KLA Corporation (KLAC) Q1 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Adam, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA-Tencor First Quarter Fiscal Year 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ed Lockwood with KLA-Tencor Investor Relations. Mr. Lockwood, you may begin.

Thank you, Adam. Good afternoon, everyone, and welcome to our conference call. Joining me on our call today are Rick Wallace, our President and Chief Executive Officer; and Mark Dentinger, our Chief Financial Officer. We're here to discuss first quarter results for the period ended September 30, 2012. We released these results this afternoon at 1:15 p.m. Pacific Daylight Time. If you haven't seen the release, you can find it on our website at www.klatencor.com or call (408) 875-3600 to request a copy. A simulcast of this call will be accessible on demand following its completion on the Investor Relations section of our website. There, you'll also find a calendar of future investor events, presentations and conferences, as well as links to KLA-Tencor's SEC filings, including our annual report on Form 10-K for the year ended June 30, 2012, and our subsequently filed 10-Q report. In those filings, you'll find descriptions of risk factors that could impact our future results. As you know, our future results are subject to risks. Any forward-looking statements, including those we make on this call today, are subject to those risks, and KLA-Tencor cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking result -- in our forward-looking statements. More information regarding factors that could cause those differences is contained in the filings we make with the SEC from time to time, including our fiscal year 2012 Form 10-K and our current reports on Form 8-K. We assume no obligation and do not intend to update those forward-looking statements. However, any updates we do provide will be broadly disseminated and available over the web. With that, I'll turn the call over to Rick.

Good afternoon, everyone. KLA-Tencor's Q1 revenue and EPS performance was generally in line with guidance, but bookings fell significantly below the guided range due to a challenging industry environment. Q1 revenue was $721 million, slightly below the midpoint of guidance, and non-GAAP net income per share was consistent with guidance at $0.84 per share. New orders in the September quarter were $506 million. The weakened macroeconomic environment has clearly impacted industry demand, and the leading device manufacturers have adopted a more cautious approach to their capacity expansion plans and scaled back investment in the near term. Customer concentration was also a factor in the Q1 bookings performance for KLA-Tencor, as orders from the Taiwan region were only 7% of the total in the quarter. We believe this was largely a function of order timing as certain customers delayed new orders as they absorbed previous purchases. Our December quarter forecast shows bookings for the Taiwan region returning to more typical levels. In spite of these adverse conditions, KLA-Tencor continues to execute our long-term strategic objectives, capitalizing on our market leadership and strong business model to deliver industry-leading financial performance and return significant cash to our stockholders. To that end, we generated $245 million in operating cash flow in Q1; paid our quarterly dividend of $0.40 per share, reflecting the increase we announced in July; and continued to execute our share repurchase program by repurchasing approximately 1.4 million shares of common stock, ending the quarter with a healthy $2.6 billion in cash and securities. Turning now to a discussion of the current demand environments. The end market mix for new orders in September was consistent with recent trends, with a concentration of orders among foundry and logic customers and investment focused on the leading edge. It seems clear from discussions with our foundry and logic customers that they intend to continue to invest at a high level and advance their leading-edge technology roadmaps. Foundry bookings were 54% of new orders in Q1, with a single customer accounting for a significant portions of the orders in the period. Logic bookings were 30% of Q1 orders and are expected to be strong again in the December quarter as the market leader moves forward with their 14-nanometer capacity RAM. Memory bookings were 16% of the total in Q1, with ongoing weakness in PC demand. And with uncertainty surrounding adoption rates of the anticipated new computing form factors, memory customers have adopted a wait-and-see approach for their near-term capacity investment plans. And consistent with that, our order forecast for memory customers is low in the December quarter. We maintain a conservative view of memory spend in 2013. In conclusion, not with that -- notwithstanding the cautious tone overhanging the industry today, we believe that the dynamics driving long-term industry growth are strong and our customers remain committed to their advanced technology roadmaps to drive innovation and device performance and meet profitability targets. Given our market leadership and strong balance sheet and business model, KLA-Tencor is well positioned to continue to deliver industry-leading profit and stockholder returns as we execute our long-term strategic objectives. Now, guidance for the December quarter. December bookings are expected to be in the range of $550 million to $750 million. Revenue for the quarter is expected to be between $600 million and $660 million, with non-GAAP earnings in the range of $0.45 per share to $0.65 per share. I will now turn the call over to Mark for his comments. Mark?

Thanks, Rick, and good afternoon, everyone. As most of you know, we present our income statement in 2 formats, one under U.S. GAAP and the other in a non-GAAP format, which excludes amortization and write-downs of intangible assets associated with the [Audio Gap] And credits, any cost and credits which are outside of our core operations including unusual tax items. There was a $0.04 per share difference between this quarter's GAAP and non-GAAP earnings, including a $0.01 per share after-tax difference for restructuring charges associated with our decision to exit the solar inspection business this quarter. Our balance sheet and cash flow statements are presented in GAAP format only. Most of my prepared remarks on operations will refer to non-GAAP information, but where I mention GAAP numbers, I'll make the distinction. A reconciliation of our GAAP to non-GAAP income statement is attached to our press release and available at our website. Q1 new orders were $506 million, down sharply from $827 million in Q4, and Q1 net orders were $510 million. The regional distribution of new systems orders and quarter-to-quarter change in distribution were as follows: the U.S. was 43% in new systems orders in Q1, up from 26% in June quarter; Europe was 13% of new systems orders, up from 3% in Q4; Japan was 13%, up from 6% last quarter; Korea was 20%, up from 8% last quarter; Taiwan was 7%, down from 55% last quarter; and the rest of Asia was 4%, up from 2% in Q4. The distribution of new orders by product group and the quarter-to-quarter change in distribution were as follows: wafer inspection was 51%, compared with 48% last quarter; reticle inspection was 1%, down from 9% last quarter; metrology was 15%, down from 22% in the prior quarter; our non-semi businesses were 4%, up from 3% last quarter; and service was 29% of new orders in Q1, up from 18% last quarter. Finally, for semiconductor systems, the distribution of new orders by segment and the quarter-to-quarter change in distribution were as follows: 54% of new systems orders in Q1 were foundry customers, compared with 65% in Q4; logic customers were 30% of new semi orders in Q1 versus 20% in Q4; and memory orders were 16% in Q1, up from 15% last quarter. Looking forward, we expect that new orders for Q2 fiscal -- our fiscal Q2 will be within the range of $550 million to $750 million. In Q1, we shipped $686 million versus $866 million last quarter. The shipment numbers included both system shipments and services revenue, and we expect shipments between $620 million and $680 million in Q2. Total backlog at the end of Q1 decreased by $208 million from June 30, and we ended the quarter with a little over $1 billion in systems backlog. The backlog at September 30 included $252 million of revenue backlog for products that have been shipped and invoiced but have not yet been recognized as revenue, and $772 million in systems orders that have not yet shipped. Total revenue for Q1 was $721 million, down 19% from $892 million last quarter. Systems revenue in Q1 was down $172 million to about $574 million, and services revenue was $147 million, roughly even with Q4. Our expectation for total revenue in Q2 is a range between $600 million and $660 million. Non-GAAP gross margin was 56.6% this quarter, down from 60% last quarter. Most of the quarter-over-quarter decline in gross margin percentage was the function of lower systems revenue and lower factory utilization. For Q2, we are expecting gross margins between 55.5% and 56.5%. Operating expenses were $211 million in Q1, slightly higher than $210 million in Q4. Research and development expenses were $119 million, up about $1 million from Q4. Selling, general and administrative expenses were $93 million, roughly flat with Q4. We expect operating expenses in Q2 to be up somewhere between $5 million and $9 million from Q1. OIE was a net $10 million expense in Q1, down about $2 million from Q4. Majority of the change was due to a $1.5 million write-down of an investment on our venture portfolio during Q4. For modeling purposes, we expect OIE to be a net expense of approximately $11 million in Q2. In Q1, our non-GAAP income tax expense was $44 million or 24% of pre-tax income versus a 19% rate in Q4 of last year. The Q1 rate increase was largely a function of a change in the estimated distribution of earnings between our U.S. and international locations. We are modeling a 24% rate for Q2 as well. Non-GAAP net income was $142 million or $0.84 per share in Q1. The revenue range I previously mentioned, we would expect our Q2 non-GAAP earnings to be somewhere between $0.45 and $0.65 per share. The weighted average share count used to compute EPS in Q1 was $169.8 million versus $170.2 million in Q4. During Q1, we spent $68 million repurchasing about 1.4 million shares. And as of September 30, 2012, we have approximately 1.9 million shares available under our current repurchase authorization. For guidance purposes, we are modeling an average share count of about $169 million for Q2. We also paid $67 million in dividends in Q1. We anticipate continuing to repurchase shares, as well as paying a quarterly dividend of $0.40 per share in Q2. On our balance sheet, cash and investments ended the quarter at $2.6 billion, up about $100 million from June 30. Cash generated from operations was $245 million in Q1 compared with $273 million in Q4. Net accounts receivable ended the quarter at $537 million, down from $701 million at the end of June. DSOs were 68 days at September 30 versus 72 days at June 30. Both DSO figures are net of allowance for uncollectible accounts and factoring. Net inventories were up $39 million from Q4 and ended the quarter at $690 million. Inventory turnover based upon GAAP cost of revenues is 1.9 turns in Q1 versus 2.2 turns in Q4. Capital expenditures were $20 million in Q1, up from $16 million in Q4. Total headcount at September 30, 2012, was 5,814, up from 5,710 at June 30. We expect our headcount will increase slightly during Q2. In summary, our guidance for Q2 is: new orders between $550 million and $750 million; total revenue between $600 million and $660 million; and non-GAAP earnings between $0.45 and $0.65 per share. This concludes our prepared remarks on the quarter. I will now turn the call back over to Ed to begin Q&A.

Okay. Thank you, Mark. At this point, we'd like to open up the call to Q&A. [Operator Instructions] And so, operator, we're ready for our first question.

[Operator Instructions] Your first question comes from the line of Satya Kumar from Crédit Suisse. Satya Kumar - Crédit Suisse AG, Research Division: I was wondering if you could comment a bit about anything unusual happening with regards to customer concentration transfer bookings in the December quarter, particularly around the foundry/logic side? And as you answer that, perhaps you can give a sense of what the mix of bookings would be by segment in December?

Sure. I think that the -- I guess, the nature of our business now has got -- especially the foundries, that the orders have gotten pretty lumpy, and we certainly saw that in the quarter we just finished. We do anticipate foundries -- as we said, we anticipate foundry to be roughly about 52% of bookings in the December quarter. When we look across the segments, I think wafer is going to be -- right now, we're modeling wafer at 43%, and we're at 51% in the quarter that just ended. Metrology, up a little at 21%. Reticle really was quite slow in September, and we see that coming back to 13%. Service dropping to 19%, with the increase in business, and the other segments that we're in, about 4%. So pretty much a return, a little bit back to normal in terms of overall. And from a geography standpoint, Taiwan, going from the 7% we were at in the September quarter. We went 55% in June, 7% in September, and we think that kind of splits the difference in December at about 36%.

Your next question comes from the line of Terence Whalen from Citigroup.

Perhaps a follow-up in terms of some of the lumpiness that we're seeing in foundry. Can you help us understand on a more granular level what is it about the nature of the installations that's causing that lumpiness? Is it in response to a particular configuration? Is it in response to perceived supply tightness? Just help us understand a little bit more what's fundamentally underpinning this trend? What gives you confidence that it may improve into the December quarter?

Sure, Terence. No, I don't -- I'm not suggesting the lumpiness will improve. I think that we'll continue to have that. As in particular, when we're in negotiations with customers about longer-term agreements, I think that can influence some of the decision-making. But what is -- what we certainly see in December, we've had a lot of conversations about delivery times. And I think as the whole industry is pausing right now, there is trying -- an assessment of how much investment is needed at what points, and there's a fair amount of digestion of existing capacity coming in. So we'd still have a rather large range on the December bookings. We have seen this phenomenon. In fact, it feels remarkably like last year, where the September quarter was very light, we didn't have much visibility and December came back quite strong. This year, we're seeing the pressures associated with 20-nanometer. There has been improvement in yield on 28, but still not where people really want to be. And so we see that, and then we see it combined with desires to ramp on certain -- from our certain customers in the early 2013 time frame. So that's all part of what goes into the forecasting we have for December.

Your next question comes from the line of CJ Muse from Barclays.

[indiscernible] calling in for CJ. Just following up on the trajectory for foundry orders into the December and beyond. Clearly, there's a little bit of a pickup into December. Just curious, as you think about the trajectory for first half '13, do you expect that to be boosted by initial 20-, 22-nanometer investments? Or how are you thinking about the linearity there?

Yes, we definitely see pressure for 20-nanometer, 22 capability getting driven in the first half. And what we do see -- if you think about the overall year for 2013, we're modeling now flat to down 10% and obviously finishing 2012 with a better quarter in December than we saw going forward -- going through the September quarter. What will drive it in this quarter and the next couple of quarters is really the capacity associated with 22, but also in preparation for pilot line in the second half of next year for 20-nanometer. And I think there are -- people are still trying to figure out their customer flow right now for that, and that's part of what's driving some of the uncertainty we just saw in the September quarter.

Got it. And then with regard the -- regarding the overall WFE outlook for 2013, you had some of your peers talking about more upbeat outlook for the memory spending, especially on the NAND side. What's your view based on your conversations with your customers?

I think memory is going to remain flat. I don't see a lot of drivers for memory. I think that as we look at it, there's certainly a lot of uncertainty around it, around the consumer demand. The people I've talked to recently are hopeful that some of the ultrabooks are going to drive the solid state drives, but there's been a rather disappointing start to some of the adoption for those technologies. I also think that some of the form factors you're seeing now come out in some of the mobility devices are not driving the level of content that some had anticipated for NAND, which means perhaps not the growth rate that people were anticipating. So when you have a slower bit rate growth than originally modeled, it's pretty hard to see how CapEx goes up significantly as we go out into '13. So when we look at overall WFE, we're looking flat to down 10%. I would say in the last 2 weeks, the bias is a little towards the bottom of that range. And I think that overall, memory, not really -- not a significant pickup next year. Some technology buys, but not a lot associated with capacity.

Your next question comes from the line of Vishal Shah from Deutsche Bank.

I wanted to just ask a question on the logic side. You said that you were going to see some orders from 14-nanometer in the December quarter. I'm just curious to see what kind of real scalability does your logic customer have and whether you are going to see a first half -- a strong first half in the logic segment?

We anticipate logic to continue to remain pretty strong. I mean, obviously, we're -- there's a lot of discussion and a lot of interest in reuse by all our customer base, and we facilitate that where we can as it's part of the overall value proposition. But sometimes, there are new technologies. They get brought out, that change the equation, and that's all modeled in our forecasting for what we see going forward. So we do see some I'd say more steady investment on the logic side perhaps than what we've seen in the foundry. And pretty strong, and as we've said, relatively strong in the December quarter and in the first half of 2013 as best we can tell right now.

And then just to follow up on the foundry spending outlook for next year. TSMC this morning was talking about a flattish outlook for CapEx next year, and then Samsung has been suggested at least were down 30-plus percent CapEx next year on the foundry side. So I'm just curious to see what you think foundry CapEx will be next year, in your flat to down 10% outlook for overall spending?

Yes, that's a great point. And then that's why I said if you bias it, I would have biased the flat to down 10% a little more toward the down, as we come off of the announcements we've seen in the last few days, even today's. However, we do see a lot of interest in process control. I'd also say that history has shown that those forecasts can change. And they change on end market demand. We saw that last year, and then they get ramped up. So for the modeling purposes, I think I'd bias it in the flat to down 10%. But we have to actually -- we got ourselves in a little bit of some challenges last year by not anticipating the strong demand that we got, and so we're going to remain flexible in terms of responding to demand. And process control continues to be a favored investment for the foundry customers based on their advanced technology challenges and the number of layers and complexity that they're dealing with now.

Your next question comes from the line of Chris Blansett from JPMorgan. Christopher Blansett - JP Morgan Chase & Co, Research Division: Lead times, how they're changing, obviously as your revenue levels come down, and how that's affecting your guidance for the quarter for revenue? Because it's quite a wide range right now. And maybe how that affects your thought process on what customers can do in the first quarter of next year.

Yes, this is Mark. The revenue guide takes into account all sorts of factors in terms of our forecast. We have a reasonably good idea of the range of revenue. What is tough to call is inside the range. There are binary events in terms of when customers do final acceptance on products. And there are obviously product line to product line difference in terms of the magnitude of the system sizes. So we do our best to forecast that, and we monitor as we go through the quarter. A probably reasonable confidence inside the range, but inside the range, it gets very difficult to say is one point more likely than the other. I hope that answers your question. Christopher Blansett - JP Morgan Chase & Co, Research Division: I guess I was just trying to get more of how your lead times are changing and, say, a foundry customer comes with a big order, how fast can you execute to that customer? Meaning do they need to order this quarter to start next quarter or are we getting into some shorter lead times here for some of your more complicated equipment?

Yes, it does depend on the equipment and the toolset. And I think that the answer is we've gotten -- I believe we've gotten better in terms of our ability to respond, but often still not at the speed of which our foundry customers would like to see response. So it's a balance that we're running there. I think in similar products, as you know, we have longer lead times for some of the key components. And those, we tend to maintain a longer backlog and often have a bit less flexibility associated with that. So we're trying to be responsive. I think often the foundries don't actually have a great idea of what they're going to need, and from that reason, they're looking for flexibility. Just met with a major customer last week who said, "We're not sure what our investment profile is going to look like, but it's addressing a group of equipment makers. But we'd like you to be ready and be responsive." And, of course, that -- there's a lot of challenges associated with doing that. But it does -- our lead times are still out there a bit, but we do have to try to be responsive. Because when they ramp, they want -- especially they want our support upfront because it's often used in debugging process and bringing it to market.

Your next question comes the line of Jim Covello from Goldman Sachs.

I was just hoping to come back to maybe some of the math around the capital reuse issue. And one of the struggles, the conversations we have with investors is that the biggest logic customer is pretty explicit about reusing now 80% to 90% of their tools from one node to the next, similar to what they did from 45 to 32. And the question I get most often from investors is, does this apply to KLA? Does this apply to ASML? And if it doesn't apply to them, how can Intel claim to be reusing 80% to 90% of the tools?

Well, I think that there's 2 things, Jim. One is the tool type and the other is the actual tools themselves. But generally associated with new technology ramps for customers that reuse, unless they are converting an entire factory and not continuing to manufacture anything at the prior node, they're purchasing additional capability in terms of capacity to be able to support that. And you can see in our history the spend of the investment of logic is not that hard to figure out. It's been relatively steady and reasonably consistent with the overall CapEx. So I think there's 2 things, one is that, and then the other is do they really turn off the old ones? And we're not seeing -- in general, we don't see customers the retirement rate of older technologies being very high, any higher now than it's ever been. And that's why I think the capital intensity for the industry and for logic remains in a similar kind of range as it's been, depending on what node we're in and depending on the specific tool types.

So that's helpful. If I could just ask as a follow-up to that, I mean so what Intel did or what one of your big logic customers did when you went -- when they went from 45 to 32 was they took 45 offline and ramped up 32 in that footprint. So they did take -- they did kind of shutter -- temporarily shutter old capacity. They're reinstituting that policy now for the 14-nanometer transition. Is that baked into your forecast or is that your assumption? Or is your assumption that they're not going to be taking the 22 and 32 offline to ramp up 14?

Well, and so then you get to specific tool types. So I'll give you an example. In general, let's say you've got a new technology that's associated with the new technology node that requires new inspection. Obviously, that's new, there is nothing doing it before. And I think that's often the case. Or let's say you win some share in a new segment that you haven't been in. Then it's not a reuse, it's a transition to something new. There are cases where you try to extend existing capability and provide it maybe with upgrades to satisfy the new technology node. But I've seen very seldom where it's the same toolset. It could be a similar toolset or the same toolset with upgrades, in which case, we model that as part of the overall investment. But it's -- I've never seen it. Because if you think about how it works, especially in a company that has a strict discipline around introducing a tool on one node and then waiting an entire node until the next tool, usually the tools that they're talking about have been dated at that point, and there's an upgrade cycle associated with it.

Your next question comes from the line of Krish Sankar from Bank of America Merrill Lynch.

I had a 2-part question. One, Rick, the weakness that you're seeing in the foundry bookings. Is there any way [ph] passing through to say how much of it is related to the cyclical and seasonal aspect of spending versus the yield [ph] improvements? And the second part of the question was can you talk a little bit about your optical inspection tool? There are some concerns out there that once you get below sub-2x nanometers, you'll have an e-Beam inspection. Although the throughputs are low, they seem to be improving over time. So can you talk about the longevity and the viability of your optical inspection tool at the sub-2x nanometer nodes?

Sure, 2 tough questions, but I'll take them both in that order. The first, I'd say part of it was seasonal for sure. I mean, we typically -- as you know, we see a downtick in the September quarter. I'd say another part was just general uncertainty and maybe shifting end customer demand causing some rebalancing and maybe a pause in the overall cycle. So I think that's what we're dealing with. And as we said, just like last year, we expect -- in fact, 8 out of the last 10 years, the September quarter had been down for us. And so that seems to be pretty much of a pattern. This one was actually not down as much as we were a year ago at this quarter, and we had our second-best quarter ever in December of last year. We're not forecasting that, but we do see a snapback. In terms of optical, again, optical inspection, it is not -- we're not required to resolve defects in order to detect them. What is critical for review is to be able to use e-Beam for review, which is why we've invested very heavily and now have a very strong position in e-Beam review. But we're confident of the ability of our optical inspection products, and this has been verified with customers to take us well below the 2x node, and we have plans in place to get us down pretty close at this point to 1x. So I'm not concerned about our viability of the inspection. But it does need to be coupled with a high capability review tool, which is e-Beam-based, which we have, and we believe we have the best review tool in the market right now.

Your next question comes from the line of Mark Heller from CLSA.

Mark, just had a question on the OpEx. I think you said up $5 million to $9 million. Just wondering what's driving that? And also, can you help us think about OpEx as we look into calendar '13?

Yes. I'll take them in that order. And the $5 million to $9 million, a part of that is just headcount, which will -- we do anticipate going up slightly quarter-over-quarter. But the other part of it is engineering materials associated with the new generation products that are currently working their way through the lab. As you think about our OpEx going forward into 2013, I think in the -- at the business levels we're experiencing today, you can expect it to be fairly steady and maybe up slightly over that period of time. But we do adjust it and tweak it based upon changes in roadmaps and changes in customer demands as we move forward. And I don't think we're anticipating a radical shift at this moment, but you never know. We have our eyes on the market and are watching business conditions as well.

Okay, great. And Rick, a follow-up. Can you just talk about maybe process control spending intensity at some of the newer nodes? 20-nanometer and maybe 16 after that versus 28-nanometer?

Sure. We see increased opportunity for inspection measurement as we go to the -- on a relative basis, as we continue to shrink. And obviously, driven by -- in this case, advanced lithography, which drives the double patterning challenges. And also in metrology, we have 3D structures to -- for our customers to deal with, which require, in many cases, optical CD capability which we have. So those -- so it's good for metrology overall. I think inspection there become similar to past trends. People are looking for smaller defects and, therefore, running higher capability tools at higher sensitivities, which requires some of our new technology, which drives increased demand. So overall, as we blend it, we look out and we think what does next year look like, I think some of the challenges associated with 2012 repeat in 2013. And we're seeing, as we said, CapEx flat to down 10%, and we think the process control intensity ends up being somewhere in the 14% to 15% range of the WFE, which is where we've historically -- slightly up from where we've been, as we see this overall some of the new challenges coming into the market.

Your next question comes from the line of Mahesh Sanganeria from RBC Capital Markets.

Rick, you would just mention that if based on last week's data, you would say CapEx more on the lower end of flat to down 10%. Can you give us a little bit color on -- that new data, is that from the memory side or the foundry side?

Both. Talked to -- have heard recently from both very large memory and very large logic customers directly and indirectly about what their plans are, and I think there's a fair amount of caution right now. So as we model it and we kind of go through the list of the big investors that that's -- we can roll it up anywhere from 5% to down 10%. But I'd reiterate that I think there's a -- in everybody's case, there's a lot of macro uncertainty and those plans can change up or down depending on other events that right now are obviously not knowable.

And just one clarification. When you mention logic, you mean you include foundry in the logic, I would think?

Yes, we have -- it's kind of blending now when you think about -- even companies that are foundry, a lot of what they do is logic and not strictly foundry work.

Your next question comes from the line of Jagadish Iyer from Piper Jaffray.

Two questions, Rick. First on the -- how should we think about your product mix for next year assuming the spend bias is similar to this year in terms of foundry logic between your various product segments, wafer inspection, metrology and reticle inspection? Can you give some color on that? And then I have a quick follow-up.

Right. I think that we don't generally give forecast over the next year, but I can tell you, for product mix, obviously we're modeling it. But I can tell you the blend of what we're seeing for December is not atypical, which is you'd see wafer that, in this case, in the 40s, 43%; metrology, around 21%; and reticle at 13%, Part of what's happened with reticle is that the opportunity in reticle, there is a bit of a hiatus for some of the reticle manufacturers in the mask shop because they've gotten our advance capabilities. So a lot of the reticle business is now in the fab line. And until EUV comes, which has been delayed, and we've seen that because our advanced reticle tools provide EUV capability. And right now, there's just not a lot of demand for that. I think reticle stays a little bit toward the lower end of the typical range of 10% to 15%. Metrology continues to be strong but as does wafer inspection, as we look out. And then service makes up the difference depending on where we are. We see a service business that's growing and obviously becomes a larger part of our mix as the overall business softens, as in the guide for our revenue for next quarter. But we expect over time that, that number is going to actually come down as we resume growth.

Talked about 14-nanometer in -- at one of your logic customers, I was just wondering can you give us some insight into where you've made some inroads there compared to the prior node?

I'm sorry, it was very hard to hear you at the last part of the question.

Yes, yes. No, I just wanted to find out, given that you had made a commentary about 14-nanometer, I was wondering whether you can give us some color in terms of where you have made some inroads compared to the prior node?

Well, it would -- then we're getting a little bit specific. And so I'd rather not do that. I would say we are generally -- from a market share perspective, we had good gains over the last year. We anticipate being able to hold our position in terms of market share and build on it, and where we particularly are strong is when we're getting into advanced nodes and people need the advanced capability. I think historically where KLA-Tencor has not won shares often when there's a good enough alternative in nodes that are not as demanding. We tend to do pretty well in the most demanding notes.

Your next question comes from the line of Stephen Chin from UBS.

Rick, just a follow-up question on the December gross margin guidance of 56%. Is this customer concentration causing the slightly lower gross margin near term? The last time KLA had revenues in this $600 million range, the gross margin was slightly higher. So just wondering if you think gross margin can recover back to normal level as business stabilizes.

Yes. Actually -- this is Mark, the answer is, is that customer concentration is probably a factor in it. It's probably not a huge factor, but there's no doubt that in terms of size and magnitude and commitment and timing of orders, we take all of that into consideration in terms of how we price and plan. I do not think it's the last time that we will see margins getting back to where they were previously, simply because the new generation of tools comes out and the differentiation in our ability to hold margin in those segments is largely a function of the differentiation in the products. And to the extent we can remain differentiated, I think you'll see margin performance in the long run consistent with what you've seen in the past.

It is also important to remember that when we look back at historicals, $600 million of revenue today versus a couple of years ago or years before that, the service mix is actually larger now. And that, of course, is dilutive to the overall gross margin.

Okay. And just a quick follow-up question, Rick, on KLA's ability to outgrow WFE next year. Do you think process control share at WFE next year depends a lot on the pace of foundry 20-nanometer ramp?

Well, I think it definitely -- yes. I mean, obviously if 20-nanometer doesn't go forward next year, then our percent -- the percent intensity would slow down, and we're certainly modeling foundry to be pretty healthy again. Although, overall for the year, we're not modeling a lot of growth. And we think the process control intensity stays at the 14% to 15%, which is higher than it was a few years ago. So from that perspective, sure, if you backed off. But I wouldn't tie it explicitly to 20-nanometer. I think there's also, what's going on, still 28 hasn't been fully built out at all semiconductor manufacturers nor has some of the logic work on 22. So I think there's other opportunities other than strictly the -- what's going on at 20.

Your next question comes from the line of Mehdi Hosseini from Susquehanna International.

I'm looking at your booking trend quarterly and over the past 3 quarters, it has been coming at the low end. And then I look at what happened late last year, the significant -- it was a very strong December '11. And, therefore, it seems like the dynamics of the industry has changed given the fact that customers' concentration is having an impact on the quarterly trend, doesn't it make more sense to focus more on the backlog and not how bookings are changing on a quarterly basis? And I'm asking this because your revenue is up or actually flattish. And if I were just to look at your booking for the year, it's down 11. But again, you started the year with such a strong backlog, that this quarterly bookings are becoming ineffective in enabling us to model. So maybe you can share with us any thoughts you may have.

Mehdi, that's a great point. And I do recall you bringing this very point up last quarter, not the part about not giving the guide, but the fact that we were low on it. I agree that it is increasingly a challenging number. It's very challenging to forecast the bookings. And frankly, not particularly -- it doesn't do a lot to drive our business. But historically, it's been a number we have given, and so we're reluctant to take it away because I think it's part of the overall modeling of the business that one uses to try to figure it out. What we have done recently, and we didn't used to do this, is give a broader perspective of our outlook over a longer term. So we're talking about 2013, and it used to be we would say that, "Look, we're not going to talk about 2013 because it's too far out." We acknowledge that but precisely for the reason that you're responding. And in fact, the way we're running the business is not on a quarterly basis, but trying to manage overall backlog and manage the factory size accordingly to where we think the business is. And you're absolutely right, if we look at last year, we've missed on both sides between September and December and then we ended up on average being about where we should have been. So from that standpoint, it wasn't particularly helpful either. So certainly, something we consider and debate, but it is hard as you know to break tradition of giving that guidance.

Sure. So to that extent, and looking forward your backlog for September quarter, actually if I were to dial in the midpoint of the booking guidance, your backlog for December will be down 30% to 40% depending on what you do with the product revenue backlog. And we're talking about a flat or actually down 10% WFE next year. So then, would it be fair to assume that revenues will be down a lot?

Mehdi, just to correct one thing is, is that the backlog at the end of December will be a function of what we book and ultimately what we revenue in that quarter. So if we were to go to the higher end of the bookings range and revenue even at the midpoint of what we guided today, the backlog will actually build.

For the purpose of simplicity, I'm just using the midpoint of the guidance range for booking revenue and shipment, and I'm assuming $100 million of product revenue backlog.

Yes, well, actually all the backlog is product revenue. We don't include services in the backlog. So, again, midpoint of the bookings guide in the $650-ish million range, and midpoint of the revenue guide, $630-ish million or so. They're fairly close. The backlog won't change much if that comes to pass.

But you're talking from a year ago, the compare?

Yes, on a year-over-year basis, backlog will be down.

Yes. No, that's right. We came in the calendar '11 with a lot of backlog. And actually, in this market, there's kind of an optimal level which we're always seeking, which is the right amount of backlog. Because there is a risk to having too much, and also you don't want to run it too light. I think we're closer to where we want to be now than we were then. We felt overly -- we had a lot of challenges going through '11 to catch up, and we had to ramp pretty hard in a period where there was customer demand. So we're trying to find a better level. I would say we're closer to that now. I got asked earlier about our responsiveness, and I think there is, in our business, a need and we focused on being more responsive to changes in the end demand. Which means in the end, that the backlog you can run with is a bit lower than it's been in the past. So when we model out for what does 2013 look like, and I go back to my flat to down 10%, we believe that based on the bookings we're forecasting, the backlog that we have, we'll be able to continue our strategy and objective of outperforming the industry on a revenue basis, although the bookings are going to be lumpy along the way.

Your next question comes from the line of Satya Kumar from Crédit Suisse. Satya Kumar - Crédit Suisse AG, Research Division: Rick, I was wondering if you can give an update on 28-nanometer use? I think recently you'd commented that you thought the use were fairly low, starting [ph] to collect in the 20s to 60s sort of range. Recently, we've seen large foundry comment that gross margins are picking up fairly well at the 28-nanometer node. I was wondering if there is an update in terms of what new trends you see in general at 28? And if we have 28-nanometer capacity expansion sort of dominate, the foundry CapEx for the next 3 quarters through June of next year. If the use are higher, what type of inspection demand should we see relative to what we've seen so far in the 28-nanometer cycle?

Right. All good questions, Satya. I think, yes, it is true, the yields keep improving. And it's a good thing too, otherwise I think there'd be no investment going forward if people weren't seeing yields improve. The range that I've given in the last few months on yields from the 20% to 60% on 28, certainly there's improvement but there's a big range. And the range depends on device type, process flow and manufacturer. So is the high end getting higher? I'm sure that it is because it's been a couple of months since we had those discussions. However, I think there is still plenty of challenges. And the other thing a lot of customers have mentioned is once they get yield on a small volume, it is not all often trivial to maintain them as they ramp volume of that device. So I think that there's still opportunity for us to support the ramp as it goes up. And I also think what we're starting to see now is investment in -- we'll see in the first part of '13, oriented toward the 20-nanometer node as much as the wrapping up of the 28. So I would say our equipment is often tied a little bit more heavily toward the front end of a node and the node that's coming up. So I think those are all things that are true, but of course, there are multiple providers of these devices and not everybody's yield is the same. Satya Kumar - Crédit Suisse AG, Research Division: Okay. And then on your OpEx increase, does this target any particular type of products or is it a general sort of OpEx increase? And specifically, have you made a decision on whether or not you're going to do the actinic inspection system for EUV, and is that included in this OpEx increase?

It is, it is included. We continue to invest in actinic EUV inspection for the reticle inspection tool. We also have investment going on in 450. And as we've discussed in the past, pretty much all of our platforms, all our major platforms are going through pretty significant technological transitions over the next few years. So there is an increase in investment in general just to make sure that we have the capability that our customers are going to need in the future. But actinic is in there, as is some of the 450 work.

Your next question comes from the line of Patrick Ho from Stifel, Nicolaus. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Clearly, there's a lack of memory capacity buys at this time. But what have you seen from your end in terms of technology buys as the memory guys go to next generation, I guess, techniques and process technologies at formats like vertical NAND? What are you seeing from your buys on those next generation techniques?

It depends. I guess I would say there are some -- one of the challenges I think people are realizing with vertical structures of any type that's certainly vertical NAND is some of the historic approaches towards inspection measurement aren't necessarily applicable given the unique challenges of those structures. So in some case, there's proving out of technologies, there's trying to figure out reuse of existing as well as development of new. So there's -- I think there's a lot of challenge in that. But as you also know, it's a very -- it's relatively early in that development cycle. So I wouldn't say it's going to provide a big support level for our business, but it is important for the future. So we're definitely seeing inspection and metrology opportunities associated with new structures in memory, but not of a significant size at this point in time.

Your next question comes from the line of Bao [ph] Pang from Caris & Company. Benedict Pang - Caris & Company, Inc., Research Division: I apologize if it's already been asked. But for fiscal 1Q, relative to the high end of your order guidance, what were the disappointments relative to the high end of the guidance?

Well, we had ones relative to the low end of guidance. It may -- we definitely had -- what's that? Benedict Pang - Caris & Company, Inc., Research Division: I want to gauge what putting in kind of in the fiscal 2Q, is it the same upside potential in terms of an application?

Well, look, customer concentration is no secret in our industry. So you're talking about a few customers that tend to play, especially for companies like KLA-Tencor, that tend to place very large orders. And that creates a bulkiness or a lumpiness associated with whether or not that happens. And so it didn't happen in the September quarter, and we're anticipating that we'll get where we need to be in the December quarter, and that's what's in the guide. Benedict Pang - Caris & Company, Inc., Research Division: And then in terms of the 1Q, was it just a plummet of one customer that takes it from what your actual result is versus the high end?

No, there's a combination. There's also -- there was some memory business that was anticipated. And I think the brakes got put on because of a lot of concerns about the overall memory market. There was also some outside of core semi. I mean it was a combination of factors. But I think in general, I'd characterize the September environment for equipment, that by and large people were in a wait-and-see mode to try to figure out where are we in the overall economic cycle. And a lot of what we heard from customers was a desire, in fact a wish that they could invest but that they were getting held up at their senior levels, as people were trying to reassess where the market is and what kind of investments are warranted going forward given a very uncertain macro environment.

Your next question comes from the line of Vishal Shah from Deutsche Bank.

Rick, just wanted to get your perspective on 28-nanometer ramp, where we are in some of your -- the competitors and customers have talked about getting 200,000, 300,000 wafer starts from [indiscernible] higher by the middle of next year. I'm curious to see what you think and how you see process control spending relative to that? And then just on 20-nanometer, one of your big foundry customer was talking about really a very small pilot production, a small production next year but with a major ramp from 2014. So I'm curious to see what kind of 20-nanometer spending you expect next year?

Sure. 28-nanometer, we have the Giants in the World Series, so I can use a baseball analogy. I'd say we're in the fourth inning on the 28-nanometer ramp. In terms of the 20-nanometer, we're going to see investments associated with that in the first part of next year. Remember, we often get investment early in the cycle because people are trying to debug their process. So I think that's kind of where we are. There's already been some preliminary looks at that, but I think that we're going to see more as we go into calendar '13.

That's helpful. I just wanted to follow up, one of your competitors has talked about refocusing on certain areas within their business, one being process control, I believe. And just wanted to understand from your standpoint where the competitive dynamics are. Any product ideas or segments you see more competition relative to the prior nodes?

Every one of our product line has had competitors for as long as I've been -- 24.5 years I've been with the company, I don't think that's going to change. I think there is a lot of interest. I don't anticipate anybody backing off in terms of trying to provide capability. I wouldn't say any particular segment is under any additional threat now than they've been in the past, which drives us to continue our investment and continue to focus on our customers. But I don't see the landscape changing. We've always had a lot of competitive pressure, and I expect that to continue.

Your next question comes from the line of Chris Blansett from JPMorgan. Christopher Blansett - JP Morgan Chase & Co, Research Division: Two questions. First was you are taking away or getting rid of your solar inspection business, and yet you're still guiding your OpEx up. Just wanted to get a context, it sounds like this wasn't a very big cost center for the company, the solar side versus what you're adding onto the OpEx?

That's correct. And we're also -- it was a very small part of -- it's actually a part of an acquisition we did a few years ago, and we're redeploying most of the resources there on some additional opportunities in the back end. But, yes, but it wasn't a big part anyway. Christopher Blansett - JP Morgan Chase & Co, Research Division: And then the follow-up was, Rick, you mentioned we're kind of in the fourth inning of the 28-nanometer ramp. I guess maybe a different way to ask this is, from an equipment that's already been shipped perspective, what kind of inning do you think we are in 28-nanometer, given some of that...

The way it's going now, like the bottom of the fourth. Christopher Blansett - JP Morgan Chase & Co, Research Division: Okay. So just wasn't sure because often it takes a while to bring that equipment online and ramp it up, so...

Yes, it's gotten -- it's, I was -- I'm scared of those analogies. It's gotten a little quicker. I'd say the people have gotten pretty good at bringing in and ramping up. And especially the foundry world, I think all of us, all the equipment guys have learned to move very quickly to be able to support the velocity associated with those businesses.

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

All right. Thank you, Adam, and I'd like to thank everyone on behalf of the management team today for joining us here. An audio replay of today's call will be available on our website later on this afternoon. And once again, we appreciate your interest in KLA-Tencor.

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