KLA Corporation (KLAC) Q3 2010 Earnings Report, Transcript and Summary

Good afternoon. My name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA-Tencor Corporation third quarter 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. I would now like to turn the call over to Mr. Ed Lockwood, with KLA-Tencor investor relations. Please go ahead.

Thank you, Simon. Good afternoon, everyone and welcome to KLA-Tencor's third 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 third quarter results for the period ended March 31st, 2010. 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 will be accessible on demand following its completion on our investor section of the website. You will also find a calendar of future investor events, presentations and conferences, as well as links to KLA'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 those 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 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 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.

Thanks, Ed. We are pleased with the company's performance in the March quarter, and as a result show KLA-Tencor successfully executing our strategic objectives in an improving industry environment. The new orders in March were $649 million, an increase of 26% compared with December, and above our range of guidance, a result of better than expected demand in our core markets and increased bookings from new markets. Third quarter revenue was $478 million, which was at the high end of guidance. With the combination of new product revenue and solid operations execution, we delivered strong margin performance in the quarter and non-GAAP EPS came in above the range of guidance at $0.41. We also grew our cash and investments to approximately $1.6 billion by quarter end, while repurchasing 2 million shares of common stock in the period. These numbers demonstrate the effectiveness of strategies we have been implementing since 2006 to extend our leadership in process control, access new growth markets and drive operational excellence. Mark will provide some greater detail on the much quarter in his comments that follows. Looking forward, we are very excited about the opportunity for more good news to come. Given the healthy investment cycle and the continued strong execution by the teams, we believe KLA-Tencor is positioned to deliver top line growth and profitability performance that will rival prior peaks of the company. I'd like to give you some perspective on how we aim to achieve this as it relates to our four strategic objectives. Our first strategic objective is customer focus. This really speaks to how we collaborate with our customers, how we drive innovation, and how we execute our product strategy. And we measure success and customer focus in terms of our market position, where our goal is to lead every market…

Thanks, Rick. As most of you know, we present our income statement in two formats. One under U.S. GAAP and the other in a non-GAAP format, which excludes acquisition and write-downs of intangible assets associated with acquisitions, expenses associated with our stock options related litigation and certain cost and expenses which are outside of our core operations, 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 income statement is attached to our press release and available at our web site. Revenue for Q3 was $478 million at the high end of our guided range of $450 to $480 million. Non-GAAP earnings per share were $0.41. Q3 GAAP EPS was $0.33. 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 $4 million before taxes or $0.01 per share after taxes, and stock option litigation expenses of $5 million pretax or $0.02 per share after taxes. We also recorded a non-cash tax charge of about $3 million associated with the cumulative shortfall position in our employee stock activity. Removing this charge from GAAP earnings added $0.02 per share to non-GAAP earnings. The recent improvement in order activity continued in Q3. New orders for the March quarter were $649 million, an increase of 26% over Q2 new orders of $516 million. We also scheduled in about $10 million of orders received in prior quarters resulting in net orders of $659 million, up about 20% from Q2. We…

Thank you, Mark. We are now happy to take your questions, and once again we request that each participant 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: Yes, good afternoon. Thank you for taking my question. I guess, first question on the gross margin line, the 58% was pretty phenomenal at the 478 revenue level. I think the last time you did that was around 635 million. So I guess the question is, what does the trajectory look like from here, is there further savings in the move to Singapore, and I guess target wise are we still looking at 60% around the 650 million level, or could that be even lower?

Yes, CJ. Hi, this is Mark. The answer is we are probably getting as much as we had originally expected out of the moves to Singapore and our lower cost manufacturing locations. We are not completely at full capacity yet, but we are certainly starting to get there, and that is part of the contribution. I also noted in my prepared remarks that we are getting some benefit from the mix of very high margin products in the performance that we just posted for this quarter. And we still think that our long-term trajectory from here is 60 to 70 incremental points of margin improvement with each additional dollar of revenue. So most of what we have done in terms of preparing for this upturn is coming to pass in terms of our cost savings, and I would say that we're putting a lot of operational focus on just making sure that we are running as lean an operation as possible. So all of that has turned in our favor, and we are seeing the benefits in the line. I would say we are still on our long-term growth trajectory of 60 to 70 incremental gross margin target. CJ Muse – Barclays Capital: Good. And I guess as my follow-up, your overall backlog grew 24% sequentially, and I guess the question here is are you still planning to manage to roughly 6 months backlog, and I guess does that change higher or lower as you think about continued strength in bookings? And I guess what does that mean for revenues in the second half, it would suggest to me a very nice up tick.

Yes, we still have a target to manage to 6 months in the backlog, and what we are currently doing right now is producing at pretty high rate and shipping everything we can. It does bode well for the second half in terms of our revenue performance, because as you said that with all of the strong bookings performance right now, we will have some catch-up period of time before it drops to the revenue line. So, all of that is a pretty good story. CJ Muse – Barclays Capital: Great. Thank you.

Your next question comes from the line of James Covello with Goldman Sachs. Your line is open. Kate Kotlarsky – Goldman Sachs: Hi, this is Kate Kotlarsky for Jim Covello. Thank you for taking the question. I was hoping you could give us a little bit more color in your memory orders during the quarter. It looks like there has been some increased activity there, and I was hoping you could break it down for us between NAND and DRAM, and then maybe comment on whether the composition of Q2 orders were – whether you are starting to now see some capacity buying in there as you had mentioned that Q1, there was a lot of technology buying still? Thank you.

Hi, Kate. Yes, thanks for the question. You know, the March quarter played out pretty much the way we had forecast. Memory did pick up. We saw 37% of our orders coming from memory, and that was prominently in the DRAM space. So 74% of that was DRAM, 24% was NAND. We look forward – we figure June is about the same as a percentage. So, we are modeling about 36%, but we think probably closer to 50-50 in terms of composition between DRAM and NAND. And what we are seeing to your question is we are definitely seeing some capacity buys happening in addition to the technology. So this is what we had been outlining for a few quarters as we thought that first we would see technology and then we will see the ramping on the other side, on the capacity, and that is kind of how it is playing out right now. Kate Kotlarsky – Goldman Sachs: And just as a follow-up on that, in terms of the capacity buying that you are seeing, is it sort of distributed among the number of customer or is it concentrated between 1 or 2 customers?

No, it is pretty widespread and as we model going forward we see broadening, and we see some new projects coming on line later in the calendar year as well. So definitely seeing that across a number of customers. Kate Kotlarsky – Goldman Sachs: Okay, and then maybe one final question, on the gross margin front you had alluded to the fact that there was some help from mix during the quarter. Is there anything that is driving that shift to higher margin systems that you are seeing?

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And actually much of our performance on margins is associated with our internal efforts towards cost reduction and management. You know, we continue to earn good pricing from our customers, but heavily focused on streamlining operations. And we put a lot of hard work into that over the years, and now we are seeing that bear fruit. Kate Kotlarsky – Goldman Sachs: Okay, great. Thank you so much.

Your next question comes from the line of Timothy Arcuri with Citigroup. Your line is open. Timothy Arcuri – Citigroup: Hi guys, thanks. Two things, Rick there is some talk out there of some sort of more challenged, you know, competitive atmosphere for you, particularly in Korea, and so I was wondering what your take is on the competitive front, and then I had a follow up, thanks.

Yes, Tim, as you know we always face competition, and I think if you look back the stories of the last couple of years, and I think our competitive position has held up quite well, and our market share is up. And we face competitors everywhere around the globe and I don't think that is likely to change. So we got to keep doing what we do, which is bring out new products to that market’s ability and work closely with customers. I'm pretty comfortable with our strategy there. Timothy Arcuri – Citigroup: Okay, and now I guess there is obviously a pretty hot debate out there about what happens in the back half of the year. You know, if you sort of do some run rate work and you look at the bookings and the shipments, we are pretty much within a very close shouting distance of what the peak was last cycle on kind of a run rate basis for wafer fab equipment, certainly for some types of equipment. So I'm sort of wondering what you think in terms of what the environment holds from kind of back half versus front half. I think most companies would have thought that there was a pull-back in the back half, but I guess recently some companies have been a bit more positive about the back half. So I'm sort of wondering what your sense is second half versus first half?

Tim, it is a great question. You know, I think for us, we have a lot of runway, because of a couple of things. One is, while our overall bookings look very strong and the bookings guidance for June looks very strong, you know 8% of that is non-semi, our services has grown. So, when we look at the actual businesses that we had in the last upturn, our complexion is different. And so we actually think there is more opportunity, and we talk to a lot of customers about new projects. So even if the core semi stuff cools off, we think we have got the ability to continue to grow, and as you are seeing in our operational performance, gross margin and bottom-line, it is not dilutive to our model. In fact, what we see is we are putting up better numbers than we did at the same point in the cycle. So I think we are not the same as the other players in this space. Timothy Arcuri – Citigroup: And I guess just one more quick thing, if I just look at your systems revenue, if I actually strip out services, there has been quite a bit of compression there. So you are keeping up with wafer fab equipment, but it is mostly because of services. So, it seems like there is some sort of compression on kind of a relative basis in the systems revenue, and I'm wondering why that is. Is that the result of you exciting some products versus back then or some pricing pressure, why might that be?

No, I think there is a couple of things. One is as we did – that were some product lines that we traded out of, but I also think if you look at our June guide for bookings, and if you look at the backlog we have been building, our profile is different. I don't know who else is guiding plus 5 to plus 25 for June on bookings. And as you know our revenue is coming in significantly below, which means we are building backlog. So I think if you do the math, you model that out for the rest of the year, I don't think you see the compression. Timothy Arcuri – Citigroup: Okay, thanks.

Your next question comes from the line of Krish Sankar with Bank of America. Your line is open. Krish Sankar – Bank of America: Yes, thanks for taking my question. Rick, when I look at it with all the new fabs coming online may be later this year or next year, when do you think you are going to start seeing significant orders for these new fabs and new shows come and hit you guys.

There certainly are new fabs, and I think some of the timing has been – it is fun to say that, right. There are new fabs. We haven't said that in a while. There are various timings for those that we are in conversations, and I think this is – if anything that is the best part of the story for second half, as some of those new fabs start ordering in the summertime and into the fall. So we do have new projects out there in addition to the expansions of the existing ones. So, I think the timing, we're having conversations with those folks right now, and if anything what is interesting is the momentum towards we are trying to pull in some plans that had been later in 2011, now there is desire to get it done sooner. Krish Sankar – Bank of America: All right. And to follow up on the competitive question, is it fair to assume besides the normal competitive posturing that happens between you guys and others, is there more activity happening among your competitors versus between you and your competition, is it fair enough to assume, or do you think there is nothing that has changed in the last 4 to 6 months?

Well, I think in the last couple of years there is definitely a change in the mix of competitors. And you have seen some competitors exit the market, and I think that that has changed the position, but you know, you don't have to do a lot of math to figure out that they are doing quite well relative to the rest of the space. Our gross margin indicates that we are getting good pricing and we are also doing a good job on cost. So our competitive position continuous to be very strong and I do think that we will never ever have 100% market share in any of these markets. And so as a result, there is going to be mix on the other end of some of those markets and I think those competitors will come and go, but if we play our – but if we continue to execute on our strategy, we will continue to be in a strong position. Krish Sankar – Bank of America: And just a final follow-up, did you say anything on the shipment guidance for June? Thank you.

Yes, we don't guide shipments forward anymore. We will fully disclose the shipments that we had in the current quarter, but we don't have any guidance on shipments.

Your next question comes from the line of Satya Kumar with CSFB. Your line is open. Satya Kumar – CSFB: Yes, hi, thank you. Very good quarter guys, just wanted to touch upon the foundry exposure a little bit, are foundries pretty much holding that same 50% level in June?

That is how we are modeling them, correct. Satya Kumar – CSFB: All right. Some of your big foundry customers have recently talked about defect densities improving significantly at 40 nm, I was wondering if that could potentially cause a pause in buying from this sector, or do you actually – are you starting to see activity at maybe the 28 node that is starting to come in as well?

No, we are definitely seeing a push, and the other thing that is happening in terms of next generation, but the other thing that is happening is there are multiple foundries in play right now. So, you know, a year ago we would have said it was pretty isolated, and now it is much broader. So there is a bit of a challenge out there for multiple companies and multiple fabs to execute on 40. The other thing you see is when they are hitting defect densities, you look at the volume and it is pretty small. So what we are talking about is a relatively early part of the manufacturing ramp on the advance design rules and a recognition that in order to maintain those defect densities as they ramp, they got to have more coverage from inspection and measurement. So I like to think of that we are helping contribute to the fact that people are driving down their densities. They are seeing the value and they will expand out as they ramp on those nodes. Because many of the tool sets out there just weren’t capable of handling broad-based 40 nm production. Satya Kumar – CSFB: All right. And in terms of the NAND orders that you are seeing in June, that is pretty much doubling from March levels, could you talk about concentration of that NAND orders, is there any projects in there that surprised you in terms of size, in terms of how much capacity is coming on?

I wouldn't say surprised, as you know, if anything we have been working quite a while with our customers in terms of their you know, basically understanding their needs and positioning our products. We are starting to see just increased activity overall in terms of people wanting to ramp. And so you know, the surprise if there was one, was just that we’re finally getting to the point, where people are letting loose their capital budgets for inspection metrology, and we are pretty well positioned to handle that right now. Satya Kumar – CSFB: Good and one quick follow-up. How much would this reduction in litigation expense lower the OpEx, all else being the same in September?

Well, if you just look at the non-GAAP OpEx, we already stripped the litigation cost out, but we've been running an ongoing rate in terms of our GAAP numbers of somewhere between $3 million and $5 million a quarter. So we should begin to see that relief beginning in the next fiscal year. Satya Kumar – CSFB: Got it, thanks.

Your next question comes from the line of Atif Malik with Morgan Stanley. Your line is open. Atif Malik – Morgan Stanley: Hi, thanks for taking my questions, a nice quarter. Rick, you mentioned that there are multiple that are ordering in the June quarter, and I presume some of them are tier 2 foundries. So I just want to get a sense of the confidence level of orders actually do coming through from some of these foundries, especially in China, and historically speaking these foundries have made decision sometimes to move forward with the fabs, but never come through. So I just want to get a sense on the confidence level of tier 2 foundry spending.

Well, there are a couple, I guess questions and assumptions in there, Atif, one is that you know, geographically where they're coming from. Let me say that we are very confident in the order books that we've got based on the customer conversations that we've had and the, you know, our understanding of their capital budgets and their procurement cycle and as you know, we are very conservative in terms of how we allocate credit to customers and we’re pretty confident that they’re very solid. Atif Malik – Morgan Stanley: I understand. And then a quick follow up, the guidance, historically you have some seasonality in the June quarter, some you haven't had that seasonality, is there any seasonal element to the services business that is making the quarter guidance look stronger?

Well, we have had seasonality in the past. It's not in the services business and it you know, tend to coincide – tended to coincide with our fiscal year end. I don't know after the last year, you know, how much we were reverting to historical practices. What we do see is that there is a strong demand out there, and that's why we guided up and then it's based on our conversations. The second half of the year has uniqueness to it as we discussed earlier in this call and that there are new fabs that are actually being built and coming online. So, I think it's early for us to forecast out what the second half looks like, but certainly from where we sit June looks very good, but I don’t think it is as much about seasonality as it is just increased confidence at our customers that now is the time for them to invest. Atif Malik – Morgan Stanley: Okay, and one last one, the non-semi business, which one is looking the best among ACD and high brightness LED, solar, you know, which one is looking the best?

You know, it's really a mix. We've – I've been delighted with the performance that we have outside the core, and these are some bets we placed in the downturn and there are a couple of quarters where we are looking around, wondering what we're thinking, but now they've come back and we've seen solar pick up, high brightness LED, you know, even hard disk drive. We are seeing investment happening there, and as we’ve said these businesses, the way we structure them and integrate them into KT, they support our overall business model. So we're pleased with that as well. We also have backend packaging, which wasn't historically in our model and we're seeing great success back there too. So it's really a blend of all of those. Atif Malik – Morgan Stanley: Great, thanks.

Your next question comes from the line of Raj Seth with Cowen & Company. Your line is open. Raj Seth – Cowen & Company: Hi, thanks for taking the question. Rick, can you talk a little bit about inspection, intensity and memory, I think previously you’ve acknowledged that it's obviously a bit lower than it is in the foundry space, and I think you’ve said you have to prove your case there a little bit. Should we assume that that begins to pick up in the relative short-term or is that a longer-term process before we start seeing that?

Yes, on the last call Raj, exactly right. I said that we needed to show it and you know, I like to think that in the March quarter we demonstrated some of that. We have some evidence now with the increase that we had, and I think it's an unfolding story. You know, the combination of customers have to feel the need and I think they've got the need and then they've got to be convinced that our products actually will support them, and we're showing evidence of that now. So as we guide forward, you know, we guided overall bookings up and we guided memory to be basically as a percentage of our overall bookings flat, which says we assume we're going to continue to see growth on the memory side and this time it will split between DRAM and NAND. So, I think it's working. We continue to be in there every day with our customers trying to demonstrate that value, but it's work in progress. Raj Seth – Cowen & Company: And do you think that – is that an easier case for you to make as people start adding capacity on some of the new nodes, where they have been moving and may have been able to, I don't know use other techniques or whatever to get to their objectives, is that facilitated by just simply more volume, or do we just need more strength and more time?

No, more it's been facilitated by new products from us. I mean, the most important thing getting our new products into the customers hands, and them seeing what they were missing, and in a lot of cases that’s been the challenge because without one of the advanced tools, ours are you know, competing with either an old tool that we had or somebody else’s. They didn't necessarily know what they we're missing. So we've got to get the tools in there and then they start seeing results and then we've seen a remarkable increase in – I was in Asia a couple of weeks ago and the conversations were about how do we get our tools into their factories faster to support their memory ramps, which is a very nice conversation to be having except we then have to get our tools in there faster, which is a challenge. Raj Seth – Cowen & Company: Yes, and Mark just a quick one for you, any thoughts on your capital structure, obviously it changed several years ago with your predecessor, do you think this is the right kind of capital structure or hypothetical is there a different model over time that you like to move to? Thanks.

Yes, we are – certainly with the upturn and sort of having flown through the crisis period Raj, this is not a bad time to be thinking it through. We are having discussions. We are certainly not in a hurry to do anything rash right away, but I certainly think from the debt leverage perspective, we're happy with this right now. I would like to see a little bit better prospects of inflation going forward before we would you know, sort of think it through differently, but as it is right now, we’re reasonably satisfied with the basic capital structure and as we noted earlier in the call, we did restart the buyback program early this quarter, which is a confidence that you know, we’ve stabilized. Raj Seth – Cowen & Company: Yes, great, thanks. Nice quarter.

Your next question comes from the line of Mahesh Sanganeria of RBC Capital Markets. Your line is open. Casey – RBC Capital Markets: Hi guys. This is Casey [ph] calling in for Mahesh. A couple of quick questions, you talked a bit about the shipments into 4 X and the 3 X nodes. Could you give some color on the timing of shipments and orders into the 2X node?

Well, you know, we're seeing some activity in 2 X as you might imagine now there's been development even for some time in R&D. And so I think it really is very customer dependent on when they're going towards 2 X, and as you know, technology dependent when the NAND guys will get there first, and then we’ll see the DRAM guys follow and some of the logic guys, but there is certainly R&D spend but as a percent of our overall order book, the 2 X is very small right now and I'd say that that is going to remain a small percentage of our business for the next several quarters. Casey – RBC Capital Markets: Okay. In the memory space, you said that the DRAM versus NAND is going to be about 50% of your orders in June. Going forward, would you expect that ratio to continue, or would you expect NAND to sort of dominate the memory span?

I think it goes to some of the projects overall that we’re talking about that are out there. You know, if you look at the projects that are being contemplated, there are a few NAND projects that are obviously going to influence that as we go forward. So assuming they'd go ahead, then you would see NAND pickup, and I guess the question will be what will the DRAM guys do in conjunction, but we certainly see you know, growth on the NAND space. NAND is as you know, dependent on a lot of external factors right now and so I think it's early to call that one. Casey – RBC Capital Markets: Okay and last question. What would you think is the approximate timing, as far as you can see, for orders from tier two and tier three DRAM players?

Yes, it's a great question. I don't know. I think it depends on you know, how well the memory markets hold up in terms of the pricing, and right now pricing has been obviously much more encouraging. So I think they are increasing their conviction. So, you know, that's probably the second half of the year kind of story. Casey – RBC Capital Markets: Okay, sounds good.

Your next question comes from the line of Steven Chin with UBS. Your line is open. Steven Chin – UBS: Thanks. Hi Rick and Mark, nice quarter also. Just a follow up question on the improvement in memory customer orders that you're seeing. Do you get the sense there could be another step function increase in orders from perhaps the DRAM companies, Rick, when they eventually get to the 40-nanometer node in volume, because it looks like that's when your foundry customers really ramped inspection orders at the 40-nanometer node with KLA over the past year. Is that kind of your sense?

My sense is that they're going to run into increasing challenges as they ramp, and I think they are seeing that. As I said, I think earlier in this call our burden, our challenge is to demonstrate the value of our products and to have them realize those ROIs. We think we've got the right products, we think we've got the right teams in place to do that, but it's very much a show me story right now. We've got to demonstrate the values and our customers have to recognize that and follow through. We just simply did not anticipate the reaction in the foundry space. So as much as we had predicted increase in intensity of inspection and measurement, we guess low on that and I think it's very possible that we are modeling low right now and the memory, but it is incumbent on us to show the value, and that's what you know, our teams are working on every day. Steven Chin – UBS: Okay. And then just a follow-up question about the number of new fabs that you're seeing built out there. Did you get the sense that KLA's order opportunity is stronger during the years when there are more new factory builds, especially since you've got a larger product offering in the sub-cycle?

Yes, in general, I mean, our footprint is bigger and so you know, we're dependent on two things, as you know we're dependent on technology and we're dependent on capacity, and we tend to do pretty well in technology. What’s interesting about the new facet is of course they are above, right. They're looking at ramping on new technologies, new fabs, and so I think that that's very encouraging. Where we have had less success in the past is that somebody wasn't ramping on an older technology but that's not going to be the case in these new fabs. So I think given our product breath, and given our positioning, we do have tremendous opportunity and it's a matter of executing. Steven Chin – UBS: Okay, thanks Rick. Nice quarter again.

Thank you.

(Operator instructions) Your next question comes from the line of Jagadish Iyer with Arete Research. Your line is open. Jagadish Iyer – Arete Research: Hi, thanks for taking my question. Two questions, Rick. First question is that if you look at 2008 in terms of your logic bookings, you had substantial bookings from the logic customers. How should we think about logic bookings as you progress through 2010 please?

Yes, you know, we're forecasting logic to kind of hang in there roughly where we were this last quarter. For the June quarter we were at 13% and we go up to 14% and it's not so much a function that logic isn't investing. It's just the other segments that are increasing pretty significantly. So even with that we see increase in logic. You know, if we look to the second half there are some projects out there that look encouraging, but they just aren't the same number of new fabs coming online and there is not as much anticipated overall investment and the logic guys have just been more steady throughout the course of the cycle as they have been historically. So I'd say we see good opportunity there but it's not the primary growth. Jagadish Iyer – Arete Research: Okay, the second question is, you had mentioned in your prepared remarks about your e-beam review product getting considerable traction. Can you give us some more color on what is driving that product traction, please?

Yes, I think there is a couple of things, one and probably most important is our most advanced inspectors find defects that there is really no other way to review then with our most advanced e-beam review product. So as we sell inspectors, as we sell new inspectors, our customers are realizing that the new review capability that we have is enabling them to identify clearly the defects that we're catching, so that they can go, take corrective action, and they really can't do that with any other equipment on the market. So that's been a tremendous value to our customers, and that's really driving it. I think the other thing that overall of course is the general pickup in market is driving more e-beam review in general, but competitively we've got a product that works extremely well with our inspectors, which is where most of the market is with our inspectors. Jagadish Iyer – Arete Research: Thank you.

Thank you.

There are no further questions at this time. Mr. Ed Lockwood, I will turn the call back over to you.

Thank you, operator, and thank you all for joining us today. We look forward to seeing you through the course of the quarter and that concludes our call.