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KLA-Tencor Corporation (NASDAQ:KLAC)

F4Q10 (Qtr End 06/30/10) Earnings Call Transcript

July 29, 2010 5:00 pm ET

Executives

Ed Lockwood – Senior Director, IR

Rick Wallace – President and CEO

Mark Dentinger – EVP and CFO

Analysts

C.J. Muse – Barclays Capital

Jim Covello – Goldman Sachs

Tim Arcuri – Citi

Krish Sankar – Bank of America

Stephen Chin – UBS

Casey [ph] – RBC Capital Markets

Peter Kim – Deutsche Bank

Jagadish Iyer – Arete Research

Atif Malik – Morgan Stanley

Presentation

Operator

Ladies and gentlemen, thank you for joining. I would now like to turn the call over to Mr. Ed Lockwood, with KLA-Tencor Corporation. You may begin your conference.

Ed Lockwood

Thank you, operator. Good afternoon, everyone and welcome to KLA-Tencor's fourth quarter fiscal year 2010 earnings conference call. Joining me on our call today are Rick Wallace, our President and Chief Executive Officer; and Mark Dentinger, our Chief Financial Officer. We are here today to discuss fourth quarter results for the period ended June 30, 2010. We released these results this afternoon at 1:15 p.m. Pacific Time. If you haven't seen the release, you can find it on our web site at www.kla-tencor.com or call 408-875-3600 to request a copy.

A simulcast of this call will be available on demand following its completion on the investor section of our 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, 2009 and our subsequently filed 10-Q reports.

In those filings you will find descriptions of risk factors that could impact our future results. As you know, our future results are subject to risks. Any forward-looking statements including those we make on this call today are subject to those risks, and KLA-Tencor cannot guarantee those forward-looking statements will come true.

Our actual results may differ significantly from those projected in our forward-looking results. More information regarding factors that could cause those differences is contained in the filings we make with the SEC from time to time, including our fiscal year 2009 Form 10-K and our current reports on Form 8-K.

We assume no obligation and do not intend to update those forward-looking statements, however, you could be reassured that any updates we do provide will be broadly disseminated and available over the web.

With that, I will turn the call over to Rick.

Rick Wallace

Thanks, Ed. Thank you all for joining our call today. Given that we provided the comprehensive strategic update just two weeks ago at SEMICON West, I'll focus my commentary today on summary highlights of our results and provide guidance for September. Then Mark will follow with a more detailed review of the financials.

Today's numbers demonstrate the KLA-Tencor's market leadership is as strong as ever and the company is executing at a high level delivering exceptional growth in financial performance against the backdrop of a very robust industry environment.

Bookings for the June quarter were $956 million, an increase of 47% compared with March and above our original range of guidance.

During the quarter we saw broad based strength in each of our major end markets, geographies and products including record quarterly bookings and our Reticle and wafer inspection businesses.

Revenues in June grew 17% to $559 million coming in above the midpoint of the range of guidance and non-GAAP earnings per share was $0.70 in Q4, significantly above the original guidance range of $0.54 to $0.62 per share.

The growth we are experiencing in the marketplace today is driven in part by strong adoption of profit control in our core semiconductor markets and increase in contribution from new markets and a healthy services business.

And underlying our strong profitability performance in the June quarter our non-GAAP gross margins of 60% and non-GAAP operating margins of 31%, both record results for KLA-Tencor illustrating continued success in our operations excellence focus.

The healthy profitability and cash generating power enabled our business helped fuel a high level of investment in R&D to enable our customer focus and growth strategies while also providing resources for the company to deliver significant cash returns in the form of dividends and share repurchases.

To that end, KLA-Tencor generated approximately $448 million in cash flow from operations in fiscal year 2010. And we were active in returning value to shareholders, repurchasing over $136 million in common stock and paying cash dividends of approximately $102 million in the year. Additionally, on July 13th we announced that our Board of Directors has authorized an increase in the level of the company's quarterly dividends, $0.25 per share.

This move reflects management and the Board's confidence in our long term outlook for the company as well as the ongoing efforts to reward our shareholders for their continued investment.

Looking ahead, end market demand is expected to remain strong as our customers' businesses continue to grow at a healthy pace.

Average third-party forecasts show semiconductor revenues projected to be up 28% in calendar 2010 with growth also forecasted for 2011. Plants are running today at high utilization levels and our customers are rapidly migrating to new more complex technologies and investing to improve yields and lower costs. All while operating under tremendous competitive and time to market pressures.

In this environment the outlook for profit, controlled investment remains excellent.

KLA-Tencor's market leadership and customer focus, the breadth of our technologies and our ongoing operations excellence position the company to capitalize on this robust industry growth and to continue to deliver strong financial performance as we progress through the cycle. Of course, the driving force behind our success is our strong support and collaboration of our customers and business partners as well as the great execution of our worldwide workforce.

I would like to take this opportunity to thank each of our employees for their contributions in helping KLA-Tencor continue to excel and in shaping our future success.

Turning now to our outlook for the first quarter of fiscal 2011, we see continued strong demand across all major end markets with sustained strength from foundry and memory and solid logic demand. Gross bookings in September are projected to be in the range of 750 to $900 million. We also expect continued strong revenue growth and margin performance with September revenue expected to be in the range of $620 million to $660 million and non-GAAP earnings per share in the range of $0.80 to $0.88.

With that I'll turn the call over to Mark Dentinger for his review of the numbers. Mark?

Mark Dentinger

Thanks, Rick. As most of you know, we present our income statement in two formats, one under US GAAP and the other in a non-GAAP format which excludes amortization and write-down of intangible assets associated with acquisitions, expenses associated with our stock options-related litigation and certain costs and expenses which are outside of our core operations, such as restructuring charges and unusual tax items. Our balance sheet and cash flow statements are presented in GAAP format only.

Most of my prepared remarks in operations will refer to non-GAAP information, but where I reference GAAP numbers I'll make the distinction. A reconciliation of our GAAP to non-GAAP income statement is attached to our press release and available at our website.

The summary of the differences between this quarter's GAAP to non-GAAP numbers are as follows.

Acquisition-related charges of $8 million before taxes or $0.03 cents per share after taxes, restructuring and severance charges of $3 million before taxes or $0.01 cent per share after taxes and a stock option litigation credit of $1 million pre-tax which had no after tax effect on EPS.

Revenue for Q4 was $559 million towards the high end of our guided range of 530 to 570 million. Non-GAAP earnings per share was $0.70, Q4 GAAP EPS was $0.66.

By almost all measures Q4 was strong and the new order total of $956 million easily eclipsed our prior peak of 824 million.

Net orders were approximately $955 million as virtually none of our customers pulled in or scheduled out orders we had processed in prior quarters.

We added almost $400 million to our backlog in Q4 and ended the quarter with 1.34 billion in total systems backlog. The backlog at June 30th included $343 million of revenue backlog or products that have been shipped and invoiced but have not yet been recognized as revenue and $992 million in system orders that have not yet shipped. The reasonable distribution of new systems orders and the quarter-to-quarter change in distribution was as follows.

The US was 25% of new systems orders in Q4, up from 23% in the March quarter. Europe was 12% of new systems orders, up from 3% in Q3. Japan was 12%, up from 10% last quarter; Korea was 19% up from 16% last quarter. Taiwan was 18%, down from 39% last quarter and the Rest of Asia was 14% up from 9% in Q3.

The Q4 distribution of new systems and services orders by product family in the quarter to quarter change in distribution was as follows. Wafer inspection was 48%, even with last quarter. Reticle inspection was 19%, up from 15% last quarter. Metrology was 14% up from 10% in the prior quarter, solar, storage, high brightness LED and other non-semi was 6% down from 8% last quarter and services was 13% of new orders in Q4, down from 19% last quarter.

Foundry customers comprised 41% of semiconductor systems orders in Q4 versus 50% in Q3. Logic customers were 21% of systems orders in Q4 versus 13% in Q3 and memory systems orders rose slightly to 38% in Q4 compared to 37% in Q3. Orders for 32-nanometer and below technology were 41% of the semiconductor orders received in the quarter.

Looking forward we expect that new orders for our fiscal Q1 will be in range of 750 to 900 million.

Shipments for Q4 which include both system shipments and services revenue were $622 million, up 21% from $515 million last quarter. Systems revenue for Q4 was up 23% to 430 million compared with 350 million in Q3. Services revenue was 129 million in Q4, essentially even with Q3. Our expectations for total revenue in Q1 is a range of 620 to $660 million.

Non-GAAP gross margin was 60% in the June quarter, up two percentage points from March. The improved gross margin percentage in Q4 was better than our incremental target of 60 to 70% largely because of favorable mix between products and services contributions as well as lower excess in obsolete reserve requirements. For Q1 we are modeling an incremental gross margin target roughly equal to our stated goal of 60 to 70%.

Operating expenses were $166 million, essentially flat for the March quarter. However, a component of the Q3 to Q4 change in operating expenses was a $3 million reversal of bad debt expense we originally reported when Spansion declared bankruptcy in fiscal 2009. Spansion recently issued stock in its new US entity as partial consideration for what we were owed when they went bankrupt.

The Q3 to Q4 decrease in operating expenses from the Spansion recovery was mostly offset by increased expenses for variable compensation and additional materials consumption in our R&D activities.

Other income and expense or OIE was a net $11 million expense in Q4 about even with Q3. For modeling purposes, we expect OIE to be a net expense of approximately $11 million in Q1. In Q4 our non-GAAP income tax expense was $41 million or 25% of pre-tax income versus $27 million in Q3 which is 27% of pre-tax income. The tax rate improvement in Q4 largely arose from change in distribution of earnings between the US and lower taxed international operations.

Non-GAAP net income was $120 million or $0.70 per share in Q4. If we exclude the Spansion recovery credit and apply our model tax rate of 30%. Our Q4 non-GAAP earnings per share would have been $0.65. At the revenue range I previously mentioned we would expect our Q1 fiscal '11 non-GAAP earnings to be somewhere between $0.80 and $0.88 per share assuming a tax rate of 30%.

Weighted average shares used to compute EPS in Q4 were 171.3 million versus 173.4 million in Q3. During Q4 we spent $82 million repurchasing about 2.6 million shares and as of June 30th, we had 5.2 million shares available under our current repurchase authorization. We will continue repurchasing shares in the September quarter. For guidance purposes we are modeling an average share count of 170 million for Q1.

As announced at the SEMICON West analyst meeting we hosted in San Francisco two weeks ago, our Board of Directors has authorized a $0.10 share increase to our quarterly dividend bringing our total quarterly dividend to $0.25 per share. This increase is expected to take effect beginning with the dividend to be declared in August, 2010. The increase will have the affect of raising our cash outlay for dividends to about $43 million per quarter beginning Q1.

Turning to the balance sheet cash and investments ended the quarter at 1.5 billion about even with prior quarter end. Cash generated from operations was $83 million in Q4 compared with $128 million in Q3. The quarter-over-quarter decrease in operating cash flow largely resulted because we have $14 million more in tax payments in Q4 versus Q3 and we made a $26 million semiannual interest payment in Q4 versus Q3.

Net accounts receivable ended the quarter at $440 million up from $323 million at March 31, largely resulting from the $107 million increase in shipments from Q3 to Q4.

DSOs were 72 days at June 30th versus 61 days at the end of March. Both DSO figures are net of allowance for uncollectible accounts in factoring. The increase in DSOs during Q4 was within our normal range of expectations in periods where business activity is rising quickly.

Net inventories increased by $28 million from March 31st and ended the quarter at 402 million. Inventory turnover based upon GAAP cost of revenues was 2.3 turns in Q4 approximately even with last quarter.

Net capital expenditures were $6 million in Q4 versus $10 million in Q3. Total headcount at June 30th was 4,989 up from 4,873 at March 31. We expect our headcount will increase slowly during Q1 especially in our manufacturing locations as we adjust or capacity in response to the recent demand increase.

In summary, our guidance for Q1 is new orders between 750 and $900 million, total revenue between 620 and $660 million and non-GAAP EPS between $0.80 and $0.88 assuming a tax rate of 30% of the pre-tax income.

This concludes our prepared remarks in the quarter. I will now turn the call back over to Ed to begin Q&A?

Ed Lockwood

Thank you, Mark, and as we begin our Q&A today, I would remind everyone to please limit yourself to one question and one brief follow-up so that we can have the opportunity to get to everyone in this call. With that, operator, would you please queue the audience for questions?

Question-and-Answer Session

Operator

(Operator Instructions) first question comes from the line of C.J. Muse from Barclays Capital. Your line is now open.

C.J. Muse – Barclays Capital

Good afternoon. Thank you for taking my question. I guess my question is on sustainability. When I look at your backlog and I include deferred revenues it's well over a billion dollars and then I think about memory and how we're still early in adoption there and hearing that next year is going to be even worse and when you look at the breadth of foundry spending with new customers emerging and new fabs next year, can you talk about your views on sustainability of shipments and orders at this run rate and what kind of path or visibility you see into 2011?

Rick Wallace

Hi, C.J. It's Rick. Yeah, I'll take those and maybe Mark can chime in, too. You know, we look at the overall demand picture to start with that and the midpoint of our guide for bookings for September is 825, as you know, and if you look out to what would have to be to be equal to first half of the year, we would need 775 and as you know, December historically has been up from September. This might not be an ordinary cycle. We don't know, but we do see a lot of projects out there, more than we've seen in the past, probably 13 or 14 new fabs being built and a lot of opportunity out there.

So we continue to – to be bullish on ramping shipments to support that. You know with all the expectations in 2011 we’ll continue to see strong demand across the board. As you say, this is a very broad bookings picture, so from our perspective it looks pretty good and overall top level forecast for 2011 are positive as well.

C.J. Muse – Barclays Capital

If I could just ask a quick follow-up, on your non, I guess core, semi business and then you talked about other and strength there, what kind of contribution should we see in the second half of '010 and then into 2011? Can that drive a meaningful uptick?

Rick Wallace

I think so. You know, right now, of course, it's being balanced against the very dramatic increase in the core, but, you know, the annual run rate of that business is probably running on the order of $250 million and if you think about the growth rates inherent and the long term secular growth rates of the markets we're serving there, they're actually pretty good growth rates. So I think that the possibility of that increasing in 2011 is pretty high. That's certainly how we're planning it. We have good share in those markets. We're making investments. We'll have new products coming out and there certainly is a lot of customer demand there.

C.J. Muse – Barclays Capital

Thank you.

Ed Lockwood

Thanks, C.J.

Operator

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

Jim Covello – Goldman Sachs

Thanks so much for taking the question. You know, there's been an awful lot of noise about your share over the last year or so and obviously with the kind of orders you're reporting now it's kind of tough to believe the stories about share loss that have been out there, is there a way that you guys can articulate or measure the share in any kind of helpful way for people?

Rick Wallace

Yeah, Jim. It's a great question. I think the only way we really can do it is with the math of our numbers, comparing our numbers to WFD and then the top down numbers looking at what we think process control is of the overall market and we certainly see process control going up and we're pretty convinced as a percentage overall, but lastly, you know, the thing that I think the best number to look at if you want to see how we're doing competitively is look at our gross margin.

Jim Covello – Goldman Sachs

Terrific. Thanks so much.

Rick Wallace

Thanks, Jim.

Operator

Your next question comes from the line of Tim Arcuri from Citi. Your line is now open.

Tim Arcuri – Citi

Hi, this is (inaudible) Tim. Thank you for taking my questions. Recently we see two new players in the foundry space and TSMC is spending record level. So based on historical numbers we see foundry CapEx to be about 15% higher than their prior peak. Do you think such a level is sustainable and particularly after TSMC's (inaudible)? Do you see a pause in foundry spending? Thank you.

Rick Wallace

You know, right now we really don't see any near term pause. I think you do point out there were more players, but I think we – it is important to remember that in the last cycle foundry largely wasn't investing very heavily and you had a lot of IDMs that went out of the market that weren't building fabs and that CapEx just kind of disappeared.

What's happening now is it's showing up in the form of these foundries and so I think that the growth in foundries has some legs to it based on the fact that there are more opportunities to pick up more orders from the people that are no longer building fabs and we really didn't see that in the past.

The other factor is from a capital intensity perspective, obviously KLA think what does very well when it comes to serving foundries because our products really support their particular business model extremely well. So we think it's a good story for foundries and a good story for KLA-Tencor.

Tim Arcuri – Citi

Great. Just a quick follow-up. In your most recent communications with the foundry customers, have you heard any kind of weakness expressed by some of the old fabs and foundries in the last couple of days?

Rick Wallace

No, it's funny actually quite the opposite. We had some – I would say a few weeks ago we heard some pauses that have turned right back into accelerated requests for demand. So I would say it's actually swung the other way.

Operator

Your next question comes from the line of Krish Sankar from Banc of America. Your line is now open.

Krish Sankar – Banc of America

Yeah. Thanks for taking my question. I have a couple of them. Number one, Rick, in terms of the bookings for September, can you just parse it through by the different customer segments, NAND, DRAM and foundry?

Rick Wallace

Sure, Krish. Let me start with that. We look at memory – September forecast we were at 38% and we think we're probably similar range, maybe a little down, maybe a third of our bookings coming out of memory, so we would say 33% and we would say most of that will be DRAMs and NAND maybe a quarter of that 20, 25% somewhere in there. Logic down from 21% down to probably about 12% and foundry actually we do see an increase in our September numbers to in the 50, 55% range.

Non-semi should pick up and be a greater percent of our overall book and that was about 6% and we see that going closer to 9% in September.

Krish Sankar – Banc of America

Okay, that's very helpful. And I just wanted to follow up on the competition question. Have you actually seen any new or incremental competitors come in from Japan in the recent past?

Rick Wallace

I can't think of any. I think there are Japanese competitors that have been around the business for many, many years but none come to mind in the core businesses that we serve. You know, I think that many of these Japanese companies stay in these markets for a long time, but we certainly have not seen any change in behavior.

Krish Sankar – Banc of America

Okay, and then the final question is what do you think is process control as a percentage of WFD today? Thank you.

Rick Wallace

We monitor that pretty closely. I think if you look, reasonable numbers out of Gartner around 14%. We think that's got the possibility to grow maybe up to 15% consistent with the thesis that we have had that the increasing complexity is driving the need for increased process control and certainly based on the strength of our bookings, we see that trend developing.

Krish Sankar – Banc of America

Thanks, Rick.

Rick Wallace

Thank you.

Operator

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

Stephen Chin – UBS

Hi, Rick. Have you seen a recovery in inspection equipment orders from the 300-millimeter semiconductor wafer dollars like SIMCO for instance and then the reason we ask this is do you think this would be another signal that the semi cap up cycle will likely continue?

Rick Wallace

There has been some increase. I would say that it was a long dry period for the wafer guys. I think pretty clearly they built in anticipation in the last cycle of gaining share and so there was an overcapacity that had to be – we had to catch up to. I think we've caught up to that.

Mainly what I would say we have seen in the first part of this calendar year was associated with some technology and maybe market share wins among them and now what we're seeing is a broader level of commitment toward a capacity increases.

So we think that's probably in the second half of the calendar year, but not robust, not at the levels certainly that it was at back in the last cycle, but that should – you know, I think they're being more cautious is the other part of that equation, but I think we'll see more demand as we go out into 2011.

Stephen Chin – UBS

All right. Thanks for that. And just one quick follow-up. When do you think orders from your new market segment will become more meaningful and which area in the new markets do you think can hit an in flexion point first?

Rick Wallace

We're forecasting about 9% of our business in the September quarter out of it and I think from my standpoint that's pretty meaningful for us and I think that if you look for an annualized run rate, if it's $250 million going up, that's pretty important and it's really pretty balanced. I mean, we do see from our standpoint, we see business in the back end in packaging which is new for us and a lot of change going on there. We see high brightness LED being a positive and we're a market leader in the solar space. So I think really the combination of those plus the work we do in storage are all contributing to our growth.

Stephen Chin – UBS

All right. Thank you.

Rick Wallace

Thank you.

Operator

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

Casey – RBC Capital Markets

Hi. This is Casey [ph] calling for Mahesh. Couple of questions. In the last quarter, you folks had said the split between DRAM and NAND was about 50/50 and for the September quarter you're finding that this split is more like 75/25. Do you expect that ratio to maintain into December or do you find the December split would be something different?

Rick Wallace

Yeah. It's really hard to say. I mean these kind of come in projects – from our standpoint it's really not so much about the split in technology between NAND and DRAM for us, unlike for some process equipment companies I think it's more specific to which company is in which investment phase, but we do expect to see increased levels of NAND as we go forward based on some of the projects that are on the books that just happened to be NAND, but you're right that, you know, it's reasonably heavily DRAMs, at this point, we think those numbers will balance more as we go forward.

Casey – RBC Capital Markets

Yeah. If I could squeeze in one more question, does all this talk about, you know, giant fabs coming up in Taiwan and elsewhere, is that something that we should start now modeling for sometime in the first half of next year or is it something much later?

Rick Wallace

Hey Casey, let me just back up a second. I was looking at my notes here. You know, I'm looking at it; the NAND forecast for September is actually to be about two-thirds of the overall number for memory. I was looking at the wrong line here. So, you know, we are seeing that participation rate which makes more sense based on the projects that are out there. So I'm sorry about that, but I wanted to make sure I got that correction out there. And your second question again?

Casey – RBC Capital Markets

Was, yeah, there is all this talk about giant foundries coming up in Taiwan and elsewhere. Is that something that we should start modeling into first half next year or is it something much later?

Rick Wallace

No. I think that’s – you know, those are work in progress. I think it's still pinned to the CapEx forecast for next year. We see some major foundries are increasing their overall level of commitment and new fab is going to be built in 2011. We probably won't see orders for those until late in the calendar year at the earliest I think, but there are build-outs of existing facilities before that.

Casey – RBC Capital Markets

Okay. Thank you.

Operator

Your next question comes from the line of Peter Kim from Deutsche Bank. Your line is now open.

Peter Kim – Deutsche Bank

Hi. Thanks for taking my questions. Rick, I know you don't give guidance for shipments, but could we expect shipments to increase as the pace of bookings has increased? Or do you think that the bookings were for longer lead time products that will ship over a longer period of time?

Rick Wallace

Yeah. Actually, I’ll let Mark take that one.

Mark Dentinger

Yeah, the bookings will probably increase close to that same rate, but the reality is that with capacity constraints and so on and so forth they'll probably trail just a little bit in terms of the aggregate percentage increase in the booking order – excuse me, the shipment rate will probably trail it just a little bit, but our goal would be to catch that up over the next six months as we digest what amounted to sort of an extraordinary Q4.

Peter Kim – Deutsche Bank

Okay. And with regard to mask inspection, I mean the bookings over the last couple of quarters have been at record pace I think and I was wondering if you could provide some color as to what's driving the demand for Reticle inspection right now and what percentage is (inaudible)

Rick Wallace

Right, so the overall demand for Reticle is driven by two things by two things; one I think that the most fundamental is we have a new product in the market that is gaining wide acceptance and that’s the Teron product line and I think a lot of the customers have been waiting to get their – to get to see that and a lot of times our Reticle inspection business once a new product comes out then it becomes a must have across the board and we see it both – often show up in that shops first, and then it will show up later depending on the fab lines, but we are also selling 5XX in the fab lines mostly now. And I think most of it has been oriented towards the (inaudible) guys at this point, some merchant business but probably a little bit more towards captive at this point.

Peter Kim – Deutsche Bank

Great, thank you.

Rick Wallace

Yes.

Operator

Your next question comes from the line of Jagadish Iyer from Arete Research. Your line is now open.

Jagadish Iyer – Arete Research

Yeah, thanks for taking my questions. Two questions, Rick. The first question is on your order guidance of 750 to 900 million I was just wondering given the tightness in the market why is there such a big range and is there anything, you know, like wildcard projects which might potentially come in the September quarter and as a follow up on the second question on the order book, I was just wondering is there anything that we need to read in your metrology numbers are pretty nicely up, is there any share gains? Can you talk about it? Thanks.

Rick Wallace

Sure, Jagadish, good questions. The range guide – we try to put in what we think is reasonable. While it is true there's tightness out there, there is a lot of volatility and, of course, as I'm sure you know, we end up wanting to make sure that we optimize the business we have with our customers and so we don't want to tighten that range because you wouldn't want a particular customer to feel like they had additional leverage as to placing an order within the quarter. So we try to keep that range reflecting what we think as the normal volatility in the market. So I think that from that standpoint that kind of explains it.

And the second question was on metrology. We did see some increase in share. We also saw penetration of metrology associated with increasing capacity and metrology perhaps is more directly aligned to some of the capacity buys and, you know, we've definitely benefited from that growth.

Metrology is a market which has inherently a lot of growth because there's so many more materials that need to be measured and in the case of overlay there is a lots of litho challenges in the films may affect so that's why we think we saw that run up and we expect the metrology as a percent to actually see some more improvement as we go forward to September as a percent of our total order book.

Jagadish Iyer – Arete Research

Thank you.

Operator

(Operator instructions) Your next question comes from the line of Atif Malik from Morgan Stanley. Your line is now open.

Atif Malik – Morgan Stanley

Hi. Thanks for taking my questions. Rick, at SEMICON West you mentioned the bookings in June could have been better. There were a few projects that moved into September and it sounds like many of those projects have come back. Just wanted to get some color –are those projects which segment are those projects, the foundry or memory or both?

Rick Wallace

Predominantly foundry. I mean it's predominantly foundry. There's some memory activity that ebbs and flows and we're seeing a lot of interest in memory and I think that we're in different conversations now with some of the memory guys who have gotten very serious about – but foundry definitely is where we saw a more significant snapback.

Atif Malik – Morgan Stanley

Got it. And then on the same subject, foundries, do you think there is a change in mindset with foundries this cycle? Clearly there is a lot of market share grab going on which is causing the foundries to spend more – as more new entrants like Global Foundries and then Samsung at this time around. So the question is I mean from an equipment point of view do you see a change in mindset that maybe the Tier 1 foundries are willing to run utilization at much lower levels, you know, maybe 80 to 85% on a normalized basis and kind of little bit lower utilization and settle on market share. Do you think there's been a change in dynamics in the foundry side?

Rick Wallace

I think there has probably been three changes. And I will tell you why I they are. One is the overall capital intensity, it is probably going up, but also they're supporting some of the IDMs that are out of the market. The second one is that because there is more opportunity I think you've got more players that are deep pocketed and are going after it and the last one I would say that the foundries in order to be competitive with – for their customers to be competitive have to be more on the leading edge. So there's more investment in newer technologies than perhaps in the last cycle.

In terms of the utilization rate, you would have to ask the foundries, but clearly some people believe there's a trade-off between utilization rate and cycle time and in a market where you're running for market share, lower utilization will enable you in some cases, in some cases to have faster cycle time and be more responsive to customers. Does that make sense?

Atif Malik – Morgan Stanley

Yes. Very helpful.

Operator

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

Ed Lockwood

Thank you, operator, and thank you all for joining us on our call today. We look forward to speaking with you after our call.

Operator

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

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Source: KLA-Tencor Corporation F4Q10 (Qtr End 06/30/10) Earnings Call Transcript

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