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

F2Q10 (Qtr End 04/02/10) Earnings Call Transcript

April 29, 2010 5:30 pm ET

Executives

Robert Halliday – EVP and CFO

Gary Dickerson – CEO

Analysts

Patrick Ho – Stifel Nicolaus

Peter Kim – Deutsche Bank

Edwin Mok – Needham & Company

Paul Thomas – Banc of America Securities/Merrill Lynch

Malhotra [ph] – Credit Suisse

Mars Aman [ph] – UBS

CJ Muse – Barclays Capital

Mark Delaney – Goldman Sachs

Jagadish Iyer – Arete Research

Operator

Good day, ladies and gentlemen and welcome to the second quarter 2010 Varian Semiconductor Equipment Associates Inc earnings conference call. My name is Melalia, and I am going to be your coordinator for today.

At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator instructions) I would now like to turn the presentation over to your host for today's conference, Mr Robert Halliday, Executive Vice President and Chief Financial Officer. Please proceed.

Robert Halliday

Good afternoon. I am Bob Halliday, Varian Semiconductor's CFO. I want to thank you for joining us for our fiscal 2010 second quarter conference call 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-K filings. 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 would like to discuss first our 2009 market share gains and secondly, the underlying drivers for these market share gains, any of which leverage our other growth opportunities.

Now, I will review second quarter results. Second quarter 2010 revenue was $204 million, which was above our guidance of $186 million to $196 million. Our actual revenues exceeded our guidance, as we aggressively ramped our operations in response to customer requirements.

Second quarter revenue increased from the first quarter by $62.7 million, mainly due to increased system sales. In the second quarter of 2010, unit shipments were approximately 56% foundry, 37% memory, and 7% logic. Second quarter 2010 earnings per share of $0.51 was above the high end of our guidance of $0.38 to $0.43 per share. The geographic breakdown of our revenue this past quarter based on fab location was Asia 87%; North America 10%, and Europe 3%.

Our PLAD installed base has now reached 56 tools including an evaluation tool at a major non-memory customer. We revenued six PLAD tools in the second quarter. Second quarter 2010 gross margins were the highest in our history excluding royalty legal settlements. At 49%, gross margins increased 0.4 percentage points from 48.6% in the first quarter. This increase was due to strong margin performance within systems and non-systems as well as improved factory absorption.

R&D expenses of $24.3 million were slightly above our guidance and up approximately $2.6 million from Q1, as we ramp spending in anticipation of product introductions in our core and new markets. Marketing, general and administrative expenses increased to $32 million in the second quarter. These expenses increased as our cost reduction activities ended in December. Additionally, even in the last few months, our expectations for full year business levels have not increased causing some of our volume related expense to increase.

Income tax expense for the quarter was $5.4 million resulting in an effective tax rate of approximately 12.3%. Our tax rate in the quarter benefited from one-time items of $2.3 million or 5 percentage points, primarily related to the closure of outstanding items from prior years. In both the quarter and year to date periods, our tax rate also benefits from a heavier weighting of international business versus domestic business, and validates our 2007 decision to align our legal entity structure with a geographic mix of our customers and suppliers.

At the end of the second quarter, our full time equivalent headcount was 1556, up from 1418 at the end of the first quarter of fiscal 2010. 124 of the additions out of the total increase of 138 were in operations and R&D. We have 230 contract employees in our total headcount of 1556.

Our cash and investment balance increased approximately $22 million in the second quarter to $400 million, all of the increase due to cash flow from operations. Second quarter capital spending was $2.6 million, primarily for demo equipment and IT improvements. Depreciation expense for the quarter was $3.9 million. Now, we will turn to our Q2 guidance.

In the third quarter of fiscal year 2010, we anticipate revenues of between $220 million and $230 million. We anticipate that gross margins in Q3, 2010 will be slightly lower than gross margins in the second quarter of fiscal 2010. In the third quarter, we expect R&D expense will be up $800,000 as we continue to develop products that will expand the adjustable markets for our technology and products.

Marketing, general, and administrative expenses will be flat in the third quarter. We are increasing our investment in marketing evaluation tools at customer sites, which inevitably drives the adoption of our new products and applications. We are offsetting these costs with reductions in G&A expenses.

Our operating margins should be up approximately 2 percentage points in Q3, 2010 from Q2, 2010. We expect our tax rate to approximate 18% in the third quarter and 17% for fiscal year 2010. As a result, in the third quarter of fiscal year 2010, we expect to earn approximately $0.55 to $0.60 per diluted share. We expect capital expenditures in the third quarter to be approximately $3 million.

I would like to spend a minute on our business model. We have raised the ceiling of our core business model. In calendar year 2000, our revenues were $804 million and peak headcount was 2271. In fiscal year 2007, revenues were $1.55 billion and peak headcount was 2035. Annualizing our revenue guidance of third quarter fiscal year 2010, our revenues would approximate $900 million and headcount would approximate 1630. Thus Varian’s revenue per headcount is increased from approximately 350,000 in 2000 to 520,000 in 2007 to 550,000 for the third quarter annualized in 2010. Varian has greatly increased its revenue per headcount in the last ten years. We think Q3 revenues and revenue per headcount are far from peak but are indicative of the continuing leverage in our business model.

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

Gary Dickerson

Thanks Bob. Our investment in products and process technology is intended to accomplish three goals, share growth, margin growth, and TAM growth. All of these efforts center on our ability to find high value problems, and deliver highly differentiated solutions to our customers. Today, I would like to discuss some of the results of our efforts.

Recently released market share reports from Gartner Dataquest and VLSI Research give us an opportunity to measure how well we have done with our investments and technology. The reports indicate that Varian increased its overall market share in 2009 by over 10 percentage points. Our success in the ultra high dose market with the VIISta PLAD tool continued in 2009. Varian maintained its 100% market share position.

In 2010, we anticipate we could meet and potentially exceed our previous PLAD revenue peak. In addition to the current PLAD market, we continue to drive adoption of new applications. Last quarter we shifted our first PLAD system to a flash fab for revenue. In 2010, we are working with customers to develop several new applications for memory, foundry, and logic fabs. We continue to advance our PLAD technology for conformal doping and for new precision material modification applications. These new applications address the needs of advanced transistor structures, high aspect ratio conformal doping, and new device architectures for memory, logic and CMOS image sensors.

The high current market is driven by device performance and yield requirements. This was true six years ago when the industry recognized the need for single wafer implanters to enable 65 nanometer devices. And it is true today as our customers look to Varian to provide enabling technology to increase device speed and reduced leakage.

In 2009, Varian achieved over 80% market share in the high current segment. Varian is the high current tool of record at virtually every customer worldwide. In 2010, we will invest in new applications and product development to grow the high current TAM and provide even greater value.

We continue to work closely with many customers on damage engineering capability through PTC II and Carborane. Also, new materials modification applications like contact engineering continued to generate significant pull from our customers. We increased the high current gap with the introduction of the HCS XP [ph]. This system has significantly improved low energy performance and enables better device performance by having improved angle control and dose uniformity. We have validated the HCS XP performance and are in the process of ramping this tool in manufacturing.

In 2009, Dataquest reported our medium current market share as 78%. We think our medium current share was a little lower and our high-energy share was a little higher as several of our tools were segmented as medium current that we classify and sell in the high energy market segment. Overall, our medium current market share increased by over 20 percentage points in 2009. Precision, flexibility, and reliability have made the VIISta 900XP the industry standard. Also we are introducing our latest medium current tool the 900XPT. This tool improves uniformity and angles, produces turn time, and enables Varian to continue to widen the gap with the competition.

Our position in the high-energy market continued to improve in 2009. VLSI Research reported our market share in 2009 to be 50%. Dataquest spent some of the high-energy tools in the medium current market, which still resulted in an increase of nearly 10 percentage points for Varian. Looking forward, we see growth in emerging markets such as CMOS image sensors where demos are showing that our high-energy products provide unique advantages.

We are currently introducing our new VIISta HE XP system and anticipate penetration into additional accounts with this product.

Our focus on solving tough customer problems and improving device performance and yields has resulted in across the board share gains validated by our customers. In addition to widening the gap with our competitors, our focus over the last several years has been to develop new applications in markets that leverage Varian’s differentiated solutions. We are leveraging our core intellectual property and skills to raise the ceiling on Varian’s opportunities.

We have developed new and valuable applications for our traditional customers in the implant module. For instance, in the foundry segment, the number of implant applications has gone up dramatically. Varian is focused on helping our customers solve some of the tough next generation problems for handheld devices. In addition to enabling our traditional implant customers to scale next generation devices, we are engaged with semi customers to help solve tough problems in other process modules including films, etch, and litho.

We are also taking our core precision materials modification technology and expertise to new potential customers and in solar and other markets outside the semiconductor business. Varian’s value proposition in these markets really resonates when one realizes that Varian the ion implant company is really the world’s leader at precisely and efficiently modifying the electrical and physical properties of materials. Varian has world-class capability to provide extraordinarily precise materials modification for tough next generation problems. We will be doing a deeper dive into new precision materials modification markets next quarter.

Right now, one year removed from the second quarter of 2009, we are pleased to say that we are busy with our current markets and making great progress with our emerging markets. In hindsight, our 2009 investments were well placed. We anticipate great future returns.

We will now take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Patrick Ho with Stifel Nicolaus.

Patrick Ho – Stifel Nicolaus

Thanks a lot and congrats on the great quarter and the great start to the year, I guess better than the Red Stocks have started.

Robert Halliday

We will take no more questions for this caller.

Patrick Ho – Stifel Nicolaus

Bob, if I could just get the stock options breakdown before I get to the rest of the questions.

Robert Halliday

Sure, I got it right here in front of me, the cost of product revenue, plus cost of service revenue were $431,000. We have research and development 1294, marketing G&A was 4614, and we have a credit to the tax line of 1092 for net impact of 5247.

Patrick Ho – Stifel Nicolaus

Great. I think one of the big debates out there right now in terms of the semi industry trends is the second half outlook, and how things are trending. Based on some of your peers’ commentary last week, it sounded like things incrementally have improved from where they were three months ago. I guess what is your take of the current situation as you look into the second half of the year?

Robert Halliday

I know nothing, but we tend to be positively biased on the second half. I mean, our visibility obviously is best for the quarter we just gave. The quarter beyond that we have some visibility, and I use the words I have been using for three or four months now that I tend to be positively biased towards that. When you get into the December quarter, it is much more subjective and qualitative. By subjective guesstimate is it feels like this thing has a little more momentum. So, I tend to be positively biased by it.

Patrick Ho – Stifel Nicolaus

Great. With some of the new opportunities that you talk about particularly on the solar side that you mentioned in last quarter in great detail, do you expect to have shipments this year for evaluation to these customers, and when do you expect to I guess recognize initial revenues on those systems?

Gary Dickerson

We continue to make good progress in solar. The value proposition for customers is that with implant replacing the furnace process that is we are increasing cell efficiency and also we are eliminating process that reduces cost. So a combination of higher efficiency and lower cost gives us a good opportunity. We are seeing really good response from customers, and as we said last quarter, we expect to have revenue this year.

Patrick Ho – Stifel Nicolaus

Final question, going back on to the semi side of things, foundries were a high concentration or at least 50% of your revenues this quarter, what do you see as the breakdown in the June quarter between memory and foundry?

Robert Halliday

We have not given that split yet. We think we are going to have pretty good strength in both frankly. I think it is going to spread out a little bit to a little broader customer base to.

Gary Dickerson

I think one thing with the foundry as we mentioned in the script, the number of steps are going up for implant fairly significantly. If you go from 65 nanometer to the 40, 45 nanometer to 32, 28, there is really a pretty significant increase in implant steps, more halo implants to improve dry current leakage, specific halo implants for each transistor and in some cases more than one per transistor. More implants to deal with contact resistance issues and more co-implants. So what you have seen is foundry being a really strong driver for us, and it looks like it is going to be a good driver going forward.

Patrick Ho – Stifel Nicolaus

Great, thanks a lot guys.

Gary Dickerson

You are welcome.

Operator

Your next question comes from the line of Peter Kim with Deutsche Bank.

Peter Kim – Deutsche Bank

Hi thanks for taking my question. First, I want to just follow-up on that question about the end market, Intel was talking about accelerating the capacity ramp over the next couple of quarters, and I noticed the mix of logic was relatively low this quarter. Is your expectation for the coming quarters for logic to increase as a mix?

Robert Halliday

What we see Peter, we do see some ramp up there, but right now we are pretty booked out with foundry and memory. So they are particularly strong in the June –

Gary Dickerson

I think it is incrementally more positive as you go out in future quarters.

Peter Kim – Deutsche Bank

Okay. And then your memory has accelerated pretty nicely this quarter but it still lags relative to the past, your recent past, I was wondering if you could talk about what you think your leverage is to memory in terms of technology upgrades versus capacity. In other words, if we see more capacity buys in memory in let’s say next year, do you think your mix of memory will be stronger?

Robert Halliday

Yes, I think that our position in memory is still very strong and also, when you look at the number of implants as people are going from like 4x, 3x DRAM or 3x, 2x flash is also positive, you see more logic like periphery types of implants, more co-implants and DRAM, and both DRAM and flash you see contact resistance types of issues that are driving additional implant steps, more implants dealing with things like plug implant and DRAM and floating gate opportunities for us in flash.

So on both cases we see really good opportunities in memory. The other thing in Japan we forecasted that we will gain pretty significant share there going forward, and one of the dynamics is that in Japan they were on batch high current tools for a long period of time, and if you look at their mix of medium current versus high current tools, they bought more of medium current tools than maybe some of the other memory companies. What is happening now is the customers are transitioning to single wafer high current, actually you are seeing some of those medium current implant steps also transition to high current which helps us from an overall implant TAM perspective.

Peter Kim – Deutsche Bank

That is very helpful. One last question regarding your market share, you have a very strong and relatively dominant market share and implant across the board pretty much, and I was wondering are customers expressing concerns about second sourcing for implanters?

Gary Dickerson

You do not see that in a lot of cases. There is not a lot of cases where people are splitting the implant purchases. The other thing is that there is a difference in architectures. We have talked a lot in the past about the advantages of dual magnet ribbon beam versus single magnet spot beam types of tools, particle related yields, and angle uniformity, dose uniformity, other types of issues.

Again, we do not see a lot of cases of people splitting these purchases. And the other thing is that as you go to these smaller design rolls, you have more types of process integration issues. So it is not easy for people to split the types of technologies that they are implementing.

Peter Kim – Deutsche Bank

Great, thank you so much.

Operator

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

Edwin Mok – Needham & Company

Hi, thanks for taking my question. Congratulations on a great quarter. Let me first talk about gross margins. So I guess I have a few questions related to that. First is you guys talked about a very low gross margin in the next quarter, is it just a function of less upgrade and more tools, and I have a follow up question to that.

Gary Dickerson

Yes, that is probably it; I am not only talking slightly next quarter Edwin. It is just a mix, the equipments ramping more aggressively than products next quarter, so it is a little bit of that.

Edwin Mok – Needham & Company

Okay, great and maybe help us out a little bit on the solar equipment you guys talked about that you expect the revenue this year, potentially more revenue obviously and doing well in that sector, I was wondering how do you look at gross margin for those products versus some of the –

Robert Halliday

Let me take a shot at that and then Gary can add his comments. What we said is that, and I tend to be a little bit conservative, in this calendar year we have revenues (inaudible) tools and next year the opportunity – we have just counted these numbers, some was $25 million to $30 million mark, and the year after it might be $100 million in 2012.

In terms of the gross margin profile, we think after the initial period they are going to be pretty much the same because fundamentally it is a high current tool. I think the initial tools are a little lower gross margin frankly just because we do not have volume, got some new end station on the end of it that we have got a cost reduce over time. So I think you get to circle around 2012 is pretty close initially it is a little lower, but I think the incremental operating margins are pretty good because the R&D effort for solar tools is not that much incrementally. It is fundamentally our high current tool.

Edwin Mok – Needham & Company

That is helpful; just to clarify those numbers you gave was for calendar or fiscal year?

Robert Halliday

Yes, I hedged it a little bit, I said calendar but it could be fiscal too.

Gary Dickerson

Yes, again, I might be a little bit more optimistic than Bob, in terms of the potential for next year, as Bob said, I think the initial margins will be somewhat lower but the value proposition is pretty compelling with higher sell efficiency and less process that is lower cost. So the engagements we have had with the initial customers have been very positive and we will have the revenue later this year in 2011 we will start to ramp.

Edwin Mok – Needham & Company

Great that was helpful. I have a follow up question for PLAD, so you guys have, it looks like you have revenues (inaudible) for this quarter and shipment has picked up quite a bit, I was wondering – two product questions, first, is that coming from a broadened group of customers that is the first question, and the second thing is on PLAD, if we think about the DRAM market opportunity of appliances talked about (inaudible) is there a way for you guys to just quantify how many PLADs you are going to see for (inaudible)?

Robert Halliday

Yes, I will take a shot at it, your number of 6 is pretty close, it is right, I think we even said it in the script at one point, so 6 is the right number, in terms of where it is, it is still pretty heavily concentrated DRAM, it is getting greater volumes at a couple of customer who had smaller quantities of it. Third thing is in terms of spreading out, we had revenue to two of the flash customers, I think we said one but there might have been two that we are about to get a non-flash per evaluation tools, so this will be foundry logic type customers. So Gary has some more to add to it.

Gary Dickerson

Yes in the logic space we have tools at two different customers working on multiple applications and the initial feedback is extremely positive. So it could be in 2011 we will see some incremental revenue in the logic types of applications.

Edwin Mok – Needham & Company

You said we can quantify what technology you are (inaudible)?

Robert Halliday

So in the logic it is hovering around 2x technology, maybe some 28 nanometer but probably more at the 22 nanometer.

Edwin Mok – Needham & Company

And for DRAM and foundry maybe –

Robert Halliday

Well DRAM is really – there is a heavy adoption of customers right now at the current technology node, certainly in both DRAM and flash next technologies nodes like floating gate for flash, contact resistance types of applications, there is an incremental opportunity for us both in DRAM and flash.

Edwin Mok – Needham & Company

Great that is all I have, thank you.

Operator

Your next question comes from the line of Krish Sankar with Banc of America Securities/Merrill Lynch.

Paul Thomas – Banc of America Securities/Merrill Lynch

Good afternoon, this is Paul Thomas for Krish Sankar. I wanted to ask, I think you said obviously you do not have a lot of visibility into the second half of the year but what your sense is at this point for when we might start seeing orders for new fabs or new shelves, do you think that will happen before the end of the year or maybe a little earlier than that?

Robert Halliday

Yes I think – in other words what you comment is new right, I think it is in the public domain, the global foundry guys are looking at some deliveries for the German Dresden facilities, which really had not been popular later in the year and then you had some other facilities at Samsung [ph] and places like that. So I think that later in the year you will start to see something.

Paul Thomas – Banc of America Securities/Merrill Lynch

And then maybe also back to the second half versus first half, do you see DRAM or NAND being the bigger driver in the second half of the calendar year?

Robert Halliday

Second half of the calendar year, I think both looked pretty good, I am not sure which one is better.

Paul Thomas – Banc of America Securities/Merrill Lynch

I guess it was pretty balanced from both of those.

Robert Halliday

It is my guess.

Paul Thomas – Banc of America Securities/Merrill Lynch

Okay and then maybe in terms of new fab capacity, could you help us kind of think about for 100,000 wafer start say 2x NAND fab what the implant tool might be for that or if there is a different scale number that you guys talked about in the past?

Robert Halliday

Yes it is probably – they do not have any reused –

Paul Thomas – Banc of America Securities/Merrill Lynch

For the 100,000.

Robert Halliday

Yes maybe 25, they could reuse a few tools then it would probably be 112.

Paul Thomas – Banc of America Securities/Merrill Lynch

Okay, thank you.

Operator

Your next question comes from the line of Satya Kumar with Credit Suisse.

Malhotra – Credit Suisse

Hi, this is Malhotra [ph] for Satya. I had a question regarding your market share. You seem to have gained significant market share rights especially in medium current, so just wanted to have like what are your targets for 2010?

Robert Halliday

Our goal that we said, we keep moving the goal, but our goal we said is around 80%, we can exceed that we will keep trying. Our goal a couple of years ago was 70%. We have a fair amount of momentum.

Gary Dickerson

Yes, I think the other thing as I mentioned earlier, in Japan one of the things that is a real positive for us is as the customers are adopting single wafer high current tools, we are actually shifting applications to high current from medium current. So if you looked at the medium current TAM in Japan, it is extremely small but it is incrementally very positive for us because again, those applications are going on our high current systems.

We are also penetrating additional fabs and this is part of the increase in eval expenses, we are right now penetrating additional fabs in both high energy and medium current. That is obviously positive for us in terms of longer term market share.

Robert Halliday

Yes as we mentioned earlier, that is a good point Gary, our evaluation expense is up next quarter, might even be up the quarter afterwards frankly, and those are all tools that we are putting out in customer sites for penetrations, and there has to be a fair amount of pull from the customers to do that.

Malhotra – Credit Suisse

So going to that evaluation expenses, given the higher evaluation expenses with the momentum in the cycle, so is our target gross margin the same as 152 [ph] or is it going to get affected by these evaluation of new products?

Robert Halliday

Evaluation tools are classified as a marking expense not as product costs.

Malhotra – Credit Suisse

I am sorry.

Robert Halliday

They do not affect our gross margin.

Gary Dickerson

Typically, if you look historically, when we shift evaluation tools into new customers, we are penetrating new customers the first tool in the fab is a little bit higher cost with parts, and other expenses that you do not have on an ongoing basis. So I think it is true that there is some drag associated with these penetrations into new fabs.

Robert Halliday

That is true.

Malhotra – Credit Suisse

Lastly, what was your tax rate assumption for the present time?

Robert Halliday

We said for the next quarter 18%, we said the full year 17%.

Malhotra – Credit Suisse

All right, great, thanks. Great quarter guys.

Robert Halliday

Thanks.

Gary Dickerson

Thank you.

Operator

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

Mars Aman – UBS

Hi Bob, this is Mars Aman [ph] calling for Steve Chin. Congratulations on a great quarter. Most of my questions have already been asked but I had a follow up question. Your solar shipments this year, are these going to existing lines or are they going to be going into new lines?

Gary Dickerson

It is a combination of existing lines and new lines.

Mars Aman – UBS

And I do not know if you have talked about this previously but can you provide some color on where regionally these tools are going?

Gary Dickerson

We are engaged – we are not going to obviously talk about specific customers. We are engaged with customers in US, Europe and Asia and it is likely that we will ship tools in all three regions this year.

Mars Aman – UBS

Great, thank you. And then just finally if I may on the tax rate, is the 17% tax rate or the 18% tax rate for the next few quarters, is that the new longer term tax rate?

Robert Halliday

A lot of it depends on mix, if we stay at the same mix of international versus domestic business, 18% is a pretty good number, a little bit of opportunity on that after this year but 18% is a good number.

Mars Aman – UBS

And Bob, I apologize if you mentioned this earlier but did you say how many of the shipments, the tool shipments were capacity versus technology?

Robert Halliday

We did not say, we do not really add them up that way. I kind of think most of this is capacity, it is capacity of leaning edge node, so sort of is it technology or capacity, I get confused on that. I think that this type of volume is capacity.

Mars Aman – UBS

All right, great. Thank you very much.

Operator

Your next question comes from CJ Muse with Barclays Capital.

CJ Muse – Barclays Capital

Yes good afternoon, thank you for taking my question. I guess first one Bob, when you look at the capital in sensitive implant, we reached a historical low in 2009 at roughly 2.7%. And when you look here in 2010, we are mostly strength but also some capacity. What kind of range did we see? Did we go back to the historical kind of 3% to 4% plus, what are your thoughts there?

Robert Halliday

I think we ought to grow wafer fab equipment this year. I think we get high 3s probably, but we are still early in the year.

Gary Dickerson

Yes, I think you know, again I talked about some of the applications, positive application trends for us in foundry DRAM and flash, the other thing we are getting traction with some of the device performance and yield initiatives, you look at something like SuperScan for instance, Carborane, cold implants, the great thing for our customers is that that is positive for them from a device performance and yield perspective. They also from a productivity standpoint are slightly negative but that is a good thing from a TAM perspective. So as customers are trying to drive device performance and yield for some of these future technology nodes, and we see more adoption of these other options that we have developed that is going to be another positive thing for the overall implant TAM.

CJ Muse – Barclays Capital

That is helpful, and I guess within implant, how do you think about high energy in 2010, I know it is more of a DRAM type of business, are we seeing enough capacity there to see a pick up, a major pick up in tools there or does that stay as a low percentage of the overall implant tool set this year?

Robert Halliday

I think it is down from last year as a percentage but the absolute dollars will be up. I think it is probably in the single digit about 8%.

Gary Dickerson

I think it stays at a low percentage. As Bob said, the overall market is up, CapEx is up pretty significantly but as a percentage it is probably maybe even lower than it was. Dollars are up.

Robert Halliday

I think PLAD is probably bigger than higher energy this year.

Gary Dickerson

Yes.

CJ Muse – Barclays Capital

Okay. And last question for me, on your ion product, I guess a two part question, first, have you placed a tool other than your core strategic partner? And then secondly, can you give an update on the handler that you have been working on and whether you have been able to drive the throughput higher?

Gary Dickerson

So, I do not know if we want to talk about the beyond the core strategic partner. We are really –

Robert Halliday

We have other guys lined up who are interested. You said you actually got two relative questions in there CJ, part of daily items are shipping and handling volumes of too many people to get the wafer handling working. Wafer handling is working pretty well so far. We have got a data product line basically.

Gary Dickerson

We are making very good progress on the product itself in terms of hitting the goals that we had for the system. In terms of shipping to other customers, as I said earlier, we anticipate that we will ship to customers in all of the different regions some time later this year. So we see positive pull from customers in terms of fan-out and pretty much on track in terms of our product goals.

CJ Muse – Barclays Capital

Very good, thank you.

Operator

(Operator instructions) Your next question comes from the line of Jim Covello with Goldman Sachs.

Mark Delaney – Goldman Sachs

Hi guys this is Mark Delaney calling for Jim. Thanks so much for taking that question and congratulations on the good quarter. I was hoping first maybe you could talk a little bit more about the customer base in the semiconductor market, what kind of contribution you are seeing among tier two foundry and memory makers?

Robert Halliday

Tier two foundry and memory, well, we are seeing a bigger fan-out I would say in Q3 in terms of buyers. We are seeing that fan-out into more foundry purchases and flash. We are seeing sustained strength in the big memory and foundry guys also. So I think it is spreading out, I think I have seen more of the spread in Q3 than Q2, our fiscal Q3 versus Q2.

Mark Delaney – Goldman Sachs

Great thanks. Do you guys think about how much of your revenue today in the implant market for semis is coming from the non-traditional type of implant that you talked about versus the traditional electrical implant?

Robert Halliday

Sure. We have a bunch of application things going on. So incremental implants in terms of new electrical implants are continuing to grow but also what we call physical implants are growing, we have identified that under the guise of precision material modification, there is about $100 million opportunity circa 2012. I think we could do about $30 million of that this year. We have other customers who are looking at some of the other applications but they have not bought production tools yet.

Mark Delaney – Goldman Sachs

A couple of things and one last one from us, any comments on what you are seeing in the CMOS image sensor market this year?

Robert Halliday

Yes, I will start and Gary might jump in too. We think our tools are actually very well suited for CMOS image sensor. If you look at some of the things that are driving in terms of dot current and noise to –

Gary Dickerson

Signal to noise.

Robert Halliday

Signal to noise ratios our tools look very attractive to them particularly the high energy and maybe down the road PLAD and medium current also. Those guys are not big spenders this year, so we are having positive engagements but they are not spending as much money this year. We are seeing a couple of images [ph] I guess but a couple of the smaller Japanese ones have better figures yet.

Mark Delaney – Goldman Sachs

Great, thanks so much.

Operator

And your final question comes from the line of Jagadish Iyer with Arete Research.

Jagadish Iyer – Arete Research

Hi Bob, hi Gary, two questions, one is you gave a scenario in your Analysts Day about your operating model targets, so I was wondering on – do you think if the second half looks much better than the first half that you might be able to achieve that in 2010?

Robert Halliday

I think we are going to make progress. I think we have an opportunity to continue to improve the top and bottom line in the operating margin line. I think that achieving those targets, which I think we probably identified as sort of circa 2012, probably not going to happen in the second half of this year. I think we are making pretty steady progress on it.

I think the additive benefit which we are getting this year on top of being the last year’s investors’ day is the growth markets are frankly looking a lot more bullish for us than they were in last August. There is a little bit extra spending on that, but I think we are getting more efficient on the quarter to help sustain that. So I think the business model is in very good shape and the growth better than expected.

Jagadish Iyer – Arete Research

Second question is that how should we think about the split now that you have a view of how in the second quarter and how it is likely to progress. How should we think about the different segments for 2010 in terms of the year-over-year growth for high current, medium current flat and high energy so that it will help us in modeling better, thanks.

Robert Halliday

I think that the overall implant growth will be faster than wafer fab equipment as I said. I think that the split within it, I think PLAD will grow as a percentage of TAM, I think that high energy will go down as a percentage of TAM. High current, medium current probably are pretty close to what they were in 2009.

Gary Dickerson

I think one other factor, as I mentioned, the transition of some of the Japanese medium current velocities [ph] to high current, high current business could be up somewhat as a percentage because of that.

Jagadish Iyer – Arete Research

Okay that is all I had. Thank you, excellent quarter.

Robert Halliday

Thanks.

Gary Dickerson

Thanks.

Operator

Ladies and gentlemen, this concludes our question-and-answer session for today. I would like to hand the call over to Mr Robert Halliday for closing remarks.

Robert Halliday

Thanks very much for joining us today. We look forward to talking to you next quarter and it is too early to put in your calendar, we have investor day this August and I look forward to seeing you all in person then. Thanks for joining us today. If you have any follow up questions let me know. Good bye.

Operator

Thank you for your participation in today’s conference. This concludes your presentation and you may now disconnect. Have a great day.

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