Varian Semiconductor Equipment Associates, Inc. F4Q09 (Qtr End 10/02/09) Earnings Call Transcript

Oct.30.09 | About: Varian Semiconductor (VSEA)

Varian Semiconductor Equipment Associates, Inc. (NASDAQ:VSEA)

F4Q09 (Qtr End 10/02/09) Earnings Call Transcript

October 29, 2009 5:30 pm ET

Executives

Robert Halliday – EVP and CFO

Gary Dickerson – CEO

Analysts

Patrick Ho – Stifel Nicolaus

Krish Sankar – Banc of America

Peter Kim – Deutsche Bank

Weston Twigg – Pacific Crest

Ben Pang – Caris & Company

Edwin Mok – Needham & Company

C.J. Muse – Barclays Capital

Satya Kumar – Credit Suisse

Stephen Chin – UBS

Jagadish Iyer – Arete Research

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Varian Semiconductor Equipment Associates, Inc. earnings conference call. My name is Elvis and I will be your coordinator for today's call. And at this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Robert Halliday, Chief Financial Officer. Please proceed, sir.

Robert Halliday

Thank you. Good afternoon. I’m Bob Halliday, Varian Semiconductor's Chief Financial Officer. I want to thank you for joining us for our fiscal 2009 fourth quarter conference call and webcast. With me on the call this afternoon is Gary Dickerson, our CEO.

Before getting into our financial results, we want to remind you that during the course of this call, we may make various comments about the company's future expectations, plans, and prospects. These forward-looking statements are subject to various risks, including those detailed in the company's public filings, including our most recent 10-Q filing. The company cannot guarantee that these forward-looking statements will actually occur, and we assume no obligation to update these forward-looking statements.

Today, I will cover several things. First, the continuing strengthening of Varian's gross margins; secondly, our robust upgrades business and how we are developing that as a high-value business; and our investments in growth programs, particularly in R&D and marketing.

Now, I will review fourth-quarter results.

Fourth-quarter 2009 revenue was $117.5 million, above our guidance of $104 million to $114 million. Fourth-quarter revenue increased from the third quarter by $44.1 million, mainly from tool sales to foundry customers and increased spare part sales. In the fourth quarter of 2009, unit shipments were approximately 59% foundry, 33% memory, and 8% logic. The foundry mix of business in our fourth-quarter was the highest it has been for years.

Fourth quarter 2009 earnings per share of $0.10 was better than our guidance of $0.01 to $0.06 per share.

The geographic breakdown of our revenue this past quarter based on fab location was: Asia, 77%; North America, 19%; and Europe, 4%. We recognized revenue from five PLAD tools in the fourth quarter, including our first PLAD tool for a Flash customer. Our PLAD installed base has now reached 45 tools. This installed base includes six customers who have bought multiple tools.

Fourth quarter 2009 gross margins increased by seven percentage points from 38.4% in Q3 to 45.4% in Q4. This increase was due to higher margins on all lines of our business, including systems, upgrades, parts, and service.

R&D expenses of $19.9 million were in line with our guidance. Marketing, general, and administrative expenses increased by approximately $1.1 million from the third quarter of 2009 to $23.2 million in the fourth quarter.

The sum of our quarterly R&D and MG&A expenses was $59.9 million in the fourth quarter of 2008. In Q4 2009, these expenses were $43.1 million. That is about $16.8 million less than the fourth quarter of 2008 or approximately a 28.1% reduction in four quarters.

Income tax expense for the quarter was $2.9 million, resulting in an effective tax rate of approximately 28%. We have revised our Q3 FY 2009 and prior year's income tax expense from understated deferred tax assets. None of these revisions were material in any previously reported period.

At the end of the fourth quarter, our full time equivalent headcount was 1345, up from 1280 at the end of the third quarter of fiscal 2009. This increase is primarily comprised of manufacturing personnel and some for R&D.

Our cash and investment balance increased $28 million in the fourth quarter to $322.6 million. Cash from operations was $25.3 million in the fourth quarter. Fourth quarter 2009 capital spending was $1 million, which was lower than our guidance of $1.3 million. Depreciation expense for the quarter was $3.8 million.

Now, I will turn to our Q1 guidance. In the first quarter of fiscal year 2010, we anticipate revenues of between $134 million and $144 million. We anticipate that gross margins in Q1 2010 will be up approximately one percentage point from the fourth quarter of fiscal 2009. This is reflective of an ongoing longer-term trend of Varian improving its gross margins. In the first quarter, we expect R&D expense will be up a little more than $2 million, as we continue to invest in growth programs.

Marketing, general, and administrative expenses will increase by approximately $3 million to $26.5 million in the first quarter. This increase is due to an increase in evaluation tools, a ramp in demo activity, investments in penetrating solar markets and new application support, and reductions in shutdowns and partial restoration of compensation reductions.

We expect our FY 2010 tax rate to be approximately 23%. As a result, in the first quarter of fiscal 2010, we expect to earn approximately $0.15 to $0.20 per share. We expect capital expenditures in the first quarter to be approximately $2 million.

Over the last few quarters, we have continued to invest in growth programs. We have several unique leverage points. First, our products come out of development on spec and more robust, because we have invested heavily in product reliability growth. The commonality of the VIISta platform is an essential foundation. With such high commonality, we are able to save significantly on development costs and time.

We have hired technologists with broad experience, not just implant experts, but device design and integration, etch, plasma, litho, solar, thin films, and yield enhancement experts. These experts have the experience to help us identify and solve problems that have not traditionally been thought of as implant solvable. Some of these problems include the harder challenges of litho and etch. What is additionally exciting is that our ability to change the electrical and physical properties of materials transitions extraordinarily well to markets like solar. In fact, our skills in device performance modeling have proven insightful and accelerated our rate of learning greatly. We see this as a significant competitive advantage for us and our partners.

The issues when you are making development investments are: Aare you solving hard problems with significant differentiation, for which you will receive high margins; and are these markets going to be bigger? Using solar as an example, the hard problem we are solving is increasing cell efficiency and lowering costs for a big market with high differentiation.

Now, I will turn the call over to Gary for his remarks.

Gary Dickerson

Thanks, Bob. We have invested through downtown to extend our market leadership, address customer device performance and yield scaling issues, and position Varian for growth in new markets. Today, I will discuss progress we have made in these areas, including

development of new technologies that enable scaling of next-generation devices, and new market opportunities that will drive our growth as customers increase their spending to more normal levels.

At each new technology node, there are significant device performance and yield issues for our customers. Some important challenges include leakage that impacts battery life and drive currents that impacts device speed. To address these challenges, Varian has developed new technology that will widen the gap with competition and will increase our margins as we provide solutions to very high value customer device scaling issues. The technologies developed by Varian include damage engineering, including process temperature control that reduces end-of-range damage and surface defects, carborane, SuperScan to address radial threshold voltage non-uniformity, and new implant scanning modes that address emerging issues with device non-uniformity.

Adoption of Varian's high-value damage engineering upgrades is increasing. Both process temperature control or PTC II and carborane are providing enabling capability for advanced technology node development. PTC II and carborane are both installed at three sites, and there is strong pull from many other customers. In Japan alone, we are working on device wafer demos for four different customers. As companies migrate to 32 nm and below, the smaller process margins of these advanced devices will make Varian damage engineering solutions a standard requirement.

Process margin reduction, particularly for issues like post-etch non-uniformity are creating device performance and uniformity challenges. These uniformity issues are impacting critical transistor characteristics, such as threshold voltage and drive currents. The Varian SuperScan upgrade compensates for these non-uniformities by tailoring implant those from wafer center to edge. SuperScan is in production at seven leading memory and logic fabs, including three new sites in the last six months. SuperScan has driven new tool sales, as customers migrate more recipes to require its use. As processed complexity increases, process margins decrease, and SuperScan becomes an enabling technology.

Die-to-die parametric variations are another emerging challenge for scaling of 45 nm and below device performance. This is an area where we are seeing major advantages of our ribbon beam technology versus spot beam tools. Spot beams, which require multiple wafer scans, creates inherent micro uniformity problems due to beam overlap. With our ribbon beam and new uniformity enhancement technology, customers are seeing significant improvement in device performance. Varian has developed a unique beam shaping capability and new scanning modes that improve small local variations on the wafer. Our uniformity enhancement module or UEM and new scanning mode require the implanter to effectively run at lower throughput, but results in significantly higher bending of uniform high-value devices. We have validated these uniformity enhancements at four installations in the field, and we anticipate several additional installations in 2010.

Our new generations of high current implanters have hooks designed in to accept not only high-value damage engineering upgrades, but also our uniformity enhancement upgrade products. Our device performance and yield technology advantage will increase as process margins become tighter for future devices.

I would also like to update you on four initiatives that will drive our growth in new markets

PLAD for Flash applications; CMOS image sensor; materials modification applications, including lithography and etch; and solar. We recently shipped a tool to a Flash customer, who is planning to use PLAD for two applications for their next generation device, and we are making significant progress with additional customers.

We have also expanded PLAD's capability beyond P-type bore-on implants and are now implanting N-type species. With our engagements with multiple customers and multiple applications for Flash, with both P-type and N-type dopants, we are optimistic that PLAD business growth should accelerate in 2010.

The CMOS image sensor market is very good opportunity for Varian, since the market is growing and we anticipate share gains. We focused on some of the specific device issues, where CMOS image sensors that impact image quality and develop solutions that widen the gap with competition. These advantages include low metallic contamination and patented precise angle control, superior micro uniformity, and our damage engineering processes to reduce crystalline defects.

One of our largest customers in FY09 was a Japanese CMOS image sensor account, where we had significant penetration in high current and high-energy. Last quarter, we penetrated another account with our high-energy tool and we are optimistic that we will drive adoption at additional CMOS image sensor accounts in 2010.

As we have discussed, Varian implant tools can be used for electrical modification and for physical modification of materials. Customers increasingly understand that our implant tools are some of the cleanest in the fab and can precisely place very pure materials at exact depths and angles to change material properties. We have customers using implant to modify film properties, cleave wafers for SOI, and we are seeing adoption at the next-generation technology nodes for changing the etch selectivity to create unique device structures.

In addition, one of our largest customers is planning to use implant in their lithography process for multiple levels of their next-generation devices. They evaluated implant versus alternative approaches and found that implant eliminated process steps, providing higher yield because of less particles and can provide a 30% cost advantage. We are currently working with five additional customers on advanced lithography applications.

Solar is another new market opportunity for Varian. We have an R&D tool installed with one solar manufacturer for process development activity and we have engagements with several others. We have demonstrated 1% cell efficiency improvements above baseline. Additionally, customers have told us they can achieve a substantial reduction in process steps using implants for their future cell designs. We anticipate that the combination of higher efficiency and lower cost will provide a great opportunity next year for us in the solar market.

Our investment to address major customer challenges over the last year has resulted in significant new capabilities that continue to widen the gap with competition and provide Varian with new market opportunities that will drive future growth. We anticipate we will drive our market share and margins beyond the levels we achieved in the last upturn, and we are optimistic we will be able to drive growth into significant new markets for Varian.

I want to thank all of our employees for their contributions to helping us manage through the downturn and positioning Varian for continued growth in the upturn.

We are now ready to take your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question will come from the line of Patrick Ho of Stifel Nicolaus. You may proceed.

Patrick Ho – Stifel Nicolaus

Thanks a lot. Congrats on getting back to profitability, guys. First, a housekeeping question, Bob. Stock options and would the 23% tax rate be usable for the rest of fiscal year 2010?

Robert Halliday

Yes, I think you should use that for the tax rate. And it might bump around, but that is our planning mode. In terms of the stock comp expense, we had a total of 4963 on the quarter, and it was a debit of 184 to cost of product revenue, another caused debit of 160 to service. R&D was a debit of 1025 and there was charge also to mark in general and administrative of 3594. That should total to the 4963, Patrick.

Patrick Ho – Stifel Nicolaus

Great. In terms of the business conditions, what you are saying out there, can you just characterize what you are seeing from the memory die and whether we are starting to see I guess either these technology conversions over the capacity buys that will give the second leg in terms of this upturn that we are starting to see right now?

Robert Halliday

We are seeing a little more heavily personally in our Q2 – some at the end of Q1 and some in the fiscal Q2. What we are seeing is some DRAM buys, some Flash buys, some of what we got this quarter and forecast for next quarter, some people doing some size conversions, there are a few used tools. But after that runs out, we are going to see a lot more new tools, I think.

Patrick Ho – Stifel Nicolaus

Okay, great. And a final question from in terms of the foundries. Obviously, they have been spending for the past few quarters and based on what TSMC said this morning, it looks like those spending trends will continue at least for the near term. What have you been hearing from them in terms of I guess this really sudden pickup in aggressive spending? Is it them just trying to catch up after years of under-spending or do you feel that they really are behind the ball at the ForEx node and that is why they're playing catch up at this point?

Robert Halliday

Yes, I will give it a shot. We are seeing pretty broad based and it seems sustainable for a little while, foundry spending, it is not just TSMC. And it just looks like the production has gone up a lot from the ForEx node in terms of devices and my understanding is that is where they get a lot of demand for things like the handheld devices, you know the iPhones and things like that. So we see it pretty sustainable, based on their end-user demand.

Patrick Ho – Stifel Nicolaus

All right, thanks a lot, guys.

Operator

Our next question will come from the line of Krish Sankar of Banc of America. You may proceed.

Krish Sankar – Banc of America

Yes, thanks for taking my question. I had a couple of them. One, Bob, I was just trying to understand the parsing of memory exposure for you guys. If I back out the PLADs to – your memory exposure is running abnormally low, while someone like Lam is already seeing pretty good buys from memory. So, is it just till the used equipment that it is impacting or is your equipment from the last cycle share gains still being extended for the next technology node?

Robert Halliday

There is a couple of things going on. I think they are buying a little bit ahead at the Lam guys frankly and the second thing what we see is some of the customers like Samsung are doing some size conversions, 200 mm, 300 mm and those are quite profitable for us, but it is not the same as a new tone from the total revenue. Now that is transitional, they don’t have a zillion of those to do. The other thing is, we have had some used tools; for instance in our quarter, there were seven used tools that passed through our P&L, so those again are transitional. So I think that is what is going on there, Krish.

Krish Sankar – Banc of America

Got it, okay. And then, in terms of the December quarter, how many PLAD tools are you planning to recognize revenue on?

Robert Halliday

I think in the next two quarters, we have quite a few. I think there is only a couple in the December quarter, just because of timing. We are looking at the strong quarter.

Gary Dickerson

I think it is 10 over the next two quarters.

Krish Sankar – Banc of America

Okay. And so, how do we think of like some of fiscal year basis, fiscal year 2010 versus 2009, the PLAD revenue opportunity for you guys?

Robert Halliday

I think probably more than doubles, frankly.

Krish Sankar – Banc of America

More than doubles, great, all right. And then just last question, did you guys talk about your backlog? I mean you do it at the end of the fiscal year usually.

Robert Halliday

Yes, we put it in the K. It is probably about similar to last year.

Krish Sankar – Banc of America

All right. Thank you.

Operator

Our next question will come from the line of Peter Kim of Deutsche Bank. You may proceed.

Peter Kim – Deutsche Bank

Yes, thanks for taking my question. I was wondering if you could talk about any volume DRAM or large memory spending on the horizon. I mean, are customers looking at talking to you about any capacity expansion over the next six months or so?

Robert Halliday

Yes, we are saying a bit more heavily weighted for the March quarter I would say.

Peter Kim – Deutsche Bank

And they haven't started booking these tools yet, they are just in the early discussion phase?

Robert Halliday

Well, unfortunately, those customers that you talk about give you order POs a week before you ship. So booking is not a good indicator.

Peter Kim – Deutsche Bank

All right.

Robert Halliday

Probably what they are doing at this point in time is giving us visibility into delivery, so that we have the spots available. And that is usually a pretty good predictor of what is going to happen. As Bob said, March quarter for us is pretty strong for memory. It is also pretty strong for foundry. But the memory is stronger in the March quarter.

Peter Kim – Deutsche Bank

And these are customers, leading-edge customers that are fairly reliable?

Gary Dickerson

Yes, yes.

Peter Kim – Deutsche Bank

Okay. And then if I could get in one more question regarding the CMOS image sensor, I mean this is a high-energy opportunity and presently, your market share in that segment is not dominant as you are in other segments. I was wondering if you could kind of give us an idea about what you think the market share could be in 2009 and 2010.

Robert Halliday

Well, so for this year, market share in high-energy should be around 50%, which we had set for a goal. So we have made a lot of progress in high-energy and especially in CMOS image sensor, we have an extremely high share of that market and as I mentioned this last quarter, we penetrated another large customer with high-energy; and over the next six months, we are anticipating we will penetrate additional customers in that segment. So that one is a very good growth opportunity for us.

Gary Dickerson

I think particularly in Japan it is interesting for us also.

Robert Halliday

Yes.

Peter Kim – Deutsche Bank

Typically high-energy tools tend to be very expensive as compared to other implant tools and they tend to be – in my understanding is that the margins are a little bit better on those tools as well. Do you expect that the increase in market share in high-energy to have an ongoing positive gross margin impact to your company?

Robert Halliday

It depends on what you are shipping and to whom. High energy long-term should be equal to our corporate average. Right now, it is probably a little under our corporate tool averages, although the one that we penetrated this last quarter was very good. I think it ends up being around the same, but right now, it is slightly under, just because we are getting penetrations in small volumes.

The other thing that is interesting about CIS, I hadn't realized until I delved into it myself is that the implant concentration in terms of the number of tools per wafers done is much heavier there too, so that is a plus for us.

Peter Kim – Deutsche Bank

Great. Thank you.

Robert Halliday

Welcome.

Operator

Our next question will come from the line of Weston Twigg of Pacific Crest. You may proceed.

Weston Twigg – Pacific Crest

Hi, I just wanted to dig into the (inaudible) implant opportunity. Just wondering – you know, you mentioned one customer that is implementing it now. How big is that business and then would it be the same size for other customers if they adopted that technology?

Robert Halliday

Yes. So, the one customer that is implementing right now is about a tool every 15,000 wafer starts. We are working with some other customers where the implementation is a little bit different, where it could be on the order of one every 8,000 wafer starts. So it is pretty significant, the more – for us, to get adoption at additional customers has a very positive impact on our temp.

Weston Twigg – Pacific Crest

Okay. And that adoption I assume there is a sort of early development programs to it, so would that be more of a 2011 revenue stream or do you expect that to ramp up in 2010?

Robert Halliday

Yes, I think probably not much in 2010, probably more 2011. You know, it takes – each one of these customers the integration scheme is a little bit different, but I think we have talked about SADPO before. The big advantage for customers if they can implement this process is that they eliminate one add step and two deposition steps. So from a cost standpoint, there is a significant advantage. The other advantage is that by eliminating those steps, you know our tools are so clean low particles they also have a yield improvement by going with our process. But as I said, again, we have to go to the device integration or the process integration with those different customers. So it is probably not a big impact in 2010, like you said, more 2011.

Weston Twigg – Pacific Crest

Okay, and then back to the CMOS side, you mentioned that one of the largest customers in 2009 was a CMOS customer in Japan. How much revenue was from CMOS in 2009 and how much do you expect to get in 2010?

Gary Dickerson

That is a good question. I don't have that handy, Wes. My suspicion is that it grows in absolute dollars for us in 2010 but not as a percentage because we are seeing more rapid growth in the traditional DRAM, Flash, and foundry markets. So, I think it is incremental for us, either have the numbers handy in terms of the breakout.

Weston Twigg – Pacific Crest

Okay, thanks.

Operator

Our next question will come from the line of Ben Pang of Caris & Company. You may proceed.

Ben Pang – Caris & Company

Thanks for taking my question. First, on the spare parts kind of the growth, do you think your customers have restocked to the level that they expected or taking care of all of their maintenance needs to anticipate growth in 2010?

Gary Dickerson

I think, Ben, this is my opinion. I think we have got through some of the restocking a few months ago. I think the big drivers now are tool utilizations – tool utilizations is running hotter and incremental tools were shipped and tools coming off weren't.

Ben Pang – Caris & Company

Okay. And kind of more of a long-term question. You have commented on a lot of your new products, including the solar. Do you need to change your field service organization or add to that in order to serve some of these new markets?

Robert Halliday

No, I think from an application standpoint, those are – there are some differences in support, but from a field service standpoint, it should be fairly similar to what we have right now and the residual value both tools is pretty good. So the future service business from that market will be positive for us.

Gary Dickerson

The most interesting, Ben, is the physical tools are probably not that similar, so I think from a field service, we are probably in pretty good shape, maybe the allocation geographies a little bit. What is really interesting for me is some of the – what I will call device people that we have hired in the last few years are incredibly good at predicting how when we make a change to an implanted solar wafer, how much the efficiency will come out in predicting the performance. It is really incredible how good they are at that and that process know-how is going to serve us well.

Ben Pang – Caris & Company

That is very helpful and good luck on your new products.

Robert Halliday

Thanks.

Operator

Our next question will come from the line of Edwin Mok of Needham and Company. You may proceed.

Edwin Mok – Needham & Company

Hey, thanks for taking my questions. First of all, (inaudible) increased sequentially into the December quarter. Is that the new norm for you guys and assuming your revenue improved on the environment, do you expect your opportunity to go up?

Gary Dickerson

Yes, I think it – the most likely scenario, Edwin, is I kind of think we have got some upward momentum on revenues, gross margins, and some expenses. You know, we won't be doing the shutdowns after this quarter; that is our plan. So we still have seven days of shutdown in the December quarter. So with people working full-time, some OpEx comes up. I think we will also incrementally invest a little more in R&D, including frankly the solar stuff. So I think the expenses will drift up a little more in Q2, frankly.

Edwin Mok – Needham & Company

Okay, that was helpful. And then, Bob, you usually give out what do you think the percentage of memory logic foundry will be in the coming quarter. Can you help us out with that and also how do you look at that breakout for fiscal year 2010?

Robert Halliday

Yes, I don't have all of 2010 handy. I think directionally, Q1, we are going to still have a strong foundry quarter, pretty good memory quarter, a pretty good logic quarter and memory is okay. I think what we are seeing is more memory in Q2, when I looked in Q2; it is a strong memory quarter for us.

Edwin Mok – Needham & Company

Okay, great. And then finally just on non-system revenue. We see a pretty high percentage of your total revenue, is it still like around a 40% range and besides, upgrades, is it mostly unfair and can you help us out with how you look at that going forward?

Robert Halliday

No, it is not as high, because although upgrades, products, and service, those three components have all grown, it has declined as a percentage, because the top line has grown in Q4 and it is going to grow in Q1. So we have got good margins on that stuff, but the greatest percentage of the growth is tools. So it is going down as a percentage.

Edwin Mok – Needham & Company

Great, that is all I have. Thank you.

Operator

Our next question will come from the line of C.J. Muse of Barclays Capital. You may proceed.

C.J. Muse – Barclays Capital

Yes, good evening; thank you for taking my questions. I guess, Bob, first question a circle back for you coming earlier you talk about transitional currently with 200 mm upgrades from the memory side. When do you think that ends and when do start to see new 300 mm tools ordered, particularly from the memory side and non-PLAD?

Robert Halliday

I think we see some incremental ones in Q1, but I think we see a lot more in Q2. I think the used tools, for instance, there were seven in this quarter, I think there is four or five next quarter and then it goes down more after that I believe. In terms of size conversions, I think they probably peak out in Q1, but I'm not sure of that yet.

C.J. Muse – Barclays Capital

Okay, great. And then on the PLAD side, considering the new Flash customer as well as DRAM continuing to adopt, do you think in calendar 2010 you can get to the kind of levels you did in calendar 2008, which is roughly 75 million?

Robert Halliday

5 million of what?

C.J. Muse – Barclays Capital

Of PLAD, sorry.

Robert Halliday

PLAD. Yes, we could do that. Yes, we might beat that.

C.J. Muse – Barclays Capital

Okay, I guess within that, what kind of mix do you anticipate between DRAM and Flash?

Robert Halliday

I think it will still be more of a lot more DRAM than Flash, but I think we could have a couple of customers in Flash. Flash is more of a ramp in 2011, C. J., but I think we are going to place; I think we look pretty good in 2010 to place some.

C.J. Muse – Barclays Capital

Great. And then on the material modification side, do you anticipate revenues there to be driven by high-current upgrades or by new tools, at least over the near-term?

Robert Halliday

That is a good question. I think there will be new tools, because for some reason I would be in different parts of the fab too. You know, the question on that is some of the things you might go how many layers to go, because you might go different places than just the gate right, so you might do one layer to strike kind of stuff. So it would be a different pile of fabs. So I think there will be new tools.

C.J. Muse – Barclays Capital

And then, last question from me, Bob. Personal question, how many innings do you think Petey will go tonight?

Robert Halliday

Five, a little over five.

C.J. Muse – Barclays Capital

Thanks.

Robert Halliday

I have already thought about it. For all the New Yorkers on the phone, I wish you evil tonight. I don't wish you well.

Operator

Our next question will come from the line of Satya Kumar of Credit Suisse. You may proceed.

Satya Kumar – Credit Suisse

Yes, hi, Bob. Would you be able to give a quick percentage of revenue from memory and non-memory in September and December?

Robert Halliday

We gave September, right? September was mostly foundry for us. Memory was 33% for us in September. December, it still stays very high foundry for us. We are seeing memory pick up more aggressively for us in terms of new tool sales in the March quarter.

Satya Kumar – Credit Suisse

Okay. Right now, what portion of your R&D and SG&A are you allocating to the non-traditional implant products?

Robert Halliday

I have got a graph here, I'm not sure it is precisely right, but I think in a couple of years. On the growth type stuff in 2007, it was like 4%, in 2009, it was like 18% and in 2010, it could be as much as 30%.

Satya Kumar – Credit Suisse

OpEx we are talking about or R&D?

Robert Halliday

R&D. OpEx is incremental to that, but that was R&D I gave you.

Satya Kumar – Credit Suisse

Is it roughly similar for SG&A?

Robert Halliday

No, you are mostly look at marketing. G&A is pretty much overhead, right, except for me. Marketing is incrementally, we are hiring there, but it is not the same order of magnitude as R&D, where we have like tool expenses and materials and stuff. So it is not similar.

Satya Kumar – Credit Suisse

So what portion of your December revenues are coming from these new products and can you remind us the total opportunity and your revenue targets in 2010 for these non-traditional implant products?

Robert Halliday

Well, you have got a couple of things. You have got new markets like solar and then you have new applications, which would be like SADPO, (inaudible), things like that. Solar, we have shipped a tool, but it wasn't a revenue tool and we are reasonably hopeful we are going to ship in several other tools in fiscal 2010. Whether they are revenue or not, I am not quite sure about the acceptance criteria frankly. In terms of additional applications markets, our goal is to get that up around 10% increase, maybe.

Gary Dickerson

Yes, I think the number could be $70 million or $70 million to $100 million, something that.

Satya Kumar – Credit Suisse

So $70 million to $100 million of incremental revenues beyond the traditional high current, medium current high-energy tools.

Gary Dickerson

Well, they might be those types of tools, but these are new applications.

Satya Kumar – Credit Suisse

Yes, yes, okay. And, you know, longer-term, if I look at your revenues as it is coming off of the trough levels, if I look at Lam or someone like (inaudible), they are going up roughly 3x from trough shipments under it, if you look through December. You guys are up more like 2x and if I look at December shipments as a percentage of peak, you are up to 50% with this 70%. Is there like a reason to think that there is a structural lower growth starting to happen with implant as we go into this up cycle?

Robert Halliday

I don't think so. I think we have a couple of tactical problems. I will give you an interesting anecdotal observation. When we give guidance at the end of April for the (inaudible), we were reasonably conservative and we didn’t quite see even the foundry business coming, which hit us really hard the next few months after that and really picked up aggressively. And I think it is little bit the same way frankly right now with memory. I think they are buying implant a little bit later in the upturn. I think they buy litho first and then sort of etch and deposition, why, because I think there is a few of these implant tools that are moving around early in an upturn. They do some size conversions and they bought some used tools. So I think that delays us a little bit on the upside. Other than that, we look at some of this growth stuff. We talked earlier about whether you are doing some of this lithos enabling stuff, not just for gates, but level 1, level 2, you know, we never really talked about that stuff before. So that is new applications for us.

Gary Dickerson

You know, I think also we look at 2010, as Bob said, the March quarter for us looks to be pretty positive and 2010 overall looks positive. The growth of the PLAD business should be a large contributor for us in 2010 and there are other things in terms of device architectures that will be positive for us. You know, we have had focus on developing some of these new applications, but it takes time to do their process and device integration before that starts really materializing in terms of orders and revenue for us. But I think 2010 will be a major transition for us in realizing some of the work that we have done over the previous two or three years.

Satya Kumar – Credit Suisse

Okay, and lastly on the competition front, looks like you are taking some share in the high-energy segment this year. What is happening in the medium current segment and specifically how are the Japanese competitors missing and the old I guess how are they doing, what are you seeing on the competitive front?

Robert Halliday

The market share for us in 2009 is going to be up. We should be more than 70% overall in terms of market share. In Japan, we anticipate that we will be around 50% high energy. We have also gained versus competition. And we have also invested as we had talked about earlier with different enhancement store technology focused on device performance and yield that really widen the gap. So I would anticipate again, we had a good year in 2009 versus competition and 2010; we should further widen the gap.

Satya Kumar – Credit Suisse

All right. Thanks.

Operator

(Operator instructions) Our next question is a follow-up from the line of Krish Sankar of Banc of America. You may proceed.

Krish Sankar – Banc of America

Yes, hi. A quick question, Bob. When you look at like the OpEx going up $5 million, you gave a bunch of reasons and one of them was in some of the temporary cost coming back. So how do you think of the temporary cost addition through your fiscal year 2010 and once it all – how much of the temporary cost what is the dollar figure that is going to come back and how do you look at the incremental margin going forward?

Robert Halliday

Well, I think putting sort of the picture together, we are optimistic that – I'm going to do the whole thing a little bit. Revenues in the March quarter were up. We are reasonably optimistic our gross margin will stay strong. And we do see some of the expenses coming back. Probably because some of the steps are calendar related and that is the January quarter. Even with that, I think our operating margins will have a good shot to improve frankly in Q2. I think after that quarter, the expenses stay pretty much flat.

Krish Sankar – Banc of America

Got it. All right, thank you.

Operator

Our next question is a follow-up from the line of C.J. Muse of Barclays Capital. You may proceed.

C.J. Muse – Barclays Capital

Yes, hi, thanks. Just a quick follow-up on the solar side. I know it is early, but I was hoping you could kind of walk through what you think the cam opportunity is there.

Robert Halliday

Well, we have numbers – so basically it is somewhere around 3 to 5 tools for hundred megawatt line roughly is the way we model it. And depending on how we drive adoption, it could be a really big market for us.

Gary Dickerson

Yes, if you look at the sort of diffusion stuff that is out there, we take a significant piece of that frankly.

Robert Halliday

So you can model it into the hundreds of millions of dollars in terms of an opportunity. If we can displace all of the current types of tools doing similar process steps. If it works out well, C. J., in a couple of years, it is a couple of hundred million of revenue.

C.J. Muse – Barclays Capital

Thank you.

Operator

Our next question will come from the line of Stephen Chin of UBS. You may proceed.

Stephen Chin – UBS

Hi, Gary and Bob. Nice job on that September gross margin. If I look at the December guidance on the gross margin, I get an incremental gross margin of about 52% in December. Is that the right way you think, Bob, to model the business going forward, assuming sales continue to increase quarter over quarter?

Robert Halliday

You know, somebody else asked that. I don't think of it usually that way, but I think you are probably pretty close. Because I think the gross margin is pretty good. I think the – we are starting to get absorption of factory; the systems gross margins are pretty good. It is a pretty good mix of tools. I mean, in this quarter, frankly, I was pleased with the gross margins we had because as I noted earlier, we had seven used tools, we are drawing gross margins, but still we had very strong margins in the quarter. So it is probably pretty close.

Stephen Chin – UBS

Thanks, Bob.

Operator

Our next question will come from the line of Jagadish Iyer of Arete Research. You may proceed.

Jagadish Iyer – Arete Research

Hi, Bob and Gary. Two questions. First question is, how should we think about the split between high current, medium current, and high energy for 2010? And as a quick follow-up on the solar side, Bob, I didn't want to beat up on that, but I just want to find out what kind of a milestone should we look for in – is it going to be in 2010 or is it going to be possibly in 2011? Thanks.

Robert Halliday

So in terms of solar, it would be improving solar efficiency, shipping tools, getting accepted, sort of design tool record (inaudible) we will use in semiconductor that is the type of stuff we are looking for in solar. There may not be as many revenues, because you are getting design type recognition and efficiency gains.

In terms of the split of the business, the split of the business next year, historically, high current is about 50%, medium current is about 32%, PLAD continue to grow though. So if you look at next year, it is probably going to continue to be strong high current, probably pretty close to that but you will probably continue to regain at PLAD versus high energy. So PLAD could be up significantly in terms of the market. It could be 8%, 15%, maybe 12%, depends; it is still early in the year to predict that.

Jagadish Iyer – Arete Research

So maybe PLAD could be over 10% at least.

Robert Halliday

Yes, I think so.

Jagadish Iyer – Arete Research

Okay, that is helpful. Thanks, Bob.

Operator

Our next question is a follow-up from the line of Edwin Mok of Needham and Company. You may proceed.

Edwin Mok – Needham & Company

Hey, Bob, sorry to beat on the solar thing. I was just wondering, I think you guys talked about shipped, that you have shipped the solar too. I was wondering when do you expect to see revenue on that.

Robert Halliday

That would be till end of fiscal 2010.

Gary Dickerson

Yes, it is sort of a learning tool and it is going pretty well, but it is an early tool.

Edwin Mok – Needham & Company

Great. That is helpful. And then, just on PLAD, you have talked about before that you guys are working on some project with the foundry guys. Care to update us on how is the progress going there?

Gary Dickerson

I think that is a longer term, it is not something that will hit revenue in the near term. We are making progress on 22 nm with some different applications, but there is nothing that is going to be incremental revenue for us in 2010.

Edwin Mok – Needham & Company

Great, thanks for clarifying that. Thanks.

Operator

This concludes the question-and-answer portion of today's conference. I will turn the call back to Mr. Robert Halliday for closing remarks. Sir?

Robert Halliday

Well, thanks very much for joining us today. There were places where we made money in the September quarter, we are going to make some more money in December and frankly, our ramp looks pretty good into March. So we are pretty optimistic with the sustaining and growing. So it has been a tough year. We appreciate everybody hanging in with us, but it looks like it is getting better. So, thanks very much for your time tonight and if you have any questions, feel free to give us a call. Thank you.

Operator

Thank you, sir, and thank you for your participation in today's conference. You may now disconnect. Have a great day.

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