科磊 (KLAC) 2013 Q4 法說會逐字稿

Good afternoon.

My name is Jay and I will be your conference operator today.

At this time, I would like to welcome everyone to the KLA-Tencor Corporation fourth-quarter fiscal-year 2013 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 hand the call over to Mr. Ed Lockwood with KLA-Tencor Investor Relations.

Please go ahead sir.

Thank you Jay.

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

Joining me on our call today are Rick Wallace, our President and Chief Executive Officer, Mark Dentinger, Chief Financial Officer, and Bren Higgins, Vice President Finance and prospective Chief Financial Officer.

We are here to discuss fourth-quarter results for the period ended June 30, 2013.

We released these results this afternoon at 1.15 p.m.

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 will also find a calendar of future investor events, presentations, and conferences, as well as links to take KLA-Tencor's SEC filings, including our annual report on Form 10-K for the year ended June 30, 2012 and our subsequently filed 10-Q reports.

In those filings, you'll find descriptions of risk factors that could impact our future results.

As you know, our future results are subject to risks.

Any forward-looking statements, including those we make on this call today, are subject to those risks and KLA-Tencor cannot guarantee those forward-looking statements will come true.

Our actual results may differ significantly from those projected in our forward-looking results.

More information regarding factors that could cause those differences is contained in the filings we make with the SEC from time to time, including our fiscal year 2012 Form 10-K, and our current reports on Form 8-K.

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

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

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

Thank you all for joining us on our call today.

Given that we have provided a thorough update just two weeks ago at SEMICON West, I'll focus my commentary on summary highlights of our results and provide guidance for September.

Then Mark will follow with a more detailed review of the Q4 financials.

Let's begin with a quick review of the quarter.

Gross bookings in June were $713 million, down slightly from the March quarter.

June quarter revenue was roughly flat compared with March at $720 million, coming in above the midpoint of the range of guidance.

Non-GAAP earnings-per-share were $0.82 in Q4, also above the midpoint of guidance.

Cash flow from operations was $176 million in Q4, and we were active in returning value to shareholders, repurchasing approximately 1.3 million shares in the quarter for $68 million.

For the full year in fiscal 2013, we repurchased 5.4 million shares for a total of $273 million and paid dividends of $266 million.

Finally, as we announced on July 9, our Board of Directors has authorized an increase in the level of the Company's quarterly dividend to $0.45 per share.

This is the fifth increase in the quarterly dividend level since it was first instituted in 2005 and reflects management and the Board's confidence in the long-term outlook for the Company as well as our ongoing efforts to reward our stockholders for their continued investment.

Our performance in Q4 highlights the continuation of the trend of market technology and business model leadership for KLA-Tencor as the increasing costs and complexity associated with managing yields makes process control increasingly more critical to our customers' success.

Against this backdrop, KLA-Tencor is successfully executing our long-term strategic objectives and delivering strong stockholder returns.

Turning now to our view of the current business environment, the Q4 bookings profile for KLA-Tencor was highlighted by order strength from memory customers.

Memory accounted for 44% of gross bookings in June, with several customers delivering upside to their original order forecast in the quarter.

We expect memory orders to grow to 55% of our bookings in September with orders to support a large new fab project comprising a significant portion of the mix.

We are also experiencing more breadth of demand among DRAM customers to support technology transitions and growth in mobile DRAM.

Memory customers are facing increasingly more complex yield challenges at the leading edge.

And as a result, we expect to see higher relative adoption of process control and strengthening market share for KLA-Tencor in leading-edge memory as customers continue to advance their technology roadmaps.

Foundry accounted for 33% of new orders in the June quarter.

We expect foundry to comprise approximately 35% of September bookings with demand spread across a broad base of customers and focused on ramping leading-edge devices.

Because foundries tend to have the highest adoption of process control, the sustained level of foundry investment we are experiencing is favorable to KLA-Tencor and a key driver to our market leadership and strong financial performance.

Finally, bookings from logic customers represented 23% of new orders in June driven by continued migration to 14 nanometer.

In keeping with our expectation for logic demand to be concentrated in the first half of calendar 2013, bookings from logic customers are anticipated to decline to 10% of the mix in September.

Now for some additional perspective on the demand picture for the remaining of the calendar year.

As we noted at SEMICON West, we expect order levels to strengthen modestly in the second half of 2013 with sustained strong demand from foundries and the growth in memory offsetting a weaker outlook for Logic.

This is consistent with our view for industry CapEx to be down in the range of 5% to 10% and total revenue for KLA-Tencor to be down in the range of 8% to 10% for calendar 2013.

Looking ahead to calendar 2014, although it's too early to quantify with any detail, we are aligned with the widely held view that the 2014 year will be strong for the industry and have significant industry growth as the factors which have sustained the high level of CapEx investment in the cycles remain in place with mobility markets fueling a rapid pace of innovation in next-generation semiconductor devices and driving growth for the market leaders.

Turning now to our outlook for the first quarter of fiscal 2014, we expect September bookings to be in the range of $600 million to $750 million.

Guidance for revenue in September is in the range of $620 million to $680 million, and non-GAAP earnings-per-share are projected to be in the range of $0.53 to $0.73 in the quarter.

With our strong shipment revenue backlog levels and our anticipated order growth in the December quarter, we expect revenue growth to resume in the fourth quarter of calendar 2013.

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

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

There was a $0.02 after-tax difference between this quarter's GAAP and non-GAAP EPS.

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

Most of my prepared remarks on operations will refer to non-GAAP information.

A reconciliation of our GAAP to non-GAAP income statement is attached to our press release and available at our website.

Q4 new orders were $713 million, down from $738 million in Q3.

Q4 net orders were $705 million.

The regional distribution in new systems orders and the quarter-to-quarter change in distribution were as follows -- the US, 38% of new systems orders in Q4, up from 17% in the March quarter.

Europe was 6% of new systems orders, down from 17% in Q3.

Japan was 12%, up from 9% last quarter.

Korea was 10%, even with last quarter.

Taiwan was 10%, down from 35% last quarter.

And the rest of Asia was 24%, up from 12% in Q3.

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

Wafer inspection was 54% compared to 51% last quarter.

Reticle inspection was 9%, up from 6% last quarter.

Metrology was 14%, down from 20% in Q3.

Our non-semi businesses were 2%, down from 3% last quarter.

And service was 21% of new orders in Q4, up slightly from 20% in Q3.

Finally, for semiconductor systems, the distribution in new orders by segment and the quarter-to-quarter change in distribution were as follows.

33% of new systems orders in Q4 were from foundry customers, compared with 47% in Q3.

Project customers were 23% of new orders in Q4, down from 25% in Q3.

And memory orders were 44% in Q4 versus 28% last quarter.

Looking forward, we expect that new orders for Q1 fiscal 2014 will be within a range of $600 million to $750 million.

In Q4, we shipped $769 million, up from $694 million last quarter.

The shipment numbers include both system shipments and services revenue, and we expect shipments between $620 million and $680 million in Q1.

Total backlog at the end of Q4 decreased slightly from the end of March, and we ended the quarter with about $1.1 billion in systems backlog.

Backlog at June 30, 2013 included $271 million of revenue backlog for products that have been shipped and invoiced but have not yet been recognized as revenue, and $817 million in systems orders that have not yet shipped.

Total revenue for Q4 was $720 million, down about 1% from $729 million last quarter.

Systems revenue in Q4 was $570 million, down about $10 million from last quarter.

And services revenue was $150 million, roughly even with Q3.

Our expectation for total revenue in Q1 is a range between $620 million and $680 million.

Non-GAAP gross margin was 57.8% this quarter, approximately flat with the 57.9% from last quarter.

For Q1, we are expecting gross margins between 56% and 57.5%.

Operating expenses were $223 million in Q4, up $10 million from the $213 million we posted in Q3.

Part of the quarterly net expense increase was attributable to a decrease in reimbursements under our direct-write lithography program.

More specifically, a $4 million milestone payment which had been expected in Q4 is now expected in Q1.

Consequently, we anticipate net operating expenses in Q1 will be down slightly from Q4 to a range between $218 million and $222 million.

OIE was a net $10.5 million expense in Q4, up slightly from the net expense of $10.1 million in Q3.

For modeling purposes, we expect OIE to be net a expense of about $10.5 million in Q1.

In Q4, our non-GAAP income tax expense was $44 million, or 24% of pretax income, versus a 14% rate in Q3.

The unusually low Q3 rate was mostly related to reinstatement of the US federal R&D tax credit in January.

As we move forward, we are forecasting a non-GAAP tax rate of about 23% for fiscal 2014 based upon the anticipated distribution of next year's earnings.

The actual rate could differ, especially quarter-to-quarter.

But under our current structure, we believe 23% is the midpoint in a range of outcomes, and we have used 23% in our Q1 non-GAAP EPS guidance.

Non-GAAP net income was $139 million or $0.82 per share in Q4.

At the revenue range I had briefly mentioned and applying a tax rate of 23%, we would expect our Q1 non-GAAP earnings to be somewhere between $0.53 and $0.73 per share.

Weighted average share count used to compute EPS in Q4 was 168.7 million versus 169.2 million in Q3.

During Q4, we spent $68 million repurchasing about 1.3 million shares, and as of June 30, 2013, we had approximately 5.9 million shares available under our current authorization.

For guidance purposes, we are modeling an average share count of about 168.6 for Q1.

We also paid $66 million in dividends in Q4.

We anticipate continuing to repurchase shares as well as paying a quarterly dividend of $0.45 per share in Q1.

On our balance sheet, cash and investments ended the quarter at $2.9 billion, up $39 million from March 31.

Cash generated from operations was $176 million in Q4 compared with $415 million in Q3.

The quarter-over-quarter decrease in cash flow from operations was largely attributable to a $155 million decrease in customer collections as well as higher outlays for trade tables, income taxes, and interest on our debt.

Net Accounts Receivable ended the quarter at $525 million, up from $454 million at the end of March.

DSO was 66 days at June 30 versus 57 days at March 31.

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

Net inventories were $634 million at June 30, down slightly from $650 million at the end of March.

Inventory turnover based upon GAAP cost of revenues was 1.9 turns in Q4, the same as Q3.

Capital expenditures were $19 million in Q4, up slightly from $18 million in Q3.

Full-time headcount at June 30 was 5821 versus 5830 at March 31.

We expect our headcount to remain about flat in Q1.

In summary, our guidance for Q1 is new orders between $600 million and $750 million, total revenue between $620 million and $680 million, and non-GAAP earnings between $0.53 and $0.73 per share applying a 23% tax rate.

This concludes our prepared remarks on the quarter.

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

Thank you Mark.

At this point, we'd like to open your call up to questions.

We once again request you limit yourself to one question, given the limited time that we have for today's call.

Please feel free to re-queue for your follow-up questions, and we'll do our best to give everyone a chance to follow up as time permits.

So Jay, we are ready for your first question.

(Operator Instructions).

Satya Kumar, Credit Suisse.

This is Farhan asking the question on behalf of Satya.

I just wanted to understand your expectations for the full year revenues a little better.

It seems like you're down-ticking the revenues for this year to be somewhat underperforming the (inaudible).

So I just want to understand like what's driving that change?

I'm going to let Bren take that one.

So I think when you look at the second-half view, which is essentially consistent with what we said at SEMICON of $1.5 billion in orders, when you flow that through our backlog number and then take the revenue guidance for this quarter, it does lead you to this calendar year view of the calendar year revenue down 8% to 10%, so roughly consistent with our expectations for the industry of down somewhere between 5% and 10%.

But that's how -- as we bottoms-up the revenue this quarter to come up with the $650 million and then flow through our backlog model into the December quarter.

So that's how the math works.

Okay.

Then thinking about 2014, it seems like 2013, just based on what you're saying for the second half, the memory shipments seem to be up quite a bit.

And that could be one reason maybe why you are not doing as well as the WFE this year.

How should we think about 2014?

How do you think related to the WFE would you expect should process control and inspection in KLA be up next year or do you think it will be down?

Certainly, we see the memory mix being probably strongest in the quarter that just finished and the September quarter.

For us, we see memory kind of reverting back to historical norms in the December timeframe.

And next year I think the large -- the expected increase in the overall market will be driven by traditional the drivers of late, which are the Logic and foundry, both of which are going to be good for KLA-Tencor.

So we think 2014 should be a good year for us and for process control.

Thank you.

That's all I have.

Timothy Arcuri, Cowen & Co.

Hi, thanks.

Rick, you said at SEMICON that you thought orders were going to be about $1.5 billion during the back half, so if I just take the midpoint of September, that implies you're like $875 million or up 30% sequentially in Q4.

Is that sort of the way to think about it?

Yes.

No change to our view of what we think the rest of calendar 2013 looks like.

Okay.

And then just as you assess maybe some of the stuff going on with respect to your exposure to 3-D and to thin-set, as more of that stuff ships next year, can you again sort of remind us how to think about your exposure to 3-D NAND relative to thin-set?

So if we were to try to assume what sort of an impact that might have on your ability to outgrow the industry next year, those two factors?

Thanks.

Sure.

I think 2014, we will expect to see some 3-D NAND, and as we mentioned, we have, we believe, a good position, very good market position when it comes to serving that market, and we do see growth off historical levels for that.

And I think there's also a period of investment now basically playing catch up a little bit on the memory side.

So memory will be at a higher level of intensity than it's been in the past, driven by that, but not as high as it would be if it were pure foundry and logic.

So we kind of go back to the historical.

We think next year looks a little bit more like the 70/30 split in logic and foundry on the 70% and memory on 30% with intensity going up in both.

Thanks a lot, Rick.

It's Bren.

Just one other thing.

So on the order outlook, so at $1.5 billion, if you take the midpoint of the Q1 guidance, that puts the December quarter nominally around $825 million, so up about 20%.

Up 30% would be a little bit higher than what we see today, so largely unchanged from -- or essentially the same as what we saw at SEMICON.

(Operator Instructions).

Krish Sankar, Bank of America Merrill Lynch.

Thanks for taking my question.

I had a two-part question.

Number one, on the revenue guidance, it seems a little weaker than expected.

Is it partly because from all these memory bookings you made scheduled for shipment in calendar Q4 or later?

And the second question I had is since you're kind of (inaudible) into the December quarter bookings, how would that mix look like if memory comes down?

Are you expecting foundry to come in a big way to pick up the slack in December?

Thank you.

This is Rick.

I'll take part two end and then give Bren part one.

We do see the mix reverting back to the 70/30 mix we talked about at SEMICON West in the December quarter, memory being 30%, most of that actually being in the NAND space as we get out to December.

And so logic, we'd see some pickup in logic and foundry to comprise the rest of what we see for the rest of the year.

And then Bren can take the revenue for Q1 comment.

On the revenue guide, so there are a couple ways to model it from a top-down perspective.

But when we give the guidance, what we do is we build it up bottoms-up tool by tool.

And in some cases, you have tools that have acceptance cycles that we have to go all the way to product acceptance to take revenue, which impacts timing.

And then other tools, sometimes you can take that revenue at shipment.

So as we build it up and go through that process and look at it, we come out at about $650 million.

So when you look at the overall model, leadtimes are still roughly what they have been.

We are averaging about four months from order to shipment and about 1.5 months in terms of shipment to revenue.

So that's how it works, so sometimes you can end up with some disconnects from a top-down versus bottoms-up as we build it up for the current quarter, which is our process.

That's where we end up.

Got it.

Thanks Rick.

Vishal Shah, Deutsche Bank.

Thanks for taking my question.

Rick, you mentioned memory intensity is going up.

Can you talk about your expectations of process control intensity in the memory sector as you look into the next couple of quarters?

And how much of the impact on revenue could be attributed to share shifts?

In other words, can you say that your overall market share this year is going to be flat, up, down versus last year?

Thank you.

Sure.

So let me start with the memory question.

What we laid out at SEMICON and we have no reason to change it now is memory intensity at the 4X node, we saw that in aggregate about 8.8% with it going to 9.3% -- this is process control intensity and memory -- at 2X, and 10.2% on the 1X.

So what we're seeing now is, depending on who is buying, that increased in intensity, but that's averaged over time.

And what happens is much as the same the case with logic or foundry, you see it maybe heavier at the beginning of a ramp, and lightening up as you go later into a ramp.

So there are some increased buying -- there's some increased buying now because at the beginning of some new fab activity and new ramps.

That's part of why we are seeing a heavier concentration of memory right now.

But over time, we think it normalizes to those percentages that we laid out.

And the other question was on share.

Our expectation, we just did the analysis.

We finished our fiscal year.

We looked back, and we did not see a meaningful change in market share in terms of dollars spent on process control for KLA-Tencor as a percent of what we know to be the overall spend.

As we look forward, we don't anticipate any change in that in our plans for the upcoming fiscal year, and we do think there are actually some opportunities for share improvement.

Thank you.

Stephen Chin, UBS.

Thanks.

Hi Rick.

Just wondering you could share your view on how much you think 2014 WFE spending should be up.

Are you kind of estimating at least double-digit growth, and do you think foundry CapEx spending will be up again next year?

It's, as you know, Stephen, really hard to predict.

I went back in time and I was looking at August predictions and, well, it was a bad year to pick it.

But 2008 -- and some of the leading equipment companies were saying 2009 was going to be up 10%.

That didn't happen, as you recall.

So I think the perils of long-term forecasting are still with us.

But assuming there's no macroeconomic changes, we do see 2014 looking better, primarily driven by the transition toward the 20/16 nanometer nodes in the foundry section, continue divested logic and memory returning to maybe more historical levels of investment driven by some of the activities in DNAND and the better pricing in DRAM.

So all in all, we are kind of sitting with the rest of the industry in terms of industry consensus on what we think 2014 will look like.

We think we're going to start seeing some of that increased activity, as we said in the December quarter, supporting what we believe will be a pretty good year in 2014.

Thanks, Rick.

Mahesh Sanganeria, RBC Capital Markets.

Rick, you talked quite a bit at the SEMICON on the competitive front on what's going on.

I mean there is of course a lot of talk about the market share movement.

Can you update us a little bit more on the Brightfield inspection?

You talked about that we are at the trailing edge (inaudible) and there is some movement.

As we see the 20 nanometer orders, are we going to see be a big pickup in your share in terms of Brightfield inspection?

Sure.

Let me start with one of the things that was brought to my attention as we were reviewing last year.

We had a record shipment year for Brightfield in our fiscal 2013.

It's an all-time record for the fiscal year.

And as we look forward for 2014, our fiscal 2014 starting now, we see continued opportunity for Brightfield as we look at some of the challenges being faced by customers in the 20 and 16 nanometer transitions, and also some of the activity that's going on, as I said, the renewed investment going on in memory.

So we feel very good about our position there and think we'll continue to show strength.

And as I mentioned, the NanoPoint discussion we had at SEMICON West, we are actually seeing more positive examples of that coming out, even as recently in the last couple of weeks, with customers.

So, we feel very good about our position in broadband inspection.

And one quick follow-up on the memory, I think you mentioned but I'm not sure that I got it exactly.

Can you tell us that, in terms of in the memory, how is the composition between DRAM and NAND changing from June quarter to September to December quarter?

We had -- in June, it was about 60% of the memory was for NAND, and it looks to be about that for September.

I don't actually have it modeled for the December quarter at this point, but roughly 60/40 for NAND versus DRAM, which is good to see DRAM actually investing at that level.

It had been much higher in the past.

But there is some catch up going on in DRAM.

Okay.

Thank you very much.

Mehdi Hosseini, FIG.

Thanks for taking my question.

Rick, I have a rather philosophical question.

When I talk to technologies, both in the memory and also logic, the guys who are in the field, they are actually doing the design for circuit chip or working on the project technology, I hear conflicting things.

On the sense that, as was captured last night by Cadence Design, there's just not a whole lot of design activity.

And if I were to assume that EDA companies are a leading indicator, they're not seeing a whole lot of volume until 2015.

When I talk to technologists on the NAND side, nobody sees commercialization of 3-D NAND until 2015 or 2016.

So, I want to hear your opinion as to what gives you confidence that, in this kind of environment, CapEx next year could be really great?

All right.

Well, in terms of the investment, let me start with the second one, what we've seen on 3-D.

People are absolutely building fabs, ordering equipment, and talking about need for increased ability to support those ramps.

Those are the signals we are getting.

And some of the business that we got in the June quarter and we expect to get in the next two quarters is in support of that.

And there's a lot of activity in terms of people moving to support that.

Customers, multiple customers making investment there.

So whether or not there's a demand for it, I actually have heard differing views that there is actually pretty strong demand for the 3-D coming from some new consumer markets.

And the challenge I think will be to ramp and meet that on the new technology.

And that's -- we are feeling that pressure to support those ramps right now.

So, it's as real as any kind of ramp pressure that I felt in the past, people wanting -- customers wanting very explicit support plans because sometimes there are new locations.

In terms of the thin-set I do think that the question of how long the 20 nanometer node lasts is a very good question.

And we are seeing some evidence that there are customers that are going to skip to 16 and 14 because they feel that either they are not necessarily going to benefit enough from going to 20 and they're going to move beyond that.

I don't know that the mix is going to be incredibly high initially.

I think that there are probably not as many starts as maybe there are some that that may be somewhat consistent, that it's a limited number of devices on those.

But that is not atypical for a new node RAM.

So we are definitely hearing very similar conversations from customers.

The ones that are later in the process of 28 nanometers I think will come later, but the ones that are further along and are in their 20 nanometer maybe higher volume at this point are definitely pushing us toward preparing for the next generation.

So, it may be true, but it's certainly not the signs.

In fact, I'd say that the memory thing has surprised us in terms of how much investment is going in, in some cases to brick-and-mortar, to prepare for what they believe is a strong customer demand.

Srini Sundararajan, Summit Research.

I just wanted to ask you as to whether you see any differences between the thin-set in the 28 nanometer node and maybe in the 14 nanometer node, or the 20 nanometer node.

What are the differences as you go down in the (inaudible)?

The differences for us -- so I'm not a device physicist, so I'm not going to be able to tell you the differences in terms of challenges performance-wise, or leakage-wise.

But what we are differently seeing is 28 nanometer in some customers is much more mature than others.

So I would start by saying there some customers much further along on the yield curve.

There are others, by the way, who are still struggling with yield on 28 and working very hard.

And we are seeing good opportunity from those customers to try to get them up and yielding.

On the next generation, I think that the tolerances are all very, very tight for people.

So we are seeing a strong push toward next-generation inspection and measurement tools from us to be able to handle the increased I guess process intolerance, if you will, and that's what's driving us right now.

We have very tough specs coming from customers that are going down that path and it's resulting in us having to sell our latest generation equipment to serve that.

So I think it's a refresh cycle.

The things -- or the products that we're going to make to support 16 and 14 are going to be the leading edge that we have now.

I think there will be very little of the trailing edge in those nodes on those critical layers because the requirements are just too high, both from a defectivity standpoint and a metrology standpoint.

Thanks.

Weston Twigg, Pacific Crest.

Thanks for taking my question.

Just was wondering real quickly.

You had mentioned you see some opportunities for share improvement.

I was wondering if you could give us a little more detail.

I know that, in the past, you mentioned that NanoPoint might help with potentially some e-beam review traction.

But is that one of those opportunities and are there others that you might like to highlight?

I think we've got some pretty good opportunities.

I mentioned NanoPoint.

I think we have some good opportunities in terms of films.

And actually it might be surprising, but I think there are some good opportunities in reticle.

And that's an area where historically we've had some strong share, has not been quite as strong recently, partly because we've been toward the end of -- not end, but we are in a mass maker holiday a bit, not pushing mass technology as much as you do double and quad patterning.

And some of the new challenges on some of the advanced reticles, once again taxing and technology and really play our strength as technology leaders.

And so we think there's a reasonable likelihood we'll actually see share gain in reticle as reticle starts investing again as we go forward.

Also, we found some customers recently that felt that they had strategies where they could limit their adoption of reticle potentially, even in the fab, and they have had been burned by some problems recently and they're coming to us for some solution.

So, we feel pretty good about the opportunities there.

Okay, good.

That's helpful.

Just on the NanoPoint piece, you mentioned some good revenue growth opportunity and I'm wondering how NanoPoint plays into that in terms of the revenue from it being an add-on option versus it driving incremental demand in e-beam and Brightfield.

Yes, I wouldn't stress the revenue from NanoPoint as much.

I think that what NanoPoint does is it creates additional value.

So, we talked a lot about it at West in terms of what it was doing Brightfield.

I just mentioned earlier in the call when we tallied up FY 2013 that just finished, we had a record year in Brightfield for the all-time record for the Company.

And I know that part of that was driven by some of the adoption of NanoPoint.

And when it comes to e-beam, it is more substitutional.

I think there are some customers that -- and this is part of what's driving it with Brightfield -- is they were feeling that some of the defects that they were looking for they could only really find them with e-beam.

And even though e-beam had incredibly slow throughput, that was the only thing they could do.

And with NanoPoint, to a number of those customers, we've demonstrated the ability to -- we leverage a much, much faster Brightfield tool in conjunction with NanoPoint to take over those inspection points.

And I think the result is more adoption for Brightfield and, frankly, squeezing some of the opportunities that e-beam had been seeing.

Very helpful, thank you.

Jagdish Iyer, Piper Jaffray.

Thanks for taking my questions.

Two questions.

First, given the intensity of Edge and their position steps in 3-D NAND and (inaudible) unproven, how would you characterize the VNAND?

Is it you have a foundry RAM that you have seen where people have stumbled on 28 nanometer.

I'd like to get your thoughts on the VNAND and how incremental would be the opportunity on 3-D versus 2-D NAND.

And I have a follow-up.

Sure.

I think one thing I did learn more about I'd say since West, SEMICON West, is it does appear that there's pretty good progress being made by some leading customers on VNAND, and I think that it is create opportunity.

So I think some of the question about will their investment materialize, I think is there some evidence to suggest that they are making progress.

And it's creating a lot of opportunity for us because a lot of the help we are being asked to provide is to assist in those ramps.

So, I think we are past maybe some of the parametric challenges and into actual defectivity.

So I think pretty good opportunity, although it's a different challenge process-wise.

So we don't really know yet what we don't know in terms of how our customers are going to use the tools.

So we are seeing good opportunity there.

And I think that, relative to 2-D, it's just different because it uses some different technologies to get at the high aspect ratio structures.

And you had a follow-on?

Yes, I have a follow-on.

So how should we be thinking about your logic orders in calendar 2013 versus calendar 2012 in terms of is there going to be a year-over-year implement in that segment?

Can you give us some clarity on that?

Thanks.

For calendar 2013, yes, we are not really modeling out as much as we finish the calendar year.

That would be forecasting more into December than I think we are comfortable doing.

But I don't think we see on average not a big change.

Down probably a little bit at this point, but again a lot of time to go here before we get to the end of the year.

The reason was that one of your customers, key customers, is going to start ramping 14 nanometer and just wanted to get the magnitude of how we should be thinking about it.

Thanks.

Right.

We had a strong first half in logic.

So we tend to get longer leadtimes in logic, so that certainly supported the first half of the year.

so we expect it down a little bit in the second half but on the strong first half.

Thank you.

Mark Heller, CLSA.

Thanks for taking my question.

Just to follow-up on a prior question, can you just discuss the inspection challenges associated with 3-D NAND?

I've heard that it's incredibly more difficult to inspect these devices because of the way they are built.

Can you just discuss whether in fact these chips or this 3-D NAND can be inspected?

They can be inspected.

It's different though because now we're looking in a vertical direction.

So part of the attraction of 3-D NAND is you can back off the dimensions, so you're not putting -- the lines and spaces aren't as small, but they're going vertical.

So instead of just looking for smaller and smaller defects, which would push in one axis the performance, you're actually looking for defects in the vertical direction, which pushes another axis.

Fortunately, our tools have enough flexibility in them to be tuned to do those kind of inspections.

Then there's the review challenge, and then there's the corrective action.

So we are finding, as we work with our customers, that we're able to create methodologies with them that help them address some of these defectivity challenges, but they are just different than what you would see if you were just in straight linear scaling on a 2-D device.

Okay, great.

And just a second question quickly.

Just what are your expectations for timing of sort of 16 nanometer thin-set or 14 nanometer thin-set from the foundries in terms of spending there?

We expect to start seeing investment toward the end of the calendar year.

And then I think throughout 2014, there should be continued investment as the leaders are followed by other close -- fast followers behind them will see continued investment through the year in 2014.

Thank you.

Edwin Mok, Needham & Company.

Thanks for taking my question.

First question on the memory customers.

I think you mentioned that you have seen a broadening of customer spending.

But at the same time, I take your commentary on the back half and how it implies for the fourth quarter.

Can it imply your memory order could actually be down even though you have one big customer that plans to RAM a new fab.

Can you help reconcile those for me?

Our leadtimes tend to be longer than others.

I see.

So basically a lot of orders already come in (multiple speakers) horizon.

We talked about it being strong in September as well.

I see, okay.

That's fair.

Then one quick question on gross margin.

This quarter, your gross margin came in above your guidance range.

And I remember last quarter, it was something due to revenue, timing of revenue, that allows you guys to have stronger margin.

What happened this quarter?

And why are you guiding for September gross margin to go back to that 56%, 57.5% range?

Incremental gross margins in Q4 were pretty consistent with our model at about 67%.

So revenue was largely flat and as you know with our products, we always end up with a fair amount of puts and takes around the mix.

But with mix being sort of largely flat in the quarter from our guidance, we ended up with a little bit better factory utilization on the stronger output in the second half, and service and warranty and things like that were favorable as well.

So that's how we got the incremental point from the guidance.

I see.

Thank you.

Patrick Ho, Stifel Nicolaus.

Thank you very much.

Just a quick question in terms of the R&D spend.

It did tick up a bit this quarter.

First, in terms of is there any -- can you give a little bit of granularity in terms of where that spending may have been targeted, whether it's for $450 million or just for continued product development?

And secondly, how do you expect it to trend, at least in the first half of the year, calendar year of next year?

So I've been saying for a while that the OpEx range was going to be somewhere between $215 million and $220 million, and we've been bouncing around within that range.

Programmatic swings have caused it to be a little bit under.

In the last couple of quarters, it has been, but there was always sort of this possibility it could be over that too.

We guided about $218 million, $219 million back in April.

We came in at $223 million, but as Mark mentioned in the prepared remarks, we did have a milestone related to a cautionary plan we have with the government that slipped out of the quarter.

So that drove this incremental $4 million or so from our guidance.

As we look out going forward, I think we are probably, as we size our FY 2014 based on our expectations here around the second half of the calendar year, and then an improving environment into calendar 2014, we are sizing the Company somewhere around $880 million, let's say, plus or minus $10 million.

So it works out in that range of around $220 million or so a quarter.

But we could have some fluctuation here and there around it.

You mentioned $450 million.

$450 million is in the number.

We've been pretty consistent in terms of our expectations around that spending.

It's roughly between $50 million and $60 million a quarter that we're -- or $50 million to $60 million for the year that we're going to spend.

And that's largely the same as what we saw last year as well, so no incremental uptick related to $450 million in our plans, at least over the next 12 months.

Great, thank you

Timothy Arcuri, Cowen & Co.

Hi Rick.

I just wanted to ask another question here.

I was looking at your memory order guidance for September, and you're going to be back up to peak absolute memory order levels, back into 2007 type of dollar numbers.

And back then, there was a lot of capacity added by the industry.

I know that this time it's a bit different because this is a new technology, it's going to actually take it time to ramp.

But there's this prevailing wisdom that it's going to be so different this time.

And I guess it just seems to sort of fly in the face of that, particularly given your commentary that there's another company in Korea that's actually readying plans to build out 3-D as well.

So can you just maybe, from just a super-high level, talk about how the memory companies are acting this time, and if it really is going to be a lot different?

You would've noticed that global memory.

Well done.

We are noticing that too.

This one is a little different though, because I think it's front-end loaded at the beginning of a fab ramp with new technology.

So there's no reuse really because there's nothing -- the product mix that we have for dealing with the new technology is all new.

So there's no ability of people to reuse.

But it is largely, for us, going to be front-end loaded towards the beginning of a ramp.

So that's why we see it reverting to normal back in the -- or more traditional 30%-ish in the December quarter, but that's really what that's related to.

We could and we believe we will see, as other companies come online, additional opportunity for us, but again likely front-end loaded and probably over time reverting to the process control intensities for memory that we saw that we outlined at West.

Now, the one difference is we don't really know yet what 3-D problems customers are going to have and I don't believe they know yet just how much process control they are going to need.

So, it looks like a good beginning, but we may be being a bit conservative on the opportunity there as we go forward.

Got it.

Thanks.

There are no further questions in queue.

I turn the call back over to the presenters.

Thank you Jay.

I'd like to thank everyone on behalf of the management team for joining us here today.

A reminder that an audio replay of today's call will be available on our website later this afternoon.

Once again, we appreciate your interest in KLA-Tencor.

This concludes today's conference call.

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