科磊 (KLAC) 2012 Q2 法說會逐字稿

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 2012 conference call.

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

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

(Operator Instructions) Thank you.

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

Ed Lockwood with KLA-Tencor Investor Relations.

Sir, you may begin your conference.

Thank you, Sean.

Good afternoon, everyone, and welcome to our conference call.

Joining me on the call today are Rick Wallace, our President and Chief Executive Officer; and Mark Dentinger, Chief Financial Officer.

We are here to discuss second-quarter results for the period ended December 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 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 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, 2011, and our subsequently filed 10-Q reports.

In those filings, you'll also 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 2011 form 10-K and our current reports on form 8-K.

We assume no obligation and do not intend to update these 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.

Thanks, Ed.

Thank you all for joining our call today.

With KLA-Tencor's December-quarter results, we are pleased to report a very strong finish to a calendar year 2011, which was a record for the Company.

We saw industry growth in processed control and affirmation of our market leadership.

Those forces helped the Company achieve annual revenue growth in 2011, that out paced the overall equipment industry by a wide margin.

Revenue in calendar year 2011 grew 27% to $3.2 billion, and non-GAAP earns per share were $4.70, an increase of 46% in the year.

We generated $940 million in operating cash flow in 2011, ending with just under $2.2 billion in cash on the balance sheet on December 31.

We continued to be proactive in returning value to shareholders in 2011, increasing the level of our quarterly dividend payout to $0.35 per share and returning 50% of our total annual free cash flow to shareholders through dividend and share repurchase programs.

Looking at the summary results of the December quarter, revenue and earnings in Q2 were both down sequentially as expected, finishing at the upper end of the range of guidance with revenue of $642 million and non-GAAP earnings of $0.72 per diluted share.

The big story for December was the sharp increase in quarterly bookings driven by a resurgence in equipment spending among foundry and logic customers, the relative strength of process control as a percentage of the overall equipment investment, and customer acceptance of our latest generation products.

Gross bookings in Q2 were $950 million, an increase of 95% compared with September and the second highest quarterly bookings result in Company history.

Order activity was particularly strong in the final weeks of the quarter.

The Q2 bookings profile featured a high level of demand for our next generation technologies, with strength across all our major productlines, including record orders in metrology in the quarter.

In terms of the end market mix, foundry was 57% of new orders in December, focused on 28-nanometer ramps and capacity growth at 32-nanometer.

Logic was 27% of Q2 orders with the majority of logic demand coming from a diversified chip manufacturer looking to increase their leading edge logic capability.

Memory was 16% of the total.

So clearly, a very strong result in December, capping a record calendar year for KLA-Tencor in 2011, and setting the stage for success in 2012.

This performance showcases the strength of our market leadership and long-term strategic objectives, and highlights industry adoption trends showing chip makers relying increasingly on the latest inspection in measurement technologies to enable their competitive strategies at the leading edge.

Shifting gears for a minute, I would like to highlight recent news on the new product front.

One of the key factors underlying KLA-Tencor's market leadership has been our proven success in collaborating closely with our customers, anticipating the potential yield challenges in their leading edge technology road maps and directing our product development activities to deliver differentiated solutions to address those challenges.

Today I'm very pleased to highlight the latest fruits of those efforts, with news earlier this week announcing the launch of a suite of three new tools for our flagship bright field, dark field and e-beam and wafer inspection productlines.

Each new platform incorporates significant advances in many key-enabling technology with leading edge defect inspection.

These technologies are designed to address the wide range of defect issues that new materials, structures and design rules are imposing on manufacturers of advanced chips; and we are very encouraged with the high level of customer interest we are seeing for these new technologies.

Moving on to our view of the current market environment and the trends we expect to play out in 2012, in general, the equipment demand environment today is very similar to what we've outlined throughout this cycle.

Despite the persistent macro issues overhanging global economics, the fundamental factors fueling industry CapEx remains strong.

The rapid consumer adoption of mobile platforms is driving high levels of foundry and logic CapEx with NAND flash investment eclipsing DRAM spend for the first time in this cycle.

And of course, the pace of innovation at leading edge continues unabated as our customers are renovating across a wide variety of technical, architectural and process approaches to differentiate and gain a competitive advantage.

In this environment of mounting cost and complexity, process control plays a critical role in enabling our customers' success in executing their growth strategies, and we are seeing an increased focus on inspection and measurement to speed [yode] learning and maximize revenue.

This is being reflected in the higher adoption we are experiencing in our core markets and the strong, relative growth exhibited by KLA-Tencor in calendar 2011.

For 2012, recent analysts estimates project a range of CapEx of flat to down 10% compared with 2011.

Given adoption growth, KLA-Tencor's strong, competitive position and strong new product acceptance, we expect KLA-Tencor to once again outperform the industry in 2012.

Turning now to our guidance for the March quarter, the Q3 demand picture looks similar to the December quarter with investment focused on leading edge technology development and concentrated primarily among the foundry and logic customers.

Gross bookings are projected to be in the range of $825 million to $975 million.

We are also projecting very strong sequential revenue and earnings growth, with March revenue expected to be in the range of $770 million to $830 million, with non-GAAP earnings per share in the range of $1 to $1.18.

To conclude, we begin 2012 with great optimism as KLA-Tencor's market leadership, strong new product demand, and ongoing operational focus position the Company to continue to perform at a high level and deliver industry leading growth and financial performance in calendar 2012.

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

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

There was a $0.06 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 in 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.

Q2 new orders were $950 million.

Net orders were $948 million.

Both order figures were up over 95% from last quarter and are very close to our historical quarterly highs.

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

The US was 19% of new systems orders in Q2, down from 25% in the September quarter.

Europe was 2% of new systems orders, down from 7% in Q1.

Japan was 9%, up slightly from 8% last quarter.

Korea was 28%, down slightly from 29% last quarter.

Taiwan was 39%, up from 22% last quarter.

And the rest of Asia was 3%, down from 9% in Q1.

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

Waver inspection was 48% compared with 28% last quarter.

Reticle inspection was 13%, down from 18% last quarter.

Metrology was 22%, up from 14% in the prior quarter.

Solar, storage, LED and other nonsemi was 3%, down from 9% last quarter.

Service was 15% of new orders in Q2, down from 31% last quarter.

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

57% of new orders in Q2 were for foundry customers, flat with Q1.

Logic customers were 27% of orders in Q2, versus 22% in Q1.

And memory orders, 16% in Q2, down from 21% last quarter.

The orders in December quarter were technology focused with 56% of the orders received in the quarter targeted toward 28-nanometer and below design rules.

Looking forward we expect that new orders in Q3 will be within a range of $825 million to $975 million.

In Q2, we shipped $700 million versus $690 million last quarter.

The shipment number includes both system shipments and services revenue, and we expect shipments between $800 million and $860 million in Q3.

Total backlog at the end of Q2 increased by about $306 million from September 30, and we ended the quarter with almost $1.4 billion in systems backlog.

The backlog as of December 31, 2011, included $333 million of revenue backlog for products that have been shipped and invoiced, but have not yet been recognized as revenue, and about $1.03 billion in systems orders that have not yet shipped.

Total revenue for Q2 was $642 million, down 19% from $796 million last quarter.

Systems revenue in Q2 was down 23% to $501 million, and services revenue was $142 million, down about $4 million from Q1.

Our expectation for total revenue in Q3 is a range between $770 million and $830 million.

Non-GAAP gross margin was 58.4% in the December quarter, about 40 basis points higher than the September quarter, as lower inventory reserve requirements offset the impact of lower revenue.

For Q3, we are expecting gross margins between 58% and 59%.

Operating expenses were $207 million in Q2, compared with $198 million in Q1.

Research and development expenses were $115 million in Q2, up $10 million from Q1, driven by material purchases for next generation platforms.

Selling, general and administrative expenses were $91 million in Q2, about even with Q1.

We expect operating expenses in Q3 to be about flat with Q2 actuals.

OIE was an net $13 million expense in Q2, up over $6 million from Q1.

The change in OIE from last quarter was mostly due to a $4 million reserve release in Q1 following resolution of a tax [pressure] and a $1 million change in Q2 due to a write-down of a nonmarketable investment.

For modeling purposes, we expect OIE to be a net expense of approximately $10 million in Q3.

In Q2, our non-GAAP income tax expense was $34 million, or 22% of pre-tax income, versus a 23% rate in Q1.

Q2 tax expense percentage was lower than Q1, in large part due to the distribution of taxable earnings between our US and international entities.

For guidance purposes, we have used our intermediate term, tax planning rate of 26% in arriving at Q3 non-GAAP EPS.

Non-GAAP net income was $122 million, or $0.72 per share on Q2, down from $1.17 per share last quarter.

We apply our model tax rate of 26%, Q2 non-GAAP earnings would have been $0.68 per share.

At the revenue range I had previously mentioned and using a tax rate of 26%, we would expect our Q3 non-GAAP earnings to be somewhere between $1 and $1.18 per share.

The weighted average share count used to compute EPS in Q2 was 169.1 million versus 169.8 million in Q1.

During Q2, we spent $63 million repurchasing about 1.4 million shares.

And as of December 31, 2011, we had approximately 5.9 million shares available under our current repurchase authorization.

We also paid $58 million in dividends during Q2.

We anticipate continuing to repurchase shares as well as paying a quarterly dividend of $0.35 per share in Q3.

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 $2.2 billion, up about $76 million from the end of September.

Cash generated from operations was $187 million in Q2, compared to $219 million in Q1.

Net accounts receivable ended the quarter at $544 million, up from $462 million at the end of September.

DSOs were 77 days at December 31, versus 53 days at September 30.

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

Net inventories increased by $27 million from September 30 and ended the quarter at $640 million.

Inventory turnover based upon GAAP cost of revenues was 1.7 turns in Q2 versus 2.1 turns in Q1.

Capital expenditures were $15 million in Q2, up $3 million from Q1.

Total headcount at December 31, 2011, was 5,593, up from 5,547 at September 30.

We expect our headcount will increase slightly during Q3.

In summary our guidance for Q3 is, new orders between $825 million and $975 million.

Total revenue between $770 million and $830 million.

Non-GAAP earnings between $1 and $1.18 per share, assuming a tax rate of 26%.

This concludes our prepared remarks on the quarter.

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

Thanks, Mark.

We will now take your question.

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

With that, operator, we are ready for our first question.

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

Thanks and congratulations on a very strong quarter and guidance.

I was wondering if you could talk a little bit about the mix of orders by device segment and geography that you expect in the March quarter?

Hi, Satya, yes, sure.

What we are looking for at March, we see continued strength in foundry, so we think foundry stays in the 50s.

We have it modeled right now at about 53%.

We do expect an increase in memory to about 31%, and logic at 16%.

And the split of memory is a little bit weighted toward the NAND, probably in the 57%, 60% NAND; and then about 5% of nonsemi.

Got you.

Anything to note in terms of geographical concentration of orders in the March quarter?

Well, March we continue to expect it to be relatively broad.

I think the three main regions for us right now, US continued strength.

We see about 21% in the US.

Taiwan we think will be, continue to be, strong, about 26%.

And we expect Korea in the 24%, and then pretty good participation from some of the other regions as well, but those are the three big ones.

Got you.

In terms of this uptick we are seeing in memory, which is pretty interesting, historically that's been lagging somewhat in terms of process control adoption, and you are seeing a good uptick in December and a stronger one into March.

Can you talk a little bit about what driving trends in NAND that's perhaps driving more adoption?

Or do you think it's just, NAND CapEx is going up a bit for the industry?

I think there's two things.

One is metrology.

We had a record quarter in metrology, all-time Company record in metrology last quarter; and that becomes very important in memory, particularly more so perhaps even in NAND, so that looks to be strong; and we continue to see that as we go forward.

The other thing is some of our advanced inspection products are performing extremely well; and what we are finding is that in some of the vertical structures, our inspection tool and our review tool are uniquely differentiated; and customers are now seeing that, that that provides value.

In fact in some cases, there's some customers that bought our advanced tools for their logic work, and realized, tested them on memory, that it had additional capability.

They hadn't understood what they had been missing, and so we are seeing some proliferation as a result of that.

So very strong product demand on the inspection side, supporting particularly NAND.

Thanks a lot.

Thank you.

Our next question comes from the line of Krish Sankar with Bank of America Merrill Lynch.

Hi, thanks for taking my question.

Rick, congrats on the great results.

A couple of questions.

Number one, in terms of bookings for both December and March, did you see any orders for 20-nanometer and below?

Krish, hi.

Not so much for 20.

Our customer's always looking forward.

I would say the bulk of the orders really are 32 build out for production and 28 for development.

I would say there is probably some -- 28 per [ramp].

There is definitely some development work that is going on in 20, in fact, even people looking forward to 14 or 18, depending on who they are.

But by and large, heavily dependent on 28-nanometer right now.

Got it.

In terms of the memory, just want to touch on that too for a second.

I understand they are going from 90 or 65 all the way to 3X nanometer.

Your inspection and your metrology touch points actually double.

So are we actually just buying more of the same equipment?

Or do you have to retool the whole fab at 3X and sub 3X nanometer?

Thanks a lot.

No, no, it is new equipment.

What we are seeing in particular, I'd highlight a couple of products that are really working.

The one we mentioned in the call, prepared remarks, is the new suite of products that we have got, the new bright field tool, the new dark field tool, and the e-beam review.

I think all of those are very exciting results what we are seeing in memory.

As I said earlier, customers starting to see and discover problems they didn't know they had.

I think that is, the discovery process is going on and that's driving additional demand.

So right now, frankly our biggest challenge is meeting demand.

Thanks, Rick.

Thank you.

Our next question comes from the line of Terence Whelan with Citigroup.

Your line is open.

Hi, this is Wenge Yang for Terence.

Thank you for taking my question.

Question about gross margin.

Revenue is up roughly 25%, if I take the mid-point.

But gross margin is pretty much flat.

I just want to hear what's the reason that gross margin is not expanding with the revenue?

Well, the revenue, Wenge, was down quarter-on-quarter.

In fact I explained in my prepared remarks, it was down about $150 million; and yet gross margin's actually slightly improved.

The reason was is that the capacity release was actually offset by the fact that we actually had lower inventory reserves requirements in this quarter.

So what you should see is the result of those two phenomena, as we move forward and the revenue improves, you should see some slight improvements in the gross margin moving forward.

Okay.

So a couple of things in terms of gross margin, one is the customer consolidation.

Do you see actually additional pressure on the pricing front that could pressure your gross margin on the other side?

You have some new product going out.

Does that help your gross margin in terms of added capacity, capability to your new tools?

Yes, I never viewed consolidation as impacting gross margin.

I think gross margin is really a measure of how unique and differentiated your products are.

And if you are able to maintain differentiation and create value for customers, you are going to get the gross margin; and that's what we saw in the quarter that we had.

And we expect that going forward, and it is a function of our cycle of heavy investment in R&D, differentiated products creating a lot of value for our customers.

So I don't think it is a function of consolidation.

I think it is a function of differentiation.

In terms of a product, the new product, is that impacting your gross margin positively?

Well, as Mark said, we expect to see gross margins improving over time as revenue goes back up.

But we continue with the model that we established some years ago, in terms of incremental margin.

And from our standpoint, a lot of that's driven by operational efficiency.

But we are pretty happy with our relative position in gross margin in the industry and pretty heavily focused on maintaining and improving that.

But we feel pretty good about where we are.

Okay.

Just one quick follow-up.

What is the schedule for your EUV reticle inspection tool?

Thank you.

Right now we are still in development.

Our expectation is that we've got EUV capability built in the Teron platform that we've got now.

We'll be able to meet industry demand for several years with the product that we have, and then we're in development.

We are fully confident we'll be in position when EUV goes to production to support it with an actinic tool.

Thank you.

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

Hi, this is Olga.

Thank you for taking my question.

Given the substantial uptick in your orders in the December quarter, do you still plan on managing your backlog to approximately six months or do you expect this magnitude of orders to really drive more of an extension in how you manage your backlog?

Well, at the current levels of both the new order activity and production, we are just actually running to keep that pace right now.

It's pretty high.

If the new order activity were to go up, you can see with our expected shipment of revenue activity for Q3, you could actually see the backlog increase slightly.

But our focus right now is to actually get the new tools built and out to customers as quickly as possible.

But as you can imagine, that puts a lot of stress on vendors.

The factories are full and we are doing everything that we can to keep up.

We are certainly not intentionally trying to grow it, but it is a by-product of the new order activity and how fast we can get it out.

Thank you.

Then just a follow-up question on your outlook for 2012, given the predominance of foundry and logic in the mix, especially in the next few quarters, and the need for them to really improve their yields, how do you think about process control intensity this year?

And following up on that, given your traction with metrology at NAND, how do you think about your market share this year as well?

Olga, two great questions.

Based on what we have seen actually through this cycle, not just in the last quarter, but foundry demand being strong because they really need what we provide and we are uniquely positioned to do that and they are facing some real yield challenges, we expect 2012 to be another strong year for KLA-Tencor and one where we'll out pace the industry.

It is really anyone's bet how the industry is going to do.

I think that some of the recent announcements show CapEx nudging upwards overall and predominantly in areas that should support KLA-Tencor business, so we are well prepared to outperform the industry again in 2012.

Thank you.

Next question comes from the line of Jim Covello with Goldman Sachs.

Great, guys, thanks so much for taking the question.

Congratulations on the terrific results.

Rick, the first question would be, the breadth of your customers seems a lot better than the rest of the industry.

And ultimately, one would think those two things kind of have to tie together.

Could you give us a little bit of perspective on historically when we have seen a lack of breadth outside of KLA but such good breadth within KLA before?

And then, what's happened on the other side of that?

Jim, great question.

I think the phenomenon that is going on right now has to do with what's going on in the markets that are being served in the mobility play.

In particular, what is happening is what we are seeing dye size increasing.

And Jim, you and I both remember when dye size used to increase, but it's been awhile.

So to satisfy the mobility market, what you are seeing is the processors are getting bigger, supporting smartphones, supporting tablets, and that creates a unique advantage for KLA-Tencor, because it means yield becomes much more critical for these guys.

They might have capacity.

In fact we know they've got capacity at older generations.

But on the new stuff, they've got to get it up and they've got to get it yielding and it's right in the sweet spot for us.

I think that is a lot of what we are seeing right now.

And the foundry wars that are going on and really based about mobility, we checked and about half our business has been driven by the PC server market and the other half is now being driven by foundry driving the support of tablets and smartphones.

And those are growing at a rampant pace.

And so, our view is we will be the big winners in that.

That's very helpful.

Thank you.

Relative, your June quarter is usually a very, very strong quarter because it is a seasonal -- it's your fiscal year-end.

On the other of that, you are coming off tremendous performance now.

How would you expect the year to play out from a sequential basis for modeling purposes?

Well as we said, we think we'll outperform the industry again in 2012.

That is certainly our plan.

Very hard to handicap what the overall industry is going to do.

But I would say the segments that are likely to invest, all the signals that we are getting from our customers, certainly play to our strength, and I would say particularly what we are seeing in foundry logic and also even in NAND, as NAND increases.

I think DRAM is likely to remain soft throughout the year.

I just don't see a tremendous driver for that business.

We feel pretty bullish about it.

Very hard to handicap June at this point.

Thanks so much, and congratulations again.

Thank you.

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

Hi, thanks a lot.

Rick, if I could follow-up on the process control intensity question for a moment.

Lots of talk in the industry as people are beginning to scale 2X, around whether or not it is scaling the way 4X did, if there is new issues or not.

Curious on your perspective there, how 2X ramps compared to what you saw at 4X.

I'm sure the sources of defect density are somewhat different but how that compares.

Then as you think about the process control intensity, and you mentioned that it appears to be going up in memory, which we have been waiting for for a while, any numbers you can put around that to give some indication of the slope of improvement you might expect in the context of some of the trends you talked about over the next couple of years?

Thanks.

Thanks, Raj.

To your question new types, I don't think it's a function of necessarily new types.

It's many of the same types of defects but much smaller in devices that are much more sensitive to it.

I mentioned, I was talking to Jim, the dye size getting bigger means that there is even an increased sensitivity to defectivity at the same level when you are trying to ramp dye size and shrink at the same time.

There other thing, though, and I want to stress this, is metrology has really kicked in; and we didn't necessarily see the same strength in metrology in the past.

The old tag line for K-T is, if you can't measure it, you can't control it.

And if you can't inspect it, you can't fix it.

I think both of those things are working to our favor right now.

As far as NAND, I still think it is relatively early in the adoption cycle of what we are going to see as a percent of CapEx with NAND.

We have some very encouraging signs.

We are finding capabilities in our tools as we work closely with customers that are getting them excited about deploying them.

But I think it is early to say what the overall model is going to look like.

But we certainly anticipate improvement off of where we had been in the past there.

If I could, Mark, just as a follow-up.

Could you comment on how to think about expense trajectory across the year?

I know it is early, but maybe a comment there, thanks.

No, it's not.

We are certainly thinking about it, Raj.

The truth of the matter is right now KLA is continuing to increase our hiring, and we would anticipate that expenses, the operating expenses, are going to increase as the year goes on.

Not significantly initially, but we are anticipating towards the end of the year with new product introductions and whatnot that we will have some increased operating expenses, particularly materials that we need to run in for new generation products.

So that is our mindset right now.

Of course, we have to be wary of what the industry and macro signals are as we move through the years.

So you can take that guidance in the context of it's what we are seeing right now.

But that is our mindset today, and certainly in support of a lot of the success we have had on the recent products, we certainly don't want to starve either the sales or the installation and support channels that we've built-up.

Thanks, Mark.

Your next question comes from the line of Mark Heller with CLSA.

Your line is open

Hi, guys.

Thanks for the opportunity to ask a question.

On the prior call you talked about having pretty good order visibility through June.

Obviously the orders are coming in much stronger than expected.

There was maybe some pull in from June in to December and March.

How should we think about the extent of your visibility at this point?

Well, I guess our visibility wasn't quite as good as we thought since it heated up quite a bit in December.

What we see is a lot of interest.

What we are seeing now, the business we got in the December quarter wasn't from June.

I think what it was, was an increase in intensity by some of the customers that are [chased] really to meet the growing demand around devices that are very hot in the market, the mobility devices, smartphones and tablets.

That seems to continue to grow.

That is part of what we are seeing when we talk about the March guide.

We have kind of kicked into a new gear here, and I don't know how to handicap June based on that.

We don't typically guide that far.

But we are pretty confident that however the industry does, the overall industry perspective is flat to down 10.

We feel pretty comfortable with our position that we ought to be able to outperform it.

And with our business model, we ought to be able to financially perform very well in this year.

Can you give some indications as far as what product bookings categories might be, which might be stronger or weaker in the March quarter?

Well, we had a strong quarter, as I said, in metrology and a great quarter in wafer.

We really had a good quarter.

I would say overall, what we're handicapping, if I had to do that now, I'd say wafer 51% in March, metrology at 16%, reticle at 11%, and our services business in the 17% range, and then the hard disk drive and other at about 5%.

That's how you'd round it out.

So metrology not quite as strong, and reticle not quite as strong.

Wafer picking up and service picking up.

Great, thank you.

Congratulations on the strong quarter.

Thank you.

Your next question comes from the line of Christopher Blansett with JPMorgan.

Thanks for taking my question.

Rick, I wanted to ask you about this trend of increasing dye sizes and potentially lower yields, effective yields, and what you think this means to the footprint out there, and how much additional CapEx you might expect to offset this declining productivity, basically, trend?

Well, I don't think our customers plan on doing anything but getting the yields up with the capacity that they have.

That is why I think you are seeing us differentially perform in this market.

I think their expectation is they are going to get yields off the dye, even if they are getting larger.

That is why I think we should get a higher percent of the CapEx.

So as we modeled -- we talked about it before -- of CapEx, inspection measurement increasing as a function of the overall and we are certainly seeing signs of that now.

We haven't fully demonstrated it in memory yet.

We have early signs, but we are definitely seeing it in the foundry space.

The second question was tied to your R&D spend.

You talk about next generation platforms.

Is this also starting to be the transition into 450 in a more accelerated manner?

Well, certainly we've got development programs for 450, and we've just mapped out -- we have a planning cycle, we looked out to 2015, and we have mapped out our investment from now through 2015, in all our productlines, actually.

And yes, over that time period we've got major platforms being developed and we've got 450 coming in.

We have some of the first 450-capable tools now, and we'll be shipping them in 2012.

But I don't anticipate large scale manufacturing of any type in the several-year time frame, but certainly investment on our behalf on 450.

Thank you.

Our next question comes from the line of Vishal Shah with Deutsche Bank.

Thanks for taking my question.

Rick, could you elaborate a little on the yields that your customers are seeing right now?

I know you said there were a lot of new customers looking to use your tools.

Maybe you could give us a sense of what some of the yields are in the foundry space today, and when we can expect capacity [vistick] again?

Vishal, good question.

There aren't really new customers.

We're pretty much telling everybody and have been, I think there are customers with increasing adoption needs.

In other words, they're putting -- deploying more inspection earlier in their development process and more of it to cover all the challenges they are facing.

In yields, as always, range we don't discuss individual customers yields, but certainly on 28-nanometer you have a large range.

But the biggest thing is you have more design starts now and exhortations in the market for 28-nanometer, just, it is overheated.

And so, our customers are trying to be very responsive to the demands that are being placed on them.

There is clearly, from their standpoint, the highest lever they can pull from a productivity standpoint and a cost standpoint is to go after yields.

We are seeing that as being an imperative that they have and one we can help them with.

Thanks.

On the NAND side, I see an uptick again from a broader set of customers or just maybe one or two customers?

Well, there aren't that many NAND customers.

So from that standpoint, we sell to all of them, but the phenomena is the same across the board.

I would say, customer to customer they have perhaps different issues.

Some have slightly different approaches to the yield management.

But the underlying themes are the same when we talk to them.

Defects, they are worried about defects in vertical structures.

They're certainly worried about metrology and that creates opportunities for us.

Thank you.

Your next question comes from the line of Jagadish Iyer with Piper Jaffray.

Thanks for taking my question, Rick.

Two questions, first up, how should we think about in calendar '12 year-over-year growth between your wafer inspection segment and metrology, given the backdrop of logic and foundry spending?

That is a great question.

As I said, we saw metrology really kicking up; and I would expect that that continues, but we have got huge demand for wafer too.

So I think the mix we are talking about going forward, if you think about our overall business being, say, 50% wafer and 15% to 20% metrology is probably about right.

Reticle is pretty lumpy so it comes in and out, depending on just a few unit sales.

But I think that continues.

Strong demand in both, but we are really excited about the metrology performance, because we have seen it kick up, as I said recently, and I think really critical for our customers to get that new capability that we have.

Okay and second one I just wanted to follow-up.

Given that you ended calendar '11 with such strong performance, can you tell us what was your market share in process control as a whole in calendar '11, please?

Yes, we looked at that.

Year-on-year we are kind of in the same range.

I think we gained a little bit of share over -- but we had a very strong calendar '10, also.

So I would say pretty similar.

There are always puts and takes in that.

But I think we probably differentially performed last quarter, as an example, on a very strong quarter in the year.

So I think a little bit stronger adoption has been going up and we are benefiting from that, for sure.

Yes.

One just quick one.

I know you had presented in semicon a while ago that process control could go as high as 17% or something like that.

Do you think that at some point of time this year that you would probably see that kind of intensity?

You know, it varies.

I think customers go through their own cycles and it very much depends.

17% seems much higher than what we've modeled.

One way we think about it is, 14% at $30 billion WFE, somewhere in that.

That is a $3.2 billion business for us.

That is kind of how we look at it.

If we look back, 2011 was about that.

2012 probably in that range as well.

Thank you.

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

Thanks, hi, Rick and Mark.

Nice execution on the orders also.

Question on the customer capacity purchases versus technology upgrades.

Do you get the sense that customers' dollars spent per wafer start on process control between capacity addition and technology upgrades are similar for KLA?

Because in other segments of WFE, we are seeing a bigger delta between dollars and cents on capacity additions versus technology upgrades.

Yes, you are saying capacity spends end up being a predominant component?

Right.

Yes.

No, I mean, for us, it is definitely true that we perform well in a technologies environment, and we'll get it, people are always moving forward on technology.

So our business often holds up.

I would say what's changing now is some of the metrology businesses, in particular, end up being more linked to ramping.

But I also think that we differentially perform relative to other capacity right now, because just there is so much to control.

So the measurement and control requirements are increasing; and I would say if you thought about our business generally, metrology would be a little bit more linked to capacity and inspection a little bit more linked to technology.

Then if we were in the wafer business, and we do support the wafer manufacturers, that is really tied to both.

But that would be predominantly capacity-related, which, by the way, is not very hot.

So we had a great quarter without a strong wafer market.

Thanks for that.

And just another follow-up question on the strong foundry orders.

Is your thinking that the foundry spend could be sustainable into the second half as foundries try to perhaps position themselves for new design wins later in the year?

Or do you think foundry has a typical digestion period at some point in this year?

I think it is logical to assume that these things ebb and flow.

And so if I'd integrated over the year, I'd say foundry was very strong in the December quarter, but again stronger than what we had originally modeled.

And we are looking at very strong now.

But when I talk to them, they are talking about sustained ramps to meet the needs that their customers have.

And what is surprising is how well how many of them are doing.

This is not a one-customer phenomena.

I think it is kind of fascinating to watch what's going on in terms of all the different devices.

There is a high-end tablet and there's a low-end tablet.

And the low-end tablet is driving a lot of, a fair amount of, CapEx too.

And it's kind of fascinating to watch because it is very broad right now.

I would say the momentum is pretty strong and I think a lot depends on the success they have as they try to ramp these new yields.

Mr.

Chin, were there any further questions?

No, thank you.

Thank you.

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

Your line is open.

Thanks for taking my follow-up.

I had a question for Mark.

As you see more metrology come into your revenue mix, I believe those are at lower margins, right?

So should I as soon that your incremental gross margin is still staying in the [modern] range of 50% to 60%?

I think you can assume the latter, Krish.

But I wouldn't necessarily as soon the former.

Got it.

All right.

Then just one of the questions for Rick.

I don't know if someone else asked this.

On the customer concentration in the foundry orders, are you seeing any tier 2 foundries start placing orders for 40 [in bill] nanometer?

They are all tier 1 to us, Krish.

We see multiple foundries placing orders.

Got it.

All right.

Thank you.

Next question comes from the line of Mehdi Hosseini with Susquehanna Financial.

Rick, going back to your comment about foundry logic as strong, how should I think about this?

If WFE spending is going to be flat to down 10%, would process diagnostic be flattish?

I'm just trying to get a sense how the spending process diagnostic intensity, spending intensity, is going to compare to overall WFE.

The way we model that, Mehdi, is that we take a very simple view of 14%, is what we are modeling.

Now, last quarter I would say it was certainly stronger than that.

But being conservative, we look across the area and we'd say 14%, and that gets 2011 to look a lot like 2012, or 2012 to look like 2011.

Is there upside for that?

There definitely could be upside based on the early returns at the beginning of it.

What we are seeing, there is certainly some momentum, but that is not how we are modeling it yet.

Sure.

You did talk about diversity of the customers that was behind near doubling in the gross booking.

But in terms of the number of customers, almost the doubling on a sequential basis, is that driven by 5 customers, 10 customers, 15, 20, anyway you can help us understand the breadth of the customers coming back?

Well, there is still a limited number of guys that are at 28.

And 40 to 28 is really the sweet spot for our market.

You kind of know who those players are.

What is interesting is the intensity ramping out of some of the ones that hadn't been investing necessarily in new technology.

That is why we are saying it is pretty broad right now relative to a fairly concentrated market that we have in this space.

But of course that makes our selling very efficient.

It makes service very efficient.

For our standpoint, we're fine with that.

But it is not -- there are no true new entrants into it.

As you know, there is one large player in Korea that's made a big investment in getting into foundry logic and been increasing that.

But other than that, it is largely similar players, but focusing on new technology.

It does make the forecasting more challenging, correct?

Well, long-term forecasting is pretty easy.

Short-term is not possible.

So when we look at it, we think, as I said, flat to down 10% for 2012, I think is not a crazy number to model.

And right now, I think K-T does as well in 2012 as we did in 2011, maybe better in terms of overall revenue.

Got it.

Thank you.

Your next question comes from the line of Weston Twigg with Pacific Crest.

Your line is open.

Hi, thanks for taking my question.

Just quickly on new bookings, and the growing backlog, I was wondering if you could help us understand how much of the current backlog and the new orders that you expect to book in Q1 are shippable in the first half, and how much of that do you think will flow into the second half?

Yes, the typical cycle between the time we take the order and to when we ship can range anywhere from three months to nine months.

It depends on the product.

But we think about it in the four and a half month range on average in general.

So that's sort of a loose proxy in how to think about that, Wes.

And then there's another 90-day cycle after that, that usually results in the final acceptance of revenue recognition.

Okay.

Good.

And then, just a quick clarification on shipment guidance, I wrote $800 million, $850 million.

Was it $850 million or $860 million, that you said?

$860 million, eight six zero.

Perfect.

Thanks a lot.

Sure.

Our next question comes from the line of Patrick Ho with Stifel Nicolaus.

Your line is open.

Thanks a lot.

And nice work on the quarter.

Can you just give me a little bit of color in terms of the high demand that you are seeing near term and the ramp in terms of getting the tools to your customers?

How are you keeping OpEx levels flat, as you mentioned, for the March quarter?

What are the levers, given that I think you also mentioned you are increasing hiring and so forth.

What are the levers there that are keeping OpEx levels flat?

There is a couple of things in place.

First of all, we are increasing hiring, but our hiring still is at a relatively low ramp rate.

Approximately the same level of hiring increase that you saw in the prior quarter, which is in the 1% range.

It takes a while for those people to get onboard, and to get up to speed.

We don't feel the full expense of that instantaneously at the beginning of the quarter.

The other phenomenon is, is that the big contributor to our spending, particularly research and development, is the amount of new material we move in.

And we have some visibility on that, because that has to be scheduled considerably in advance with suppliers and so on and so forth.

So quarter-to-quarter at the $200 million to $210 million level, things can go up or down and throw you up $5 million in either direction.

So I don't want to imply more science than really exists on this.

We just simply roll out the divisions in terms of their planned spending in the quarter.

They are usually fairly thorough on how they forecast it, but as you know, it is an educated guess at this point.

I would just say that flattish is a good planning assumption, but could it be up our down a little bit from there?

Absolutely.

Fair enough.

Maybe a bigger picture in terms of the metrology, some of the questions you have taken today.

The pickup that you are seeing, and I'm going to as soon it is a little bit of both, maybe a little more color on it.

It's probably a little bit of both of market demand increase, as well as potential share opportunities.

Rick, maybe if you could give a little color of how that mix is working in KLA's favor on both of those ends?

Sure.

Well, what has happened, on the advanced nodes -- just give you a very specific example.

People doing more inspection, for example, in a registration tool, where you are measuring overlay.

They are measuring more spots on a wafer, and they are measuring more wafers in a lot.

And they doing that because they need better control.

That is a market where KLA is very strong.

And as a result, we see demand going up and we benefit from that.

In other ones like OCD, optical CD control, where we have a strong position, there we've actually seen good adoption by customers and some share gain as our technologies have been differentiated from our competitors.

So we are getting some of both as a result.

But there is definitely demand increase, and to your point, we've also benefited from some share movement.

But really, you have to go product by product.

Great.

Final question for me in terms of NAND and the 3-D device stacking and the TSV move that is going on on the NAND side of things.

I'm sure that you are working with the customers on both inspection and metrology.

I guess bigger picture, where do you see the potential bigger opportunity, maybe not only just dollarwise, but in terms of the tool adoptions on a volume basis?

Well, most of the business we see in NAND is not in the TSV in the back end.

It is in the wafer manufacturing itself and has to do with the design rules plus the vertical nature of the devices, so the requirements on registration and metrology for measuring 3-D devices.

But we also have inspection capability that is being leveraged as those design rules shrink and people are much more sensitive to defects that they in the past perhaps weren't as sensitive to or they just didn't know they could find.

So not so much back end, definitely for us, WFE, and pretty strong demand.

I think it is pretty split.

We definitely see metrology's strength there, but we've got some great inspection opportunities as well.

Right.

Thank you.

Your next question comes from the line of Edwin Mok with Needham & Company.

Your line is open.

Thanks for taking my question.

So one of your customer, [Sanders] yesterday said that they planned to push out [fab 5].

Do you see that as potentially impacting your business in the first half of 2012?

First of all, we don't talk specifically about specific customers.

But certainly the model we have for CapEx for 2012 encompasses all the input that we've got and there are some puts and takes in that.

But by and large, what we see for 2012 is CapEx to be in the range of flat to down 10%.

There were no surprises in any of the recent announcements that we have seen that impact our thinking on that.

That was helpful.

There was recent chatter about DRAM customer consolidating.

How do you see that impacting your business?

Are you worried that your customer coming together, become bigger buyers may potentially negotiate on pricing?

I think it is actually not a bad thing for the industry to have strong players.

Nothing has been finalized in any of those discussions.

But in general, we are best positioned when our customers are strong and healthy and financially doing well.

So anything that leads to that is ultimately good for the industry, because they can invest in R&D.

They can keep developing new technologies and we can work with them closely.

So that is not something that we are particularly sensitive to if it happens or if it doesn't happen.

If I can squeeze one more question in.

You mentioned about metrology picking up this past quarter.

I was wondering how you think about metrology versus inspection market in the coming year?

Do you see metrology continue to potentially outgrow the inspection space?

I think it is going to be a close battle.

Those divisions are both shooting for, demonstrating, their capability.

They are different drivers.

I would say the lithography space, all the challenges in litho, drive a lot of what we have in metrology whether it is registration or the OCD business or the films business, all related to that.

The defectivity is driven, drives us, pretty strongly in what we see in the wafer, and both have strong currents of pushing them forward right now.

So I think very strong businesses in both of them, and we are really pleased to have the broad portfolio we do to support our customers' needs.

Great, thanks so much, Rick.

And our final question comes from the line of Mahesh Sanganeria with RBC Capital Markets.

Thank you very much, Rick.

Since you have been talking about metrology, maybe I'll ask another metrology question.

If you can provide us some more details among overlay versus OCD or registration?

Are you seeing an inflection in one of the technology, 28, 22-nanometer?

Or it's more of a gradual improvement, gradual increase in the intensity?

Yes, there is no question that there are definitely, there have been, opportunities for what we are seeing.

A big part of what is happening is K-T has gained share in some of those segments.

So from that standpoint, I think the demand has been there.

But our differentiated solutions are winning in the market, so a big part of what we have been seeing in increase is a function of product positioning and, frankly, competitors stumbling.

And so can you provide us a little bit color, is it more on the foundry side or NAND side or logic side, your market share gain of the requirements?

So we don't break it out, as I said.

There are demands in both.

Certainly foundries have pushed very hard on demands on metrology, as have the memory guys, but most of our business last quarter was around logic and foundries, and that is where we saw the strength in metrology, as that was a bigger part of our business.

Memory was only 16% of our business overall last quarter.

The fact metrology was a record implies very strong logic performance and very strong foundry performance.

Thank you very much.

We have no further questions in queue.

I turn the call back over to our presenters.

Thank you all for joining us on our call today.

We look forward to speaking with you throughout the quarter.

This concludes today's conference call.

You may now disconnect.