科磊 (KLAC) 2012 Q3 法說會逐字稿

Good afternoon, my name is Steve and I will be your conference operator for today. At this time I would like to welcome everyone to the KLA-Tencor third-quarter fiscal 20'12 conference call. All lines have been placed on mute to prevent background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions) Thank you. I'd now like to turn the call over to Ed Lockwood with KLA-Tencor investor relations. Please go ahead.

Thank you, Steve/ Good afternoon, everyone, and thank you for joining us on our call today. Joining me today are Rick Wallace, our President and Chief Executive Officer, and Mark Dentinger, our Chief Financial Officer. We're here today to discuss third-quarter results for the period-ended March 31, 2012. We released these results this afternoon at 1.15 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 be accessible on demand following its completion on the investor section of our website. There you'll also find a calendar of future investor events, presentations, and conferences, as well as links to KLA-Tencor's SEC filings, including our annual report on Form 10-K for the year-ended June 30, 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 those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements.

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 current reports on Form 8-K. We assume no obligation and do not intend to update these forward-looking statements. However, you can be assured that any updates we do provide will be broadly disseminated and available over the web.

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

Thanks, Ed. I'm pleased to report that KLA-Tencor began calendar 2012 with a strong fiscal third quarter, delivering revenue and earnings growth that surpassed the upper end of the guidance ranges. Revenue grew 31% sequentially to $841 million in the March quarter and non-GAAP earnings per share was $1.27. Gross bookings in March were $833 million, coming in at the lower end of the guidance range with the shortfall largely attributable to a shift in the timing of one large order into the June quarter.

In general, the semi cap equipment demand environment is healthy today. Device manufacturers are maintaining a high level of investment at the leading edge in their efforts to support technology development and to meet robust end-demand forecast associated with the rapidly-growing mobile electronics markets.

As a result of these technology and demand trends, the rate of change in device and process technology remains strong and continues to accelerate. In fact, the introduction of new transistor and memory technologies, such as high-k metal gate and finFET and logic and 3-D NAND and memory, as well as advanced manufacturing and packaging techniques, are all contributing to driving higher technology development and manufacturing costs for our customers. These technologies and techniques are also compounding the yield challenges at the leading edge, helping to drive strong adoption of process control.

This is translating to market-leading growth for KLA-Tencor, as advanced process control becomes increasingly important for our customers, and the industry continues to look to KLA-Tencor as the market leader to meet their increasing complex inspection and measurement challenges at the leading edge. Our strong market position was recently highlighted in Gartner's annual industry market research report. That study shows KLA-Tencor is growing share process control, with particular strength in the wafer inspection and metrology markets, both of which are on the critical path for enabling next-generation device innovation. Today's strong financial results and our industry-leading position are a direct outcome of KLA-Tencor's ongoing customer collaboration focus and the successful execution of our long-term strategic objectives.

I'll now provide an update on the current demand environment in each of our major end markets. Orders from foundry customers were 55% of gross bookings in the March quarter. Leading-edge foundry capacity remains in tight supply as rapid growth in the mobility markets is driving demand for increasingly complex fabless application processors into the foundries. In this environment foundry market leaders are ramping production in an effort to meet high levels of demand and to secure their positions in an increasingly-competitive market.

Looking ahead, foundry demand is expected to remain high and comments earlier today from one of the leading foundries suggests that they intend to increase their 2012 CapEx budget, which should support this trend as we move ahead in the year. Strong foundry industry CapEx favors KLA-Tencor, as these customers tend to be the highest adopters of process control due to the heightened yield requirements unique to their high mix, short time to market business models.

Logic was 16% of new orders in March. Logic investment today is focused on ramping 22-nanometer processes to high volume and development of next-generation technology at the sub 20-nanometer node. Driven by competitive dynamics surrounding the future intersection of x86 and on-base processors for mobility applications, we expect logic investment to remain at a high level in calendar 2012. Memory bookings grew 29% of orders in March, with orders from NAND customers representing 60% of the memory orders.

Mobility are driving NAND bit growth rate, and capacity growth in NAND remains modest as NAND customers are investing in leading-edge technology to advance their competitive and cost strategies. Finally, though DRAM investment remained modest in the March quarter. Our second-half calendar forecast for 2012 shows higher levels of DRAM investment. DRAM industry CapEx is expected to remain focused primarily on technology migrations.

Now to provide some perspective on the industry landscape for the remainder of calendar 2012. Growth from mobility markets, the high pace of innovation at the leading edge, and competitive dynamics are all driving a high level of capital investment by our customers and sustaining a healthy business environment with wrong order momentum. In this environment KLA-Tencor continues to perform at a high level, with strong at option on our core markets and strengthening market position driving greater than industry growth rate for the Company. Looking ahead to the remainder of calendar 2012, current industry forecasts predict the demand for capital equipment will continue to be strong, and we'll remain focused on capacity ramps in the leading-edge logic and foundry, with technology development remaining a priority for market leaders across all of our end markets.

As a result, another good year for capital equipment spending is expected in the year, with total industry capital investment now projected to be flat to down 5% compared with a very strong 2011. Given this industry backdrop, and with our backlog, the high demand for new products, and adoption of the leading edge, we are currently projecting revenue growth for KLA-Tencor in the 2012 calendar year that significantly outpaces the industry.

Turning now to our guidance for the June quarter. The Q4 demand picture looks similar to the March quarter, with investment focused on leading edge technology development, concentrated among market leaders, with continued strong momentum among the foundry and logic customers. Gross bookings are projected to be in the range of $775 million to $950 million. We are also projecting revenue and earnings growth, with the June quarter expected to be in the range of $840 million to $900 million, and non-GAAP earnings per share in the range of $1.20 to $1.38.

In conclusion, we see calendar 2012 as another year of industry-leading growth and financial performance for KLA-Tencor, as our market leadership, our new products and the increasing adoption of process control all position the Company to continue to perform at a high level. And with that I'll turn the call over to Mark Dentinger to his review of the numbers and the outlook. Mark?

Thanks, Rick, and good afternoon, everyone. I'll remind you that 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 cost or credits which are outside of our core operations, including unusual tax items. There was a $0.06 per share difference in 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. Where I mention 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.

Q3 new orders were $833 million. Net orders were $816 million and were down about 14% from last quarter. The regional distribution of new systems orders and the quarter-to-quarter change in distribution orders were as follows. The US was 22% of new systems orders in Q3, up from 19% in the December quarter; Europe was 8% of new systems orders, up from 2% in Q2; Japan was 11%, up from 9% last quarter; AMEA was 39%, up from 28% last quarter; Taiwan was 13%, down from 39% last quarter and the rest of Asia was 7%, up from 3% in Q2.

The distribution of new orders by product family and the quarter-to-quarter change in distribution were as follows. Wafer inspection was 54%, compared with 47% last quarter; reticle inspection was 6%, down from 13% last quarter; metrology was 19%, down from 22% in the prior quarter; solar, storage, LED and other non-semi was 4%, up from 3% last quarter; in service was 17% of new orders in Q3, up from 15% last quarter. Finally, for semiconductor systems, the distribution of new orders by market and the quarter-to-quarter change in distribution were as follows. 55% of new systems orders in Q3 were foundry customers, compared with 57% in Q2, Logic customers were 16% of new semi orders in Q3 versus 27% in Q2, and memory orders were 29% in Q3 up from 16% last quarter.

Looking forward, we expect new orders for Q4 will be within a range of $775 million to $950 million. In Q3 we shipped $818 million versus $700 million last quarter. The shipment number includes both systems shipments and services revenue and we expect shipments between $820 million and $880 million in Q4. Total backlog at the end of Q3 decreased by $23 million from December 31st and we ended the quarter with about $1.34 billion in systems backlog. The backlog at March 31, 2012 included $313 million of revenue backlog for products that have been shipped and invoiced but have not yet been recognized as revenue, and a little over $1 billion in systems orders that have not yet shipped.

Total revenue for Q3 was $841 million, up 31% from $642 million last quarter. Systems revenue in Q3 was up $200 million to $701 million overall, and the services revenue was $139 million, down about $3 million from Q2. Our expectation for Q4 is a range between $840 million and $900 million. Non-GAAP gross margin was 58.3% in the March quarter, down slightly from 58.4% last quarter, as margin improvement from higher revenue was offset by product mix and product transition-related inventory reserves. For Q4 we are expecting gross margins between 58.5% and 59.5%.

Operating expenses were $199 million in Q3, compared with $207 million in Q2. Research [expenses] were $109 million in Q3, down $6 million from Q2, driven by the timing of materials for purchases for next-generation platforms. Selling, general and administrative expenses were $90 million in Q3, down almost $2 million from Q2. We expect operating expenses in Q4 to be up slightly from Q3.

OIE was a net $10 million expense in Q3, down about $2 million from Q2. The change in OIE from last quarter was mostly related to a $1 million charge in Q2 to write-down a non-marketable investment. For modeling purposes we expect OIE to be a net expense of approximately $10 million in Q4.

In Q3 non-GAAP income tax expense was $65 million, or 23% of pretax income, versus a 22% rate in Q2. For guidance purposes we are using our intermediate term planning rate of 26% in arriving at Q4 non-GAAP EPS. Non-GAAP net income was $216 million, or $1.27 per share in Q3, up from $0.72 a share last quarter. If we apply our model tax rate of 26%, Q3 non-GAAP earnings would have been $1.22 per share. At the revenue range I previously mentioned and using a tax rate of 26% we would expect our Q4 non-GAAP earnings to be somewhere between $1.20 and $1.38 per share.

The weighted average share count used to compute EPS in Q3 was 170.1 million versus 169.1 million in Q2. During Q3 we spent $67 million repurchasing about 1.3 million shares, and as of March 31, 2012 we had approximately 4.6 million shares available under our current repurchase authorization. We also paid $59 million in dividends in Q3. We anticipate continuing to repurchase shares, as well as paying a quarterly dividend of $0.35 per share in Q4. For guidance purposes we are modeling an average share count of 171 million for Q4.

Turning to the balance sheet, cash and investments ended the quarter at just under $2.4 billion, up about $190 million from the end of December. Cash generated from operations was $262 million in Q3 compared with $187 million in Q2. Net accounts receivable ended the quarter at $638 million, up from $544 million at the end of December. DSOs were 69 days at March 31 versus 77 days at December 31. Both DSO figures are net of allowance for uncollectible accounts in factor.

Net inventories increased by $11 million from December 31 and ended the quarter at $650 million. Inventory turnover based upon GAAP cost of revenues was 2.2 turns in Q3 versus 1.7 turns in Q2. Capital expenditures were $14 million in Q3, down $1 million from Q2. Total headcount March 31, 2012 was 5,655, up from 5,593 at December 31. We expect our headcount will increase slightly during Q4.

In summary, our guidance for Q4 is new orders between $775 million and $950 million, total revenue between $840 million and $900 million and non-GAAP earnings between $1.20 and $1.38 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.

Okay, thank you, Mark.

At this point we'd like to open up the call to Q&A and we do, once again, request you limit yourself to one question given the limited time we have for today's call. Feel free to requeue for your follow-up questions and we'll do our best to get everyone on for today's call. Stephen, we're ready for the first question.

(Operator Instructions) And your first question comes from the line of Satya Kumar with Credit Suisse. Your line is now open.

Hi, thanks for taking my question. I was wondering if you could give a little bit more color on the push out that you talked. Was it in logic, foundry or memory? Was the push out related to end demand, or was it related to other constraints, like availability of other equipment, like the photography or facilities or how should we think about that? Thanks.

Sure, the push out was actually just a timing issue and the orders have since been processed, so it was really not related to any end demand, just getting things through the system.

Thanks.

Your next question comes from the line of Krish Sankar from Banc of America Merrill Lynch. Your line is now open.

Hi, thanks for taking my question. Rick, in terms of the foundries that are placing these huge CapEx numbers, from your vantage point do you think that it's a mixture of both true end demand as there is improvement in yield, or do think the yield is at pretty low run rate and the CapEx has to increase to meet the demand? And I had a follow up, too.

Sure, Krish. I think it is definitely the case that our customers have a lot of demand for leading edge in the foundry world. And I think that's driving a lot of the activity we are seeing. And the yields, at 32-nanometers are not great, and they're lower than that at 28, and I think there is also development work driving business for us at 20-nanometers.

And I have met with most of them in the last 90 days and for sure, they're seeing strong demand based on broad-based market pull, whether it be 4G or LTE, chip sets, graphics, or processors to support mobility and it's at multiple customers. But there's certainly yield issues associated with both metrology and inspection, which is why think KLA-Tencor is performing disproportionately well in this environment.

Right, and if I could just squeeze in a follow up for Mark. You said OpEx is increasing in June, how do we think of that going forward, or, and how to we think about the incremental operating margin going forward as you start doing other investments? Thank you.

Two responses to that. The OpEx, we are anticipating, at least based upon what we know today, that the OpEx will continue to increase into next year as we prepare for next-generation product development. It's probably going to be more pronounced on the research and development side than it is on the G&A side, but there'll be a little bit of G&A growth, as well. I still think you're looking at a few million dollars a quarter increase as we move into next year. At least that is our mindset as of today. If things change we would certainly update you, but that's certainly our framework for today.

Thanks a lot.

Your next question comes from the line of Terence Whalen with Citi. Your line is now open.

Good afternoon, thanks for taking the question. When I look at the composition of your orders that you reported, it seems like there was a fall off in logic orders but conversely a pickup in some of the memory orders. Can you describe the composition of those memory orders and what you're seeing in general in terms of behavior among your memory customers? Thank you.

Sure Terence, I think that you're right. We saw memory picked up to about 29%, and if you look back in December we were at 16%, so pretty significant increase there, largely in NAND and mostly technology-related, dealing with some of the new yield challenges they have and metrology challenges at the advanced node. Logic, we did see lower logic and I think that it's always -- the logic tends to be lumpy because there aren't that many players and it's just where we are in the order cycle with them. In fact, we don't see logic getting stronger as we go out in the June quarter, probably be later in the year before we see logic pick up. So I think for now -- in fact we're forecasting logic down even further as a percent of total next quarter with foundry actually picking back up.

And as a quick follow up, do you expect the second half memory orders to be stronger than first half? Thank you.

Sure, we do see some signs of strengthening in DRAM for technology, I wouldn't say for capacity, and we will see a little bit of that in the June quarter as we forecast a little but more activity going forward in DRAM. And I think the second half, again, technology-related we do expect memory to pick up some, but we also see strength in the foundries and as I said, we'll see logic, we believe, coming later in the calendar year.

Thank you.

Your next question comes from the line of C.J. Muse with Barclays. Your line is now open.

Hi, this is Olga calling in for CJ. Thank you for taking my question. Just to follow up on the previous question. You highlighted pretty solid visibility for foundry strength through the rest of the year, expectations for logic to pickup in the second half and memory, as well. So, on a net basis can you talk about how you expect her shipment and orders to be weighted first half versus second half?

We really -- we're not in a great position to guide for the entire year, but when we do look out we see CapEx in general for the year to be flattish to maybe down a few percent. So, from that point when you look at the compares, you do have to see some overall strengthening happening in the second half. And with our backlog situation, the model we gave, the guidance we gave for the next quarter I think you can see we're nominally at a book-to-bill of about one if you take the midpoint on those ranges.

And so, we expect to be able to continue to do that, but probably would like to support our customer base as we think about the demands they have to ramp quickly. So, all our efforts are on ramping manufacturing and we're really supply constrained right now to be able to support our customer base.

And then specific to process control intensity, given the continued yield issues at foundry, and you've recently highlighted yield issues emerging on the NAND side, as well, could we see process control intensity actually exceed 15% this year, or will it still be in the 14% to 15% range?

I think it's hard to get that precise on it as we go forward. I think it does depend somewhat on the complexion of the different customers that we're working in and their timing, but we've definitely seen since last year -- through last year we saw an increase in intensity. Some customers are further along in their understanding of their challenges than others. There are a couple of other sectors that are low right now from a process control standpoint that we expect to pick up late in the year, and those -- reticle inspection's not particularly strong right now and that's more just driven by the dynamics of that market. And the wafer manufacturers are not strong. So, in those two realms we think there's more opportunity for intensity to increase, but that's not really happening in our next 90-day outlook.

Thank you.

Your next question comes from the line of Jim Covello with Goldman Sachs. Your line is now open.

Great, guys, thanks much for taking the question. I do apologize if you touched on this, I was a little late hopping over for one of the other calls, but it's kind of a bigger picture question. You guys are uniquely positioned, I think, to comment on some of the differences and some of similarities between the yield issues that happened at 45-nanometer, especially at some of the foundry customers, and then the new yield issues that are happening today. What you think is similar and what do you think is different about these yield challenges that those customers are facing in this cycle?

Hi, Jim. Yes, I think mainly probably the bigger one is related to metrology. I think that there are a number of challenges people facing in yield in general that we saw at 45, which plays to the defectivity, but there's some uniqueness associated with the metrology product lines that we have with multiple patterning happening and increased intensity and some of the 3-D finFET structures driving more metrology. So I'd say that the intensity goes up and it's driven as much by increase in metrology as it is by the ongoing challenges of defectivity.

So, I'm sorry, I think I understood that, but the issue just from KLA-Tencor's standpoint, it's just -- the issues that they're facing require more metrology than the issues the 45-nanometer yield challenge has created, is that what you're saying?

Exactly. Metrology is a bit more stressed than it was at 45, which is, I think, why the overall intensity goes up.

I see. And is there a simple way to explain the technical issue that drives that increase in metrology?

Yes, the fact that you have to do multiple patterning because the EUV is late, and I think that there are definitely more critical layers, which just drive -- so the requirements for overlay and the requirements for finFET drive more metrology. There is also strong defectivity, but we have strong defectivity challenges back at 45, as well. In fact, that's what kick started a lot of our business.

Really helpful, thank you so much.

You bet.

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

Great, thanks for to my question. Rick, just a follow up on the last question. Is the mix of architecture types that are going through the foundry, big die consumer chips, et cetera, is that a material factor in some of the yield issues, or is it more around the node transition and less about particular architectures, be it graphics or processors, et cetera?

No, it's definitely related to die size and geometry, Raj. You have both things happening and I think it's more analogous to what happened to processors -- microprocessors in the '90s when they were getting both larger die but at the same time smaller dimensions. We're seeing that in mobility driven by slightly different factors. One is drive for less power, but it is definitely the case that the dier getting bigger and the yield challenges associated with that are more pronounced, especially as they go to smaller design rules.

Great, thanks. A quick follow up, if I might. The comment you made on the trajectory in the second half, what were you suggesting about the order trajectory? I think I understood what you said on shipments, but would orders be expected flattish, or would they be down and that does that include the increment of TSMC spending that they announced today? Thanks.

Well, Raj, it's -- as I said we don't like to model what the second half is going to look like. At this point it's really tough for us. But we do see a lot of good indicators out there in terms of the conversations we're having with customers in both the foundry space and there are many people that said foundries were going to fall off three quarters ago and we see ongoing strength, and I think its driven by this mobility drive. We have multiple players supporting that and including a big foundry increasing their CapEx today. We don't think that's necessarily the end of that.

But at the same time, we do have some opportunities because of the process challenges associated with the latest generation NAND, and what we will believe will be in DRAM. So, on balance I also think there's some capacity opportunities as we get wafer manufacturers turned back on, and that's going to take a while. But it too soon to model. We have an overall view for the year relative to last year, of flat to down 5%, but I don't want to get into specific guidance for second half at this point.

Great, thank you.

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

Good afternoon, thanks for taking the question. You mentioned supply chain constraints. I'm just wondering if your lead times are darting to extend at this point and if so what are they? And I was also hoping to -- can you characterize your bookings concentration among your customers, is it broadening out, or is it still fairly concentrated with one or two customers?

Okay, I'll take the two in the order you gave them. The first one, the supply constraints are really driven by the ability to get parts. It's not so much our space issues or talent. We've got people, it's a matter of pulling the supply chain and we've had a dramatic ramp. For us it's the usual suspects.

It's going to be around optics, it's around illumination sources, whether they be laser or broadband, and it's really related to critical components, which have longer lead time. And we've done -- and our suppliers have done a great job of ramping up to support us, but demand far exceeded what we'd originally modeled, so we're playing catch-up. I would say that we're doing a good job of that.

In terms of order breadth, it is really among the logic and foundry players and its broad among logic and foundries as it was last quarter. What's slower -- and we saw little bit of pickup in memory, but what's slower is, there's just not a lot of action in DRAM, we do expect to see some of that. There's not much in the way wafer manufacturers, not much actually in the reticle manufacturers right now, and so it is broad among foundries and logic on advanced, not really very broad anywhere else.

Thank you.

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

Hi, this is Bill Peterson calling in for Chris. When looking -- if you look maybe a year ago compared to revenue run rates it looks like the gross margins are 100, maybe to 200-basis points lower. Can you provide any color around that? Is it related customer mix, product mix, you alluded to, for example, a lack of reticle or wafer, but I'm wondering what are the key moving parts within that? Thank you.

Bill, this is Mark. Yes, you actually hit on one of them. We categorize the mix -- the customer mix, which includes the merchant mash shops. We are seeing, in terms of the margin pressure that we've experienced in this run-up versus a year ago, basically it's mostly attributable to product mix. There is a little bit of volume component in terms of the big customers. And, at least in this quarter, we had a product transition that pressured the inventory reserves a little bit more than what we've experienced in at least the last five, six quarters. So, a combination of those three factors, but I would largely attribute it to the mix of products that we're shipping right now.

Thank you very much.

Your next question comes from the line of Vishal Shah with Deutsche Bank. Your line is open.

Hi, thanks for taking my question. Can you just talk about the concentration of orders by different segments, foundries -- foundry, memory and logic in the June quarter? And also, with respect to 20-nanometer spending, are you seeing just one customer spending or placing orders on that note, or are you seeing multiple customers on that, as well? Thank you.

Yes, I'll take those in reverse order. We're definitely multiple on 20-nanometer but they're at different stages, I would think, of maturity, but we are seeing R&D-related work for 20. In terms of forecasting, what we see right now for June by end customer, memory, we think, is around 21%, with actually most of that being, as we're forecasting right now, DRAM related. Logic at 12%, and foundry picking backup to 67%, and the non-semi about 5%.

Thank you.

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

Yes, thanks for taking the question -- two questions, Rick. So when you talked about significant outperformance in calendar 2012, how should we think about in terms of your individual product lines between wafer inspection, metrology and reticle inspection? And I have a follow up.

Well, I think we're doing pretty well across the board in terms of relative when you look at market share. We were talking more in general about the overall performance of KLA-Tencor from a revenue perspective relative to the overall industry, where we see process control strengthening as we go forward for all the reasons we've talked about in the past. But also we have gained share and so that puts us in a great position to support our customers as we go forward. There are great opportunities for us in metrology. As I mentioned, the double patterning, more layers, but also the challenges of defectivity. So, right now it's pretty broad. As I said earlier, I think the areas that are slower that may pick up but won't -- they haven't been on for most of this calendar year relate to wafer manufacturers and there's been some softening in overall investment by the reticle manufacturers at this point, which may pick up later in the year.

Okay. And on the -- one of your key customers is starting to work on the 14-nanometer, and you guys are well exposed on the R&D side. Where do see clearly this would be some incremental opportunities that could drive, particularly in the second half, any specific details on that one?

Well, I think the advanced node work continues to challenge our customers. They're definitely -- there's definitely work going on with 14-nanometer. When we think about the early phases of development, it tends to favor tools like the very advanced wafer inspection tools. Sometimes the e-beam tools will get pulled into that. And there are -- we do have tools that are perhaps more related to capacity, and those tend to come during the ramp phase as opposed to the development phase. But, we are seeing that demand right now, and working closely with our customers on the tool sets to support their R&D.

One quick follow up on the reticle inspection. When do you think it can bounce back? Thank you.

Well, probably not for a couple of quarters. We had a strong placement of a number of 6XX product line when we introduce that. We're doing very well from a share perspective. But we do forecast another relatively softer quarter in June, and we would expect in the second half to see more activity in reticle. But right now it is definitely lower than it has been in prior quarters. Because of the size of those orders and the capital intensity of that equipment, that tends to be pretty lumpy, and we forecast that going forward, as well.

Thank you.

Your next question comes from the line of Weston Twigg with Pacific Crest Securities. Your line is now open.

Hi, thank, I just had a couple of quick questions. The first one, I'm just curious, looking longer term, over the next two or three years, I'm wondering if you can give us an idea of which process control market markets you're most optimistic about, in terms of growth or profit contribution?

Well, I think that the dynamics of foundry continue to play to KLA-Tencor. I think we're an important ingredient in anybody that's running in the high mix environment, and has a lot of process change. And I think the overall dynamics of the mobility market support our Business thesis that they're going to need more inspection and measurement.

I would say that DRAM less intensive and probably not a huge contributor to our progress going forward. I think that NAND, however, is because of the technology associated with, especially, the 3-D NAND work that's going on. So, if I had to pick -- and logic continues to be, but logic, of course, is starting to blur with foundry if you look at the dynamics. So, I think over two to three years logic looks more like foundry as the main logic players move to support the mobility market. And I think for us, the strength will be in those markets, less so in the DRAM market.

And how about just from an equipment standpoint or a segment standpoint, which products are you most optimistic about, in terms of generating growth?

Well, I think the demonstrated value that we've seen in our metrology, especially around multiple patterning, which drives both the Overlay business and Registration business, but also the Films business, is strong. I don't see any change in that, because the complexity associated with that goes. And then defectivity. I think that there's no question that our strength in technology advancement in both the main platforms there, the bright field, the dark field, but also bare wafer, are all well-positioned to support advanced technology node. So I wouldn't say one is particularly stronger than the other when it comes to those three categories.

But we do see big opportunities, and we're seeing it now when we provide more capability on the advanced design rules defectivity. A lot of it is customers then learn what they have been missing, and that is part of what caught us by surprise with the big demand, is they got a hold of the new technology and, of course, we're heavily investing in R&D and we'll be bringing on next generation. We've got at least a five-year roadmap mapped out in our key product lines, where we have developments going on that we'll be bringing out capabilities to support the market as we go forward.

Okay, that's very helpful, and then if I could just real quickly on the service revenue line. That's trended down for three quarters, it looks like, I'm just wondering if that starts to flatten out and maybe improve through the back half of the year?

Yes, I'd be happy to talk to that. A couple of things are happening there. First of all, we did have the (inaudible) interruption this quarter, which cost us about $3 million in the top line. The second thing is that where we lightened up over the last, I would say, two to three quarters is in what we call our billable work, which is where customers aren't on contracts. Most of the new tool customers are buying contracts that come along so that they can service the tool in its most intense initiation period of usage.

So, we do think that at least part of that effect was when Japan went through the tsunami last year, we had an intense increase in that particular region in billable. That has now subsided as those customers have stabilized so we suspect that we will begin to grow in the services revenue line in our fiscal Q4. We would expect that the growth to return to normal trajectories as we move into next year. But those two phenomenon did have an impact on us over the last two to three quarters.

And just to add to that, I think that you're well aware that utilization at the leading edge is very high, but utilization at the trailing edge is actually softer and that more tightly correlates to the Service business than the leading edge does, and the Systems business outperforms during that time period, in addition to the factors that Mark highlighted.

Very helpful, thank you.

Your next question comes from the line of Stephen Chin with UBS. Your line is now open.

Hi, Rick, just a question on your thoughts of technology upgrades versus capacity expansion. Now do you think it's fair to say that foundry logic is capacity-driven now and memory is technologically- driven now, but both could be more capacity heavy as we head into the second half of the year? Is that how you're planning KLA?

Stephen, right. I think that's -- generally try -- I might modify it a little. There's no question that there is technology happening in the foundries, as well, particularly in the areas of the advanced design rules, and that's a big catalyst for growth for us. But no question that memory right now is about technology, and it's also where we see capacity when we talk about the wafer manufacturers, which have been very, very slow. The only purchases we've seen out of wafer manufacturers have been associated with technology, indicating that we believe there'll be opportunity once they, too, resume their growth. But right now it's all about technology and I'd say the one -- in the middle is NAND as it deals with advanced technology and we're hoping to see some improvement in capacity later on NAND.

Okay, thanks, Rick.

Sure.

Your next question comes from the line of Ben Pang with Caris & Company. Your line is now open.

Things for taking my question. Two questions. One, if you look at the order guidance, if you didn't have that push out would your order guidance pretty much just been flat then at the midpoint?

I think that's right.

Okay. And then when you talk about the DRAM strength, are you just talking about the June quarter, or do you have some visibility beyond the June quarter on DRAM?

We don't have a lot of visibility beyond it. We do see some June activity, but as you know -- I'm sure you know -- there's been a couple disruptions in DRAM, if you just look at some of the players, that have caused everybody to be able to tap the brakes. One player didn't have really any access to capital and the other one had big financial problems, so that kind of froze everybody.

Since then, you have one that's going through the process, and we think there'll be some resolution when it comes to the bankruptcy in [Velpita] and the other one is merger completed in Korea, which means they'll release some of the CapEx. So we'll see technology, we're definitely seeing signs of that in the current quarter, and then we expect that later in the year we'll see some resumption of capacity investment or more technology. But we're not talking about big numbers. It's been almost off, so we're talking about off of a very low base.

Okay, and one final one. On the reticle inspection you commented that -- I guess it'll be slow for a little while before you expect to see a pickup. Is a pickup around 22-nanometers, then? Is 28-nanometers essentially done for reticle inspection?

I think there's two ways to think about it. There's definitely -- there is some truth to that that the -- we sold a number of our 6XX series. The other thing is there's going to be some fab line business that becomes available. when the yields are low on the advanced design role there is less business in the fabs for some of the reticle qual business, so we see less business there until the yield issues really get ramped, and so I think that those are two factors associated with that.

Thank you very much.

You bet.

Your next question comes from the line of Edwin Mok from Needham & Company. Your line is now open.

Hi, thanks for taking my question. Rick, I noticed that your metrology order is down for the quarter, was that due to just timing or is it specifically related to a certain end market, can you help us out with that?

Well, down but above -- down quarter-on-quarter, but they're running a little bit higher than they had historically. I think it was also, frankly, the strength of the wafer inspection makes it as a percent come off. But, yes, there was timing associated with that. Some of that we'll see as we go forward, and then it's also associated with some strength in wafer displacing them.

I see, it's just a mix issue then. And then a question on NAND side. I guess some of your peers have talked about NAND looks like it's going to be softer this year than was a lot of people were predicting for the year. Have you guys seen that softness in NAND, or do you think you might not see that because you're more tied to technology spending rather than these capacity (inaudible)? Can you help us out with that?

Yes, there's no question on NAND. Our capacity's been slow and we don't expect that to change much. Where we have seen some business and had a reasonable quarter in the March quarter was associated technology. But as we said, going forward, even in the June quarter we expect to see NAND as a smaller percentage of a smaller number. So, agree that we don't see a tremendous amount of investment in NAND either, except for some technology buy.

Great, that's all I have, thank you.

Thank you.

Your next question comes from the line of Patrick Ho with Stifel Nicolaus. Your line is now open.

Think you much. I think, Rick, you may have touched on this with one of the prior questions, but I just wanted to get clear. With some of the challenges emerging in memory manufacturing, particularly on the NAND side of things with vertical NAND structures forthcoming, where do see the process control intensity for you guys, in terms of either metrology and inspection. Do you see metrology given the bulk of those increased dollars, or are there inspection opportunities, as well?

So, there's two sides of it. One is the overlay challenges and the 3-D structures when it comes to making fill measurements, are both going to drive metrology for us. When it comes to the defectivity associated with the advanced design rules, just smaller devices but also leave the VNAN structure creates opportunity for the wafer inspection. The other thing we've seen is some opportunity for bare wafer into memory in places where we hadn't necessarily seen adoption in the past, so we think that's a good opportunity for us to penetrate further in those markets.

So I'd say the mix is pretty good. Given that wafer is overall a larger percent of our business been metrology, I think you'll probably see equal weighting increase in opportunity, which means the mix stays similar, but both go up as a result of the process complexity. And that's based on the preliminary data we're seeing now and what we're working with customers in their development.

Great, thank you very much.

Thank you.

Your last question comes from Mehdi Hosseini from Susquehanna Financial. Your line is now open.

Thanks for squeezing me in. I have two follow up. I'm just trying to understand the dynamics of this push out from March to June and apologies in advance if I'm beating a dead horse. But when I look at what we have heard from your customers and the customers' customers over the past couple of weeks, it seems like one major fabless company would have to redo their layout and come up with a new reticle set, or mask set. Is that what could explain what led to this push out?

No, the push outs were related to just transferring of information and data, some hiccups in IT, and we have since booked the orders.

Okay. And then June quarter has historically been your strongest quarter, so does this push from March to June mix this June quarter even bigger than historical trends in terms of terms of sequential changes?

Possibly. You notice we have a ready wide range on June capturing that. A couple of things have happened. One, we're in pretty big numbers for us, and we're talking about a not that large customer base, which has always been true but it's especially true now, and so you have large orders from a few customers creating a large range and a certain amount of uncertainty.

The thing that does give us some confidence is, there's a high demand for slots and so for us to be able to respond to support our customers, so we think we'll get more clarity as the quarter goes on. But I think as we have seen in the last few quarters it's getting harder for us to have much visibility although we see demand, just because we have a fewer number buying a larger percent of the order book. And so I would say we're going to -- it'll be right down to the wire, as it was at the end of March, and that's why we've given such a large range.

Would it be fair to say that the visibility to your customers will actually become even more challenging later this year because there could be a pause as they determine or evaluate what the demand would be next year. Could that lead to a pause in booking patterns because the visibilities are very limited and orders have become very lumpy?

I don't think so. I think that we're at a pretty narrow visibility now, and I don't think it'll get much worse. The only exception I would give you, the caveat, if you go back to a market situation where there's macroeconomic shock then all bets are off. But I think we're living in a world now where our customers are driven by consumers, many of our customers are not producing for their own needs but producing as foundries, and therefore they have less visibility and therefore we have less visibility. And I think it's unfortunately the new normal, because I think foundries will dominate the CapEx spending because they're the ones that are really benefiting the most from the mobility work, which is where most of the business -- semiconductor growth certainly looks to be for the next several years.

Got it, thanks so much.

Okay, thank you.

There are no further questions at this time. I'll turn it back to Ed Lockwood for any closing commons.

Think you, Steve, and we'd like to thank everyone for joining us this afternoon and for your continued interest in KLA-Tencor.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.