Good afternoon. My name is Christine, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Fiscal Year 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ed Lockwood, with KLA-Tencor, Investor Relations, you may begin your conference.

Thank you, Christine. Good afternoon, everyone, and welcome to our conference call. Joining me on our call today are Rick Wallace, our President and Chief Executive Officer; and Bren Higgins, our Chief Financial Officer. We're here to discuss first quarter results for the period ended September 30, 2016. We released these results this afternoon at 1:15 PM Pacific Time. If you haven't seen the release, you can find it on our website or call 408-875-3000 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. Today's discussion of our financial results will be presented in non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings press release. These slides can be found on KLA-Tencor's Investor Relations website. There you will also find a calendar of future investor events, presentations and conferences, as well as links to KLA-Tencor's SEC filings, including our Annual Report on Form 10-K for the year ended June 30, 2016. 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 statements. With that, I'll turn the call over to Rick.

Good afternoon, everyone. Two weeks ago we held a conference call reintroducing the KLA-Tencor story to our stockholders featuring a message that highlighted how our strategies for growth based on market leadership, customer focus, and operational execution provided the foundation for the outstanding results we achievement in fiscal year 2016 and set the stage for an exciting future for the company as we move forward. Today I'm very pleased to announce that we got off to a very solid start in FY17 as KLA-Tencor finished above the midpoint of guidance for shipments and revenue for the first quarter and exceeded the range for non-GAAP diluted earnings per share. September quarter orders came in slightly better than our internal forecast highlighted by strong foundry mentioned [ph]. These results were fueled by strong customer acceptance of new products and a business model that consistently delivers superior operating leverage, providing the resources to rank KLA-Tencor among the Top Tier of all technology company in terms of returning cash to shareholders. Our recently announced 4% increase in the quarterly dividend level from $0.52 to $0.54 per share is further evidence of our confidence in the strength of our business and our ongoing commitment to enhance stakeholder value. Our performance in Q1 also affirm KLA-Tencor's ongoing focus on providing value to our customers in terms of meeting market requirements and delivering superior competitive offerings. As in the past, a key contributor to the strong demand we're experiencing today is the success of new products across our product portfolio. Our market leadership is sustained by ongoing successful execution of a product strategy that's focused on intersecting market needs with a portfolio of complimentary solutions to address the broad range of yield challenges our customers are facing at the leading edge. And the pace of new production…

Thanks, Rick and good afternoon. The September quarter represented another solid period of financial performance and operational execution for KLA-Tencor. Revenue was near the top end of the range and earnings per share finished the quarter above the range driven by strengthening gross margins that continue to reflect strong differentiation of our products in the marketplace. Revenue for Q1 was $751 million and fully diluted non-GAAP earnings per share was $1.16. GAAP diluted earnings per share was $1.13 in the quarter. In our press release, you will find GAAP to non-GAAP reconciliation of $0.03 difference. With the exception of when I exclusively refer the GAAP results, my commentary will be focused on the non-GAAP results which exclude the adjustments covered in the press release. In regards to highlights of the Q1 demand environment, we are no longer reporting quarterly booking results or quantifying order guidance in terms of dollar amounts but we will continue to share our perspective on the current quarterly demand picture to give investors insight into industry trends. End market mix estimates for the December quarter based on current forecast. Foundry was 69% of new semiconductor system orders in September; foundry bookings featured strong demands across our product portfolio to support leading edge development projects although foundry expected decline to 30% of total system orders in Q2 due to project timing. We are currently expecting foundry orders to grow in the first half of calendar '17 compared with the second half of this calendar year. Memory was 15% of new system orders in Q1 with demand evenly split between DRAM and NAND. Memory orders are expected to jump to 60% of the total in December largely due to concentration of orders to support a single new memory project build out in Korea. Logic was 16% of new…

Okay, thank you Bren. At this point we would like to open up the call to Q&A, and we do once again request that you limit yourself to one question and one follow up given the limited time we have for today's call. Please feel free to reach your follow up questions and we'll do our best to give everyone a chance for follow-ups in today's call, as time permits. Christine, we are ready for our first question.

[Operator Instructions] Your first question comes from a line of Timothy Arcuri from Cowen & Company. Your line is open.

Thank you so much, I had two -- nice job guys; I guess the first question is really wreck on 7 nanometer. You know the last really economical new in foundry we had was 28 nanometer but recently a host of companies, most recently TSMC are now talking about 7 nanometer being very big, maybe even as big as 28 was. So am curious on getting your perspective on way for demand at that note and how much of this maybe has been bought already in the orders you've got for 10 in the third calendar quarter and how much that is still on the comp? Thanks.

Thank Tim, I was in Asia last week revisiting and getting reacquainted with our customer base and there is a lot of excitement I think about the potential for 7 nanometer to your point. Most of the investment that we've seen so far, in terms of production investment has been for 10 nanometer, we have seen investment for the development in 7 and even some looking forward to 5 so I think most of what happened was today that we've seen is 10 and we do expect to see continued strength as we go forward in for 7 nanometer. Bren, anything to add to that?

Yes, I think Tim, you know we've had foundries very strong and we even know a drop off this quarter, we think we see a bounce back into the first half of calendar 2017. There's always a dynamic about how the capacity openly get sell by the people following the leaders and so customers will try to optimize their capacity, as much as they can, so to the extent they try to use some of that equipment they may try, but and then given the challenges in a node and what we're hearing about size of it, we feel pretty confident about that foundry trajectory into the calendar year.

Thanks a lot. And just a second thing, I-- wanted to talk a little about memory because it looks like there's some uptake in the-- adoption of inspection in memory here in the next round of orders, you have cited a some big orders coming out of Korea during the fourth quarter. Can you talk about what's going in memory? Is there an uptake in inspection in intensity, in memory and particularly why it is happening and can it sustain going forward, thanks.

Yes, it is not just inspection I think process control in general, we are-- seeing some strength and I think it kind of goes across the portfolio. I would attribute the increase in inspection to memory which we have seen some, is more a function of Gen 5 where we've had some placements there that maybe in the past might of been served by alternate technologies like EVM, so we've seen some strength, I'll be modest at this point. The metrology is also growing and a lot of that has to do with some of the challenges in terms of things like registration, and so the overlay business and some of the film's businesses. So we're feeling pretty good about it, it's not at the intensity levels of course of foundry, but it is significantly up from where it had been in prior nodes and then we see strength to going forward there.

Thank you guys, appreciate it.

Your next question comes from the line of Farhan Ahmad from Credit Suisse. Your line is open.

Thanks for taking my question. Rick, I had question on Gen 5 just in terms of how -- where you're seeing that option of Gen 5 verses Gen 4, and how we should think about the ramp of Gen 5 next year, and also even at the Analyst Day at Semicon [ph], you had first talked about Gen 5, you talked about potential to gain some of the layers from EVM applications and is that something that you already starting to see?

Farhan, thanks for the question, yes we do pretty good about Gen 5 I think that what we were hoping for is to get it out mainly as a discovery tool. So way back in Semicon [ph] and 2015 we talked about the discovery market and our goal overtime was to get to 50% of that market served by optical. I think by the run rate we have now the end of calendar 2016 we're dressing about a third of that markets, so I think we've got about a third of that market, and our target remains that by the end of 2017 to be 50% of that market. Part of the market grew a little bit, because EVM was just not capable of satisfying some of it, so there is a gap in terms of functionality in terms of whole wafer but the displacement I think is going on we're seeing Gen 5 adopted more broadly. Gen 5 really does not go into production and replaced Gen4 until future notes when the critical defects size gets smaller, and you can really think about that more in terms of the adoption of EUV lithography. So, for now it's doing what we hoped it would do, customers like what they see it's a new products so of course there's improvements that we need to keep making, but we think we're on track for the plan that we laid out little over a year and three months ago.

What I really want to add to that; is that we're pretty much in line with what we thought would be we have 4 or 5 units revenue in this calendar year, and then that number would probably double or so will take 8 to 10 units into calendar 2017. So to Rick's point given our objectives in the in the 2017 we think that is how the adoption plays out. most of what we're seeing in terms of 10 nanometer production is really being driven by the Gen 4 product line, receptions just been really strong for that in its capability, so we're really encouraged by that, the extend ability we think and have this move into seven and the two will be mixed and matched and impaired to meet discovery high end production, and then ultimately high volume production type use cases.

Got it. And my second question on the foundries of -- There's been a big growth in foundry investments in China this year, I wanted to understand like from your perspective how much of the foundry demand this year that is coming out of China -- China foundries. And as you think about the 28 nanometer down put those foundries, how do you think that will play bigger advantage as you typically have like a very strong of process control intensity a 28 nanometer some of the first wave of foundry investment that we saw.

So on the foundry business overall, I mean we had a record year in China in FY16, so the year that ended in June in bookings so that those tools of these new revenue in through the course of this year. So I would say of our total foundry business in the year maybe 30%, 35% or so of the total is probably foundry.

Yes, and then in terms I was there last week and meeting with customers and I think that 28 nanometer demand, this is that there's a lot of investment going on as you know, there's a lot of new employees. I think they are counting on us to help educate, train, and support them as they wrap these new fabs and they got very aggressive ramp. So I think we look forward to good business and be able support our customers as they go through there, and I think that we see the intensity being somewhere, in fact in some ways because in many cases you're starting greenfield for some these facilities, the intensity ends up being front and loaded for some of them, so it's even higher as well as we go forward. So we're looking forward to great things that in our China operations.

Yes to clarify I meant 30% to 35% of the foundry business with China.

Thank you, that's all.

Your next question comes from a line of Harlan Sur [ph] from JPMorgan. Your line is open.

Good afternoon and congratulations on the solid results and the great margin profiles. given the view of WFP [ph] growth next year and obviously your business going in line or better than that, we should see the team you know roughly around $3.3 billion in revenues in calendar 2017 combination of industry growth, momentum and Jen 4, Gen 5 in your other new products. If you continue to drive the better performance in the margin funds, feels like operating margins in that kind of 36% to 38% range would seem achievable, I'm not asking you guys to endorse the $3.3 billion revenue number, but if you were to beat those levels, does 36% to 30% operating margin sound reasonable.

Harlan, its Bren. So I mean just following the map to the point that we think that we're going to grow sort of in line with the market in the next year, and the market forecast that that we laid out, you end up with that revenue level I think that's fair. I think we're seeing some tail winds in gross margin right now that we've seen or -- for several quarters but I think as we start to transition into some of the newer products, some of the benefits we've seen around warranty and support costs, and an efficient cycle times and things like that. I think some of that goes away now. I do think and as I said in the in the call a couple weeks ago, I do believe that versus the model we published that were operating probably a solid 100 basis points above what we had put out there. so and I think that sustainable, so I think some of what we're seeing today be hard for me to come to replicate that type of gross margin profound in next year, so might be a little bit a degradation there, so given at that revenue level the range that you mention probably feels a little bit hot, but I would say you're probably in that 35% range plus or minus 100 basis points or so. Now there is a lot of factors in that mix and so on but that's how I would characterize it.

Great, thanks for the insights there and we've tended to focus on the Gen 5 and the 29-30 and 29-35 upgrade cycles, in some of our most recent reports but obviously you guys are driving new product cycles across their wafer inspection, review document inspection and of course your new radical inspection platform. I'm sure you guys track this but can you give us a view of the mix of your new platform as the percent of your current bookings and maybe some comparison of that some of your prior cycles?

The comparison will be tough, I mean I don't really have that data; I mean what we are booking a lot of these new platforms that things to come out in this last year, right. so in even in the more trailing edge businesses like in China, they are buying and the latest Gen of tools, with the ability to try to use that capability as they ramp through this early development of new technology there. So I would say the majority -- pretty solid amount of the business is new products but I don't have the actual percentage.

Great, thank you.

Your next question comes from a line of Steven Chin from UBS. Your line is open.

Hey guy's thanks for taking my question. Related to the foundry opportunity in China there is an announcement of a ramp of 8-inch and 12-inch capacity earlier this week. I just want to get a sense of -- and sort of price desk on -- looking back last few years I see that the customers sort of mix between four big customers and you may be give us a sense of China foundry customers getting into that category?

I guess I'm not sure exactly the question sorry, Stephen, but what…

I'm just trying to -- like I guess simply how big do you think the China foundry opportunity could be?

I see. Well, Bren talked about the percent of our business that we had -- if we look back just to give you an idea of FY16 that finished, China was the second biggest market for us and that was partly because there was some underspending going on but China is pretty significant for KT and I think as we go forward we have the combination of this investment even though it's in -- maybe N minus two technology [ph], we also have a very significant amount of penetration and market share and also this is higher adoption because its foundry. So they are buying some of our newer tools and we see a lot of interest in ramping these facilities quickly, they are spending a lot of money, they are trying to grab markets share, in some cases service the domestic demand; so we feel pretty good about our position there and the fact that there is an area that we're going to invest more heavily going forward as overall to support that China investment cycle. This one is real.

But the only thing that I would add is while I think that there are certainly some new development activities happening there as they are ramping these fabs from greenfield state, that ultimately -- its serving a global market and so I think you'll see some movement around in terms of who gets market share but there will be inflexion in the short-term, probably some of it doesn't necessarily contribute to supply but overtime it eventually will. So I think the overall foundry dynamics in the long run will stay pretty consistent but there is certainly a commitment there and there is a focus to Rick's point, not only on the ramping of new technology but also our market position there is very strong.

Thank you.

Your next question comes from the line of Edwin Mok from Needham & Company. Your line is open.

Great, thanks for taking my question. So I guess first question on the patterning part of your business; I think on the last call you guys talk about increased focus there on patterning -- just call one to see you've implied more commentary around that; is there more focus on metrology and also in terms of financial impact should we expect more R&D spending on that side which ultimately will increase your OpEx?

I'll take the first part and then let Bren talk about the second part. We're definitely seeing demand associated with multi-patterning and also EUV. And I'd say the EUV work is in the radical space where we do have tools that are dedicated now to EUV in terms of our 6XX and some of our newest 6XX capability; people are buying for EUV so that's early days of course for that. In terms of overall challenge with customers whether deregistration overly, film thickness or optical CD; all those things are potential areas for drug. We're doing well, we think there is more upside to them and we feel good about our competitive position. Now whether or not we see significant increases in the next 12 months but I think overtime there is potential to keep that business growing. And from an investment standpoint Bren could you talk a little bit about how we thought about that?

Yes, I mean we've got a pretty active portfolio management process here in the company and I think given the strategic reorganization that we did a year ago we have the ability to move capital around much more freely than we did in the past so we will continue to execute our process, we've been investing in those businesses, we'll continue to do so. I gave some guidance in the prepared remarks around what I expect OpEx levels to be overall; there is a bit of an increase there and we are trying to drive the focus of that to be mostly R&D with an overall target of trying to 60% or the R&D expenses or the overall OpEx as R&D.

Okay, great, that's helpful. And then, I guess just circle back to China or maybe just increase level or investment we see on a trading act [ph]; I think you talked a lot about selling new product and even these customer buying new products but to the extent that they buy older generation products because that's what they need for 28 or higher note. Do you -- should we expect some pricing pressure on that and just because there are more legacy tools?

I don't think that's really what we're seeing. I mean right now we do have some ability to flex the different tool capability people need but a lot of these facilities don't think they are going to stay at 28, so there is a desire to have newer capability and of course it doesn't hurt them to have it when they are doing their 28 work but they are hoping that they are going to go obviously lower than that. So I think we're in pretty good shape regardless of where they buy in the portfolio. It's not quite the same; I'll give you a very different example, if you think of some of the investment going on in Internet of Things where people -- maybe an automotive or they are in sensor technology, then we're talking about older tool sets and maybe even some of our KT pro-stuff which is reconfigured or refurbished tools, that's not what we're seeing in our markets in China for the most part, maybe there will be an element of that later but that not what it looks like right now.

Great, thank you.

Your next question comes from the line of Jagadish Iyer from Summit Redstone. Your line is open.

Thanks for taking my question, Rick. Two questions; first, what's the termination of the deal with LAN? How much of your effort is focused on putting on the EUV mass inspection, and can you give us some clarity in terms of the line of sight of revenues from this product line as ASML [ph] prepares to ship a dozen tools next year? And then I have a follow-up.

So the way we're serving the EUV market is with the 6XXX series that's been out for several years and we have some additional capability to do that. So that's already part of the portfolio and had nothing to do with any discussions we had with our other companies, that's out there and no we're seeing their demand -- some demand for that. I can't really say that at what point that's going to ramp because for a long time it was a part-time application for some customers but we are seeing some dedicated purchase of those tools for that capability and it really will depend on how many starts they have in terms of different types of devices, how many mask they have. But whatever they have with the adequately time we are prepared to serve it; we don't -- it's not really about additional development beyond the capability that we have and some software upgrades and algo upgrades in that platform, we're not talking about a new platform which we talked about several years ago, that's not what we are doing; we're not doing an actinic [ph] inspector, we're developing additional capability on our existing products to serve it.

Okay, fair enough.

Then the only other thing on that is that we would add is that they will do flap-down inspection to qualify radicals, certainly for recall capabilities and incoming quality checks where they will basically print the waiver and do Gen 5 inspections on the waiver to qualify radicals as another checkpoint in terms of making sure radicals are good.

Okay, fair enough. Then on a big picture question, I just wanted to understand given that there are so many smaller players in the process control segment; what are your thoughts on consolidation post-termination of the deal with Lam?

It's not really an area we're focused on, I mean its possible others might do that but we feel pretty good about the products that we have, the range that we have and our ability to satisfy the markets with our organic efforts in terms of process control. So it's not really something we're looking at.

Thank you.

Your next question comes from the line of Patrick Ho from Stifel Nicolaus. Your line is open.

Thank you very much. Rick, first in terms of some of your comments about memory and inspection, given the transitions that are going on, particularly in the 3D NAND front, the capital intensity from metrology [ph] has obviously increased and it makes sense for your overlay data film and even OCD metrology business. What's been some of the key drivers that have gotten at least some Gen 5 evaluations in that marketplace where traditionally they haven't used as much inspection?

I think just the fact that there -- as customers are looking at the newer technology notes. First of all, there are more customers trying to get into production; second of all, as those that are in-production are looking to new capability; just the ability to have a better sense of debugging the process in terms of -- from the discovery phase, not really from in-production, so it's really that. And in terms of their ability to see things they've never seen before because if they had EVM Solution, they could find small defects but they couldn't get away for signature, and now they can do both, they can find small defects and get way for level signature.

Great. And Bren on the supply chain side of things, you guys have performed really well over the last year in terms of seeing the increases and booking and shipments and trying to surround very quickly; can you just give a little bit of color what some of the tactics and I guess efforts you've made that have had the quick turnaround you've had on the -- in terms of the shipment from bookings?

Yes, the NPI process at KLA which is new product introduction where engineering is headed off to manufacturing; on a lot of the new platform transitions that we've had has been really exceptional so tools are being handed over to operations, we have good design stability, our marketing and sales teams are managing the transitions well with customers; so we are not getting stuck necessarily with a lot of the extra inventories, we move customers from one platform to the next. Because of the design stability you don't have retrofit programs and other things; we are out there trying to fix tools as you're shipping them out. So it's been a huge factor I think -- not only in the conversation but also been a factor in the margin profile; A) because of the inventory issues but also the fact that the service cost around the warranty cost to support the tools and get them installed quickly has been fairly efficient, and so that's been a factor as well. So very impressed with the teams been able to do this and do this in a period of time where there was a lot of work around integration planning distraction and so on, so really impressed at work.

I think the one other thing is, as we've taken more risk in terms of inventory risk so one of things we've done is provided more flexibility in the master schedule to be able to react to market demands, especially most of our customers now have a very short visibility into their cycle so we're trying to be prepared so that we don't get caught out not having capacity when it's needed.

Great, thank you.

Your next question comes from the line of Atif Malik from Citigroup. Your line is open.

Hi, thanks for taking my question, good job on the quarter. Rick, can you talk about the yields that you guys are seeing on 3D NAND over the last New Year or so? Is that going to be on 3D NAND and the bunch of folders; I'm just curious where you think the yields are broadly speaking on 3D NAND? Will you cover [ph] on 3D NAND different from other devices and logic and [indiscernible]?

Yes, obviously given the relative small number of players, I'm going to be careful about this. I would say that the leaders feel good about where they are and I won't comment to that. There are other players getting in the market and I would say that we are seeing success but it is -- if you think about a yield curve, I think that there is a long flat part of that curve down around zero, and I think it took a while for people to debug the process. And frankly, one of the things -- one of the areas for opportunity for us going forward is there is not a really good defect discovery mode for 3D NAND because there is really no tool capable of helping debug; and even although we've made some attempts, when you do find the defects, they are very hard to verify because you have to essentially reprocess or flip them to go find it. So I'd say it's been slow in terms of getting started; now it's getting better. I think that there is -- some people are getting their process but as they look at expanding to the next technical challenges we anticipate yield is going to be a big part of the challenge and I think there is a lot of interest in partnering with us to come up with solutions to address that because obviously there is demand there but they are certainly getting very challenged by making the processes actually work.

Okay. And then on the foundry side, we've heard from Lam Research yesterday that they did expectation for next year foundry investments are going to clap to down and then they talked about maybe little bit of digestion [ph] and tend not to be driven. And you're expecting to actually get drove in the first half of '17, is your optimism based on the success of your new products or are you assuming the investments at foundries will kind of sustain at the level we are putting this year?

I think -- so Atif, this is Bren. I don't think our general view on the year is much different. I think there could be some growth in foundries as we build it bottoms up but we think it will see continued momentum around and my comments were order, so you'll start to see those tools ship in the second half of the year that will also will see stronger foundry shipments in revenue in the second half related to 7 nanometer activity. But I don't know what -- how they make up their forecast but at the end of the day, I -- as I said, I feel like we're not that far apart and generally in terms of how we look at it and how we look at the year overall.

So Bren, just to be clear do you expect orders in first half of calendar '17 to be higher than the second half of '16?

Yes, I do, both for overall and within foundry.

Got it, thanks.

Your next question comes from the line of Craig Alice [ph] from B.Riley. Your line is open.

Thanks for taking the question. I'll start with one that's pretty high level; it's very nice to hear the confident tone on what can happen in the first half of calendar '17. So the question is, relative to a year ago or little bit more when you were last providing quarterly updates, has the visibility on the business improved? And if it has, to what extent is that improvement due to industry dynamics versus company specific, potentially product cycle dynamics that apply for KLA?

I don't think it's really changed all that much, I mean to Rick's point earlier, I think we've tried to be as flexible as we can; we've taken some risks, I think we're managing through transitions and any time we have product transitions to bring a new product with new capabilities of the market, there is a level of customer demand that goes with that. So I guess in one way on anytime you have a transition, you do see some increase in visibility but we are still reacting to -- our customers are facing short lead times with their customers and trying to expect us to follow suit with that and we're doing all we can to try to be as flexible as we can to meet their needs. One other thing now that is, there is a little different is, the strength out of China is pretty different and there are Greenfield's that are happening, there is big investment plan. So if you think about that part of our business, there is a much more committed and maybe that could change but they are more committed than it was hard to see in the past.

That makes sense. The follow-up is a question on products in next year's outlook, so in the year where the business has potential to grow 5% to 7% in line with the target model, the product like Gen 5 can double next year as I think I heard previously -- what would some of the other products be that would be viewing some of that company specific growth in a year with a rising top line?

Well, you know our 5% to 7% are through cycle multi-year target, right and that was -- when we put that together and say, look from calendar '15 and as we're sizing around the business, we're going to position it so we can deliver that level of revenue growth and try to have operating leverage that's 2X the growth rate. I mean certainly Gen 5 is a bigger piece but there will be some mix and matching that will happen within broadband plasma. So I think it's really -- the strength is, I don't see a fundamental shift in overall mix as we move into next year. To Rick point earlier, there could be more investment in radical inspection as customers begin to prepare for more development activities around EUV. So that could be an inflecting product a little bit into the year; year to year, but overall I think the mix looks relatively consistent across the different product segments.

Thanks.

We have time for one more question. Your last question comes from the line of Sidney Ho from Deutsche Bank. Your line is open.

Thanks for taking my question. My first question is, have you looked at your annualized revenue for your December quarter, you get to somewhere around $3.3 billion. Sorry, if the question has been asked before but if you look at the operating model that you guys put out, you guys should be somewhere around 59% in gross margin. I'm curious if you think this is kind of permanent step up in gross margin forecast while they are some of the factors that's driving the upside in your near-term?

Yes Sidney, we got that question earlier but just to go over it again really quickly, yes, there is -- we've clearly been outperforming the model, I think some of that is due to some of the maturity of the platforms that are out there, we're transitioning some new platforms and so I think will lose some of those tailwinds we've had but to the point I made earlier, I think we're operating probably a 100 basis points or more over that model and so as you play that through, I think you will see the same kind of performance in the operating margin line.

Okay, great. Sorry for asking the same question. My follow-up question is, let's go back to Gen 5 product, it sounds like you guys don't expect Gen 5 to be cannibalizing Gen 4 until EUV is in production, so that would be put you in 2018 to 2020 timeframe. But if you go back to when Gen 4 was in R&D mode per say, is that roughly the same kind of timeframe? The same number of tools that you used for R&D before they go to -- they go into production?

Yes, here is the big difference is. There is no real scaling going on right now. I mean and tell you here EUV, essentially with the multi-patterning, you're not really doing anything relative to defect size, so Gen 4 from a lot of customer's perspective serves that market. So it's really -- people want more sensitivity but it's more about discovery. Frankly, if add the deal with those same defects on the earlier nodes on the current nodes, they wouldn't be able to be in large-scale production. So it really has hinged on when you see advanced technologies going into production on EUV.

Okay, great. Thank you.

Thank you. Mr. Ed Lockwood, I'd turn the call back over to you.

Okay, thank you Christine, and thank you everyone for joining us on the call today. We remind you an audio reply of today's call will be available on our website later on this afternoon. We appreciate your interest in KLA. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.