KLA Corporation (KLAC) Q2 2010 Earnings Report, Transcript and Summary

Good afternoon. My name is Alisha and I will be your conference operator today. At this time, I would like to welcome you to the KLA-Tencor Corporation second quarter fiscal year 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator instructions) Thank you. Ed Lockwood, you may begin your conference.

Thank you, Alisha. Good afternoon, everyone and welcome to KLA-Tencor's second quarter fiscal year 2010 earnings conference call. Joining me on our call today are Rick Wallace, our President and Chief Executive Officer and Mark Dentinger, our Chief Financial Officer. We are here today to discuss second quarter results for the period ended December 31st, 2009. We released these results this afternoon at 1:15 p.m. Pacific time. If you haven't seen the release, you can find it on our web site at www.kla-tencor.com or call 408-875-3600 to request a copy. A simulcast of this call which will be accessible on demand following its completion on the investor section of our website. On that website, you will 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, 2009 and our subsequently filed 10-Q reports. In the filings you will 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 today are subject to those risks. The KLA-Tencor cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those in the forward-looking statements. More information regarding factors that could cause differences is contained in the filings we make with the SEC from time to time, including our fiscal year 2009 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, you could be reassured that any updates we do provide will be broadly disseminated and available over the web. With that, I will turn the call over to Rick.

Thank you, Ed. Welcome to our second quarter fiscal year 2010 earnings call. In my remarks today, I will discuss the financial highlights and the demand environment in the December quarter, provide some perspective on our industry outlook for calendar 2010 and provide guidance for the quarter. Mark Dentinger will then take you for the details of the December quarter result and will conclude with your questions. Let’s get started. We are pleased with the company's second quarter performance as the combination of strengthening industry dynamics, strong demand for new products and good execution contributed to solid results for KLA-Tencor. Second quarter revenue was $440 million, an increase of 28% compared with September. Non-GAAP net income was $49 million, up 88% sequentially and non-GAAP net income per share, including stock-based compensation, but excluding some one-time charges was $0.28 in the quarter. In addition to strong revenue growth and profit performance, we also generated $164 million in operating cash flow in the period and our cash position grew to $1.5 billion at quarter end. So by any of these measures, a very good result for KLA-Tencor in the December quarter. As we look into calendar 2010, we see the semiconductor equipment market place on solid footing and progressing steadily in what the analysts projected the healthy cyclical recovery for the industry. This is driven by solid IC growth and a favorable supply and demand balance and high fab utilization. Current consensus for the semiconductor revenue percentage growth in the mid-teens range in 2010. And the market analysts are forecasting capital expenditure to increase in the range of 50 to 60% for the year with investment focused primarily on advanced technology development. We expect process control will be a key enabler of our customers' success in this period of technology focused capital…

Thanks, Rick. As a reminder, we present our income statement in two formats. One under U.S. GAAP and another in a non-GAAP format which excludes amortization and write-downs of intangible assets associated acquisitions. Expenses associated with our stock options related litigation and certain cost and expenses which we do not expect to be recurring, such as restructuring charges and unusual tax items. Our balance sheet and cash flow statements are presented in GAAP format only. Most of my prepared remarks on operations will reference our non-GAAP income statement, but where I reference GAAP numbers will make the distinction. The reconciliation of our GAAP to non-GAAP statement is attached to our press release and available on our web site. Revenue for Q2 was $440 million slightly towards the high end of our guided range of $420 to $450 million. Non-GAAP earnings per share was $0.28. Q2 GAAP EPS was $0.13. A summary of the differences between this quarter's GAAP and non-GAAP numbers are as follows. Acquisition-related charges of $8 million before taxes or $0.03 per share after taxes, restructuring and severance charges of $14 million before taxes or $0.05 per share after taxes, stock option litigation expenses of $7 million pretax or $0.02 per share after taxes. We also recorded a non-cash tax charge of about $9 million associated with the cumulative shortfall acquisition in our employee stock activity. Removing this charge from GAAP earnings added $0.05 per share to non-GAAP EPS. The recent improvement in order activity continued in Q2 with foundry orders generating the largest portion of new business. New orders for Q2 were $516 million, an increase of 5% over Q1 new orders. We also scheduled then about $33 million of orders received in prior quarters resulting in net orders of $549 million, up about 15% from Q1.…

Thank you, Mark. We are now happy to take your questions. And we once again request each participant to please limit yourself to one question and a brief follow-up to allow us to get as many callers as possible in the time allotted today. And with that, operator, we are ready for our first question.

(Operator instructions) your first question comes from the line of CJ Muse with Barclays Capital. Your line is now open. CJ Muse – Barclays Capital: Good afternoon. Thank you for taking my question. I guess first question, following William print overnight, there's clearly a concern of a near-term peaking in shipments. So I guess my question is this, do you subscribe to this view or do you see a different shipment pattern for KLA, particularly given your growing leverage to memory?

Yes, CJ, it's Rick. I think that what we see as we look out is that our exposure to memory is increasing. And we did not have that much exposure in the last two quarters as we said then, we saw it going up and we continued to see that happening over time. I think that for us, it might be a little different than some of the process guys that are more capacity related and for that reason; we're anticipating an increase again in the March quarter and better prospects throughout the year. So we don't see a peaking. We also see foundry, while we don't anticipate foundry to be at the same level as percent of our business, we believe and all the indications are it will continue to be strong for us. So we don't see a short-term peak for us. CJ Muse – Barclays Capital: Right and as a quick follow-up, on the memory side, I guess what are you looking forward to give you the confidence that memory process control will, indeed, increase and I guess can you comment on your expectations for RAM relative to DRAM.

Sure. Yeah. What we are seeing, I think, I characterize. There was an increase of reasonably dramatic increase from some of our customers in their need to respond to the market. And I think that their first inclination in those situations was to ramp up starts and get some process equipment in but they didn't really go to work on yield. We know that the native yield before people can do repairs is very low on the advanced devices, but you can make up for that with repair, but it's not long term, what you really want to be doing in process. So all the conversations and all the discussions we are having with our customers lead us to believe that there's a very high likelihood that we are going to see increased demand as we go forward and enabling our customers to get native yields up and ultimately to get their costs down over time. In terms of the NAND complexion, the NAND was about 25% of the memory orders and memory was only about 17% of what we saw in the December quarter and we anticipate those going to about 35% in the March quarter and we see memory up to probably about 35% of our overall business. So we see a third of a third being left demands. So not – not huge levels of investment yet and NAND and DRAM picking up before, NAND does.

Your next question comes from the line of Krish Sankar with Bank of America. Your light is now open. Krish Sankar – Bank of America: Is there any way, you could quantify what it was last cycle versus this cycle? Because it seems like the DDRT, additional applications that I have seen increasing the process control capital intensity, but is there any way to quantify it versus DDR2 or the prior cycle.

Krish, we don't really have – we don't have a detailed model on that or time to go over it. We have the detailed model but not really time to go over it. I think that what happened to the last cycle, of course, as we know, there was probably more capacity to put online than the market was going to support. So from that standpoint, overall intensity was higher and we don't anticipate things getting back to that level. But in a steady state, where you are not overbuilding, we do see process control intensity increasing cycle on cycle for memory, but lagging what we saw in foundry. So we do see it increasing but as I said, they have – they have a redundancy card to play which delays the insertion and we have seen that in the past with memory. So we anticipate that that will be a similar – the way things play out for us in this cycle as well. Krish Sankar – Bank of America: Good and then I just have another big picture question. If you look at the last cyclical wafer fabs in 2007 and in 2007, it was about $30 billion. Do you actually think we could reach those levels this cycle?

Well, I have – I don't have a crystal ball that's any better than – and certainly not as active as all of you guys that cover the space. Let me put it this way, we are not building our business and planning our future based upon exceeding the prior peak. And we believe we can continue to grow and we can exceed our prior peak without the industry exceeding its prior peak. That said, if it does, we will certainly be in a position to capitalize from it. But part of our acquisition strategy was to get into new TAMs to give us new exposure to new markets so that if the next cycle wasn't as high, we still have great opportunities for growth. Krish Sankar – Bank of America: Thank you.

Your next question comes from the line of Jim Covello with Goldman Sachs. Your line is now open. Kate Kotlarsky – Goldman Sachs: Hi, this is Kate Kotlarsky for Jim Covello. A couple of questions, One I think you answered in part but just hoping you could comment on why perhaps your guys order increase was as significant as we've seen some of the other companies announced. Was it, because your foundry exposure is generally a little bit greater than some of the other companies in the space and then your memory exposures may be a little bit lower and that's where a lot of the orders are coming from? And to the extent that's true, should we expect you guys to sort of play catch-up in the next couple of quarters and see your memory business increase in line with some of the your peers?

Yeah. Kate, we've had pretty steady improvement in our bookings. This is the fourth sequential up quarter for us since the December 2008 level. We feel pretty good about where we are. I can't comment on the other players. What I do know is as I just mentioned, we did not see and did not anticipate seeing memory to be a catalyst for us in the near term. We saw it as a growing and important part of our business but not the dominant part but we do see it increasing over time and we are anticipating even in this quarter, in the March quarter, where memory will go from 17% of our order book to about 35%. So – and we expect that increase to continue over time. Kate Kotlarsky – Goldman Sachs: Okay. That's very helpful. And then, you know, you had mentioned earlier that, you know, from your perspective, you don't believe that business is approaching, peak levels. If we were to think about it, sort of by segment, you know, foundry, let's say, versus memory. Do you think that the Foundry business is getting closer to peak level and the memory side of the business still has a ways to go?

I think for us, just do the model of what we said last quarter, we did in foundry in the quarter before, we did 76% of our business in September. We did 59% in December and we're anticipating about 54% in March for foundry. So it will become a smaller percent of our overall business as our business is going up. So we think foundry continues to invest at similar levels. There are some pretty big foundry projects that are not currently being booked because they are out of their out of their ways in terms of getting facilities ready. While there could be near term lows is in that, the largest foundry players are committed to increasing CapEx. The largest foundry driving those guys. So we think it should be a pretty robust year for foundry throughout the year, but, you know, you can always – it's very hard smoothing function on these to predict exactly quarter by quarter. We anticipate from the calendar year that foundry will be strong throughout 2010. Kate Kotlarsky – Goldman Sachs: Okay. Great. And just a quick other one. Do you guys have an expectation for shipments for next quarter?

Yeah. We don't typically – we haven't guided shipments in the last five quarter or so, Kate. We do have an internal expectation but we don't externally guide it. Kate Kotlarsky – Goldman Sachs: Okay. Thank you so much.

Your next question comes from the line of Satya Kumar with Credit Suisse. Your line is now open. Satya Kumar – Credit Suisse: Hi. Thanks. Rick, I was wondering if you could elaborate a little bit on some of the memory yield challenges that you said your customers are facing. Is that any different cycle around compared to previous shrinks and where do you think we are with the overall big picture, particularly in (inaudible) as you go to the sub 3X nodes?

It is different. I mean I there was every sequential generation from memory. They start up with lower yields and they have to compensate through repair. And that' certainly, there are standings we have .Yes, it is different. I mean, I think that with every sequential generation for memory, they start off with lower yield and they have to compensate through repair and that's certainly the understanding that we have. So the native yield right out is rather low. And, you know, as we see it, that's not really different, it's got more difficult, I think for our customers. But it doesn't keep them from shipping and it actually doesn't even keep them from yielding. It keeps them from being as cost effective as they want to be. So what we plant it is, improving that overall native yield and sometimes that result them having a ship, a lower density device off the same ship because of yield concerns. So we are seeing a lot of pressure, without going any specific customer details, you can imagine what's driving it. The NAND [ph] guys are driving the most advanced design and the memory guys have a lot of concerns about the overall process integration. So we are seeing that pressure right now from many of our customers and are working closely with them to serve it. We are also, engaged heavily in the R&D but also trying to help them in production work through those problems. But I say increased problems and they do have a way to compensate, but it's harder for them, at the beginning of a ramp, they just want to get wafers out and they want to get chips out. So, I think they are more prone to start more wafers than a foundry might be. Satya Kumar – Credit Suisse: Okay. On the foundry, how concentrated are your foundry orders? How big is, is there a number two customer placing orders in foundries at this point?

Yeah. Absolutely. And it's pretty much concentrated in the sense there's a concentrated number of foundries but we are seeing activity from all of them and I think that, that really has been the story. There's obviously leading foundry companies who has been investing and has now heavy investment but others have followed as well. So we are seeing really cost foundry state. Obviously there's another foundry player with plans for a new fab coming late in the year, which will be a bit of an inflection point. Satya Kumar – Credit Suisse: That's very late in the year, I would have presumed, right?

Well, yes, yes. Satya Kumar – Credit Suisse: Okay. And lastly, if you look at all of these different trends that are playing out between you guys and some of your peers, if CapEx is up 50 or 60% from these technology-type buying, how should we think of KLAC's potential to overgrow or undergrow the market this year.

Yes, we remain committed to our thesis that we can out grow the market by about 5%. And that's based on, our position in the market, our ability to grow into new markets and we think actually 2010 sets up pretty well for that when we look across our forecast and the industry projections we are talking about. We do see processed capital, process controls intensity increasing. Our calculations was it was around 13% in 2009 and we anticipate it going up in 2010 and, again into 2011. So, from that standpoint, we do see the opportunity to outgrow the overall market.

Yes, we remain committed to our thesis that we can out grow the market by about 5%. And that's based on, our position in the market, our ability to grow into new markets and we think actually 2010 sets up pretty well for that when we look across our forecast and the industry projections we are talking about. We do see processed capital, process controls intensity increasing. Our calculations was it was around 13% in 2009 and we anticipate it going up in 2010 and, again into 2011. So, from that standpoint, we do see the opportunity to outgrow the overall market. Satya Kumar – Credit Suisse: What that means, Rick, is that you are reasonably comfortable in maintaining these total shipment bookings or revenue run rate as we proceed through the year? That's basically what that would imply if you want to grow 60% this year?

Right. Well, it depends on what you believe the industry will do. I am the last guy who's going to tell you what the right number is for the industry but what I will tell you is that our objective is to outperform the industry. And we think that, that's very doable with what we see right now but, of course as we all witnessed in the last couple of years, forecasting is a difficult business.

Right. Well, it depends on what you believe the industry will do. I am the last guy who's going to tell you what the right number is for the industry but what I will tell you is that our objective is to outperform the industry. And we think that, that's very doable with what we see right now but, of course as we all witnessed in the last couple of years, forecasting is a difficult business. Satya Kumar – Credit Suisse: I understand. Thank you.

Your next question comes from the line of Gary Hsueh with Oppenheimer & Company. Your line is now open. Gary Hsueh from Oppenheimer & Company, your line is now open. Your next question comes from the line of Timothy Arcuri with Citi. Your line is now open. Timothy Arcuri – Citigroup: Hi, guys. A couple of things. I'm just trying to get to the backlog number. It looks like backlog was up $88 million on a systems basis but you only ordered $57 million more than you shipped. So was there a reverse adjustment there?

No. There wasn't a reverse adjustment in the sense that we didn't take anything out but we did actually bring a net 33 back in, which I alluded to in this distinction between new orders and net orders in the quarter, Tim. And that is that, again, when you go into an upturn, things that pushed out of our 12-month visibility which is the definition of what's on backlog. We typically take out of our backlog and call that a push out. When you are on a ramp back in, those orders tend to come back in and we brought $33 million back in on the quarter. Timothy Arcuri – Citigroup: I'm sorry so, Mark, so the 516 that you talked about gross is does not include those?

Yeah. It does not include those and the net number was, I believe, 549. Timothy Arcuri – Citigroup: Okay. I got it. That makes sense. Okay. And then the second question, so if I just sort of run a very simple. I mean, this is bookings, so it's kind of flawed but if I look at your share of WFE and I look at what ASML is doing and LAM, they are pretty darn close to peak. They are 5, maybe 10% away from their sort of prior peak bookings and you are still about 20% away. Now, I certainly understand that that could be due to Samsung because they are such a big portion right now of the bookings, but is there any other factor because I know you guys talk about you know, PDC gaining as a percentage of wafer foundry equipment. It doesn't seem like it in recent years and certainly right now it doesn't seem like it either. I'm wondering if there's some customer specific issue right now that would explain it, that would reverse itself going forward, that would allow you to basically gain share. Thanks.

Yes, Tim, again, we look at calendar '09 and it did gain. We saw the intensity of process control was higher than the prior year and the early signs, I think, there will certainly be quarters where that won't be true but we think an aggregate, as we look across, we will see that play out. Obviously time will tell, but a lot of that goes to the indications. The comments that I made earlier about what's happening and particularly in memory. We were the first to admit, we were not going to come on as fast as the other guys did in memory but we see a steady increase in that as we go forward. And of course, we benefit in some areas that perhaps the other guys haven't as much. So year on year, we believe strongly in our thesis that we'll outgrow overall WFE in calendar 2009. Calendar 2010 as we did in 2009. Timothy Arcuri – Citigroup: Okay. I will look at the numbers again. Thanks, Rick.

Your next question comes from the line of Steven Chin with UBS. Your line is now open. Steven Chin – UBS: Hi, Rick and Mark. I wanted to ask, Rick, about the continued strong wafer inspection orders that you continue to show. Do you get the sense here you are taking share at foundry customers for wafer inspection and are any of the 300-millimeter wafer growers contributing yet to wafer inspection orders?

Yes, Steven. I wouldn't say we are necessarily taking share. I think our share position kind of stays in the same range as it has. I think that it is true we are seeing, I think, some benefit from adoption and so that's part of, part of our story. We did some business in their wafer segment. I wouldn't say it was the main guys but it was signs from some of the other players that we had, we had some signs of life there, which is great to see because it's been quite a while and we've talked about that in the past, that that was one of the legs that hadn't really turned on. I wouldn't say it's a large percent of our business but there was some improvement there and we would anticipate as we model the demand for wafers and the overall industry trajectory. We think that as we move through this calendar year, that business will continue to improve. But right now, it's a relatively anemic compared to prior peaks. Steven Chin – UBS: Yeah. That was helpful. And then a follow-up question, Rick. The orders from these new products, solar and LED, they have been running about $30 million a quarter. Do you get the sense that you could see a substantial increase soon given the big solar capacity additions that are happening in the industry and the large LED capacity additions you are seeing here in 2010?

Steve, it's hard to say. We are certainly hopeful of that, but I also believe that it will take some time. I think the solar dynamics are challenging and I think that that's part of the issue here. There is capital being spent but, as we look at it, we think our share position is good. I'm a little bit waiting to see on that. So we think the current run rate we've got is pretty good. The good news for us is we are in a good margin position on that business. So, we're not in need of huge volume to be making it accretive to our model and we also didn't invest heavily in R&D for that. That's how we are playing that market. Steven Chin – UBS: Okay. Thanks, Rick.

Your next question comes from the line of Raj Seth with Cowen & Company. Your line is now open. Raj Seth – Cowen & Company: Thanks for taking the question. Hey, Rick, on the 40-nanometer buzz that continues to float around about yield challenges and flat capacity etc cetera. Is there something unusual about 40 new defect mechanisms or something that makes that very different from previous transitions in logic or is this really just the usual sort of teething with a new technology and on the same sort of learning slope that we've seen historically?

Well, I think what made it different for our customers is they couldn't see them because they were working on old technologies of ours and so from that standpoint, they got hit pretty hard by stuff they couldn't see. They had to believe it first and then when we did evaluations on our new equipment, there was a bit of a stir to get the new equipment in there so they could see the stuff. And the deal, Raj, if you can't see it, you can't fix it and that was part of the problem with those guys. As we were saying, we believe the same trend will play out in memory. There's a phase lag to it, though. Raj Seth – Cowen & Company: And as you move to 32, any difference in sort of the intensity of 32, or is it the normal step up, node to node that you typically have seen in the past?

I think there's a step up. I think that the issue for us is the problems are there and the problems are getting harder. Our real challenge is making sure we've got the tools that can find the problems that the customers can then take and use to solve the problems. And so for us, it's a matter of inspecting them and reviewing them and we’ve got a lot of investment playing out, we are very solid with our roadmap but we’ve got to play it out. But we think that the trend continues and we have just got to keep executing our product development to be able to capitalize on that. Raj Seth – Cowen & Company: One last one, if I might. You touched on ADE do you mentioned some signs of life, can you talk about some of the other pieces you added through acquisition ICOS and the like. Are you seeing anything there?

Yeah. We don't breakout the individual products but what I can tell you is we have seen some activity in the backend, which has been encouraging. I think the backend had really shutoff during last year and we saw that comeback and so that's encouraging, we see a number of opportunities there. We do see some high brightness LED opportunities and some good growth there but off a very small basis. Even our business like sensor, we have seen a nice pickup in that business so really they are starting to kick in. I would say the acquisitions still have a ways to go to get to their full potential and we're working very hard to see that happen but from my perspective, they represent upside as we move forward. Raj Seth – Cowen & Company: All right. Thank you.

Your next question comes from the line of Wenge Yang with Oppenheimer & Company. Your line is now open. Wenge Yang – Oppenheimer & Company: Hi, this is Wenge, actually for Gary. A couple of questions. First one is we see foundries struggling quite a bid at 40 nanometer based on your current observation, do you see the memory guys running into similar troubles, when they move to 40 nanometer DRAM or 40 nanometer in NAND technologies?

Yes. There's no question that the memory guys face yield issues, defectivity issues, metrology issues as they move down in design roles, very similar to what we’ve seen foundries and foundries may have got hit with that are up little bit earlier in the cycle. The memory guys have a bit of a hedge though, because they have redundancy and they can play off of that and that's why we believe, we have seen this lag for us in terms of our order book on the memory side. So as we go forward, we're certainly working very hard to realize those opportunities but they are definitely seeing and being challenged by the defectivity levels that they are – that they are having to deal with and it's just a matter of smaller devices, smaller design rules, so smaller defects matter now that didn't used to matter to them and there's integration challenges as well as they run these processes, which is tighter and tighter for them. Wenge Yang – Oppenheimer & Company: Okay. Just a follow-up. Some of the process tool guys, subcomponent constraints and constraints and supply chain kind of constraints. Do you see similar things and what's your lead time at this moment compared to maybe a quarter ago?

So I would say we definitely see constraints in our supply chain. I think there's no way you can go from where the industry was, to where it is now and not have strain in the supply chain, in the same way perhaps our customers see constraints from us. That said, you can imagine there's a tremendous amount of work going on to close those gaps, to not lift those shipments and to be in a position to support our customers. So from our standpoint our materials people our manufacturing people, are working really hard and doing a great job of closing those gaps so we can meet those customer demands. But there's no question that when you whipsawed an industry the way this one has been whipsawed you will going to run into to some those constraints. Unfortunately, I think throughout the cycle we stayed very close with our key suppliers worked closely with them to be in a position to anticipate ramping up and we continue to do that and I think that that's again, there's a lot of work going on in our manufacturing area around the world to try to close those gaps. Wenge Yang – Oppenheimer & Company: Thank you.

(Operator instructions) Your next question comes from the line of Steve O'Rourke with Deutsche Bank. Your line is now open. Steve O'Rourke – Deutsche Bank:

I don't know what their visibility is, Steven. I mean I think that's part of the challenge for us. I think from our standpoint, we have pretty good dialogue and discussion with customers, I think that given the nature of our products and the lead time of our products, I think most of our customers know that the products that they want from us, they can't just get and order and get in the same quarter. So I think that gives us probably, naturally a bit more visibility into what's going on with our customer base. That's why I think if you look back at the ramp, we've been pretty consistently doing what we thought we would do relative to this ramp. So I would say from that perspective, our visibility is better actually than it's been in quite a while. A year ago, I said we had no visibility into anything. Now, I think we've got at least more like normal visibility. Steve O'Rourke – Deutsche Bank: Okay. And can you comment on what you are seeing with the Taiwanese memory manufacturers?

Yeah. I wouldn't want to breakout specific regions. I guess, it's probably okay to talk about Taiwan. I think that Taiwan has got a couple of – you really obviously the kind of two groups there and I think that there has been as you know, more investment, at least dollars becoming available and I think given the pricing and this better than I do, I think they are in a better position to make investments going forward. And Taiwan obviously, has been an important region for us but I would say that the next four quarters I think will tell the story, because we are anticipating more investment in memory overall and if anyone doesn't invest over the next four quarters, I think they are going to have to have a different strategy beyond that because they are just going to be out of position. I think everybody got a bit of a pass if you go back over the last year of not investing because the leaders had backed off so much that’s no longer, okay. So the deal if you don't keep your investment going you better find a different strategy that doesn't rely on the leading edge, does that make sense. Steve O'Rourke – Deutsche Bank: It does. Thank you.

Your next question comes from the line of Jagadish Iyer with ROK [ph] Research. Your line is now open. Jagadish Iyer – ROK Research: Thanks for taking my question. Rick, two questions. First is how do you see the subsequent between wafer inspection, metrology and reticle inspection playing all that's going into '10 and as a follow-up, I wanted to find out how do you see the metrology business coming along particularly in light of new materials and new technology being adopted? Thank you. And a question for also for Mark is that these one-time charges, when do you – how do you see them going forward for the next few quarters? Thank you.

Okay. Why don't you take the first?

Yeah. Why don't we start with the one-time charges, they are not actually technically all of one-time. We have an unresolved stock option litigation exercise, which we're hoping comes to an end at some point in the future, but that's very difficult to predict and as long as that's out there, we are adopting the industry convention and sweeping that up. Obviously, that's one where it will not be ongoing in the long-term run in the model but it's hard to say when it gets cutoff short-term. The second – sort of batch of GAAP to non-GAAP adjustments goes with acquisition premiums. Typically, those intangible assets that we acquire along with the acquisitions, they get amortized over three to five years and if you don't do an acquisition for three to five years after about a five period, you will see those things essentially fade away. The third category is something that is completely out of the normal operating purview of the company has just a one-time settlement something like that those are little bit difficult to predict. In terms of restructuring charges, which we do have a small amount this quarter, we're pretty much near the end of that presuming we don't have a big course correction with the worldwide economic situation in 2010. The latest restructuring charge had to deal with the campus consolidation from us moving to out of our performer [ph] over to repeated that is now done. So we don't anticipate anything there. The final category, which I won't bore you with has to do with the tax treatment of employee stock grants and that is – that we are earn an unusual meaning that not many other companies are in it, where we are in an excess shortfall position cumulatively and when you are in that position the tax impact, if it exceeds the book impact of employee stock charges actually windup running through your tax expense line, instead of your equity. That will go back and forth between quarters most companies are not in the excess shortfall position, so they basically take all of those charges through equity, we are doing that sometimes in the quarters in which we are taking through in the tax expense line we are scheduling them out. So the short answer your question is the nonrecurring stuff that comes out of the blue that's hard to see should be infrequent. The other areas where we are seeing some consistently – some consistency hopefully fade in the relatively, let's call it the intermediate term. It won't be next quarter. Jagadish Iyer – ROK Research: Thank you.

All right and on your question regarding wafer versus metrology and what we see for that, we have been in the wafer metrology radical and service. And I will give you a perspective, we did see wafer increase in the December quarter of 42%, metrology is down slightly as wafer picked up to 13 radical went up from 21 to 15 and service crept up to 24. There is a lot of opportunity in metrology and as we go forward we do see a lot of opportunity, but that's another case where we've just got to be in a position to capitalize on it. So, some of it is a matter of us executing on our products and demonstrating that to our customers. So we think there's a lot of opportunity. That said, I would say right now there's probably more opportunity in the yield challenges that our customers face. So I don't know that we're going to see metrology increase as a percentage given the enormous opportunities there are in wafer inspection. But there's definitely growth potential in metrology and we are, I think well positioned to build on that as we go forward. Radical is kind of an interesting story. That's a lumpier business because of the nature of the products that we have and I think that we will continue to see strength in radical but it will continue to be lumpy just by the nature of the ASPs and the relative small number of units that we sell and radical. And service while we have seen healthy service growth in an environment where CapEx is growing faster, service ends up becoming a smaller percentage of the business. In an environment where the CapEx is growing slower, service becomes a larger percent. Does that answer your question? Jagadish Iyer – ROK Research: Yes. I didn't, just a clarification. I just wondered on the year-over-year basis, on the fiscal year-over-year basis, do you think the wafer inspection can probably outgrow the other three segments.

It really depends. I think they all have opportunities and inside it's a horse race for these guys to see how the different divisions operate. I definitely think that there's tremendous opportunities for metrology but it's like anything you've just got to execute against them. So right now, we have models but we are not forecasting any particular segment over the other. I would say the yield challenges out there have certainly presented a lot of opportunities but you look at advanced lithography and it creates a lot of metrology opportunities as well. Jagadish Iyer – ROK Research: Okay. Thank you, that's helpful.

(Operator instructions) Your next question comes from the line of Timothy Arcuri with Citi. Your line is now open. Timothy Arcuri – Citigroup: Hi, Rick. Just a quick follow-up on something you were saying. If you look at foundry orders and you look at memory orders versus prior peak, it's pretty interesting how much lower memory orders are for you versus the peak and foundry is much higher. Obviously that has much to do with the 4X yield issues that the foundries are actually having but NAND has now moved through 4X and they haven't their bookings haven't picked up very much. So I'm wondering what's going to be the straw that breaks the camel's back for the DRAM guys to ultimately see the same yield issues that the foundry guys have. Because I am just sort of wondering whether there is something structural that’s changed for the DRAM guys that may be their sort of process inspection and intensity if the will gone down.

Yes. Tim, it's a good question. I think, again, what we attribute it to is kind of two things. One is there's no question that the memory guys have not seen the same level of pain causing them to act as the foundry guys. No question. Just shows in our numbers. I think the other question is have we demonstrated our capability as effectively with the memory guys causing them to act? And I would say that's where we have more work to do. We think we have done some good work. We think it's going to continue to progress. We think the opportunity is there but I'm like you in terms of we've got to demonstrate it and prove it and we saw signs of improvement over the last quarter. We are forecasting March again up. I think we have been pretty consistent on what we have been able to do with memory but we have to demonstrate it over the next year. We think the opportunity is there. We just think that we've got to execute and demonstrate our abilities there and then the numbers will prove themselves. But it's pretty hard to argue with the analysis to date. Timothy Arcuri – Citigroup: But I guess, Rick. I'm just sort of wondering are they telling you that it's just a matter of time so they are saying look, we have problems down the pipe it's Just as a six months from today whenever we get all of this other equipment and we start to ramp production that's when we are going to have the problems. Or are these things that only you see coming from your side not from the customer side?

No. I think, Timmy gets down to a conversation that goes like this. Look, if you can solve this problem for us, if you can demonstrate you can find these defects at this throughput at this cost of ownership, we will deploy your tool. If you haven't done demonstrated that then we are going to wait and see and we are going to find other ways around it. One other way around it is repair but we don't like that because that's a painful process and ultimately we need you to solve the problem. So I think there's some technical challenges that we've got to overcome. There's some demonstrating that we've got to do and if we execute on that and we are seeing signs of that and we will see it continue to grow as part of our business, you know from my standpoint, the good news is the opportunity is there. The challenge for us is to demonstrate that our tool set solves those problems and we'll generate the ROI. So I think the opportunity is there. We just got to execute on it. Timothy Arcuri – Citigroup: Got it. Thanks, Rick.

Your next question comes from the line of Mahesh Sanganeria with RBC Capital Markets. Your line is now open. Mahesh Sanganeria – RBC Capital Markets: Rick. Another question on metrology. Metrology seems to be a lot more volatile for example 2008, when the market was down 33% you were down only 4% but this year the market is down close to 40% and you are down close to 55, 60%. Why are you seeing that volatility? Is it related to the wafer market volatility?

So did you check out our metrology percent, you tracked it over time? That's how you came up with that. Mahesh Sanganeria – RBC Capital Markets: . :

Right. Okay. Mahesh Sanganeria – RBC Capital Markets: I get it from that.

I think that's a great question. It's not about the wafer. It's much more related metrology probably as a better proxy for us for process equipment. It's the part of our business that looks more like process equipment than does our wafer business. But the products that go and sell to the wafer manufacturers, if that's what you were referring to. Mahesh Sanganeria – RBC Capital Markets: Right.

Are actually not in the metrology group. More so. Mahesh Sanganeria – RBC Capital Markets: Okay.

They are much more dominantly in the wafer group. Mahesh Sanganeria – RBC Capital Markets: The 80 portion of the business that also goes in the inspection group?

Yes. That's part of wafer. Mahesh Sanganeria – RBC Capital Markets: Okay. And a question on OpEx. At the current level like the way you guided EPS, you are sort of in 160, 165 kind of range. Is that what we should model for 500 kind of run rate, 165 kind of number? Is that still valid?

Yes. we don't expect to add as I indicated the two operative left three operative levers in operating expenses are the head count levels of the company how much material procurement we do on new purchase and development projects. That can go up and down a little bit. Right now it's fairly stable and the other is variable compensation which does tend to go up and down with our expectations about the business, but as I indicated in my prepared remarks, we wouldn't expect to see wild fluctuations in the expense level at least in the near to intermediate term. I will call it less than six to nine months. At least for the short term, for short term modeling purposes I wouldn't expect it to move around a lot. Mahesh Sanganeria – RBC Capital Markets: Okay. Thank you.

There are no further questions at this time. I will now turn the call back over to you for closing remarks.

Thank you, operator. That concludes the time we have for our call today. Thank you all for joining us and we look forward to speaking with you later on in the quarter. Thank you.

This now concludes today's conference call. You may now disconnect.