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Executives

Robert Halliday - Executive Vice President & Chief Financial Officer

Gary Dickerson - Chief Executive Officer

Analysts

CJ Muse - Barclays Capital

(Kari Sakaa) - Merrill Lynch

Edwin Mok - Needham & Company

(Nidi Hassini) - Susquehanna

Chris Blansett - JP Morgan

Steven Chin - UBS

Satya Kumar - Credit Suisse

Patrick Ho - Stifel Nicolaus

Mark Delaney - Goldman Sachs

Peter Kim - Deutsche Bank

Ben Pang - Caris Company

(Yagdish Ayer) - (Areet)

Varian Semiconductor Equipment Associates (VSEA) Q1 2011 Earnings Call January 27, 2011 5:34 PM ET

Operator

Good day ladies and gentlemen and welcome to first quarter 2011 Varian Semiconductor Equipment Associates Incorporated earnings conference call. My name is Kathy and I’ll be your operator for today’s call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. If at any time during this call you require operator assistance please press star followed by 0 and an operator will be happy to assist you. I would now like to turn the conference over to your host for today’s call, Mr. Robert Halliday, Executive Vice President and Chief Financial Officer. Please proceed sir.

Robert Halliday

Good afternoon. I’m Bob Halliday, Varian Semiconductor’s Chief Financial Officer. I want to thank you for joining us for our fiscal 2011 first quarter conference call and webcast. With me on the call this afternoon is Gary Dickerson, our Chief Executive Officer. 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 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 we will discuss our current financial results and guidance for the second quarter and the positive outlook for Varian in its core and growth businesses both in fiscal 2011 and beyond. Now I will review first quarter results. First quarter 2011 revenue was $282.6 million. First quarter revenue increased from the fourth quarter by $23.8 million, almost completely due to increased tool sales to foundry and logic customers. In the first quarter of fiscal 2011 unit shipments were approximately 53% foundry, 28% memory and 19% logic.

First quarter 2011 earnings per share of 95 cents was higher than our guidance of 84-89 cents per share. This is our highest ever quarterly earnings per share. The geographic breakdown of our revenue this past quarter based on fab location was Asia, 70%, North America, 19% and Europe, 11%. First quarter 2011 gross margins were 49.2%, in line with our guidance despite an increased mix of systems revenues relative to non-systems. R&D expenses of 26.6 million were in line with our guidance as we increased resources for growth projects in our core and new markets.

Marketing, general and administrative expenses were $33.5 million, which was higher than our guidance. MG&A expenses were greater than the fourth quarter due to increased variable compensation expense in anticipation of a stronger year and the addition of marketing resources to support new products and growth activity. In the first fiscal quarter we had operating margins of 29.9%, which represents the highest achieved in the history of the company. Our effective tax rate was approximately 9.6% in the first quarter of 2011 resulting in income tax expense of $7.6 million.

Our tax rate benefitted approximately 4% from discrete items in the quarter including the retroactive reinstatement of the R&D tax credit and the closure of outstanding items from prior years. The first quarter also benefitted approximately 1.5% from a heavier projected mix of international sales for the year and 1% from the R&D tax credit in the current quarter. At the end of the first quarter our full time equivalent head count was 1795 people, up from 1734 at the end of the fourth quarter of fiscal 2010.

45 of the additions out of the total increase of 61 were in operations and R&D. Our cash and investment balance increased approximately $54 million in the first quarter to $450 million. In the first quarter we repurchased approximately 608,000 shares of our own stock for approximately $19 million. First quarter capital spending was $6 million primarily for facility and IT improvements. Depreciation expense for the quarter was $3.9 million. Now I will turn to our second quarter guidance.

In the second quarter of fiscal year 2011 we anticipate revenues of between $315-325 million. We anticipate that gross margins in the second quarter will be approximately 49%. In the second quarter we expect R&D expenses will be up approximately $2.4 million. Marketing, general and administrative expenses will be up $3.1 million in the second quarter due to calendar year focal reviews, other variable compensation increases, some marketing additions and annual corporate governance expenses. Our operating margins should be up almost 1% in the second quarter of 2011 from the first quarter of 2011.

We expect our tax rate for the second quarter and the rest of the year to be approximately 14%. The 14% rate is lower than the approximate 16-1/2% estimate that we gave last quarter due to 1% reduction for the R&D tax credit and approximately 1-1/2% for a heavier mix of projected international sales. Based on the mix of business the quarterly tax rate may be a little higher or lower in any given quarter in fiscal 2011. As a result, in the second quarter of fiscal year 2011 we expect to earn approximately $1.02-1.07 per share. This would represent the highest quarterly earnings per share in Varian’s history.

We expect capital expenditures in the second quarter to be approximately $5.5 million. Gary will be focused on Varian’s growth opportunities and top line leverage. Even while we have been investing in these growth opportunities we have significantly increased Varian’s economic leverage. A couple of high level statistics are noteworthy. First, our revenues per headcount in fiscal 2007 over the last peak were 539,000 per employee. In the quarter just ended our annualized revenues per headcount were $641,000 per employee. In the second quarter of this fiscal year for which we have just given guidance our projected annualized revenues per headcount should be approximately $700,000 per employee.

Secondly, in terms of headcount additions since the end of fiscal 2009 through next quarter we will have added 573 employees of which 169 are contract employees. Of the total 573 employees added 57% were in manufacturing, 25% in R&D, 7-1/2% in the field service organization and only 10-1/2% in all of G&A, marketing and sales. In other words, 89.5% of headcount added have been for operations and R&D. With greater efficiency in the core business and the addition of future growth revenues we are optimistic that Varian’s longer term operating margins have significant upside. Gary will now discuss how Varian is well positioned for 2011 and the longer term outlook.

Gary Dickerson

Thanks Bob. As Bob mentioned earlier, we are forecasting record revenue and earnings for the March quarter. In addition to the positive near term outlook for our business we are increasingly bullish on growth opportunities for our core technology in new markets. Today I will discuss Varian’s 2011 outlook, our momentum exiting 2011 and Varian’s longer term opportunity to drive significant revenue and earnings growth.

In 2011 wafer fab equipment spending by our customers will be stronger than we thought a few months ago. Implant as a percentage of wafer fab equipment looks good with more implant steps and increasing adoption of upgrade products like PTC2. Customers are reacting very positively to our products including Trident, our new high current tool and implant is gaining traction with solar customers as they validate the ability to increase cell efficiency and eliminate process steps. In terms of customer spending we are seeing strong demand from foundry, flash and logic customers.

We have been aggressively adding tools to our build plan to satisfy that demand. Implant as a percentage of wafer fab equipment was up in 2010 and we believe it will be up again in 2011. As we mentioned before, customers are adding implant steps to solve top problems like leakage and contact resistance. PTC2 or cryogenic ion implant is a particularly effective technique for damage engineering to reduce surface defects and end of range damage defects. It’s been widely reported that lower temperatures for ion implants provide lower leakage and improved other device performance parameters.

PTC2 has gained traction as a solution for handheld device leakage problems and also to increase yields and improve device performance for memory manufacturers. Initially PTC2 was adopted for high current applications. Based on recent extensive customer evaluation PTC2 has been released on Varian’s 900XP medium current tool. Halo implants using PTC2 on the Vista 900XP have been shown to increase yield and improve device performance including leakage. Medium current applications require the lowest temperatures possible to achieve these results. Varian’s PTC2 is the only technology capable of going to these low temperatures.

Varian also has patents that protect our ability to achieve these low temperatures at high productivity and reliability. Implementation of PTC2 on Varian’s Vista 900XP has been simple and seamless. Unlike our competitors Varian has a common end station across all products. Any process or product development work carried out on Trident is easily extendible to the Vista 900XP. To date there are 13 PTC2 kits installed at customer sites with several in volume production. We expect that PTC2 installations will double by the end of this year. WE have worked with Synopsis to integrate PTC2 in their Tcad modeling software.

Device engineers who use Synopsis Tcad will be defining their processes with Varian’s PTC2 for both high current and medium current implant applications. Trident, our latest generation high current tool, continues to widen the gap with our competitors and address key customer device scaling challenges. For future technology nodes customers have more high dose and low energy implant applications and a requirement for lower particle counts. Trident, which is based on our production proven Vista platform, provides superior device performance and yield and the highest productivity for low energy implants.

We have Trident tools at multiple large foundry and memory customers and recognized our first revenue last quarter. In early 2012 we anticipate Trident will represent more than 50% of our high current shipments as it ramps into production and multiple accounts. And finally, solar is continuing to gain traction with more customers. Since our last call we have doubled our Solion system orders and customer engagements have increased by about 50%. Also our first customer reported achieving 19% cell efficiency. Next month we will showcase Solion at the SNEC trade show in Shanghai.

We will host over 60 industry experts at our third V Tech Seminar that will include customer results demonstrating the advantages of implants in cell manufacturing. Additionally in the solar market, we are now engaged with 19 different solar customers and have increased our internal 2011 revenue estimates significantly from the 25-30 million that we have previously communicated. We don’t want to reset revenue expectations at this time. However, we do see an upside to our original forecast. Earlier I mentioned that I would discuss our momentum exiting 2011.

Although we cannot predict the business cycle, I can comment from the Varian specific perspective. We have strong drivers for our business into 2012. Trident should be qualified at most customers by the end of 2011, which should result in a strong 2012 for high current. Leakage, contact resistance and other device scaling challenges will be an increasing problem for customers and an opportunity for Varian. Customers will add more implants to improve device performance. For a number of years Varian has had programs focused on driving tan growth. In 2010 we estimate that 5% of the implant tan was a result of these efforts.

In 2011 we estimate 8% of the implant tan will be reflected in Varian’s revenue as new applications that would not have existed without our efforts. We see those percentages increasing in future years. PTC2 could be in production at seven customer sites by the end of 2011 with 28 upgrades installed. This install base could increase significantly in 2012. PTC2 is important as an upgrade sale and increases our tan. Solar is another opportunity for Varian in 2012 and beyond as we are qualified at multiple customer sites for production buys. In terms of Varian’s longer term prospects, we are working on additional new opportunities that have the potential to more than double the Varian tan.

But it’s too early to discuss/disclose the specifics of what we are doing. As in solar, we are focused on solving high value problems with innovative solutions that leverage our core technologies. We are far ahead of competitors in identifying new opportunities and want to build strong IP position and be closer to a significant revenue ramp before external communication of these opportunities. In solar we were working for a few years developing our product strategy and filing 120 invention disclosures and 60 patent applications. We anticipate implant will see significant adoption in solar and we have a strong competitive position that will increase as customers move to higher efficiency cell designs.

For these additional new markets we have focused marketing and technical teams to find high value problems and develop disruptive solutions leveraging our core technologies. In each new market we are working with leading customers to validate costs, device performance and yield improvements. In several cases we have very promising results we believe will lead to large opportunities similar to implant applications in solar. We have significant economic leverage as we expand into new markets.

If you think of Varian’s income statement we can leverage research and development by starting with core technology and intellectual property. Product cost has been leveraged the last few years and will continue to be leveraged by pumping more volume through the same infrastructure. We are now shipping twice as many tools as we did several years ago with the same facility and a smaller organization. And we can use our strong field organization for the majority of our growth opportunities. We have a very robust organic growth process. Solion is the first product to be launched by applying our core technology to a new market.

Early adopters for Solion were identified and engaged to validate Varian’s value. We are now driving adoption and sales of Solion at multiple customer accounts. We are confident that Varian can drive growth in our core business and in new markets. We have a very strong and deep team, a culture that is customer focused and always looking for high value problems to solve and business processes that drive disruptive technical solution and outstanding execution of new ideas. We have never been more optimistic about our near term and long term outlook for Varian. We will now take your questions.

Question and Answer Session

Operator

Ladies and gentlemen, if you wish to ask a question please press star followed by 1. If your question has been answered or you would like to withdraw your question press star, 2. Questions will be taken in the order received. As a reminder, press star, 1 to begin. Our first question comes from the line of CJ Muse of Barclays Capital. Please proceed.

CJ Muse

Yeah. Good afternoon. Thank you for taking my question. I guess first question on your adjacent growth opportunity, I feel like this is the first time in a while where we’ve heard real great granularity both on PTC2 as well as on the Solion product. And I know you’re hesitant to put a number out there until you really drive traction there but I’m curious what kind of growth we could see in revenues for this adjacent opportunity in calendar ’11 versus calendar ’10. And maybe if you could frame it for calendar ’12 and beyond, that would be great as well.

Robert Halliday

Yeah. So you’ve got two or three buckets there. You’ve got solar, you’ve got the other app stuff that Gary talked about and you’ve got the third bucket, which is the longer term stuff that we talked about. I’d say the other app stuff we said in the script goes from 5% to 8% of the implant tan. So if you think about that, the tan was up this year and all that 5-8% is going to us. So that’s about $50 million last year in ’10 and more than double in this year probably. And then that includes PTC2 in that bucket that you asked about CJ.

The next one would be solar. 25-30 million is what we’ve been saying for nine months. We feel increasingly optimistic about those numbers. I’ll tell you the tactical problem we have is we think we’re going to ship a lot of tools this year. It’s just a new market in terms of getting the acceptance paperwork signed off. So we don’t take because it’s a new product, we don’t take any revenue on these until we get the paperwork signed. So projecting by the end of the calendar year when we get signatures it’s a little hotter.

If you follow that traditional model we should significantly beat the 25-30 this year. In terms of the ramp into ’12, I think it could pretty easily - we’ve said 100 million, which would be a tripling of those numbers. I think even if we significantly beat the 25-30 this year it could still double or triple next year.

CJ Muse

That’s very helpful. And I guess as a quick follow up, you talked about OpEx growing here in the March quarter and I guess I’m curious if we kind of see the revenue line hold where it is or grow incrementally and think about increasing mix coming from Solion. How should we think about I guess the OpEx trend there and also the trajectory of the gross margin line?

Robert Halliday

Sure. So the OpEx we tried to give you some oblique color in the script. So if I can make it less oblique now I will. There were about three buckets of why expenses were up in the projected quarter. First is we do a lot of our compensation things on a calendar year basis like everybody has focal point reviews that kick in February 1st. So all the raises hit at once, right? And then after this there’s a little bit more of a kick in June quarter because you’ve got one extra month. But you get most of it in come the March quarter.

The second thing is all of our fringe benefits go up because health insurance plans and all that, all the plans get recast on January 1st. So my point is the first bucket, which was the comp stuff, which is I guess about a third of the increase, that largely is fixed after this quarter. It’s in the run rate. The second bucket is growth stuff, which is discretionary for us and that’s about 40% of the increase maybe. And that stuff is discretionary. I think it goes up a little bit more after this quarter but we go through every month and every quarter what we value. Things fall out, things fall in.

But I think most of that is in. And then the third bucket was just we think we’re going to have as you see the guidance and we’re hopeful that this momentum continues and we’re going to have a good year. So some of the incentive compensation plans are accruing at a somewhat higher level. So we’re to give you some more granularity, I kind of think the expenses could drift up a little bit more to maybe $1 million. But that’s today’s guess. You asked a second question too I think. What was it?

CJ Muse

Yeah. Sorry. Gross margin trajectory with adjacent Solion coming into the mix.

Robert Halliday

Yeah. I’ll tell you the moving pieces. The are three moving pieces on mix issues. One is the mix between systems and non-systems. I’ll drill into that. The second one is geographic mix and the third is mix of Solion. I think we have - we’re hopeful that we’re going to have a pretty strong year on the systems side so that actually that the systems growth relative to non-systems growth just because systems could grow more.

That’s a good thing. It puts a little downward pressure on gross margins we may be able to mitigate. The second issue is I think we’re probably going to gain some share in Japan this year. So that’s another good thing. But that’s our lowest margin region. And third is that Solion as it ramps is a somewhat lower gross margin than our regular tools. Now we think Solion can get to the corporate gross margins exiting ’12. Net-net, even if we have higher systems and even if we have more Japan share and even if we have some Solion I think we’re in pretty good shape on the year around where we’re at but we could have quarters that are a little higher and a little lower.

CJ Muse

Perfect. Thank you.

Robert Halliday

You’re welcome.

Operator

Our next question comes from the line of (Kari Sakaa) of Merrill Lynch. Please proceed.

(Kari Sakaa)

Thanks for answering my question. Hey Bob, a couple of questions - you spoke about implant intensity. Where was it in 2010 and where do you think it’s going to be in 2011?

Robert Halliday

Yeah. It was up in the low to mid 3s in ’10 and we’re speculating it’s in the high 3s in ’11.

(Kari Sakaa)

Got it. All right.

Robert Halliday

That’s our wafer fab equipment, not CapEx.

(Kari Sakaa)

Right. Okay. And then a couple of other questions - in terms of the Solion product it seems that you guys are getting some good traction and getting some efficiency improvement. What is the feedback you’re getting from the customers versus the current incumbent process that they use? Is it predominately throughput or is it (glass) or something else?

Gary Dickerson

Yeah. The feedback we get from customers is they’re seeing higher cell efficiency. And again the other thing that we’re doing is eliminating process steps. So the combination of those two from a cost per watt standpoint is very positive. The other thing is that as people move to more advanced cell design from blanket and selective emitters, the use of Boron for instance for anti-substrate and more advanced cell designs, our system will continue to be useful with those higher efficiency, lower cost per watt cell designs and they really don’t have a path forward with the current technology. So for today there is an advantage but also from a roadmap perspective we have an advantage for customers.

Robert Halliday

Yeah. If you look at the economics we think we have a payback period just with simple cell designs of about eight months, maybe seven or eight months. But if you look at the more complex cell designs we almost become enabling there. So it’s like really rapid payback.

(Kari Sakaa)

Got it. And on your core implant business when you look at the March quarter how does it shake out between memory, logic and foundry? Do you think it’s going to be similar to December or any changes coming up?

Robert Halliday

I think foundry is still really strong. I think logic is up and memory is down a little bit.

(Kari Sakaa)

Got it. Okay. All right. And then one last final question from me - the 14% tax rate, is it just a fiscal lever or is it something you should use through the rest of the calendar year and beyond?

Robert Halliday

Well, it’s always mix dependent. If we keep the consistent mix that we have now, which I think is a reasonable mix, we’ll probably be similar next year.

Gary Dickerson

I think longer term if you look at solar, a lot of the business is outside the US. So that would be positive from a tax standpoint.

Robert Halliday

I mean 14 is a good estimate for next year if you said well, it’s a little bit more upward or downward bias. It could go down a little bit.

(Kari Sakaa)

All right. And then the final question from me - if you look at the CapEx estimates being revised quite positively in the last few weeks, are most of the purchases this year going to be capacity purchases? Or do you think there is any technology node efficient out there that would take place this year? Thank you.

Robert Halliday

My guess is they’re mostly capacity. When you look at the fabs that are being built that’s my interpretation.

(Kari Sakaa)

Thank you.

Robert Halliday

You’re welcome.

Operator

Our next question comes from the line of Edwin Mok of Needham & Company. Please proceed.

Edwin Mok

Thanks for taking my question and congratulations for a good quarter. First I have a question on PLAD. Can you remind me about how many (packages too) did you ship in the December quarter? And how is it progressing with the non-DRAM customer?

Robert Halliday

Sure. It was four. We’re making really good progress on flash. We’ve run through a couple more tools. Foundry and logic and we’re still engaged with validation and process qualification. I think the two things I’d add on freezing volume PLAD is one, PLAD has got a couple big pods going for it. The first is that if you look at how they’re designing devices in terms of high dose, shrinking the air you need higher doses and smaller areas and potentially conformal doping.

PLAD is really well suited for where they’re going in chip pocket protectors. The second thing is if you look at how we have designed our plasma tool, there’s a real advantage to it in terms of pulse plasma, DC bias, things like that. So I think both of those are big plusses for PLAD. If you said to me what’s - how about rate of adoption, we’re engaged. It looks really good but rate of adoption and process qualification take a little bit longer than I would have thought.

Gary Dickerson

I think longer term we’re seeing more and more potential applications and precision material modification process steps. So longer term I think if you look at where customers are going from a device architecture standpoint, that’s very positive. We also have new technology that we have developed that we will bring to market that should widen the gap with competition and also be very well uniquely applicable to some of these new applications. So I think longer term we’re pretty bullish.

Robert Halliday

Yeah. I think longer term we’re pretty damn bullish Edwin. The tactical thing that’s also hurt by a little bit is the early applications that were in production were DRAM and DRAM spending overall is really down this year. So that doesn’t help either.

Edwin Mok

Just to clarify Gary, you mentioned precision material modification that was mainly related to PLAD and that PLAD is enabling you to do some of those applications?

Gary Dickerson

Yeah. Absolutely. So litho applications for instance, line edge wrap ends for EUV resist or 193 lithography, that’s one area. Etched types of applications we’re seeing more and more of those types of applications where the data is looking very, very promising. Film modification is another one. So again there are a number of these that I think again as Bob said, it takes time to drive the adoption for these new applications but there are some high value problems there. And we have developed some new technology in that area that we’ll bring to market that will be unique and enable us to grow that business.

Edwin Mok

Great. That was very helpful. And then Bob, I just want to ask you a question regarding the foundries. I remember like a quarter or two ago you talked about maybe concern that foundry guys ramping capacity right now but that they might moderate by the middle of the year. You look at that, how do you look at (volume at your foundry) order for this year? Do you expect it to remain strong throughout the next three quarters beyond the March quarter or next three quarters? Do you expect any kind of moderation for the year?

Robert Halliday

Well, you know, they keep sustaining their buying patterns. In fact, even in the last couple of months almost every week has been stronger. And we have multiple foundry customers buying. There are a few things that are positive and they’re underlying. One, the devices they make whether they be handheld devices, products like Apple type products, smart phones, are all doing pretty well. The second thing that helps us is that the capital intensity of the (dense node) seems to be higher. And the third thing that specifically helps us is the implant intensity is higher. So it seems to be holding up pretty well.

Edwin Mok

Great. That was helpful. And then lastly just on solar, congrats for securing so many customers. I’m just curious you guys talk about upside for your forecast this year and I think last quarter you guys talked about potentially five or more customers could potentially be revenue in this year. Care to kind of put a number on that? How do you think that is progressing? Is it more than five now and how much more?

Gary Dickerson

I think what we said last time was between five and ten. And I think it’s more at the higher end of that range.

Robert Halliday

For ’11.

Gary Dickerson

Yeah.

Edwin Mok

I see. That was very helpful. Okay. Thank you. That’s all I have.

Operator

Your next question comes from the line of (Nidi Hassini) of Susquehanna. Please proceed.

(Nidi Hassini)

Yes. Thanks for taking my question. Bob, can you please revisit the second half shipment? I think last conference call you were more upbeat about the first half coming in flat to up compared to second half of last year. And maybe you could provide us an update on the second half of this year and I have a follow up.

Robert Halliday

Well, as I always say to you guys, our vision longer term out is less insight. I’ll tell you this and try and help you as much as I can that each period you’re looking at whether it’s the March quarter or the June quarter or the September quarter and to a much lesser extent December quarter, has incrementally got better looking in the last couple of months. So we’re very confident of March and that has gotten better since we thought two months ago. From what we thought two months ago June looks better and September looks better.

So December we don’t put as much effort into forecasting it but I think it’s better. We do a lot. We do a detailed build plan more through September.

(Nidi Hassini)

Because when I look at the December revenues and if I were to assume flat to up 2010, I get to a 16% year over year revenue growth. I’m just trying to understand how I should think about increased mix of ion implant, some contribution from solar and some from the Asian market.

Robert Halliday

Yeah. So are you doing calendar year or fiscal year?

(Nidi Hassini)

Calendar year and assuming that revenues would go flat compared to December ’10.

Robert Halliday

Flat from December of ’10?

(Nidi Hassini)

Yes. If I just take December ’10 that you just reported, 283, and I assume if revenues were to go flat Q March, June, September and December then I get to 16% year over year revenue growth. And I’m just trying to understand how I can resort this into the three buckets assuming that wafer fab equipment industry would be flat to up 10%, which I think is pretty much a consensus.

Robert Halliday

Well, I’ll tell you a couple of things. One, you’re assuming it’s flat in the quarter we just guided to up about 14-15%. And secondly although we have not guided past March we have told you that we’re reasonably optimistic from what we know that wafer fab equipment looks pretty good this year. My own personal opinion is that year on year wafer fab equipment is probably north of 10% at this point. The second point we made is that implant as a percentage of wafer fab equipment is up next year.

And we said earlier in the call that it was probably in the low to mid 3% in ’10 and in calendar ’11 we think it’s higher, 3% plus. And thirdly, we’ve told you we’re going to have some incremental solar revenues. So if you take those pieces together we’re more biased on the upside. I don’t see at this time a projection of us flat year on year. I mean next quarter is up a good amount.

Gary Dickerson

Yeah. March quarter is up right now. The June quarter also looks up and pretty positive and the September quarter also looks very strong. So I think all of those quarters from what we see today beat the December quarter.

Robert Halliday

Yeah. The further out we get the less sure we are. But today we feel pretty good.

(Nidi Hassini)

Okay. And then just going back to your OpEx and gross margin coming through, when we put everything together how should we think about the drop through, the fluctuations, volatility in gross margin versus a little bit of uptick in OpEx? Would you drop through actually go up given such a strong revenue momentum?

Robert Halliday

Yeah. We have the opportunity to increase operating margin somewhat with good revenues and pretty good gross margins. Remember if we can even maintain gross margins with increasing revenues that’s practically a victory for us because the revenue growth would have been predominantly in systems, which are slightly less gross margin than non-systems. So we would be offsetting that mix issue and still maintaining the gross margins.

And if you’ve got volume then you have more gross profit dollars. And expenses we’re taking the biggest increase in expenses in this quarter. We talked about earlier we could go up to about $1 million next quarter so that we’d have pretty good drop through if there is any volume.

(Nidi Hassini)

Great. Thank you and congrats.

Robert Halliday

Thank you.

Operator

Our next question comes from the line of Chris Blansett of JP Morgan. Please proceed.

Chris Blansett

Thanks guys. A quick question about linearity of your expectation of revenue for solar maybe over the next few quarters - should this be blocky or do you kind of expect a consistent pace of sign offs and revenue recognition?

Robert Halliday

I think it ramps up through the year. I mean the thing that’s hard for me to predict Chris, I can predict shipments a little better than I can predict revenues. And I think shipments are going to see reasonable pick up and revenues it’s harder to pick when people sign a piece of paper. So I think the revenues could be a little bit more back end of the year.

Chris Blansett

And I also wanted to know if you guys had an idea like when you actually expect products to reach the end market that have gone through your systems.

Robert Halliday

Well, people have implanted a large number of wafers now, 500,000 I think.

Gary Dickerson

More than that.

Robert Halliday

Yeah. More than that. So there are a bunch of these that are in somebody’s roof already.

Chris Blansett

Okay. So you actually do think that modules have been made through using the Solion already?

Robert Halliday

Yeah.

Chris Blansett

And then lastly I guess when you think about the customer uptake of these products should we assume that they’ll take one, do an eval and then maybe take a few more to kind of get a line going? And how do we think about proliferation across a specific customer who is adopting the technology?

Robert Halliday

Yeah, we’ve had a lot of pull from customers. We shipped them pretty aggressively. They want to get a first tool in then what they want to do is when they have individual wafers and they have process - in other words, what we’ve done - here are the steps. They give us their wafers and instead of 25 wafers like a semi fab they might give you 300 right? We run them here, we show the efficiency and then they say okay, that’s exciting. Ship us the tool. We want it fast. And then we ship them a tool and then they run it in their own fab, get the process down, get integrated and run it and actually want to run a bunch of wafers to show this efficiency works.

And they get the efficiency and that’s the process. Once they get that running on one tool then they buy more tools. Then what they typically do is once the wafers have been run here at our factory they’re pretty confident it’ll work. So what they’ll do is give us projections on if the tool in their factory works they’ll buy more. So that gives us a sense of the timing of follow on business.

Chris Blansett

Okay. And then have you seen any customers retrofit existing lines with this? Or is this mainly new lines?

Robert Halliday

It’s mostly new I think. It’s mostly new. There is no real reason. It’s not a hard drop into existing lines.

Gary Dickerson

We have seen some. We have seen people add Solion tools to existing lines. But probably the bigger opportunity is for new lines.

Robert Halliday

Yeah. To tell you the truth I think we’re going to have our hands full initially just filling demand for the new lines. And then we can revisit the existing lines. It’s not a hard drop in. The process to install a solar fab isn’t that complicated. It’s going to take a little bit more space.

Chris Blansett

Okay. And then one last question from me just tied to your mainstream business, effectively your comments earlier about new markets driven by Varian technology - is that just a nice way to say you expect to gain a lot of share this year?

Robert Halliday

No. I think we’re going to gain share this year. I think implant as a percentage of tan is good too. I think solar is going to do well. I think we’re giving you a sense a little bit of where we’re going the next couple of years. We think that using our technology in semi but also outside semi has some real positive opportunities. Now you guys can’t value that today but that’s where we’re heading.

Chris Blansett

Okay. Thanks guys. I appreciate it.

Operator

Our next question comes from the line of Steven Chin of UBS. Please proceed.

Steven Chin

Thanks. Hi Gary and Bob. Nice results and guidance. Just two follow up questions on solar - does the March sales guidance include any solar sales?

Robert Halliday

Yeah but not a heck of a lot because we’re taking a conservative posture on acceptance timing.

Steven Chin

And then can you share any color on how this solar tool is doing in China, maybe how many customers in terms of these ten are actually in China or what percent of the test customers are in China? I’m just trying to gauge the feedback coming specifically from some of the low cost manufacturers in China.

Gary Dickerson

I think from a regional standpoint China is probably the most active area for us and the most, the highest number of customers of any region. And the initial feedback there has been very positive.

Steven Chin

Great. Thanks Bob and Gary.

Gary Dickerson

You’re welcome.

Operator

Our next question comes from the line of Satya Kumar of Credit Suisse. Please proceed.

Satya Kumar

Yeah. Hi. Thanks. Good quarter guys. Just in terms of the cold implant market I was wondering where you think your market share settled in 2010 versus ’09? And how do you see the market share tracking in the current system build up this year? Do you see any potential impact from the steel second gen products that certain competitors are announcing?

Gary Dickerson

No. What we said before is we thought that 2010 share would end up between 75-80%. We still believe that. We think our share - we have a good opportunity to increase share in 2011. Trident as I mentioned earlier, is a very strong product for us. We have Trident at multiple foundry and memory customers and really extends our technology leadership versus the competition. If you look at where customers are going towards higher dose, low energy types of applications, Trident is by far the most productive system.

Again, similar to what we have had in the past in terms of advantage from a particle perspective and the initial results from customers have been extremely strong. On the cold implant PTC2, as I mentioned earlier, we’re also seeing a lot of adoption there. We could have by the end of the year 28 upgrades installed and we have significant advantages for cold implant versus competition. So again that’s another area where we see a good opportunity. Bob mentioned earlier in Japan we see a good opportunity to increase market share there also.

And in terms of our technology pipeline we have additional technology for beam line and plasma and some of these device performance and yield options that we’ll be introducing later in 2011 that will also put us in a very strong position from a share standpoint. So I’m right now very optimistic.

Satya Kumar

Okay. Sounds good. And getting back to this question on implant as a percent of WSC, if I go back to the last cycle back when DRAM was strong and implant was used pretty heavily in DRAM plant and all that, it was running in the low 5% range and it came down. Implant tends to go up as capacity goes up and so.

Robert Halliday

Satya, we were at 5% for a long time. If you go back to ’06 and ’07 I think we were high 3s maybe.

Satya Kumar

Okay. I guess like maybe we will take that part offline but the question I was trying to get to is implant going up do you think because capacity mix is getting bigger and implant tends to benefit from that? Or do you actually see apples to apples the use of implant going up faster for say logic foundry application as you go from 14-30 nanometer or the 20 nanometer compared to all the other applications? Specifically things like metal gears or semi transistors, how do you see those types of technology transition affecting the implant mix just to keep the discussion to say logic?

Gary Dickerson

Yeah. So if you look at the logic and foundry customers, we model actually for all of the different technologies, for flash, DRAM, foundry, logic. We normalize it on wafer starts and we look at implant penetration. So if you look at the next technology nodes, we’re basically positive in all of those different segments. And some it could be up as much as 30% in terms of again if you normalize it from a wafer start perspective number of steps increasing with co-implants to address some of the device performance issues.

The other thing is customers adopt cold implant or super skin, some of the device performance and yield options. Certainly those are very positive from the standpoint of addressing some key device scaling challenges. But they also slow the tool down so as you have more adoption of those options it’s positive for our tan.

Satya Kumar

Got you. And one last thing on the solar side, it seems like you’re getting a lot of good traction there so good job on that. I was just wondering to follow up the earlier question what you currently have in the backlog. Are you able to talk about what geographical mixes versus the prospective customer base - it sounds like that’s more in China.

Robert Halliday

Yeah. The folks that we’re engaged with, China is probably the biggest one. There are others in Korea, Taiwan, US and Europe that we’re engaged with. The Asia markets are the biggest opportunity probably in the long term.

Satya Kumar

Okay. Cool. Thanks.

Operator

Our next question comes from the line of Patrick Ho of Stifel Nicolaus. Please proceed.

Patrick Ho

Thanks a lot and also congrats on the great work for the quarter and looking forward. Bob, in terms of just housekeeping again, the stock option break down.

Robert Halliday

Yeah. I got it. I was going to volunteer it and I didn’t get a chance. Cost of goods sold in the quarter was 379. R&D was 1161. MG&A was 3725 and on the tax line it was a credit of 718. The total should come out to 4547 and then cash from operations was 69,468,000.

Patrick Ho

Great. In terms of I guess the gross margin you guys have done a great job particularly as you mentioned that systems is going to be a higher percentage of your overall revenue base. Can you give a little more color of what type of efficiency improvement I guess you’ve implemented that is keeping these gross margins at a pretty high level given all of the headwind factors you’re facing?

Robert Halliday

There are a few things that have helped. I think we continue to get as I said earlier, twice as many tools out of the same facility. So that helps our absorption and the labor force is more efficient. So the factory and cost reduction have done well. That especially helps us also in the cash line. We don’t spend much cash on expansion. The second thing that has helped is that the value proposition of our new products whether it be Trident or PTC2 and things like that have been really good with customers.

So that’s been very helpful to us. And the third thing is that we’re continuing to introduce these new upgrades and products. So the longer term the mix of upgrades is going to be really powerful for us. Right now it’s actually mostly systems and we’re still getting the gross margin improvement.

Patrick Ho

Great. This is more of a conceptual question given how I think Gary you mentioned there are more and more ion implant steps at each successive technology node. Just for hypothetical if you took a logic 65 nanometer and a 22 nanometer, can you just give a little color on how many more steps there are or maybe how many more ion implant pools are needed as you look from that older technology node to the next generation node?

Gary Dickerson

So the one - I don’t remember all of the different technology nodes but if you go from 4X to 3X technology in a foundry right now we’re modeling again equivalent number of wafer starts. Implant could be up as much as 30% for the equivalent number of wafer starts.

Patrick Ho

Is that steps?

Gary Dickerson

Well, it’s a combination of steps but again as I mentioned before, as we increase the adoption of some of the DPY options again it’s very positive in terms of addressing device scaling challenges. But it also slows the tool down. So as we have more adoption of those options that is positive for our tan. So there is both an increase in steps with co-implants being the biggest area of adoption but also from adoption of some of these upgrades.

Patrick Ho

Great. Final question from me - you guys have done also a great job of obviously leveraging your technologies and getting into these new market places. Can you just describe or can you just I guess update us on your M&A thoughts and what it would take for you to quote, “find” different technologies or find something synergistic? What’s the current policy for Varian in terms of the M&A opportunities out there?

Gary Dickerson

So I guess if you look inside semi what I have seen, I’ve been in the industry I guess 30 years, I think the number one supplier in any segment makes a lot of money, number two breaks even and everybody else loses money. So I don’t think there are that many great opportunities inside the semi business. What we always look for, again you want to have leadership in whatever market you’re going to participate in. There are some great opportunities for us to leverage our technology in other markets.

And there are some cases where there may be opportunities for us to accelerate adoption. But again I think for us 90% of our growth is right now focused on organic growth.

Patrick Ho

Great. Thanks a lot guys.

Operator

Our next question comes from the line of Jim Covello of Goldman Sachs. Please proceed.

Mark Delaney

Hi. This is Mark Delaney calling for Jim. Thanks for taking the question and congratulations on a great quarter. Bob, I was wondering if you could give us an update on your thoughts for use of cash. I know you’ve been using the buy back and the cash level has been growing pretty nicely here.

Robert Halliday

Thanks Mark. Yeah. We increased our authorization another 100 at the November board meeting it went up to about 146. We bought back stock prior to the blackout. During the blackout, which ends next Tuesday we haven’t been buying anything. The next time we’re going to review this is at the February board meeting, which is the middle of February. So we’ll review it then. Our history is that we have been pretty aggressive on the buyback in the past.

We bought back about $750 million of our own stock and the board is always very supportive of returning value to investors. It’s always a question of timing and volume and stuff like that. So I anticipate we’ll end up buying back stock again. But today we’re not buying back because we’re in the blackout. We’ll go over it at the board meeting in February.

Mark Delaney

Thanks. One other - I was wondering if you guys could talk about how you see your market share in the nan market for 2011.

Robert Halliday

Pretty strong.

Gary Dickerson

Yeah. Very positive.

Robert Halliday

We’re strong. We’re probably gaining actually.

Gary Dickerson

Yeah. I think our share there is very strong and our forecast is also for the market share to be very good there in that market.

Mark Delaney

Okay. Great. Thanks very much.

Operator

Our next question comes from the line of Peter Kim of Deutsche Bank. Please proceed.

Peter Kim

Great. Thanks for taking my questions. Just quickly on you said that you recognized a couple more tools for nan application. I was wondering if you could talk about how many unique number of customers that have qualified your tool and if those production tools are very good or are they still kind of in the development phase?

Robert Halliday

Total number of customers for all applications of PLAD or just nan?

Peter Kim

Just for the nan.

Robert Halliday

I think we’ve only revenued one and we have a couple others looking at it.

Gary Dickerson

Yeah. So we have one customer that is ramping in production in nan and other customers where we are engaged where it looks optimistic that those customers not necessarily soon but longer term opportunities for us in flash.

Peter Kim

Okay. And then with regards to this I was wondering if you could talk about the move to 3D structure. I mean do you really think that kind of like a fence side gate is something on the horizon within the next couple of years? And what would that do to the server market for implant if the gates were to transfer over to (finta) structure?

Gary Dickerson

Well, I think the key thing for customers is affordability. So when you look at device scaling from one technology node to another technology node cost effective scaling is a big driver certainly for the memory customers but also for foundry customers. We’re engaged with all of those customers with implant applications and I think it’s too early to say in terms of what technology people will use for 16 nanometer or several years out in the future.

Again, right now we’re engaged with many of those customers. It’s very positive in terms of the potential that we have there. If you look at what’s happening for the technology node transitions that are happening over the next two to three years, all of those are very positive for Varian. And then again longer term we’re engaged with these other customers but it’s really too early to say what the net impact would be.

Peter Kim

Great. Thank you.

Operator

Our next question comes from the line of Ben Pang of Caris Company. Please proceed.

Ben Pang

Thanks for taking my question. First on the solar market, how do we actually figure out what your opportunity is in like 2012 calendar?

Robert Halliday

Well, what we’ve said is that our goal is to have 100 million in revenues. In the August investor day we said sort of the opportunity set is about 300 million.

Ben Pang

And has that changed at all?

Robert Halliday

I think the realistic opportunity set is 300. 100 is the official goal. I think I’m a little more optimistic than 100 but I haven’t reset the numbers.

Ben Pang

Okay. And at the $100 million level how many customers would you actually have?

Robert Halliday

I’d have to go back and add it up. You’d have probably several ramping multiple tools in production. You might have 10 total. I don’t know off hand.

Ben Pang

Okay. So it would kind of be in the same customer base that you’re already shipping to right? You mentioned ten or 11 customers that you’re shipping too, right?

Robert Halliday

No. What I said was engaged with 19 and Gary projects that in calendar ’11 that we will ship. Last call we said five to ten we would ship to in calendar ’11 and today we said the higher end of the double/single digits, right?

Ben Pang

Okay. And then…

Robert Halliday

The other color I’ll give you on that Ben is a number of those guys you’re shipping to this year are first tools, right? So what you get is more guys in volume next year.

Ben Pang

Perfect. And switching back to the semi cast space, if you track the number of projects that you’re looking at in the late summer versus now, has that actually increased?

Robert Halliday

We don’t do it so much in projects. I’d say a couple things. One, a couple more projects. Another thing is more volume on the projects. Like places like a major foundry in Taiwan where they keep adding expansions but they might come from the same line. Then they added another line. So I’d say it’s three things. One is there is some new projects but then the definition of how many tools they’re going to buy or commit to is bigger. So I think it’s both.

Ben Pang

Okay. And the final question for me, when you talk about your tan growth of 5% going to 8% how much of that was due to PLAD in terms of the 5%?

Robert Halliday

That’s not exactly what we said. We said a couple things. One is we said that the new application stuff exclusive of solar and all that stuff, that was new application work we did added 5% to the tan in ’10 and 8% in ’12 and that’s from the tan. And we got all that, right? It didn’t go.

Ben Pang

Okay.

Robert Halliday

The second thing we sad was that the implant tan we believe will grow faster away from fab equipment this year because we gave a higher percentage of the percentage away from fab equipment. If you accept that make believe you assume whatever you assume, wafer fab equipment grows 10-12% this year. If we go to that higher percent we could double the growth rate of wafer fab equipment if we’re lucky.

Ben Pang

Okay. Great quarter. Congratulations. Thank you.

Robert Halliday

Thank you.

Operator

As a reminder ladies and gentlemen, press star, 1 to ask a question. The next question comes from the line of (Yagdish Ayer) of (Areet). Please proceed.

(Yagdish Ayer)

Hi Bob. Hi Gary. Thanks for taking the question. Two questions Bob - first is how should we think about PLAD revenues for ’11 given all these new evaluations, which are ongoing? How should we think about PLAD for ’11?

Robert Halliday

Yeah. It’s a little early to say. I think we get a pick up from the flash stuff and I think we get a down tick because DRAM guys aren’t spending much. And some of the ramping in DRAM we would have expected a little more and stuff. So I think PLAD is sort of flattish maybe. It depends on how much DRAM spends later in the year. That helps them a lot.

(Yagdish Ayer)

Would it be like for calendar ’11, could it be less than 100? Could it be more than 100?

Robert Halliday

I think it could be less than 100.

(Yagdish Ayer)

Okay. And second question is on a little bit bigger picture question on the solar story. I just wanted to find out who is really driving the efficiency improvements at your customers’? Is it they take your recipe and start to plug in and use it? Or do they have their own expertise to kind of improve upon whatever the baseline recipe that you give?

Gary Dickerson

Well, certainly we give them a BKM. We give them a recipe to start and some of the customers are also tweaking the process with their own technology development. But certainly we give them a starting point from a recipe perspective.

(Yagdish Ayer)

Okay. And one final question just if I can squeeze one - how should we think about the three main segments, the high current, medium current and high energy in terms of growth for this year given the mix between foundry and logic customers in that?

Robert Halliday

Well, it’s been I think last year - I haven’t got the real data. I don’t remember the exact numbers. I think it was probably about 50% high current, about 30% medium current and about 10% high energy, about 10% PLAD. I think next year is probably similar, maybe high current is up a little bit.

(Yagdish Ayer)

You mean for calendar ’11, right?

Robert Halliday

Yes.

(Yagdish Ayer)

Okay.

Robert Halliday

I mean high current may be up a couple points.

(Yagdish Ayer)

But probably the high energy takes a back seat here and PLAD?

Robert Halliday

Probably. I think it’s going to be a pretty good high current year.

(Yagdish Ayer)

Okay. That’s good. Thank you.

Robert Halliday

You’re welcome.

Operator

We have a follow up question from the line of Edwin Mok of Needham & Company. Please proceed.

Edwin Mok

Hi. Thanks for taking the call. Just one quick question on you mentioned that Chinese customers account for a big percentage of your engagements for solar products. I was wondering some people worry that at least some customers we talk to are concerned that operators in China are not as sophisticated as semi operators and therefore running an implant may be challenging. Do you see that as a push back from your customers? And if so, how do you address that?

Gary Dickerson

We haven’t seen any push back from that. It’s pretty simple. It’s not like in semi where you have many, many, many different recipes that you’re running. It’s very straightforward in solar.

Robert Halliday

Yeah. I agree Edwin. A year and a half ago maybe I thought that or a year ago but a couple of things. One, you really don’t change the recipes much. You’re really just running the same thing over and over. And secondly, our up time is really high. The tools are very reliable. Now that’s why installation warranty cost is so low. And third, the solar customers are getting more sophisticated. A lot of them, more and more of those guys have come from semi. So it hasn’t been a problem.

Edwin Mok

Great. And just one more quick question - I think on answering one of the analysts’ questions you mentioned that a majority of business is likely to renew installation for solar. Isn’t it true that your first customer is only retrofitting its existing line with implants?

Robert Halliday

That’s correct. Yes.

Edwin Mok

Great. Thanks for clarifying. That’s all I have.

Robert Halliday

Thank you.

Operator

That concludes the Q&A session for today’s call. I would now like to turn the conference back over to Mr. Robert Halliday for closing remarks.

Robert Halliday

We want to thank you all for joining us today. We feel pretty darn good about 2011 and the new markets and the existing markets look good. If any of you want to visit us in Gloucester bring your snow shoes. We have about three feet of snow on the ground but we’ll welcome you into the building and keep the heat on. So thanks very much for joining us today. Bye-bye.

Operator

Ladies and gentlemen, thank you for today’s participation in this conference. This concludes the presentation. You may now disconnect and have a great day.

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