KLA Corporation
Q2 2007 Earnings Call Transcript
Published:
- Operator:
- I would like to welcome everyone to the KLA-Tencor second quarter 2007 earnings conference call. (Operator Instructions) I will now turn the call over to Mr. Jeff Hall, Chief Financial Officer. Sir, you may begin your conference.
- Jeff Hall:
- Good morning and welcome to KLA-Tencor’s second quarter of fiscal year 2007 earnings conference call. I am Jeff Hall, Chief Financial Officer. Joining me on our call today are Rick Wallace, our CEO; and John Kispert, our President and COO. We're here today to discuss our second quarter results for the period ended December 31, 2006. We released these results this morning at 4
- Rick Wallace:
- Thank you, Jeff and thank you for joining our earnings call for the second quarter FY07. Today I'll be discussing the highlights for the December quarter, updates on key product activity, and guidance for the March quarter. In the December quarter, the company continued to execute on delivering new products and producing solid financial results. I'll begin with a quick rundown of the numbers and then I'll provide my perspective. Orders for the December quarter were $725 million, up 12%; revenue was $649 million, at the lower end of our guidance. This was a timing issue resulting from a special upgrade we did to meet customer needs. Shipments were at the high end of expectations at $700 million; and excluding special charges, net income was $147 million or $0.72 per diluted share, including stock-based compensation. This strong financial performance is the result of meeting our customers' needs with the right products and services to help them be successful. Memory was about 50% of orders, and again, the strongest segment in the December quarter with significant DRAM spending. NAND remains soft at only 30% of our memory bookings. Logic at around 30% of orders was also strong in December with investment and capacity in the U.S. the primary driver. Boundary was at the lowest segment at 15% of bookings. Boundary continued to spend under their historical rates as they cautiously add manufacturing capacity to existing fabs. We expect an increase in foundry orders as we go through 2007 in order to build out 65 nanometer capacity. Looking ahead to 2007, we see a healthy semiconductor industry, but with some softness in specific markets. Current projections are for semi revenues to be up 5% to 7% and for CapEx to be flat to up 5% in 2007. Let me now give you a couple of updates on our product activity. We continue to demonstrate our product leadership at the leading edge. Our Puma Darkfield inspection system continues its success as one of KT's fastest adopted products. In the December quarter, the 9130 won a head-to-head at a major Taiwanese memory fab because of our breakthrough Streak technology provided both high sensitivity for etch line monitor and high throughput for tool monitor applications. Our 2800 Brightfield tool demonstrated superior DRAM performance for next generation design rules. A major Korean memory manufacturer chose the 2800 after it demonstrated five times better capture rate and 40% faster throughput than the competition on a critical layer. During the December quarter, we also announced two new products
- Jeff Hall:
- Thank you, Rick. We closed our acquisition of ADE on October 12, so the results for the second quarter include ADE from October 12th through December 31. As I told you on the call last quarter, we expected ADE to contribute bookings of $30 million, revenue of $20 million, be slightly dilutive to gross margin, and add $10 million to fixed costs. ADE performance was in line with our expectations. As I told you last quarter, since we are running ADE as a division of KLA-Tencor, we do not intend to break out or discuss the numbers on this call or going forward. Net bookings for the December quarter were $725 million. Each quarter we review our backlog in detail and de-book in accordance with our bookings policy that restricts actual bookings to a set criteria. The set criteria mandates that technical specifications are signed off, valid terms and conditions are finalized, and delivery is scheduled within 12 months. This quarter, we de-booked $21.8 million of orders. Backlog for unshipped orders was $23 million in the quarter at $1 billion, or approximately five-and-a-half months at current shipping levels. We do not include any service bookings in this backlog number. In addition, deferred revenue was up $54 million to $558 million, or about three months at current revenue levels. This is invoiced systems revenue deferred under SAB 104. It includes no service revenue and is made up of tools delivered but awaiting written acceptance from the customer. We remain confident that we have a strong backlog shippable over the next six to nine months. Our ability to maintain this significant level of both shipment and revenue backlog continues to help KLA-Tencor sustain profitability throughout any business cycle. The regional distribution of orders for the December quarter was as follows
- Operator:
- (Operator Instructions) Your first question comes from Timothy Arcuri - Citigroup.
- Timothy Arcuri:
- Hi, guys. A couple things. First of all, looking at the push outs that the other folks saw recently, it sounds like you didn't see those sort of push outs. I guess as you look out to the June quarter, I know it's difficult, but typically June is up seasonally for you; is there any reason to believe that wouldn't be the case this time?
- John Kispert:
- On the push outs, what we saw -- I'd say over the last 45 days or so -- is some movement, but I'd call it net zero movement. As you guys all know, there's some JVs that are moving production around joint ventures, from one region to the other. Certainly some folks who are deciding who is going to fund what and when. But I'd say we saw as much stuff pull in as far as shipments are concerned and as much as we saw get pushed out. I'd also characterize this for everybody to make sure they understand this, probably less than 5% of our output that got moved in and out of the quarter. I think the second quarter part of your question is, yes, if you look over the time, the June quarter is typically up for us. When I say over time, I mean 25 to 30 years; June is the end of our fiscal year for KLA-Tencor, it's our fourth quarter. For whatever reason, that usually drives an uptick in our business.
- Timothy Arcuri:
- John, just to clarify, you would see that happening this year as well?
- John Kispert:
- I think when we do a bottoms up, it looks that way to us today. Yes.
- Timothy Arcuri:
- Okay, John. Thanks a lot.
- Operator:
- Your next question comes from Jay Deahna - JP Morgan.
- Jay Deahna:
- Good morning. John, a question for you. As you look at the demand pattern throughout the year do you see actually a pickup in foundry in IDM in the latter half of the year? Generally speaking, do you think that demand in the second half of the year in terms of orders can be equal to or higher than the first half, given the fact that memory is pretty strong in the first half?
- John Kispert:
- It's a tough one, Jay. Through the years we try to stay out of the second half of the year as far as predicting in January or February. What I can tell you when we do bottoms up, which is what people are telling us in the categories you're giving me which are foundry, logic and memory, memory certainly looks more front-end loaded. I would characterize the foundry plans today as being starting the beginning of the April/May timeframe and picking up through the second half of the year. I'd also characterize the logic pattern as being that also, which would in both those cases would be back-half loaded versus memory, which looks more front-end loaded today in a bottom up view of what customers are telling us.
- Jay Deahna:
- Just to follow-up on that, John, how much of the 65-nanometer ultimate build-out has already been done? I mean Intel's done, but I don't think a lot of other people are. So as we move into the back half and into the next year, is 65-nanometer logic a cyclical driver? Secondly, do you see the development and early stage ramp of 45-nanometer happening simultaneous to that so that at some point there might be a sustainable new cycle out there after this flat stuff for a while, or do you see it differently than that?
- John Kispert:
- Certainly a 65-nanometer build out, if you will, is the key for the 2007 for KLA-Tencor. We tend to look more at yields, as you guys know. The learning on yields for the majority of the industry are still very low. So there's lots of work to be done there if yields aren’t up. When I say low, well below 50% for most folks. So nobody's going to be adding capacity until you figure out how to get the yields up. To the first part of your question, we see lots of opportunity not only in logic and foundry there, but with certainly some memory folks throughout the year. And then, 45-nanometer is a great driver for KLA-Tencor. I don't know if we've given you the number yet, but it was about 20%, 25% of our business this last quarter, 45-nanometer. That R&D investment in those pilot investments will kind of pick up as the year goes on, no doubt, as people try to keep up with the leaders. Certainly that will be a big driver for us as the year goes on.
- Jay Deahna:
- Thank you.
- Operator:
- Your next question comes from Harlan Sur - Morgan Stanley.
- Harlan Sur:
- Good morning. Just curious as to figure out what you're hearing from your NAND customers; and seeing in the way of orders and shipments, given the weak fundamentals in this part of the market? Any commentary on first half versus second half spend for this segment of your customer base?
- Rick Wallace:
- John and I were just in Asia last week meeting with customers and spent some time with both NAND, flash, and DRAM customers. Clearly stronger momentum in the DRAM space, as we all know, and it doesn't appear that demand is going to pick up in the near term for that. There are some potential drivers that could kick in for the second half, things like the iPhone, which I think are going to use a lot more NAND. In general what we're getting a sense of is that DRAM will carry the memory spend and the investment for the remainder of the calendar year. That's kind of how we're modeling it, is we think the DRAM continues to be strong, and as John said, the rest of the industry, foundry and logic picking up in the second half.
- Harlan Sur:
- Any expectations for NAND coming back in the second half of the year?
- John Kispert:
- The way we've looked at it, Harlan, again, bottoms up is it's one-third of the memory spend throughout the year. I think it'll be very lumpy; memory in general is kind of lumpy for us; bigger orders some quarters and then it's quieter for a quarter. But hard to tell exactly as the year unfolds if it's back half or front half or when it is, but as we look at it bottoms up, it's about one-third, maybe a little bit less of the spend through the year.
- Harlan Sur:
- Great.
- John Kispert:
- One-third of memory.
- Harlan Sur:
- One-third of memory. Yes, got it. So with 45-nanometer and below accounting for one-quarter of the bookings, I just wanted to know what your customers are saying about the yield challenges at this particular node? I know it is early days but any feedback would be great.
- Rick Wallace:
- Very interesting meetings last week as we were going through that with a number of customers and huge concerns about defectivity in terms of managing yield at 45, and so we're getting a lot of pressure. The good news is, I suppose there's huge opportunity for us as we just sat through a litany of challenges people faced. The challenge, of course, is it means we've got to keep bringing out our latest generation products to be able to satisfy those needs, so it puts a lot of pressure on our engineering groups to bring out our latest generation, which is the kind of pressure we want, but it certainly seems to be defectivity is the key to success. We had a number of customers telling us that last week; the ability to find and fix these defects at 45 is going to be just tremendously challenging.
- Harlan Sur:
- Thank you.
- Operator:
- Your next question comes from Jenny Yun - JP Morgan.
- Jenny Yun:
- Good morning. With $2.1 billion of cash and cash equivalent on your balance sheet, what kind of uses are you considering for that and how much do you need to run your business?
- Jeff Hall:
- As we look over the past three months, we've used about $500 million of cash for acquisitions. We're restarting our normal buyback on Thursday, we still have about 3.8 million shares authorized on that plan. We have a plan for excess cash beyond this. We're not ready to disclose it today, but we expect to make an announcement of our plans in the relatively near future. Of course going forward, as we continue to execute on our operating excellence and improvements, we're going to continue to increase our operating cash flow going forward.
- Jenny Yun:
- So you need, you said, $500 million of cash for operations?
- Jeff Hall:
- No, I did not say that. I said we have done about $500 million of acquisitions over the last few months. I didn't say how much cash we actually need for running day-to-day operations. It's not a number we typically talk about.
- Jenny Yun:
- And then for your share buybacks, is that on a matrix or is it just from time to time when you find the opportunities available?
- Rick Wallace:
- We don't disclose it, Jenny.
- Jenny Yun:
- Thank you.
- Operator:
- Your next question comes from Mark Fitzgerald - Banc of America Securities.
- Mark Fitzgerald:
- With the shutdown of the facilities in the fourth quarter, can you give us an update on how far along you are in terms of this manufacturing transition, moving stuff overseas?
- Jeff Hall:
- Let me just clarify, Mark. We didn't shut down any facilities in the quarter. What we did is we put some facilities on what's called available for sale, which means you write them down to the market value, but we're still using those facilities. We have plans to get out of those facilities as we transition. At this point, we've got some products up and running and we're going to continue that transition in line with our three-year plan.
- Mark Fitzgerald:
- Thank you.
- Operator:
- Your next question comes from Jim Covello - Goldman Sachs.
- Jim Covello:
- Good morning, thanks so much. Question about the fungibility of NAND and DRAM capacity. Do you see NAND capacity getting moved back to DRAM to fix the excess in NAND? If you do, do you think that could have any impact on the planned DRAM orders as we go throughout the year? What kind of revenue opportunity do you guys see in DRAM versus NAND under that kind of scenario, and are there any big differences between the yield issues that the customers are facing in either one of those segments? Thanks.
- Rick Wallace:
- Hi, Jim. Thank you for the question. Fungibility. There's certainly, as you know, some key players out there that service both NAND and the DRAM market and flash and they do have fungibility, but I think those plans are already in place that they've already optimized for what they believe the needs are going forward and so we don't really see… I think John laid out earlier in the call how we see the memory market over the calendar '07. In terms of yield challenges, there's no question that NAND presses the technology, but DRAM has its own set of challenges and so as I said, when we were meeting with memory customers last week, a lot of concern about the ability to ramp their yields. I would say that equally challenging, both tend to push the technology limits as they try to battle competitively to bring out new technology. So we see both opportunities for us in terms of bringing out yield capabilities. It's really the other drivers more than the underlying technologies, such as emersion lithography, pushing things, high Ks, there's a number of technologies that are driving the need for better yield management than simply whether it is a DRAM or a flash.
- Jim Covello:
- So you don't perceive any incremental risk to your orders then from more NAND capacity getting moved over to DRAM and that in turn obviating the need for new DRAM orders?
- Rick Wallace:
- No, I think we've modeled that in as we go forward. As I said, there's only a few people that can do that because they serve both markets, and that's what we're looking at as we go forward. John, do you want to add anything to that?
- John Kispert:
- The only thing, Jim, as you know, your question is somewhat customer-specific. There might be timing issues if a particular customer decides to start moving more capacity off of NAND and on to DRAM as far as an order in a quarter or a capacity expansion or even R&D, but…
- Jim Covello:
- John, I understand that there are only a few customers that can do it, but those customers collectively represent over half of the NAND market.
- John Kispert:
- But we're pretty close with those, Jim; that was the point.
- Jim Covello:
- Sure, sure. Okay, thank you.
- Operator:
- Your next question comes from Edward White - Lehman Brothers.
- Analyst for Edward White:
- Hi guys, this is Dave for Ed. Could you talk a little bit more about 45 nanometers, where you were on terms of your orders for 45 nanometers about six months ago and where you expect to be six months in the future and then 12 months?
- John Kispert:
- Six months ago was probably about 10% of our order book. In fact, we probably said it on the conference call. Today, as I just said, it's 20%, 25%. I think it probably stays in that range for most of this year. It's a different set of folks that start investing there over time, so it's a different set of folks every quarter. But in that 20%, 25% range we tend to, at a next technology node, I think most people know we tend to get a bunch of our next generation tools ordered early on in the R&D cycle. 45 nanometer, I think, is a bigger opportunity for process control or inspection of measurements, so I think 25%, maybe up to 30% in the back half of the year, depending on the total.
- Rick Wallace:
- Just to give you an example, when 65 got to this level, to John’s point, it took about a year at the same level, so we're modeling 45 in a similar fashion, if that makes sense.
- Analyst for Edward White:
- Yes, that makes sense. A question about market share. Just looking at the [WWSens] data, it looks like, depending on how you look at it, you guys gained some share. Can you talk about how you think about that? Do you think that perhaps you are gaining any share and if so, why do you think that is the case?
- Rick Wallace:
- We track pretty closely our market position. Our focus is on how do we make sure that we're bringing out the capability that our customers need? I would say that overall, our share pretty much stays kind of where it is. It's been pretty strong in the markets that we've been successful in historically. We've had a lot of people make a run at these markets over time and I think the reason we maintain our position is as a company, we're solely focused on inspection and metrology and we continue to bring out the capabilities; we invest heavily in R&D to do that and we support our customers. I don't see this being a particularly new story.
- John Kispert:
- At this point in the cycle, Dave, where we are exposed on market, especially around price, are folks that will be investing in 90 nanometer; the trailing edge, if you will. Obviously, that's where our competition is going to come after us, that's going to be the area. The learning is done there, the technologies have been in place for a while, it's more price sensitive. Clearly, at this point in the cycle, that's where we're most focused when it comes to competition and market share.
- Analyst for Edward White:
- Very good. Thanks, guys.
- Operator:
- Your next question comes from Brett Hodess - Merrill Lynch.
- Brett Hodess:
- Good morning. I was wondering if you could talk a little bit, with four acquisitions in the recent times, what you think these four acquisitions will look like in a couple quarters once they're consolidated? Ballpark percent of revenue and what kind of impact they might have on the margins, if any? Also if you can comment, if the environment out there is still fairly rich in opportunities for you to continue these acquisitions that are close to your product lines and technologies.
- John Kispert:
- Brett, I will take the first part and Rick will take the second part, kind of how we've divvied up responsibilities. I think ADE, we've talked a bunch about here, Jeff, had them in the prepared remarks, so far so good. It's been very good. Good markets, good technology, good management team. The integration, although any integration is difficult, has gone relatively well and we're happy with the financial return on it. You know the size of it has been a $20 million to $30 million a quarter business and it's actually will be accretive here over the next quarter or two. We're happy with that. We think more and more opportunities with this technology, with our distribution and the challenge we have. The other two acquisitions, SensArray and OnWafer are two companies we've known for a long time. We've known the management teams for a long time. One company is 20 years old and really adds to our mission, which is critical process control data. As Rick mentioned, it's not just in etch and litho, but also in deposition where we can get unique data essentially around temperature or thermal data and eventually we believe pressure and voltage kind of data that will complement the stuff that we do today. This is a much smaller business, 1% to 2% of KLA-Tencor's top line today. We do think the markets double in the next year or two as you move into 45-nanometer. It also is complementary to our channel as far as the folks that we sell to and deal with every day. So that business, we believe, will take a little bit longer as far as accretion is concerned, but an opportunity for us to add more and more data, ease of use to our customers as far as controlling their process and production tools. The fourth one, which is Thermawave, a much different business, as you know, Brett. I think bottom line for Thermawave, a company we've known for a long, long time and competed against for a long time is great technologies as we know, very good synergies with KLA-Tencor, not only in distribution and service and applications, but we know the markets pretty well. They have good products, and as we all know, they have good customers, because they're our customers. There's good synergy there. That will take a little bit longer for accretion, if you will, but we have to get the deal done, first.
- Rick Wallace:
- Brett, the second part of your question, the opportunities that are out there, there are a number of opportunities as we focus on inspection and measurement in our core markets we serve today and in adjacent markets. We're monitoring those closely as we always have. I think the key to these is to maintain the right discipline, to make sure the valuations that one uses and pays for companies make sense in a relatively short order that we're not counting hugely on synergies, but that we see both the opportunities to fill out our product portfolio and as well to essentially create growth opportunities for us. In some cases like the ADE, one of the real attractive aspects of that deal was that they had a product line which they really couldn't access a different part of the market with so it was a way for us to bring it in and we believe we'll be able to grow from there. It is a key part of our strategy going forward. These happened to be available at the time we were looking at it, but we're going to continue to work the pipeline. I think we can continue to grow through acquisition if we're careful and thoughtful about it.
- John Kispert:
- The key, obviously, Brett, is our execution on each one of these and we're very focused on that.
- Brett Hodess:
- Thank you.
- Operator:
- Your next question comes from Satya Kumar - Credit Suisse.
- Satya Kumar:
- Thanks for taking my call. I wanted to get back to this question of fungibility and DRAM capacity. When I look at the industry out there, there are probably two or three companies that can actually make this transition, but if you look at the installed capacity, what they have is a lot of NAND capacity still sitting on 200 millimeter, which they converted from DRAM to NAND two or three years ago when NAND margins were higher. My question is, how much longer do you think this 200 millimeter platform can actually continue to produce cutting edge memory, particularly given all of the new things we are seeing with the DRAM industry so far?
- Rick Wallace:
- I think you bring up a very good point, Satya. I think the 200 millimeter NAND capability struggles as they get to the next node. In discussions with those very customers you're talking about over the last week or so, they're counting on the ability to get to 300 millimeter. I think that you're right that the 200 will play out, but part of the growth story in memory has been this transition to 300 millimeter. That will continue as that just has higher productivity than 200.
- Satya Kumar:
- Did you give an outlook for orders in March by device, by memory, foundry, and logic?
- Rick Wallace:
- We didn't. We see it pretty similar to what we saw; memory still at the 55% range, with the split we talked about with NAND being maybe one-third of that. Logic, a little bit less, a little bit lighter at 25%, and foundry, a little bit up, closer to 20% range.
- Satya Kumar:
- If I try to reconcile that with what you seem to be saying for June, I think you mentioned that at this point based on June orders look up, but at the same time I think you mentioned that shipments are first half loaded for memory, which means at some point in September and December you start to see shipments from memory decline pretty substantially. If that's the case, shouldn't you see orders for memory decline in the June quarter given that orders should lead shipments by a quarter? In other words, if you're seeing June more flat to up, how do you see memory orders trending into the June quarter? Shouldn't you be seeing June down at this point?
- Rick Wallace:
- Yes. I think you see foundry get bigger in June, at least that's what we see in the funnel today.
- Satya Kumar:
- Is that foundry going to completely offset any declines in memory in June, is that the way you see it?
- Rick Wallace:
- Today, that's how we see it.
- Satya Kumar:
- Thank you.
- Operator:
- Your next question comes from Gary Hsueh - CIBC World Markets.
- Gary Hsueh:
- Hi guys. Just looking at your guidance here, if I look at 700 and 715, $0.76 and $0.79, and I look at my model, a consensus of 679 and $0.73 it looks like most of your upside to consensus in my model is coming from the top line here. Can you describe what it will take to start driving more massive earnings leverage at the bottom line with all of this restructuring going on? Is there a little bit of a longer tail, or do we need to restructure a little bit more here to see more meaningful leverage on R&D and SG&A and that kind of stuff?
- John Kispert:
- On the bottom line, we've talked about getting out of some of our unprofitable product lines over the last couple of quarters and that takes a while. The key there for us is to not hurt our customers. So that you'll see unwinding over the next quarter or two. I guess your question is the fixed costs of R&D and SG&A, does that come down over time? The biggest issue we have there is, as we've been able to move more and more of that to lower cost regions or to tamper it, we've added these three acquisitions now and then potentially a fourth. How do you consolidate those over the next three to four quarters and leverage the R&D and SG&A? We're confident we can do it. The way I look at it, if we can execute over the next three to four quarters, it's relatively flat if not down a little bit relative to the top line. But the real leverage, as you pointed out, is in our gross margin. The key there for us over the next couple quarters is our cycle times. We have a lot of backlog we have to ship. The teams are focused on this. We're fortunate we can still take our cycle times down at this point in the ramp after a couple of quarters. I still think we can take our cycle times down by another 30% across the company, and that will continue to add leverage in the gross margin.
- Gary Hsueh:
- So, John, just to review, a lot of numbers flying around in the quarter, but that $10 million risk in terms of severance charges, is that mostly for your ADE division or acquisition?
- John Kispert:
- Some of it was ADE and some of it was some management levels here in San Jose.
- Gary Hsueh:
- When you look at your guidance for the March quarter, you obviously guided to some in-process R&D charges. Any more restructuring or severance charges we should be modeling here in the March quarter?
- John Kispert:
- Don't anticipate any related expenses in the March quarter.
- Gary Hsueh:
- So we're kind of fine here with SG&A running around the $105 million range. That's not going to come down appreciably or stepping down anytime soon?
- Rick Wallace:
- It's about flat.
- Gary Hsueh:
- Just what John said. Perfect. Thanks, guys.
- Operator:
- Your next question comes from Suresh Balaraman - ThinkEquity.
- Suresh Balaraman:
- With the acquisition of Thermawave, do you guys have some thoughts on how large the optical CD SIMM can get for you? This has been talked about as a very large market as you have talked about CD SIMM. I'm wondering, are there any hurdles that can be controlled by the acquisition as opposed to just a market adoption?
- Rick Wallace:
- Yes, I think that the optical CD position that we have, we're in a good position and we definitely have seen good growth in that. Clearly there are some opportunities for some synergy with the Thermawave, but our optical CD strategy does not count on the Thermawave technology to execute. I think our challenges are more fundamental, which is, we've got to meet our customer needs as they push their new design rules requiring us to bring out new algorithms and new capability to model these smaller devices. So it's more of a function of that. There may be some technology IP that we pick up, but we're actually not counting on that to execute on our optical market.
- John Kispert:
- The opportunities, Suresh, are around the newer architectures and newer materials at 45 nanometer. That's where the opportunities are, and less around the two companies.
- Suresh Balaraman:
- Can you put some numbers on it, how big can it with be? $100 million, $500 million, $1 billion? People have talked about a $1 billion opportunity, but I'm just wondering, what can it potentially get to?
- Rick Wallace:
- I think that the overall CD market is a pretty good-sized market and relatively slow growing, except for the optical CD part. I think there are more opportunities to grow that. It really is fundamentally a question of how many layers can you take from the CD measurements and put them on optical CD. To some degree the technology solutions we come up with can drive how large that market can become. We've got opportunities to grow it, but we've got to execute in order to do it.
- Operator:
- Your next question comes from Mahesh Sanginario - RBC Capital Markets.
- Mahesh Sanginario:
- A quick question on the bottom line. If I continue to model, say $700 million in revenues going forward for the next three or four quarters, where can I expect the EPS upside could come from? Will it be from restructuring, share buyback? How should it trend for next four quarters?
- Rick Wallace:
- You're going to see us continue to execute on our operating goals, so as we see revenue at about 700 to 715, operating expenses flat, up a little bit as a result of the OnWafer SensArray acquisition. We'll see gross margin tick up a little bit as we go forward into the next quarter as we get through some of the issues we had in this quarter. Right now in guidance, we are modeling share count at flat. So if it goes down from there, we'll see some benefit as well.
- Mahesh Sanginario:
- You don't see for the next four quarters a substantial uptick in the EPS numbers at current revenue levels?
- Rick Wallace:
- Mahesh, I don't intend to give guidance for the next four quarters.
- Operator:
- Your next question comes from Steve O'Rourke - Deutsche Bank.
- Steve O’Rourke:
- Good morning. Two questions. First in a flat CapEx environment, how much can KLA grow in 2007? Second, can you give us an update on the joint venture with DNS on electrolyte deposition?
- Jeff Hall:
- I'll take those in reverse order. Let me start with the DNS one. When we announced last year that we were going to focus on inspection of antrology, part of what that meant was that we were not going to focus on process. We had a joint venture which we then started the process of unwinding, so we are now through that process and that joint venture has now been retired. It was successful in the sense that we brought out some interesting technology, but it was really for future nodes, so that is behind us. In terms of our ability to grow in a flat market, as I've said, we've modeled it from zero to 5% growth for overall revenues and CapEx in 2007 and we see the ability for the KLA-Tencor to grow faster than that. We think probably 5% points faster than that as we go throughout 2007.
- Steve O’Rourke:
- Thank you.
- Operator:
- Your next question comes from Mehdi Hosseini with FBR.
- Mehdi Hosseini:
- Going back to the margin profile, if you could clarify, if I exclude the option expenses, I come up with a 60% gross and around 30% operating margin. My question in that regard is, is that the peak margins you're seeing, or is there still leverage left? If you could help us quantify this leverage. With regard to revenue guidance, how much of the March quarter revenue comes from Thermawave?
- John Kispert:
- I'll let Jeff take the last part of the question. When it comes to modeling gross margin and operating margin, what we do here is focus every quarter on just improving it. We try not to set a goal or a target internal to the company because goals and targets, once you make those goals and targets, people tend to stop. We just keep trying to up the bar. So it is a really difficult question for us to answer pointing into the future. I think if you look at our history, you're probably not far off, but there's no way internally we are going to say that's where we're going to stop.
- Mehdi Hosseini:
- But are we talking about a low single-digit upside expansion from here?
- John Kispert:
- Like I said, we're going to keep trying to push it higher. I'm not going to tell you what, because I have to idea. We think we can keep doing better and we are going to keep trying to do better.
- Mehdi Hosseini:
- How about on the OpEx side, should we assume on a dollar base, is this operating expansion going to remain flat, or is it going to increase? Can you help us understand to what extent?
- Jeff Hall:
- Mehdi, operating expense, I said, was basically flat, up 1% to 2% as a result of the addition of On Wafer and SensArray. But I think the right assumption here is it's flat, it's not going up. Thermawave, the other part of the your question, Thermawave is not included in guidance.
- Mehdi Hosseini:
- Thank you.
- Operator:
- Our next question comes from Stephen Chin - UBS.
- Stephen Chin:
- Good morning. Thank you. In terms of the operating expenses, is the company still hiring for the core KLA business? Secondly, if you were to exclude some of these acquisitions like Thermawave and the two other small pending acquisitions, would you expect the core KLA headcount levels to be up sequentially at the end of the March quarter?
- Jeff Hall:
- We're always looking for good people. If we can find a good person, we'll bring them in. But I would think core KLA-Tencor is flat to down in headcount, especially locally here.
- Stephen Chin:
- Thanks. In terms of orders by geography for the March quarter, which regions do you think might deviate from the historical average in the March quarter?
- John Kispert:
- The U.S. looks to us to be a little bit down for the March quarter, that's just timing. It ran about 20% the last couple of quarters and I think it will probably be down closer to 10% of the total in the March quarter. The offset to that is Japan will pop back up to around 30%. I think we see Taiwan, Korea, China, and the rest of Asia, their typical percentage is flat to where they were last quarter. I think there's some opportunities in Europe again, just timing for the March quarter that would pop Europe up to closer to 15% in the March quarter.
- Operator:
- Your next question comes from Robert Maire – Needham & Co.
- Robert Maire:
- We're going through a number of technology transitions or likely transitions this year, such as copper starting to come into memory and double printing on litho. How does that impact your mix of products of overlay versus wafer inspection versus other products that you put out there? Any significant changes in mix that we can expect?
- Rick Wallace:
- Hi, Robert. Thanks for the question. There are some challenges out there, as you mentioned, copper coming into memory, double patterning, emersion lithography, IK. There are a lot of technology changes that are pushing our customers and they're pushing the demands in both the metrology space where the need to measure and control these materials is very important as well as the defectivity, where the integration of new materials and the challenges associated with that. So I would say, just to give you a couple of specifics, double patterning, as it comes into being, pushes the overlay requirement specifically creating really a driver for our new technology, the Archer 100, to be able to go in and serve that market and we see that continuing to grow as a result. Also, emersion creates challenges with the edge of the wafer, which is something that our VisEdge product addresses. In addition to just the overall defectivity challenges presented by those and by copper, we see both demands for metrology and inspection going up. Again, part of our overall thesis is that inspection of metrology will outgrow the market as new technologies continue to come on. So we're very bullish and we think challenges are broad-based in terms of the portfolio that we have and how those will address the challenges.
- Robert Maire:
- A quick follow-up, I may have missed it, but any update on your data storage side of your business or any strategic changes there? What's the direction of that part of the business?
- John Kispert:
- It's going well. As you probably know and I think most people know, it's not a part of our world where there's an incredible amount of investment right now, but it's a pretty steady business for us. What we've done with ADE and with some of the other acquisitions is leverage that part of the business into other markets like high brightness LEDs, like not only the substraight and media, but also optical electronics, compound semis. So that business, we call it our growth and emerging business, is seeing an uptick the last couple of quarters, but I think generally the demand in that space is relatively flat. We're planning on it being relatively flat the next quarter or two. We're trying to make our own way there as far as penetrating new applications, just like we do in the semi industry. It's possible to see some pick up, but it's a small percentage of our business.
- Robert Maire:
- Okay, just curious. Thank you very much.
- Jeff Hall:
- Luan, we've got time for one more question.
- Operator:
- Okay, sir. Your final question comes from Mark Bachman - Pacific Crest.
- Mark Bachman:
- Hi, thanks, guys. John or Rick, when looking at SensArray here and On Wafer, these products appear to be quite different from what you already have on the market. Just wondering, are these acquired technologies? Do you look to integrate these into your current product lines, or will these be new product categories for you? In other words, what was the thought process behind making these acquisitions?
- John Kispert:
- I thought I said earlier that the thought process is pretty simple in that it adds more critical process control data to our suite. Organizationally, the divisions are going to report into our service organization. Why is that? Because that's where we're closest to touching the preventive maintenance on process tools, the fixes that you do to process tools, because that's generally where you use these, as you probably know, these are wafers both wired and wireless wafers that you use to monitor process tools. As you know, there's a handful of our products that do exactly the same thing. So it's a complementary set of data points that our customers can use. I’d also say when it comes to SensArray and On Wafer, we're uniquely positioned in the industry in that these wafers are also bought by our sister companies, if you will, in the process space. So the process and litho guys also buy these to do their own development and their own testing. So KLA-Tencor, with our position in the industry, can kind of act as the arbiter of that and we can sell to everybody as well as sell to the semi guys and make sure that the data is getting used throughout the line and patched up and down the line with our software. Does that help?
- Mark Bachman:
- It does. Thanks so much. One follow-up for either you or Rick as well. I believe that AMAT’s UVision has made some in-roads against KT in the logic here in the U.S. I'm just wondering, can you talk about the merits behind the decision process here and how the competitive front might have changed with the newest version of UVision now on the market?
- John Kispert:
- I don't know who you're referring to. On the competitor front, as Rick said earlier, we don't see much of a change here, we've always had competition in our Darkfield product space as well as our Brightfield. Our market share on the leading edge is as strong, if not better, as it has been in the last 10 to 15 years. As I said earlier, where we're challenged at this point in the cycle is when folks are investing more at the trailing edge, which in this case would be 90 nanometer, you'll see more of our competitors' tools pop in there, because it really gets down to more of a price decision. KLA-Tencor's lead in technologies aren't as high at 90-nanometer as they are at 65-nanometer, obviously. But I don't see a change in our market share. You're picking a particular customer, which I don't know which one it is, but no big change in total market share, particularly at leading edge.
- Mark Bachman:
- Thanks so much.
- Jeff Hall:
- Thank you all for participating on the conference call today. We look forward to speaking with you again next quarter.
- Operator:
- This concludes today's conference call. You may now disconnect.
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