科磊 (KLAC) 2014 Q2 法說會逐字稿

Good afternoon, my name is Candace, and I will be your conference operator today.

At this time, I would like to welcome everyone to the second quarter FY14 earnings conference call.

(Operator Instructions)

Thank you.

Mr. Ed Lockwood with KLA-Tencor Investor Relations, you may begin your conference.

Thank you, Candace.

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

Joining me on our call today are Rick Wallace, our President and Chief Executive Officer, and Bren Higgins, our Chief Financial Officer.

We're here to discuss second-quarter results for the period ended December 31, 2013.

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 will 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, 2013, 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 2013 Form 10-K, and our current reports on Form 8-K.

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

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

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

Thank you, Ed.

Good afternoon, everyone, and thank you for joining today's call.

KLA-Tencor executed well in the second quarter of FY14, delivering revenue and EPS in the upper half of the range of guidance, and shipments above the top end of the range, and demonstrating market leadership and strong execution across our worldwide operations.

New orders were below the range in Q2.

As previously indicated, in Q2 a customer delayed a large order for mask inspection tools, earmarked for 10-nanometer development.

We currently expect that order to book in the first half of calendar year 2014.

Regarding our customer focus and growth objectives, as the market leader in process control, our success is dictated by ongoing productive collaboration with customers, and continuing to innovate and execute, so we can bring new products to market.

KLA-Tencor advanced our leadership in the December quarter, winning key customer engagements in each of our major end markets.

Process control is continuing to play a critical role in enabling the major technology inflections under way at the leading edge, as well as helping customers solve their most complex yield challenges.

Customer highlights in Q2 included adoption of our latest generation broadband plasma inspectors, by customers for 14-nanometer pilot programs in foundry, and in memory for both 3D NAND and 2X nanometer DRAM projects.

KLA-Tencor's broadband plasma inspection platform leads the optical inspection marketplace today, in terms of capability and cost of ownership.

In laser scattering wafer inspection, KLA-Tencor extended our leadership in line monitoring applications in Q2, achieving a significant advantage in head-to-head competition in the quarter, both in terms of dollar and unit share.

Q2 also marked a record for quarterly bookings in our film measurement and optical CD division.

KLA-Tencor's SpectraShape metrology solution is critical in the successful ramp of leading edge logic and memory devices, with complex three dimensional shapes, such as FinFET and vertically-stacked NAND.

Metrology is playing an increasing critical role in the success of our customers' technology road maps, as they move beyond traditional scaling, with the incorporation of new materials, and advanced structures at the leading edge.

Overall, in spite of the bookings data, the December quarter yielded good results for KLA-Tencor, demonstrating the strength of our market leadership, our superior business model, and successful execution by our worldwide team.

Now, for some perspective on the current industry environment.

End demand for our wafer fab equipment continues to be driven by mobility markets, and a high level of investment in customer activity at the leading edge.

Today, the market leaders are engaged in an all-out race to leverage their scale and technology advantages, to gain a competitive advantage.

For 2014, our outlook is for a continuation of this multi-year investment cycle, with the aggregate semiconductor industry CapEx expected to grow at approximately 10% for the year.

As is typical, we can expect the quarterly spending level supporting these technology transitions to fluctuate quarter-to-quarter as our customers address their yield challenges, and adjust their capacity plans and outlook throughout the year.

In foundry and logic, the pace of investment in 20-nanometers is accelerating, and expected to continue in 2014, with the market leader currently ramping early 20-nanometer capacity, and with broader customer participation expected at 20-nanometer later in 2014.

Initial pilot production of FinFET technology at 16- and 14-nanometer is also expected from leading foundries in 2014.

The introduction of FinFET structures in leading edge logic significantly compounds device complexity that drives new requirements for advanced inspection and measurement, to address the significant yield challenges associated with ramping these new devices.

In memory, in addition to the investment in the 20-nanometer planar road map for NAND, the first phase of 3D NAND production has begun, and is expected to grow in 2014, with more than one leading edge memory customer announcing intentions to bring 3D NAND devices to market in the year.

For DRAM, tight supply conditions and improved pricing environment are driving higher investments.

With the increasing cost and complexity associated with introducing 3D structures in leading edge memory, we're seeing higher adoption of process control for memory customers, and we're strengthening our competitive position in this end market.

In summary, 2014 has set up to be an exciting year for our industry, and for KLA-Tencor, with CapEx growth projected in each of our major end markets.

On the technology front, the cost and complexity associated with competing at the leading edge continues to increase, and our customers can no longer rely solely on scaling to achieve their performance and cost improvement targets.

With the incorporation of complex new device architectures materials, and processes such as multi-patterning, FinFET, and advanced packaging, the number of process steps requiring inspection and measurement is increasing.

And our customers are relying more than ever on KLA-Tencor as the market leader in process control, as they execute their growth strategies.

Against this backdrop of industry growth, customer competition, and increasing device complexity, we believe KLA-Tencor is well positioned to continue our market leadership to benefit from the expanding need for process control, and to deliver greater than industry average growth, and superior profitability, and stockholder returns in 2014.

Turning now to the guidance for the March quarter.

Bookings are expected to increase approximately 10% at the midpoint, and be in a range of $700 million to $900 million.

Revenue for the quarter is expected to be between $790 million and $850 million, with non-GAAP earnings in the range of $1 to $1.20 per share.

And with that, I'll turn the call over to Bren.

Thanks, Rick.

Good afternoon.

Revenue for Q2 was in the upper half of the range of guidance at $705 million, and fully diluted GAAP earnings per share were $0.83.

Non-GAAP earnings per share finished the quarter at the upper end of the guided range at $0.85.

In our press release, you'll find a GAAP to non-GAAP reconciliation of the $0.02 difference.

My comments on the quarter will be focused on the non-GAAP results, which exclude the adjustments covered in the press release.

New orders in Q2 were $728 million, finishing below guidance of $800 million to $950 million for the quarter.

As previously discussed at an investor conference in early December, the significant multiple system mash up order that was originally scheduled to book in Q2 moved out of the quarter as the customer shifted the delivery dates for these tools into the first half of calendar 2015.

These shipments are now expected to revenue in the middle of 2015, instead of in the beginning of that calendar year.

Customer concentration is driving more volatility around the order profiles on a quarterly basis.

Though our December orders fell short of our forecast, our aggregate orders across the December and March quarters remain in the $1.5 billion to $1.6 billion range we have been targeting, only slightly below the six-month outlook that we expected at the beginning of the December quarter.

This forecast range is consistent with business levels that would support strong revenue growth for KLA-Tencor in 2014, and strong relative performance for the Company, in what is expected to be a good year for industry growth.

Turning now to our customer segment commentary.

Foundry came in below the original forecast, at 47% of new orders for Q2.

Foundry demand was slightly weaker than expected, due to timing delays for 28-nanometer fill-out capacity, as well as marginal weakness at the leading edge.

We believe the near term foundry push outs are largely a timing issue, and a function of a variety of factors, including our customers' yield improvement activities related to ramping complex leading edge device technologies and architectures, in addition to new capacity timing at both the leading edge and at 28-nanometer, and customer concentration.

We see foundry orders increasing in the March quarter, with strong customer acceptance of our latest generation products driving order growth.

Memory was stronger than expected, at 46% of new system orders in December, with upside from DRAM and from the Japan region driving upside in the quarter.

We expect memory to decline to 20% of orders in the March quarter, as orders for phase one of the latest NAND capacity project are largely complete, and tool installations are in process.

Memory investment remains focused on 3D technology development, and new capacity in NAND and technology upgrades in DRAM.

Logic was 7% of new orders in December, slightly below the original forecast.

Investment by our customers at 20-nanometer and below constituted roughly 63% of the orders we received in the December quarter.

Turning now to the regional distribution of new system orders in Q2.

The US was 26%, up from 22% in the September quarter.

Europe was 1%, down from 8%.

Japan was 12%, up from 10%.

Korea was 18%, flat to September.

Taiwan was 30%, up from 26%, and the rest of Asia was 13%, down from 16%.

The approximate distribution of orders by product group was wafer inspection was 43%, reticle inspection was 11%, metrology was 22%, service was 22%, storage, high brightness LED and other non-semi was approximately 2%.

Total shipments in the quarter were $862 million, up 35% from the September quarter, and $32 million above the $830 million midpoint of guidance.

Customer pull-in activity for shipments of our latest products is encouraging, and highlights the demand for the higher-performance capability required at the leading edge.

In total, we ended the quarter with just over $1.2 billion of total backlog, comprised of $820 million of shipment backlog, for orders that have not yet shipped to customers and expect to ship over the next six months, and $407 million of revenue backlog, for products that have been shipped and invoiced, but have not yet been signed off by customers.

We expect shipments in the March quarter to be down approximately 13% at the midpoint, compared to Q2.

As the shipment pull-ins from March into December, coupled with delivery timing for key projects, drives a lower output level in the March quarter, March quarter shipments are expected to be in a range of $720 million to $780 million, and current expectations are for shipments to return to the $800 million to $850 million range in the June quarter.

Turning to the income statement, revenue for the quarter was $705 million.

This result was up 7% quarter to quarter.

As you may recall, we discussed in last quarter's call that our revenue guidance for the December quarter reflected the impact of high shipment levels of newly-introduced products during the quarter.

As these are new products, they did not meet our criteria for recognizing revenue upon shipment, so customer acceptance is required on these products for us to recognize the revenue.

These systems have met customer expectations, and our product and regional teams have executed our processes well, so we expect we will recognize revenue from these new product shipments in the March quarter.

As discussed last quarter, we expect these factors to result in strong sequential revenue growth in the March quarter.

For the March quarter, total revenue is expected to be in a range between $790 million and $850 million.

Gross margin was 59.8%, up 160 basis points from the September quarter.

Our gross margin significantly exceeded guidance for the quarter, due to a favorable product mix, and better than expected manufacturing efficiencies, due to the higher factory output.

We expect gross margin to be in a range of 58% to 59% in the March quarter, as the benefit of higher revenue volume is offset by a weaker product mix, compared to the December quarter.

With faster order to revenue conversion rates on backlog, our gross margin volatility on product mix has increased.

However, over time, we expect our gross margins to perform consistent with our long-standing 60% to 70% incremental gross margin model.

Operating expenses were $228 million, flat from the September quarter, and in line with the guidance range of $225 million to $230 million.

R&D was $133 million, up $2 million from September, as we continue to invest in key research and development activities, and customer collaborations for next generation technologies.

SG&A for the quarter was $96 million, roughly flat, compared with Q1.

We are continuing to size the Company's quarterly operating expenses in the $225 million to $230 million range, and expect it to remain in this range for the next few quarters.

The timing of product development investments will lead to some fluctuation within this range quarter-to-quarter.

Other income and expense for the quarter was a net expense of $11 million, up $1 million from the September quarter.

We expect OIE to be a net expense in March, between $10 million and $11 million.

The tax rate was 21.5% in the quarter, lower than the 23% planning rate, principally driven by an increase in offshore income relative to the US.

At the 23% guided tax rate for the quarter, earnings per share would have been $0.83.

Going forward, you should continue to use the long-term planning rate of 23% for modeling purposes.

Net income was $143 million, or $0.85 per fully diluted share.

Turning to the balance sheet, cash and investments ended the quarter at $2.95 billion, essentially unchanged versus September quarter.

In the quarter we repurchased $60 million of stock at an average price of $62.87.

As of December 31st, we had 3.9 million shares available for repurchase under our current authorization.

We paid a dividend of $75 million in the quarter.

In July, we raised our dividend per share $0.05 to $0.45 per share.

This was our fourth consecutive annual increase in our quarterly dividend.

Cash from operations was $115 million in the quarter, down $62 million sequentially, as expected, due primarily to higher accounts receivable associated with the ramp in shipments.

Accounts receivable finished the quarter at $573 million, up $132 million from the prior quarter.

Days sales outstanding based on shipments were 61 days.

Net inventory increased nominally by $3 million quarter to quarter, to $663 million, to support expected shipment levels for 2014.

Inventory turns on GAAP COGS were 1.7 times, flat to the September quarter.

Net capital expenditures were $14 million, to support continued facility expansion activities worldwide.

Fully diluted shares ended the quarter just over 168 million, and are expected to remain roughly flat in the March quarter.

Full-time headcount ended the quarter at 5,981.

Finally, we are encouraged by the strength of the business environment at the leading edge.

We expect that the yield challenges associated with multi-patterning and FinFET will drive sustainable process control investment by foundry and logic customers through 2014.

Continued investments in technology buys in DRAM and 3D NAND development and early production activity should lead to an increase in overall memory spending versus 2013.

Given these expectations, we continue to believe that semiconductor industry CapEx in 2014 will be up about 10% versus 2013.

Given process control adoption during node transitions and our market position, KLA-Tencor is well positioned to outperform the overall capital equipment industry in 2014.

With that, to reiterate, our guidance for the quarter is, bookings are expected to be within a range of $700 million to $900 million, revenue between $790 million and $850 million, and EPS of $1 to $1.20.

This concludes our remarks on the quarter.

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

Okay.

Thank you, Bren.

At this point we'd like to open up the call to Q&A.

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

Please feel free to requeue with your follow-up questions, and we'll do our best to give everyone a chance for follow-ups in today's call, as time permits.

(Operator Instructions)

Your first question comes from Timothy Arcuri with Cowen & Company.

Bren, does the order guidance in March, does that assume that the pushed out reticle business books in March?

And then I had a follow-up.

Yes, Tim, as we roll it up, I think as I said last -- at the end of last quarter, I think that business shifts into the first half.

I think, right now, we expect it to book in March but as I had indicated in the past, I think there is some fluidity to this particular order, because the delivery date is further out.

Right now, our expectations are that we'll see this business book, but obviously there's an extra element of risk with it.

I think, because of the size of the ASPs associated with this particular order, it is something that has driven our views, perhaps maybe a wider range may be appropriate.

This, coupled with just general customer concentration overall, large orders.

So that's how we're thinking about it today.

Okay.

Thanks.

And then, Rick, there's been a lot of talk about EUV and about the insertion point, and a lot of confusion about what TSM has said about EUV, and what they haven't said about EUV.

Can you just give your perspective, because it seems like these chip makers are able to push out the need for EUV, by just extending immersion.

So I'm curious, your perspective on the timing of EUV.

Thanks.

Sure.

I think that the timing has moved out, from my perspective, especially for high volume manufacturing.

And the insertion point at 10-nanometers I think is now pushed to 7, although there still could be a couple layers at 10.

One of the indications we have is the industry's need for an out wave length reticle tool.

We have seen that push out.

Because what feedback we get from customers is they believe they can make do with what they have, in terms of using our 6XX, because it's relatively low volume.

And it's all about the economics.

EUV remains too slow to be put into production on an economic base.

There's a lot of work to get the source up, to get the throughput up.

Right now, what we're getting from customers is double patterning is more and more the plan of record, as they go to 10-nanometers.

That puts EUV in HVM, or at the 7-nanometer node.

That's how we're currently planning.

Thanks a lot, Rick.

Your next question comes from Harlan Sur with JPMorgan.

Great job on the quarterly execution.

Over the past couple of months it seems as though there's been a firming of your customers' programs and projects across all segments.

CapEx outlooks have been provided to the markets.

I believe you're still projecting 10% WFE growth this year.

But relative to your view three months ago, has anything changed as it relates to CapEx spend by segment?

It seems like foundry and DRAM could be a bit stronger than previously anticipated, but would love to get your views.

Well, I think on the near term, I think, as we mentioned in the prepared remarks, in December we did see a little bit of weakness, which we really attributed more to timing related to non-leading edge foundry, and at the leading edge, some adjustments to some capacity planning.

So on the whole, relative to three months ago, I think our view's slightly weaker, as I had said.

I think in terms of how we're thinking about 2014, we feel pretty confident.

It's always hard to say where it's going to land from an order and shipment perspective, but in terms of our overall views on the remainder of the year, we still believe that we're looking at somewhere around plus 10%.

And as you said, I think as you see more input from customers, in terms of their discussions about next year's planning, I think overall, from a year perspective, we feel pretty good about that forecast today.

Great.

And then the team has talked about the migration to sub-20-nanometers driving a mix that is more focused on some of your high end inspection tools like your broadband plasma platform, let's say, versus your dark field line monitoring products.

So given all of the migrations that are taking place across your customer base, how are you seeing that current order mix playing out?

Are you seeing that it is being more relatively skewed toward high end?

Any way to quantify this mix or mix shift, relative to, let's say, 18 to 24 months ago?

Sure.

This is Rick.

I think the best way to think about it is the way we laid out the segments, and the process control intensity back at our Analyst Day in July.

And that is that at 2X you see an increase -- overall increase in process control intensity and we baseline 4X to 2X from 13.7% blended to 14.7%.

So increase of over 10% in terms of the overall from 13.7% to 14.7%, but I guess a little under 10%.

But we were basing that partly on the increased adoption of the more advanced tools, and so two things have happened.

One, the laser based tools have gotten more complex as you go down and, therefore, higher ASPs, and the broadband plasma also has advanced, and I'd say the mix is more dependent on where you are in the ramp.

I think we laid that out.

Early in the ramp, you tend to see more of the broadband plasma tools, and then as the ramp progresses, the laser scanning tools come in.

But all of them, because they're more capable, provide more value, and with that comes higher ASP, which is a big part of what drives the overall WFE number.

So, so far what we've seen since we laid out that model publicly, but also since we started modeling it probably 24 months ago, it's pretty much conforming to what we thought it would be, in terms of that, and we have seen strength in both product lines, as we've increased the intensity associated with the new nodes.

Does that make sense?

Yes.

Makes sense.

Thank you.

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

The first question I had, Rick, was in terms of your March quarter guidance for memory orders, 20% of your bookings going to be memory.

Is that -- what is the split between DRAM and NAND, and also along the 3D NAND side, you said phase one is almost complete for the leader.

When do you expect phase two to start ordering?

Krish, it's Bren.

I'll go ahead and start.

NAND as a percent of the memory mix is 40%.

So 60/40 DRAM to NAND in the March quarter.

We've had four pretty good quarters from a memory mix perspective, and so we think that March is a little bit lower.

To my point in the prepared remarks, is most of the orders came in, in the second half, mostly in the September quarter, related to the significant project in China.

And so those tools shipped in the December quarter, and those tools are being installed today.

There will be a second phase, and we think it's a big part of what happens in 2014.

That second phase happens sometime mid-year, and into the fall, in terms of timing of deliveries.

So that's what we're planning today.

And no indications that things are not on track there, and we're pretty happy with what we're seeing, in terms of the installations of the new tools going in.

And the other part of your question I think talked about other players.

We do see other players coming in in 2014, probably toward the later part of 2014 for 3D, and maybe one or two more players in that time frame, depending on how technology development goes for them.

But I do think it will be competitive market if you go out 12 months from now.

My estimation is there will probably be three people with -- three players with that capability in development and ramping.

Thank you.

That's very helpful.

If I could just ask a quick follow-up.

Rick, I remember your SEMICON slides on process control intensity growing.

Just wondering, just if I look at foundries specifically, if you go from 20 planar to 16 or 14 FinFET, is there a way to quantify what is the increase in the SAM for you?

Well, it all -- we did it with steady state, or the steady state assumption about process control intensity.

So it depends how much they're investing in the node, obviously, but we had the increase, we had the logic foundry at 2X being 17% going to 18.4%, so almost, not quite a 10% increase in the SAM just from that node transition.

But as you know, depends on where you are in the ramp, it depends on which particular players, and what kind of challenges they're facing.

But I think overall we're continuing to see that kind of pressure, driven largely of course by the FinFET challenges with yield, but also the multi-patterning that's more prevalent once you go to the 1X, given the current lithography options people have.

Thanks, Rick and Bren.

Your next question comes from Jim Covello with Goldman Sachs.

This is [Jack Shane] on behalf of Jim Covello.

My first question is, given your view on WFE spending this year, can you just give us an idea of -- on the weighting of that spending between first half and second half?

In addition can I also get some color on the differences between logic, foundry and memory?

Thanks.

Yes, Jack, this is Bren.

So I think in terms of weighting, I'm not really ready to call that yet.

I think the biggest wild card in that is, at least from an order perspective, will be timing related to some significant projects that are going to happen in that mid-year to fall time frame.

We mentioned the memory project earlier, there are a couple significant projects on the foundry logic side as well.

I think the deliveries are fairly firm on those projects in the second half of the year or so, and I think the timing of the order placement, I think, is one question in terms of whether the first half of the year is stronger or weaker than the second half.

So we'll see how that goes in terms of timing.

In terms of mix overall, I think foundry logic probably grows in line with market about 10% or so.

We think NAND flash is probably up somewhere between 10% and 15%.

And we're a little bit more cautious on DRAM, just because historically there's just been more volatility there.

There's some growth there, but off a low base.

So that's how we're thinking about it and I think when you think about the overall mix, you probably end up with foundry logic somewhere around 60% to 65%, with memory 35% to 40%, in terms of how we're thinking about it today.

That's incredibly helpful.

And then as a quick follow-up, so many of your competitors have been pretty vocal about gaining share over you this year.

So with that said, how should we think about share shifts and markets such as e-Beam and low beam inspection going forward?

Thank you.

Well, when we look at the market share data over the last several years, in spite of a lot of claims that people have made of gaining share, we actually feel pretty good about our position, and don't really see much evidence of share loss.

In fact, in some of our most important segments, we've actually moved ahead.

And some of our products it's actually quite hard to measure share.

For example, our broadband plasma, there's really not another broadband plasma tool.

There are laser scanning tools, but they compete with our laser scanning, where we have a pretty good position.

So in that, if I look out, I look back, and I look forward, I don't see a lot of change in the share position.

I do see some potential going forward for some gains on our side, but I don't really -- right now, we've not been experiencing any real significant challenges that make me change our view of our share position.

There are always bumps in the road, as there have been in the past on certain segments at certain times, but in aggregate, we feel very good about our position and confident we can maintain it going forward.

Great.

That's helpful.

Thank you.

Your next question comes from Terence Whalen with Citi.

I believe you alluded earlier to a statement regarding capital intensity of memory and inspection increasing.

I was wondering if you could elaborate on that a little bit more.

Thank you.

Sure, Terence.

We laid out in SEMICON West, we're sticking with the analysis we did, which had, just to remind people, 4X node at about 8.8% capital intensity, as compared to logic and foundry, by the way, at 15.8% so significantly less, but still increasing, 2X going to 9.3% and then 1X going to 10.2%.

But the other way you could think about 1X is being V NAND being equivalent, even though that's not technically a 1X node.

In fact it goes backwards in terms of lithography technology, but it is increased in overall opportunity for us.

And since we laid that out, we had that model before we laid it out, we've seen market behavior pretty much in order with that dynamic we forecasted, of about a 10% increase from the 4X to 2X node, and then another not quite 10% but on that order increase, as we go to the V NAND node.

Terrific, Rick.

I believe that we talked a little bit earlier about EUV.

My question specifically is, does the change in insertion in EUV that seems to be a consensus now, does that affect any of your investments in EUV reticle inspection, and where are you in the process of developing reticle inspection for EUV?

Thanks.

It will certainly change our ramping up of our investment.

We will maintain core technology and continue to invest but there have been different scenarios in which we would have ramped that investment over the next couple of years, and what we talked about at SEMICON West was doing that in conjunction -- in partnership with our key customers, to be able to support that ramp.

We don't believe that that's as eminent as people believed it was nine months ago, based on the delays in productivity gains on the scanner.

So we will continue to invest but it will be at -- we won't see a ramp as we had forecasted, going forward.

But again, that was going to be shared with customers.

So Bren can speak to the implication that has to the overall model, but in general, we won't be ramping our investment as soon as we originally planned.

Terence, I think that from an EUV perspective, we've been essentially investing in early development activity, technological feasibility work, and so we continue to do that, obviously having the ability to continue to progress here and maintain some optionality around this is important for us, but I don't expect inflection on spending, and that's why I feel pretty comfortable with the guidance around our OpEx flattening out here at this level over the next several quarters.

Okay.

Terrific.

Thanks, Bren.

Your next question comes from Mehdi Hosseini with Susquehanna International.

I'm a little bit confused, Rick.

If I were to take the $100 million out of your March guide, it suggests to me that the core business declined by 8% compared to September, and March will be down 4%.

We have been waiting for these turns, especially from foundry side, for almost 12 months.

So where is the turn?

What I hear from now, there is incremental emphasis on 3D NAND.

Can you help me reconcile the trend and how you see things evolving?

Because your booking trend is not really giving me much confidence, and I have a follow-up.

As I said, I think it is a bit of a wide range, because we're not exactly sure how the reticle inspection business ends up here, at the end of the quarter.

As I said earlier, there has been a little bit of weakness on the foundry logic side of things, over the December quarter and into March, in terms of timing around some of the non-leading edge activity.

And I think some rational -- not with the rationalization but some digestion, if you will, around some of the wafer start plans for particular customers on the leading edge.

So we think that resolves itself; it's mostly about timing.

I think, as I said earlier, fluctuations quarter to quarter here in our order profile, given the size of the orders, the number of customers, the big ASPs, and so on, can cause a little bit of volatility there.

I don't think the order number is as a cyclical indicator perhaps as it used to be, as the industry has changed.

As we look at calendar 2014, we continue to believe, consistent with the revenue guidance for the March quarter, that we're operating in this $800 million to $850 million range from a revenue perspective.

We'll see some fluctuations in orders, to a lesser extent in shipments, but that's how we see the year, and that's how we're sizing the Company to support the dynamics that are happening in the industry.

I'd also just add to that.

I think what we saw in September was uncharacteristically strong for that part of the cycle, typically September we don't have an up quarter like that.

And I think in effect, what we had was some pull-in to the September quarter from December, and then we did actually have a little push-out from December into March.

But to Bren's point, when we aggregate it and we look out, it's still pretty much falling in line with what we believed would happen if you integrated over time.

And I think as we look out to 2014, that's pretty consistent with our view as well.

Let me ask the question a different way.

You talked about $800 million to $850 million of shipments for the June.

Would you have to hit the high end of your booking guide to do that shipment in June, given where your backlog is?

I think given the just timing in terms of where deliveries are lining up, it's driving a lower number than you would expect in the March quarter, and I think as we move into June, we'll see a ramp in shipments in June, which is why I put that color into the prepared remarks.

So, I think that's consistent with general views around the current views of the range, and the midpoint to be able to make that happen.

Obviously, if you were to come in the extreme low end of the range or below that, then perhaps those plans would change.

But given our backlog and the lead time we get from customers, we feel pretty good about how those quarters are shaking out.

And, also, the other thing is on those --- on that bookings, to some degree the bookings we're talking about that have been in question, so the reticle bookings wouldn't ship in June anyway.

So that's more a part of the -- what it would look like, in terms of where we are in that range, and that's part of the wild card in the wide range for the quarter.

Okay.

Very helpful.

Thank you.

Next question comes from John Pitzer with Credit Suisse.

This is Farhan asking a question on behalf of John.

My first question is on memory, if I look at the long-term trend, [Scalex] orders in the memory segment have outpaced your peers, and I just wanted to understand better like what's driving the long-term growth on a relative basis to your peers, in terms of memory growing at a faster rate for KLA?

Is it more of a market trend or more of a market share trend?

Great question.

I think there's two elements.

One, our share has definitely increased in memory.

We focused on that a few years ago.

It didn't show up because there wasn't a lot of memory activity, and so when finally the memory guys started spending, we benefited from that trend.

The other thing is that the process control intensity has increased with the new design rules.

And lastly, I think that the memory manufacturers have recognized the value of getting memory process control capability early in the ramp, or for technology development.

So part of what we're seeing is accelerated demand earlier in the cycle.

I think it does normalize over time to the process control intensity we talked about at SEMICON West.

In some ways, we'll benefit very early in the ramp.

There's also some technology catch-up.

There are people that were doing investments, were on hold for a while, I think, when they were integrating acquisitions, and so on, and once they got focused again on manufacturing and new nodes, they invested.

So I think it's a combination of those three factors, increased share, increased investment, process control intensity, and timing of where they are in the cycle.

Got it.

And just one question on the June shipments.

I mean, if I adjust for the $100 million of orders, the guidance for March quarter orders is in the range of -- it's lower than the December quarter.

You're basically guiding to $600 million to $800 million.

How can you get a shipment growth in June quarter?

Because the $100 million order won't start shipping in the June quarter.

So the June quarter orders need to increase significantly.

Is that a fair assumption?

Well, so I'm not guiding the June quarter shipments.

I was just giving some color on our expectations about the range.

When we get there we'll actually provide a number, but as I look at the build plans today and the timing of some of these shipments, I would have expected given our expectations for the quarter that shipments would have been a little bit higher this quarter.

But, as I said, it was all about where delivery timing is set up.

So as I look at the June quarter, given our expectations for orders over the next six months plus our backlog position, I was comfortable with providing the color statement that I gave around $800 million to $850 million range.

So that's how we're thinking about it.

And we'll see around those reticle inspection shipments, we'll see where those ultimately end up landing from an order perspective.

And as I said earlier, that's why we're -- I've expanded the range to deal with that potential risk.

Thank you very much.

Your next question comes from Steven Chin with UBS.

This is [Maha Vier].

Just one question about order profile for calendar 2014.

Rick, you talked about a number of memory projects in the second half, and if you look at the memory order guidance for the March quarter, it's at $160 million, roughly.

Your peak was about $300 million back in September quarter.

Just wondering if we should think about order profile as perhaps growing throughout 2014 or kind of bucking the trend, if you will, in the September quarter, when you typically have a decline.

Thanks.

As I said earlier, I think it's hard to say, in terms of the timing of that business mid-year, and I think I mentioned one significant memory project.

The others were foundry logic projects that are out there in that time frame.

So we'll just have to see from a timing perspective where they land.

I mean, one situation that we do deal with today is we do get less lead time than we used to get historically, in terms of order to shipment.

So there is some fluidity, if you will, in terms of the timing, but in terms of how we're lining up the rest of the year, we see ourselves operating in this range of $800 million to $850 million.

Orders could come in above that level, orders could come in a little bit below that level in a 12- month -- or 12-week cycle, but at the end of the day we think we're going to -- we're operating at that level.

Thanks.

That's all I had.

Your next question comes from Westin Twigg with Pacific Crest Securities.

Just real quickly.

You had mentioned advanced packaging as one of the drivers for growth.

I wonder if you could give us an idea of how much of that really could be contributing at this point, and potentially how big that market could be, and maybe even if you could lay it out over the next couple years, that would be helpful.

Not much.

We're not counting on advanced packaging for calendar 2014 to significantly contribute.

We do have some investigation developments there.

We're not -- that's not in our baseline, for what we're seeing out for the rest of this year.

So, understood.

But since you mentioned it as one of the drivers for growth, could you give us an idea of how that market could evolve, maybe for you?

Well, we have some play in it.

I do think if you look out a couple years, there's probably $100 million or so of opportunity on an annualized basis for us there, but we're not seeing that today.

We're seeing maybe part of that.

And so I do think there's some growth opportunity.

But it's -- it would be high growth rate, just off of a reasonably small base.

Very helpful.

Thank you.

Your next question comes from Mahesh Sanganeria with RBC Capital Markets.

Rick, just want to follow up on your commentary on the foundry.

Can you give your view on what do you think is driving the delay or push-out of the foundry?

Especially I'm interested in the 20 nanometer.

Is it that customer is having issue ramping, or that the demand has pushed out?

That would be very helpful.

I think there's a couple things.

One, there's -- certainly not everybody's delaying.

So I think it's more leaders are still going, and then there's some delay behind, and I think the delays tend to be around a combination of factors.

One is getting the process right, so the yield is there, so they can ramp.

The other one is I do think there is a bit of churn going on based on some management changes in some of the foundries, and I think that's creating at least a pause, as people are regrouping and trying to figure out different kind of partnership strategies and who might be doing what for whom.

Okay.

I think that makes perfect sense.

And I want to follow up on the EUV reticle inspection.

I know you mentioned in the past that you would need an order of $500 million of investment from your partners to be able to invest in that project.

What's the response?

Is the customer still not willing to do that, or they want to wait, but they would do it?

What's the response on that, your proposal?

We've said, just to clarify, $500 million we thought was the total cost and we were looking to share that, so not $500 million from them, but $500 million in total.

The response was there was a lot of interest last summer and earlier last year, but it was all contingent on people feeling like the insertion point was going to be planned.

I think every one of the major partners we talked to indicated their belief that the insertion was delaying, and therefore their urgency waned quite a bit.

So they're all very interested.

Many have said, not just the overall companies, but individuals, that they think it's a must because the need for pellicles is becoming clearer on EUV.

The challenge with the need for pellicles is, the need for pellicles also means more power is needed, because the pellicle actually consumes some of the power.

But it does drive the market to need an [atenic] tool in high volume manufacturing.

But the biggest issue is the perceived delay, and the timing of that high volume.

Interest, but not yet at the point of us securing funding, where that looked I'd say much more promising, if I go back nine months, in terms of it being a near term.

We're in agreement with our customers that we don't want to be investing in a capability that they don't need because jointly there are great high return projects we could do, and so instead we're focusing our efforts on supporting the multi-patterning challenges that people are going to face, as the alternative to EUV.

That's very helpful, Rick.

Thank you.

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

So first one's on gross margin.

This past quarter, you have margin expansion, you mentioned favorable mix.

Just want to know if that's metrology inspection or customer mix, any kind of color around that.

And then I noticed that you are effectively guiding your margins to be lower in the coming quarter.

But your revenue backlog actually expanded and you have more tools being signed off by customers.

Why are you guiding margins to be lower?

Gross margins in the December quarter were stronger than expected, and our product mix was a little bit richer than what we thought it would be in the October quarter -- or at the October call.

So we had higher-end wafer inspection, and obviously had higher gross margins, and so that was a part of that, as well as higher-end reticle inspection as well.

As I look into the March quarter, we are benefiting -- and then, of course, I think also in the December quarter, efficiencies in manufacturing were favorable to our planning.

So we had a very strong incremental gross margin in March, outperforming -- or in December, outperforming our model, 60% to 70% incremental gross margin model.

We'll underperform it a little bit in the March quarter, as the mix is less favorable.

But I think when you think about it, over the six month time frame, I think the incremental gross margins are high 60s, 68%, 69%.

So a little bit of volatility driven by some of the dynamics I mentioned earlier.

Depends what you're shipping, and as those tools revenue, that drives gross margin.

We do have obviously a number of products in the Company, and they all have different margin profiles.

So mix is probably a bigger factor for us than it is for some of our peers.

Okay.

That's fair.

And then for -- I think, Rick, you mentioned on your prepared remarks that you had record order flow with 3D, and metrology is very strong.

I was wondering if that's driven by kind of foundry logic side, or are you seeing incremental demand out of the memory side because of things like 3D NAND?

What's the driver for the stronger booking and is this a sustainable trend?

I think it is.

Probably not quarter to quarter, just the way the orders tend to come in kind of lumpy that way.

But what's driving it is really 3D structures, both in memory but also in logic.

That, and finally having capability to meet the needs.

It's a very tough technical challenge and it's taken our team, who's done incredible work -- it takes a lot of work to get to having solutions that are robust enough to work in production, but we've made a lot of progress, and I think we're seeing the benefit from that.

As we forecast going forward, it's not a technically a share opportunity, in the sense that we have a large share.

I think it's a share opportunity in terms of against the alternatives, which historically CDSMs have been the primary use for CD measurement, but I think the optical has a lot of capability, especially when you're dealing with the 3D structures.

Your next question comes from Patrick Ho with Stifel Nicolaus.

Rick, maybe first, can you give a little more color in terms of the 3D NAND opportunity?

When you mention the process control intensity being above 10%, is there a weighting or a bias towards inspection or metrology, or is it kind of a mix of both, 50/50 split in terms of the increasing process control intensity for 3D NAND?

Yes.

I don't think there's much difference, actually.

I guess, probably I'd say maybe a little metrology bias, because overlay becomes a bigger challenge.

I do think that the 3D inspection challenge is pretty significant as well.

But I think probably it's a little biased toward metrology, but I wouldn't say by a lot.

I don't have the data in front of me, but my gut says it's probably a little more metrology focused.

Although we had great success with inspection.

One of the big challenges people had, and their fears, and I think we're not out of the woods yet because nobody's really ramped in production on it, was trying to figure out how, once you identify defects you could deal with them, because they're going to be buried, and what is the -- how do you determine the root cause and then fix it.

And we've got some clever inspection technology, as well as metrology and technology to be able to penetrate those layers, but there's still this issue of fixing and moving forward.

But overall, if I had to tip it, I'd tip it a little more toward the metrology side.

Great.

That's really helpful.

Maybe a big picture industry outlook.

I think you've given us good color of what you expect for 2014, but obviously there are always a lot of moving pieces.

If the industry does trend, and you've seen many of these upturns, a lot of times they track higher than expected.

If there are key customer variables as we get into the second half of the year, where do you see the potential upside between foundry and, say, memory?

Where's the greater chance for upside potential, as the year progresses?

Wow, that's a good question.

I don't have a great answer.

I guess I would say foundry, because I think there is -- foundry can be driven by -- I guess both can be driven by this opportunity for share gain.

The foundry in particular, I think there's a lot of dynamics around that, and I do think the fabless companies would like to be able to have alternatives, and so if you have success at the advanced nodes at multiple foundries, I think you could see investment tracking that.

Memory guys I think are going to have to prove out two things.

One, the DRAM technology, and we know overall they're not as capital intensive as the foundries would be.

And then, 3D, I think you could have the followers to the leader come in.

I'd say -- again if I had to bias it, I'd say probably a little more toward the foundry logic space toward the end of the year.

Great.

Thank you.

(Operator Instructions)

Your next question comes from Ben Pang with Northland Capital.

First, just a follow-up on the EUV push-out.

How long does it take you to develop your part of this technology?

2017, 2018 is what we said we'd have a production tool, had we gone and followed the investment plan.

So I think we're looking closer toward 2020, based on what I anticipate a massive -- a one node, essentially shift towards HVM.

Now, we do have capability in our 6XX, and I think customers will utilize that for the relatively small volume, but I would say that HVM, that's going to require atenic reticle is pushed out.

And when you talk about small volume in terms of just the number of layers, that would be a one or two layer, you would look at it as high volume, or small volume?

Low volume.

I think what will happen is, there are going to be a number of EUV scanners out there.

People are committed to getting.

There's a number they're going to want to use.

Once they're out there they're going to want to try what they can to get them in some production, but they're relatively low throughput, so they're going to get -- they'll get a couple layers.

On their own, economically, they wouldn't have probably passed.

Since they're already out there, they're going to get used.

There's not going to be a massive ecosystem development to support that.

That's what I'm talking about.

That's the HVM stuff.

So it's not inconsistent with the idea that there's going to be a number of scanners out there.

They're just not going to be doing a lot of layers on them.

And then a follow-up on the reticle inspection push-out.

Is that an indication that 10-nanometer has also pushed out, then?

Well, that was -- yes, that was what we said in December.

The customer had slipped their delivery dates, and because they slipped the delivery date, they slipped the PO placement.

Those delivery dates slipped into the first half of 2015, and as a result, the orders will slip into the first half of this year.

So we're planning for them, but I'm always a little cautious once you've had one move, and there's some fluidity around those plans, and perhaps one slips into June, which is why we wanted to set the order guidance the way we did in terms of the range, because at $30 million, it can obviously have an impact on your core performance.

I guess my question is more, is that an industry trend or just the specific customer?

I'll jump in on that.

I don't think it's a big trend.

I think it's -- we're talking about the timing, and I think they do have capability to handle some of the development still, with the existing tooling.

This is to get to higher volume.

I think Bren's point, it's a three to six month kind of delay, and these are people that were ahead.

I don't know that it's an industry issue.

The issue will come is if everybody else, when the whole industry struggles on the FinFET technology, what does that do overall, does that push everything, and that's gotten a lot of people's attention, the challenges associated with FinFET.

Thank you very much.

Very helpful.

Since we have no further questions at this time, I'll turn the call back to our presenters.

Thank you, operator, and on behalf of management, I'd like to thank everyone for joining us on our call today.

Just a reminder, an audio replay will be available on our website later this afternoon.

And once again, we appreciate your continuing interest in KLA-Tencor.

This concludes today's conference call.

You may now disconnect.