Varian Semiconductor's CEO Discusses F2Q 2011 Results - Earnings Call Transcript

| About: Varian Semiconductor (VSEA)

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

F2Q 2011 Earnings Conference Call

April 28, 2011 5:30 PM ET

Executives

Robert Halliday – EVP and CFO

Gary Dickerson – CEO

Analysts

Chris Blansett – JPMorgan

Krish Sankar – Banc of America Securities-Merrill Lynch

Jim Covello – Goldman Sachs

Edwin Mok – Needham

Stephen Chin – UBS

Satya Kumar – Credit Suisse

C.J. Muse – Barclays Capital

Patrick Ho – Stifel Nicolaus

Weston Twigg – Pacific Crest Securities

Ben Pang – Caris & Company

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Varian Semiconductor Equipment Associates Inc. earnings conference call.

My name is Lacy and I’ll be your coordinator for today.

At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the presentation 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 second 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 third quarter and the positive outlook for Varian in its core and growth markets, both in fiscal 2011 and beyond.

Now I will review second quarter results. In the second quarter of fiscal year 2011, we reported record quarterly revenues, operating margins, net income, and earnings per share. Second quarter 2011 revenue was $330 million. Second quarter revenue increased from the first quarter by $47.4 million, due to increased tool sales to foundry and logic customers. In the second quarter of fiscal 2011 unit shipments were approximately 52% foundry, 46% logic and 22% memory.

Second quarter 2011 earnings per share of $1.07 were at the higher end of our guidance of $1.02 to $1.07 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, 68%; North America, 23%; and Europe, 9%.

Second quarter 2011 gross margins were 49%, in line with our guidance, despite an increased mix of system revenues relative to non-system.

R&D expenses of $29.8 million were higher than our guidance as we increased our development of products for new markets.

Marketing, general and administrative expenses were $36.8 million. Second quarter MG&A expenses increased from the first quarter due to calendar year focal reviews, other variable compensation increases, annual corporate governance expenses, and cost relating to upgrading our IT infrastructure.

In the second fiscal quarter, we had operating margins of 28.9%, which represents the highest achieved in the history of the company. Our effective tax rate was approximately 13.9% in the second quarter of 2011, resulting in income tax expense of $13.3 million.

At the end of the second quarter, our full-time equivalent headcount was 1,924, up from 1,795 at the end of the first fiscal quarter of 2011. 125 of the addition out of total increase of 129 were in operations and R&D.

Our cash and investment balance increased to approximately $104 million in the second quarter to $554 million. In the second quarter, we repurchased approximately 543,000 shares of our own stock for approximately $20 million.

Second quarter capital spending was $5.7 million, primarily for IT, R&D equipment and facility equipments. Depreciation expense for the quarter was $3.9 million.

Now, I will turn to our third quarter guidance. In the third quarter of fiscal year 2011, we anticipate revenues of between $323 million and $333 million. We anticipate the gross margins in the third quarter will be 0.5% lower than the second quarter.

In the third quarter, we expect R&D expenses will be up approximately $1.6 million, mainly due to the accelerated investment in two next-generation tools for our core and adjacent markets.

Marketing, general, and administrative expenses should be up $600,000 in the third quarter. This increase is related to additional demo tools for our Solion and Trident products.

Our operating margins in the third quarter of 2011 will be between 27% and 28%. We expect our tax rate for the third quarter to increase to between 16% and 17% as the mix of our business shifts towards the US. As a result, in the third quarter of fiscal year 2011, we expect to earn approximately $0.97 to $1.02 per share.

We expect capital expenditures in the third quarter to be approximately $6.5 million.

I get a lot of questions about gross margins. I thought I might give a little more insight into the various moving pieces. Over the past five quarters, we have achieved gross margins of approximately 49%. That is about 2 percentage points higher than our prior cyclical peak.

We have achieved these margins despite three current adverse mix issues. First, the mix of our total revenues that is due to our sales of non-systems products is running under 20%. In the years like 2008 and 2010, the non-systems business represented 26% to 29% of our total revenue. Our non-systems business typical carries higher margins than our systems business.

Second, we expect strong share performance in Japan in calendar year 2011. Due to the special product and support requirement to Japanese customers and local competition, Japan is our lowest gross margin region.

Third, the initial gross margins on our Solion product will be lower. Solion’s margins will start on lower due to a preponderant on first tool installation, low volume component purchases, and sales from our development partners. As our Solion volume increase and we gain more customers, these margins will trend up to the corporate averages.

Gary Dickerson

Thanks Bob. As Bob mentioned earlier, we had a record-breaking second quarter, achieving new company records including revenue at $330 million, operating margins at 28.9%, earnings per share at $1.07, cash from operations at $103.5 million, and shipments per employee of $750,000 per personnel.

I would like to thank all Varian employees for their contributions to this outstanding performance.

Investments in our core business have enabled Varian to establish share leadership and provided us with great operating leverage as our business ramps to record levels.

In addition to our semi business, we have identified opportunities that leverage our precision materials modification technology to solve high-value problems in new markets. Our investments have created significant momentum in solar and in other new markets. We anticipate these new opportunities will provide a pipeline of substantial growth in revenue and earnings per share for the next several years.

During the call today, I will focus on three areas; market leadership in our core semi business, solar opportunities, and growth in new markets from leveraging our core technologies.

Since 2004, Varian has achieved market share growth from 30% to roughly 75% today. Varian has built technology leadership a reliable common platform product portfolio and a very strong field organization. All of these factors enable Varian to continue to widen the gap with our competitors.

Varian’s extended period of high overall market share has resulted in customers coming to Varian to solve their high-value device scaling problems. We have a very strong team in the factory and field with device integration and modeling capability to engage with leading R&D customers working on next-generation devices. This forward-looking focus on device performance and yield is a huge advantage for Variant versus competitors that are mostly focused on trying to achieve better reliability for their product platforms. Last year, there was a significant increase in implant as a percentage of wafer fab equipment and we anticipate 2011 will also be a strong year for implants.

Some of the drivers for this increase include, an increase in co-implants for foundries, an increase in the number of implants to tune the multiple transistors on each device, the DRAM market is moving toward a more logic like periphery and increasing co-implants, implants to deal with increasing contact resistance and junction leakage, more adoption of device performance and yield options like PTC II and super skin that improve device performance but also impact tool productivity, an increase in the number of precision materials modification implants, and higher dose and loser energy recipe for next-generation devices.

We are also engaged with memory and logic customers on longer-term device scaling changes and have multiple technical solutions that can be enabling and drive further growth in the semi market for Varian. The largest market in our core business is the high current segment with the 2010 TAM of more than $500 million. For the seventh consecutive year, Varian has increased its market share in high current. Varian has consistently over the seven-year period brought new and enabling technology to market to continue to widen the gap with our competitors.

Our most recent high current product offering is the VIISta Trident. The Trident provides the unique combination of energy purity and high productivity for high dose and low energy recipe that are required for next-generation devices. Coupled with enabling device performance and yield technology such as improved uniformity, angle control, and beam current, the Trident is also easily upgraded with Varian’s production proven PTC II cryogenic implant option. Several customers are integrating PTC II into their next-generation devices. There are currently 10 Trident in production and multiple fabs, and we anticipate a significant ramp of Trident tools in 2011 and 2012.

In the medium current segment after five years at approximately 50% share, Varian has achieved 70% market share in the last two years. In the last year, we gained significant share at one major foundry. We are also making good progress with two major customers this year. By the end of May we will have installed PTC II on our medium current platforms at logic and memory fabs, to provide leakage reduction for next-generation devices. In addition of PTC II for medium current tools extends our device performance and yield leadership in this market.

In high energy, we anticipated significant increase in 2011 market share. We have a leadership position at every leading edge CMOS image sensor fab and we have a very strong position in the Japan high energy market.

Outside the semiconductor industry, we have many opportunities to leverage implant technology. The opportunity that is generating the most interest now is in solar. We are seeing very strong customer momentum with the Varian Solion implant tool. To date we’ve received orders from eight different customers. This quarter, we will recognize our first Solion revenue and anticipate an additional five tool orders and shipments of at least five new tools.

Our first customer has made significant gains in advancing sale efficiency. They have aggressively published and promoted the use of implant as being essential to achieve grid parity through higher cell efficiency and cost reduction by reducing the number of process steps. Solion is now in full production at our lead customer and repeat orders have been shipped. We are engaged with 25 of the top 30 single crystal silicon PV suppliers and customers tell us that they are increasing focus on high efficiency to drive lower cost per watt and differentiate versus their competitors. The solar opportunity for Varian can add significant revenue growth and operating leverage starting in 2012.

Varian is focused on leveraging our core technologies to implement unique solutions to solve high-value problems. We have a very strong team that has identified a pipeline of new market opportunities that can drive significant long-term growth for Varian. Solar is the first new market outside of the semi industry where we can provide a disruptive high-value solution. But this is only the first of several materials engineering opportunities that will drive future growth and significant operating leverage for Varian. We have engagement with leading customers and additional markets where there are very high value problems that Varian can solve with our unique materials modification technology.

We will set many new records in 2011 and also start to see the first significant revenue from a market outside the semiconductor business. The new market growth in solar and the pipeline of other large market opportunities creates a tremendous growth opportunity for Varian. We’ve never been more excited about our near-term and long-term outlook.

We will now take your question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question will come from the line of Chris Blansett with JPMorgan. Please proceed.

Chris Blansett – JPMorgan

Good afternoon, gentlemen. Gary, I had a quick question. You mentioned in your comments that you believe you are going to continue to gain share this year. Do you have sort of a range of share gain you’re expecting overall and if you had the specific comments within the different implant sectors?

Gary Dickerson

I don’t know that we’re going to gain share this year, but I am optimistic. In high current, as I said, we gained share seven consecutive years, we’re in a great position, especially with the Trident product and the DTY options that we’re introducing. So I’ll say high current, we’re in a great position. In Japan, we have gained significant market share, again a very strong market position. And, in high energy, we also anticipate significant share gain in Japan also with CMOS image sensor customers.

Chris Blansett – JPMorgan

Okay. And then going to another topic, you mentioned some comments about the Solion product. I wanted to – the solar industry has undergone a little bit of weakness in demand in the first half of the year. One, I wanted to see has that changed your outlook for revenue and shipment expectations for this year. And, two, if you could just reiterate some of those facts you said earlier about order shipments and what you’ve seen so far.

Gary Dickerson

All right, I’ll have Bob do the facts.

Robert Halliday

I’ll look up those numbers.

Gary Dickerson

Again the basic value proposition for us in solar is implants can increase cell efficiency and reduce process steps. So from a cost per watt standpoint, it’s a compelling value proposition for customers. The other thing is the long-term roadmap as people move to anti-substrates and you move to cell architecture whether a multiple patterning steps and we can do those patterning steps in situ. Again the roadmap with the Solion product is also very compelling. So overall we’re extremely optimistic in solar. Bob, why don’t you have the specific?

Robert Halliday

I have it. So the quotes we gave today were that we’ve received orders for eight different customers. In this quarter we will recognize our first Solion revenue and we anticipate an additional five tools and a shipment of at least five mini tools.

Can I just add one more thing, just a clarification? Somebody just sent me an email that in terms of the guidance, I might have read it wrong, in the second quarter we repurchased approximately 543,000 shares of our own stock for approximately $25 million. I don’t know if I said $22 million, I apologize.

Gary Dickerson

I guess one other thing relative to the solar market slowing down, again we are penetrating this market targeting higher cell efficiencies. And what we are hearing from customers is that they need to differentiate. So going to higher cell efficiency is bright for us from a penetration standpoint.

We are working with some very large solar customers that have aggressive plan to introduce low-cost IBC structures and that fits perfectly with the implant and the in situ patterning where you can go again towards higher cell efficiency with 2D patterning and have a dramatic reduction in terms of the number of process steps.

Chris Blansett – JPMorgan

Okay. So even though you see weakness in the solar market, you still feel pretty comfortable about your outlook for the Solion this year and next?

Gary Dickerson

Yes. Again, I think what we had said before was, originally $25 million to $30 million, and then we updated that by saying that we thought we would exceed that and I think we are still on track to do that.

Chris Blansett – JPMorgan

Okay. Thank you, guys. I appreciate it.

Operator

And our next question will come from the line of Krish Sankar with Banc of America Securities-Merrill Lynch. Please proceed.

Krish Sankar – Banc of America Securities-Merrill Lynch

Yes, hi, thanks for taking my questions. I had a couple of them. Bob, if I look into your June quarter guidance, can you help us reconcile which segment – are you seeing your core ion implant business go down directionally and the new applications pickups. Can you give some color on the mix of revenues?

Robert Halliday

Yes, most of the revenues in Q3 are still the core business. Within the core we’re still seeing some sustained buying from foundries and memory, so you might say what’s the disconnect for Varian between some of the other commentary you’ve heard last week or two.

Couple of things; one is we guided about flat roughly, and you might say that’s an achievement. We were actually significantly up just as recently a few weeks ago, so we saw some of the things that other people have seen. We’re just – we’re at a very high number as recently as few weeks and month ago.

The second thing which we think is helping us is there is an increasing demand for implant at the advanced nodes. So I think as some of these customers doing these tool buys they look at them pretty confident they need for implant. It is not just at this node but for increased utilization at the future nodes. They feel comfortable with those buys.

Krish Sankar – Banc of America Securities-Merrill Lynch

Got it, got it, all right. And then, two other questions; one is – how do we think about OpEx beyond June? I do remember like some of these one-time things might come off in the SG&A line item. So should we assume that on a flat sales OpEx might come down in September?

Robert Halliday

Well, I don’t want to give guidance on two quarters. That’s suicidal. But to give you some directions, I think there is going to be a little bit more investment in Q4, in September quarter, and typically in things like R&D. I mean I don’t want to give the numbers in there, but I think we might invest a little more in R&D if you ask me to guess.

Krish Sankar – Banc of America Securities-Merrill Lynch

Okay, all right. And then a final question for Gary, in terms of the Solion products, how strong is the IP as you start proliferating multiple customers beyond your tool guys right now? And is there any IP issues depending on if some of these are different technology? Thank you.

Gary Dickerson

Well, we have a very strong IP position. We filed more than a 120 patent applications and somewhere around, I guess, of more than 120 disclosures and 70 patent applications. We have some patents granted relative to the in situ patterned implant. And again for these advanced cell architectures, that is really a big deal.

If you look at an advanced cell architecture like IBC, we can eliminate potentially half the process steps with this in situ implant. So that’s very important. We’ve had a patent granted relative to multiple implants in a vacuum. We got breaking vacuum. That’s also very significant as you go to these more advanced cell structure. So we think we have a very strong IP position, especially as customers go towards higher cell efficiencies.

Krish Sankar – Banc of America Securities-Merrill Lynch

Thank you.

Operator

And our next question will come from the line of Jim Covello with Goldman Sachs. Please proceed.

Jim Covello – Goldman Sachs

Hi guys, thanks so much for taking the question. Bob, question for you, you mentioned just a couple of weeks ago that the numbers looked up a lot now they’re a little softer, so you’re seeing some of the same things that others are seeing out there. How do you personally differentiate between just kind of temporary softness and something more permanent? What kinds of signs do you look for, for those kind of things after having been through so many cycles?

Robert Halliday

You mean my 100th year here.

Jim Covello – Goldman Sachs

I don’t want to make you feel older or anything.

Robert Halliday

Well, I’ll give you the way I look at, and I’ll say I’m inevitably wrong, but I’ll try. We look at a bunch of things. We look at – we’re getting across the board, push outs and cancellations and many different customers that’s interesting to us. We look at tool utilization which was reflected in our spare part sale. We get tool utilization data, but also we look at our spare parts and upgrade sales, because that tells how higher they’re running the tools.

We have a lot of qualitative discussions with customers, because we have a pretty good strong sales force out there that gives us a lot of insight. My own take is it’s kind of tough to tell right now. Some customers look they push things out, some have not, so it isn’t across the board. And they did give us new dates. It wasn’t like they pushed it out forever. So it’s very hard to read Jim.

Jim Covello – Goldman Sachs

That’s helpful, thank you. And then, do you – what’s your overall perspective on kind of industry consolidation at this point when something that’s happening in a little bit in the backend of the equipment industry, we haven’t really seen too, too much into the front end of the equipment industry, you think there is going to be any, and does it impact Varian in anyway?

Robert Halliday

Well, it’s impossible to predict. I mean the thoughts everybody always raises is motivations for industry consolidation as the customer is getting bigger, and there are a small group of customers are bigger percentage of the spend which is true, and people predict that will get more pronounced as you approach 450. I think that is true. I think that if you have a very strong IP position and a market share position as frankly Varian and a number of other companies do, you can compete well with those large customers and service them well. So I think Varian is pretty well positioned in either respect.

Gary Dickerson

I think from our perspective looking at M&A, one of the things that I’ve learned being in this industry now for 30 years is that in any given segment, the number one guy makes a lot of money, the number two guy breaks even, and everybody else losses money. So unless you have a really clear vision for market leadership in any of these segments in the semiconductor industry, it doesn’t make sense to move in that direction. So for us when we look at opportunities we are very, very selective using that type of criteria. Can you be number one in that segment?

Robert Halliday

Yes, the other thing I’ll just add Jim is, we have to prove it, but I personally and Gary, have become a lot more excited in the last year or two on this potential to take the implant technology to other markets very cost effectively and solve a lot of problems, so the conundrum of how do you keep growing and how do you stay out of the cycles. We’re trying to feel more and more positive about that.

Jim Covello – Goldman Sachs

Very helpful. Thanks so much.

Robert Halliday

You’re welcome.

Operator

And our next question will come from the line of Edwin Mok with Needham. Please proceed.

Edwin Mok – Needham

Hi, thanks for taking my question. So, I’m going to have to ask this. Bob, how do you think – how do you feel about the second half of this year?

Robert Halliday

Well, again, I’ll be inevitably wrong. We guided to a Q3 that’s flat. We’re still getting lots of indications of interest from customers that they’ll have a pretty good September quarter for us, but there is no doubting that recent news has been downward directionally.

So if you look at – one of my secret piece of paper here today, it doesn’t look too bad for the fiscal year, but the direction seems a bit on the downward momentum. Now we’ve had downward momentum because of Japan or because of capacity issues or ramping issues, I have no clue. But right now we look okay. But it’s very difficult to say, just moving around along right now.

Edwin Mok – Needham

So the pushed out that you talked about the date might be moving September quarter, but there is no guarantee that will happen, but that’s maybe how you’re looking at that right now?

Robert Halliday

Things are in a relatively high state of flux right now.

Edwin Mok – Needham

I see. Okay, that’s fair. And then my second question is related to PLAD, just curious how many tools you’ve shipped and can you update us on the progress in NAND that you recognize running on that and what’s the progress on logic as well?

Gary Dickerson

We shipped four tools. I think we delivered one or two NAND, I’m looking at up, because I don’t remember that.

Robert Halliday

We’ll look it up, I’ll let you know.

Gary Dickerson

So in NAND flash I think that so far we have orders for three tools this fiscal year. Don’t – of course PLAD has been driven mostly by the DRAM business and DRAM is very weak this year. We’ve made some progress in NAND flash with the three orders, but it’s not significant and that’s not going to ramp to a very high level anytime soon.

In logic, we’re certainly working with customers on some of – some future technology challenges they have. There are opportunities for a material modification types of implants, some high aspect ratio structures, [inaudible], potentially even litho types of applications for material modification. But it takes a long time to integrate into the device process flow.

So from the time that you’re starting working with these R&D customers it might be two, three years before you actually start seeing revenue. So I don’t anticipate significant PLAD revenue in logic anytime soon. Again, we’re making some progress in NAND flash, and unfortunately the DRAM market right now is pretty weak.

Robert Halliday

Hi Edwin, I just clarified. We shipped for our revenues to and the flash revenues next quarter.

Edwin Mok – Needham

Next quarter. Great, very helpful there. So it sounds like logic is still in the R&D stage, is that correct?

Gary Dickerson

That’s correct, yes.

Edwin Mok – Needham

Okay. Great, very helpful. One question I have related to solar. So you mentioned that you guys got these new orders from these customer. Are those still predominantly kind of in development state and realistically in terms of revenue as well as kind of volume shipment reduction for those customer is more likely to come in, in calendar 2012. Is that how we should think about that?

Gary Dickerson

Yes, so one customer we actually already have repeat orders, and we anticipate additional repeat orders coming within the next quarter. But the majority of these shipments are single tool customer opportunities. Basically they’ll bring the tool in, they’ll do the qualification, and once that qualification happens then move to volume production with their next fab brand. So you’re right. I believe that we have a good chance to exceed what we had earlier the $25 million to $30 million in revenue for calendar ’11, but the more significant ramp in solar is more 2012.

Edwin Mok – Needham

I see. Great, very helpful. And one last question for you Bob, I noticed that the service revenue is down a bit sequentially this quarter, can you help explain that?

Robert Halliday

That’s the external reported numbers. Now, remember that’s not what we call non-systems. What we call systems internally is shipments of tool and that’s basically a 100% of the revenue – of the tool revenue. And what we call non-system is spare parts and upgrades and service contracts. We think that’s the way everybody looks at the business.

What do you see in the external reported data for the accounting rules which is most of the tool revenue, about 88%, because that’s deposits not related to installations, and then has all the products and upgrades revenues. So the service revenue you look at is predominantly just installation revenue and service contracts. I won’t read too much into that. Right now, our service business is doing pretty well, it’s sort of flattish Q2 and it looks pretty in Q3. But it’s going up generally.

Edwin Mok – Needham

Great, very helpful. Just one – I would just squeeze one. Well, your main competitor which reported yesterday talked about a pricing environment being a little more competitive, can you shed some light on that?

Robert Halliday

I would be happy to. I read that and I couldn’t remember any of that. All of our regional sales people say I want to hear all the deals when you got into competitive pricing. And I got virtually no feedback.

Gary Dickerson

Yes, I – again I can’t think of virtually any cases where we’re not significantly a higher priced and it comes through in our gross margins gap that we have.

Edwin Mok – Needham

I see. So maybe they were referring to strip. Okay, thanks, that’s all I have. Thank you.

Robert Halliday

Welcome.

Operator

And our next question will come from the line of Stephen Chin with UBS. Please proceed.

Stephen Chin – UBS

Hi Gary and Bob. Also, congrats for the results. Gary, I just wanted to come back to the R&D spending. Is there anyway you could share more color on some of the adjacent market that’s driving the continued investment in R&D and what some of those might be, and if not, when might we get an update on some of these adjacent R&D initiatives?

Gary Dickerson

Yes, so again we’ve talked a lot about solar, we’re ramping into that market, we’re driving very hard for these future cell architectures where implant can be even more disruptive. So they’re still a significant investment in solar. We see opportunities in LED, in data storage, flat panel. You can use implant technology to modify reflectivity, porosity of films, and many, many different applications. We’ve talked about using implants in etch, etch stop, in litho, so there are a number of different applications.

Of course, what we do is we go through and prioritize all of those. And if you look at our growth spending today, probably about 50% of our growth spending is solar, and then the remainder of the growth spending is in some of the areas. I don’t want to say specifically, but in some of the areas I just talked about.

Stephen Chin – UBS

Okay. As a follow-on to the solar update, it sounded like the Solion sales are mostly being driven by capacity buys. Have you seen the customers purchasing the Solion for the replacement of the fusion furnaces?

Robert Halliday

They’re more Greenfield.

Gary Dickerson

Well, I think that, absolutely as customers move forward, the whole idea to replace the fusion furnaces with implant. In fact, one of the leading furnace suppliers even in their earnings call said, they believed that implants will be a significant share of the future doping markets in the solar business.

Robert Halliday

Yes, 50% and more.

Gary Dickerson

Yes.

Stephen Chin – UBS

Thanks Gary.

Operator

And our next question will come from the line of Satya Kumar with Credit Suisse. Please proceed.

Satya Kumar – Credit Suisse

Hi, thanks. I was wondering if you have any targets for – Gary for the solar business into 2012 at this point?

Gary Dickerson

Yes, what we have said in the public domain is – for now nine months is a $100 million. I’ll let you what, I think we’re pretty optimistic about that. The issue, Satya, is not too much shipments, it’s revenue recognition. So that’s a $100 million of revenue. It was getting first tools accepted and then the bugs are inevitably in the new market is the challenge. But a $100 million we’ll put on the record.

Satya Kumar – Credit Suisse

Okay. The shipments that you’re making in the June quarter, pipe shipments and it looks like you’re taking in orders of that much. And I'm guessing you're going to do a handful of shipments in December. How should we think about the incremental margins impact? Let's say September hypothetically, on the core business was, call it down 10% like most of the companies are saying. How should we think about the gross margin impact in Q3 and September and December?

Gary Dickerson

Yes, I’ll talk – I talked about that a little bit. I went into a little bit of detail on the call about the mix issues. And we’re kind of managing two different business models here right now. We’re managing the core business model, we’re managing the growth business model, particularly solar. So if you look at the core business model, it actually give us pretty damn high grades. If you adjusted our core business gross margins for a low percentage of mix of non-systems that would penetrate in Japan and we’re gaining share in places like high energy. But core gross margins are pretty damn good when you think of those mix issues, especially the non-systems it sets a low percentage.

If you look at the – so we are doing a pretty good job of optimizing the core gross margin. In fact, we’re probably, if you will normalize a north of some of the targets we’ve given you in past investor days. The second thing that was managing the growth markets, particularly solar, I do think there is little risk I’ve been talking about this for nine months and 12 months on the road that as you shipped these early solar tools, our gross margins on those tools will be lower. That will be lower because most of them are first tools in brand new fabs, so we had men on sites, spare parts, it’s going to take longer and more costly to get them installed because they’re unfamiliar with them.

The second thing is that they’ll be buying low volumes in terms of pipes purchasing, so we don’t get cost – cost reduction always comes on this stuff, but initial stage you get it, you every quarter for a couple of years. And then the third thing is some of the early tools are either are development pioneer or they don’t quite have as many different steps involved.

So I think the gross margin in solar will be lower than our corporate average and they will go up almost sequentially until about the end of ’12, calendar ’012, above the corporate average for tools. That means in the September quarter, if our solar revenues doesn’t pickup and we gain some sales in Japan, we will have some gross margin challenges. Now, I don’t think we’re going to have terrible challenges, but there is a little bit of risk that we have to manage.

Operator

And our next question will come from the line of C.J. Muse with Barclays Capital. Please proceed.

C.J. Muse – Barclays Capital

Yes, good afternoon, and thank you for taking my question. I guess first question, Bob, you talked about implant growing as a percentage of WFE. So curious what you calculate that percentages was for the 2010 and where you think that could go here in 2011?

Robert Halliday

What do you think total WFE was in 2010?

C.J. Muse – Barclays Capital

Well, I guess if you go by Gartner and you take out MOCVD they’re around 31, 32.

Robert Halliday

Hold on. Ask another question. I had a piece of paper here. I’ve got it.

C.J. Muse – Barclays Capital

All right. So second question is on the Solion side. In terms of the orders that you’re receiving with customers, are all of those for P type or are you starting to see any orders or evals on the N type side?

Gary Dickerson

They’re both. The majority are on P side. Some are focused on N type JDPs. I would say though however every customer that even ordering for P type today and ramping manufacturing is also working with us on N type. So there are some specifically focused on N type JDP. But even the customers that are ramping P type, one of the great value propositions for Solion different than what they’re doing in buying the fusion furnaces is that technology can also work for future N type substrates.

C.J. Muse – Barclays Capital

That’s helpful. And then on the plasma doping side, considering the weakness in DRAM, how should we think about the size of that market here in 2010 – ’11 rather?

Gary Dickerson

The question is on the plasma doping market in 2011. It’s down a little bit. DRAM is terrible this year, so we don’t get a lot of DRAM, so I think it’s down some.

C.J. Muse – Barclays Capital

I mean, it’s 50 million ballpark.

Gary Dickerson

Still north of that.

Robert Halliday

I think maybe 60 million.

Gary Dickerson

Yes. C.J., what did you say you had for wafer fab equipment in ’010 or ‘011?

C.J. Muse – Barclays Capital

In ’10, Gartner has, I think it’s 31, 32, if you pull out MOCVD. I get 29, but I was curious what you were thinking.

Robert Halliday

Yes, I thought it was more or like 29, 25. I don’t think it’s 31, 32, we’ve got the data across, I didn’t see that number. So we think that TAM for implant was 1023. So if you use 285 or 36, if you use 29 it’s less.

C.J. Muse – Barclays Capital

And then, I guess importantly the trajectory here in 2011.

Robert Halliday

Yes, we think it’s up. We think the TAM’s up significant double figures.

Gary Dickerson

The implant – the implant TAM, our current forecast is up around 25%, 30%.

C.J. Muse – Barclays Capital

Right, okay. And last question, I’ll go away. In terms of, I guess, implant intensity, can you share how you see that in the next couple of years in terms of logic versus foundry versus memory? And then particularly I guess on the logic side in terms of the 3D structures, the impact that the increased doping and how that might benefit implant would be very helpful? Thank you.

Gary Dickerson

Sure. So overall intensity, foundry look pretty damn positive the next few years. Logic depends on the way they go on the 3D structures and stuff. Even if they go, certainly we think it will be split, and we’ll do okay there. Memory, if the periphery starts to get cell, more logic life, it’ll grow okay there. So I think we’re okay the next few years.

C.J. Muse – Barclays Capital

Thank you.

Gary Dickerson

Welcome.

Operator

And our next question will come from the line of Patrick Ho with Stifel Nicolaus. Please proceed.

Patrick Ho – Stifel Nicolaus

Thanks a lot. Congrats on a really good quarter. Bob, first the housekeeping, stock options for the quarter.

Robert Halliday

Yes, I have right here. For the three months ended April 1st, cost of revenue was 306, cost of service was 191. You can add those together for COGS. R&D was 1444, marketing, general and administrative was 4896, taxes there was a credit of 930 for total of 5907.

Patrick Ho – Stifel Nicolaus

Great. Just a follow-up on the earlier question about the gross margins and some of the stuff you’ve done in your core ion implant business to basically provide the high margins that you’ve achieved. Can you just give some of the specific actions that you’ve taken that has help to optimize at least that business segment’s gross margins?

Robert Halliday

Sure, we’ve driven – our value proposition of customers is pretty good, particularly the new product introductions for the tools we’re doing reasonably well. So like a Trident is a good tool, if you look at PLAD is good for us, high current, well that’s Trident. In medium current, we’re doing pretty well. The other thing which helps us is all these upgrades which we used to sort of whatever apples we can get off the tree years ago we pick them up, but now we actively cultivate those upgrade products and those tend to be very good gross margins for us with very high value to the customers, so that’s helping us. Those were all sort of revenue line type issues.

Then if you look at cost, we’re consistently driving down the cost of our tools between lower labor hours, more capacity out of the same factory. And sourcing, we’ll do more source in Asia and we’re sourcing bigger volumes, so there is a cost element for that. So the cost and a sort of revenue element. So if you look at the core models, it’s pretty good.

The other thing it’s hidden for you guys is the spare parts and upgrades were a lower percentage of revenues this year and that’s because equipment revenues grow so rapidly. But the other reason is many of these tools in the first year they’re under warranty, and once you finish warranty and the tools have been running for a while, you tend to pickup your sales of upgrades and spare parts on those things. So that tends well for us in future years that our install base is growing rapidly this year.

Patrick Ho – Stifel Nicolaus

Great, that’s really helpful. Bob, in terms of just some of the, I guess, the finances between the Solion tool, what’s the turnaround time right now between when you receive an order and when you can recognize revenues. I assume they are on acceptance at this point, is it a six to nine months type of lag that we’re getting right now between the orders and revenue recognition.

Robert Halliday

Well, order to ship is 12 months [ph]. It’s a little over four months order to ship. And then to revenue after shipment is four, five months.

Gary Dickerson

Six to nine months I think is probably, sure ends up once you get second tools.

Robert Halliday

First tools always take a lot of time, Patrick.

Patrick Ho – Stifel Nicolaus

Okay, great. And a final question just again broader kind of industry picture and just maybe following off of C.J.’s question about ion implants intensity, as the industry begins the migration towards EUV and whether there is delays or not, maybe Gary, because I know we’ve talked about lot of the technical aspects of it. Can you just give a little bit of color on what the potential ion implant opportunity is with EUV? Does it increase, does that, I guess, capital spend also increase as we move to that process technology?

Gary Dickerson

Well I think for us as you go forward to future technology node, probably the – one of the biggest opportunities for us is the unique aspect of our technology and enabling some of these new device architectures ability for us to do formal doping for some of these high aspect ratio structures. And when we look at this from a competitive standpoint, we have some tremendous advantages that customers really can’t do those structures without our technology.

The material modification applications we’ve talked about, as people continue to try to extend lithography, current lithography solutions or even with EUV, applications like lineage roughness, the device variability, device parametric variability is a very big problem, so that is a great opportunity for us with litho and also for etch related types of applications. So those are the areas. Again, one is on the device side and the other one is on the material modification side. And, right now, we have significant pull from a number of customers in both of those areas.

Patrick Ho – Stifel Nicolaus

Great. Thanks a lot guys.

Operator

And our next question will come from the line of Weston Twigg with Pacific Crest Securities. Please proceed.

Weston Twigg – Pacific Crest Securities

Yes, just a couple of quick questions. One, I’m just wondering in terms of your solar customers, I’m wondering if you’re sensing any anxiety around potential solar overcapacity? And then, as a result, do you think that could drive maybe even faster demand for your tools as customers race to inform their cell efficiency and improves their economics?

Gary Dickerson

Yes, as I said earlier, certainly customers are all focused on differentiation, and trying to drive lower cost per watt. So, absolutely, we see that with the existing customers. There is also some very big companies that are looking at this market and wanting to enter with differentiation and disruptive technology. So we have JDPs with some of these customers that we’re working with and it offers a really great opportunity for us.

Weston Twigg – Pacific Crest Securities

So I guess the other way to ask that is, if there is substantial overcapacity in solar production, it may not necessarily be a bad thing for Varian, is that right?

Gary Dickerson

Well, I think it makes people more sensitive as you said to differentiation, and that certainly is helpful for us.

Weston Twigg – Pacific Crest Securities

Okay. And then the other question I had is can you just remind us – I know you’ve done a lot in terms of manufacturing improvements over the last two or three years, how many manufacturing employees did you have in say 2007 versus this year?

Robert Halliday

That’s a good question. We’re way down from 2000 or down from 2007. I’ll give you some metrics that will help you. Our labor hours to build and ship it through today are running – for medium current and high current I’m talking about – about 750 maybe total. And then for 2007, I guess is about 1,200-1,300 hours, so the hours are down about 45%. In terms of the actual production volume it’s up.

Gary Dickerson

Cycle times are also dramatically lower.

Robert Halliday

Yes. Where we save a fair amount of money with is that a lot of these tools don’t go into the clean rooms. So we save not just labor hours, we save all the wafers that we’d have to write-up we did the final acceptance in the past. So the cost depending on any measure of not putting a tool, the cost and labor and overhead of not putting a tool to clean room and having lower labor hour is like $40,000 to $100,000 on your account.

Weston Twigg – Pacific Crest Securities

Okay, very helpful. Thank you.

Operator

And our next question –

Robert Halliday

The other thing I’ll just quickly wrap, I’ll give you a fact. Most of ’07 we used to use the whole clean room for manufacturing virtually, all 48 lay down in slots. Not less than half the clean room slots were used for manufacturing and the rest were used for engineering. What that does for us in terms of a return on investment a lot more throughput through the factory even more than you see, because that clean rooms is used for R&D mostly.

Operator

And our next question will come from the line of Ben Pang with Caris & Company. Please proceed.

Ben Pang – Caris & Company

Thanks for taking my question. Two quick ones. First, you commented on some of the push-outs you have some new base for that. Can you share which vertical that is or is that all the push-outs?

Robert Halliday

Mostly five-year memory.

Ben Pang – Caris & Company

But which one has come back to give you days.

Robert Halliday

They all gave us days, because –

Ben Pang – Caris & Company

Okay.

Robert Halliday

[inaudible].

Ben Pang – Caris & Company

I’m not going to make you guys try to go in that direction. And then the follow-up is on the total available market you commented on the TAM growth 25% to 30%, what mix do you assume for the end market applications, not high current and all that, but in terms of foundries, or just like logic, DRAM and NAND?

Robert Halliday

Well, today we’re doing about 50% of our business is foundries. So if you use roughly that number that would be the mix. It would be 50% foundry. We said overall memory here today is more about 20%, 30%, and then 20% logic – 22% logic. So it’s probably 50% foundry and maybe 22% I think, 28% for memory and memory is mostly the flash.

Ben Pang – Caris & Company

So if the DRAM came back like in 2012 as higher mix as a higher mix of total spending, your ion implant intensity actually continuous to go up even faster.

Robert Halliday

Well, foundries is a pretty a little more ion implant intensive than memory. But the intensity in both of them is growing.

Gary Dickerson

So if you had the same total spending in the world, it was a greater weight for DRAM versus foundry –

Robert Halliday

Yes, we could be down a little bit.

Ben Pang – Caris & Company

Okay, thank you.

Robert Halliday

If you look that frankly, if you look at the number of layers which drives that, everybody has got enough layers basically. That’s what drives it.

Ben Pang – Caris & Company

Fair enough, thank you.

Robert Halliday

Thanks.

Operator

(Operator Instructions). And our next question will come from the line of Chris Blansett with JPMorgan. Please proceed.

Chris Blansett – JPMorgan

Thanks guys. Actually, I think all of my questions have actually been answered so.

Robert Halliday

I’m glad we could help you.

Operator

At this time, I show we have no further questions in queue. I would like to turn the conference back to over Mr. Robert Halliday for any closing remarks.

Robert Halliday

Well, I want to thank you guys for joining us today. We had a good quarter in Q2 and we’re looking forward to the rest of the year. The year maybe volatile in our core business, but we’re gaining increasing momentum in our new markets and that’s given us a lot of cause for enthusiasm, so hopefully we’ll be talking more and more about that in the future. Thanks for joining us today. Bye-bye.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day, everyone.

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