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KLA-Tencor (NASDAQ:KLAC)

Q4 2011 Earnings Call

July 28, 2011 5:00 pm ET

Executives

Richard Wallace - Chief Executive Officer, President and Executive Director

Mark Dentinger - Chief Financial Officer and Executive Vice President

Ed Lockwood - Senior Director of IR

Analysts

Atif Malik - Morgan Stanley

Thomas Yeh - BofA Merrill Lynch

Christopher Muse - Barclays Capital

Farhan Rizvi - Crédit Suisse AG

Patrick Ho - Stifel, Nicolaus & Co., Inc.

Mahesh Sanganeria - RBC Capital Markets, LLC

Mahavir Sanghavi - UBS Investment Bank

Unknown Analyst -

Operator

Good afternoon. My name is Jessica, and I will be your conference operator today. At this time, I'd like to welcome everyone to the KLA-Tencor Fourth Quarter Fiscal '11 Conference Call. [Operator Instructions] Thank you. Ed Lockwood, with KLA-Tencor Investor Relations, you may begin your conference.

Ed Lockwood

Thank you, Jessica. Good afternoon, everyone, and welcome to the KLA-Tencor's Fourth Quarter Fiscal Year 2011 Earnings Conference Call. Joining me on our call today are Rick Wallace, our President and Chief Executive Officer; and Mark Dentinger, our Chief Financial Officer. We're here today to discuss fourth quarter results for the period ended June 30, 2011. We released these results this afternoon at 1:15 p.m. Pacific Time. If you haven't seen the release, you can find it on our website at www.kla-tencor.com or call (408) 875-3600 to request a copy. A simulcast of this call will be accessible on demand following its completion on the Investors section of our website. There, you will also find a calendar of future investor events, presentations and conferences, as well as links to KLA-Tencor's SEC filings, including our Annual Report on Form 10-K for the year ended June 30, 2010 and our subsequently filed 10-Q report. In those filings, you'll find descriptions of risk factors that could impact our future results.

As you know, our future results are subject to risks. Any forward-looking statements, including those we make on this call today, are subject to those risks, and KLA-Tencor cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. Any information regarding factors that could cause those differences is contained in the filings we make with the SEC from time to time, including our fiscal year 2010 Form 10-K and our current reports on Form 8-K. We assume no obligation and do not intend to update those forward-looking statements. However, you can be reassured that any updates we do provide will be broadly disseminated and available over the Web.

With that, I'll turn the call over to Rick.

Richard Wallace

Thanks, Ed. Thank you all for joining us for our call today. Given that we provided a thorough business update just 2 weeks ago at SEMICON West, I'll focus my commentary today on summary highlights of our results and provide guidance for September. Then Mark will follow with a more detailed review of the financials.

KLA-Tencor delivered record revenue earnings and cash flow in the fourth quarter and for fiscal year 2011, demonstrating our continued strong market leadership and successful execution of our long-term strategies for customer focus, growth and operations excellence in a period of robust industry growth. Bookings for the June quarter were $853 million, flat compared with March and at the upper end of the range of guidance. And in the fourth quarter, we experienced strong demand in each of our major end markets, looking for a record $3.2 billion in fiscal year 2011, 14% above the previous fourth quarter high that we set back in fiscal year 2007, driven by higher adoption of process control, growth in our services business and the addition of new markets.

June quarter revenue grew 7% to a record $892 million, coming in at the upper end of the range of guidance. And the non-GAAP earnings per share were $1.50 in Q4, above the range of guidance for the quarter. Contributing to these results in Q4 were record operating margin of 40.1%. Today, KLA-Tencor is reporting margins significantly above our baseline model, reflecting our cost discipline and the value that we bring to our customers.

Finally, cash flow from operations was a record $290 million in Q4. And we were active in returning value to shareholders, purchasing -- repurchasing 1.4 million shares in the quarter for $58 million, and of course, paying our are regularly quarterly dividend. In fiscal year 2011, we repurchased a total of 6.2 million shares for $233 million. Also, as we announced on July 12, our Board of Directors has authorized an increase in the level of the company's quarterly dividend to $0.35 per share, which is scheduled to take effect beginning with our dividend to be declared next month.

This move reflects management and the board's confidence in our long-term outlook for the company, as well as the ongoing efforts to reward our shareholders for their continued investment. So clearly, our results indicate another very strong performance for KLA-Tencor in Q4, capping a record year for the company and showcasing the strength of our market leadership and our industry-leading business model. Of course, the driving force behind our success remains the strong effort in collaboration with our customers and business partners, as well as great execution of the worldwide workforce. And I'd like to take this opportunity to thank each and every employee for their contribution in helping KLA-Tencor excel in this environment and in shaping our future success.

Shifting our focus now to the current period and our view of the near-term outlook, as we reported at SEMICON West 2 weeks ago, the near-term industry demand environment has cooled off significantly of late with customers reassessing their capacity expansion plans and timelines and in light of persistent weakness in the macroeconomic environment and lackluster PC sales. However, looking past the current environment, we believe the drivers underlying long-term growth in our industry remain intact.

With economic expansion in the emerging markets, the rapid proliferation of new end products featuring high IC content and increasing complexity as the leading edge, all pointing to healthy long-term equipment demand. And we further believe that our customers remain committed to their roadmap towards shrinking device sizes and other technology advancements as a means for driving future competitive differentiation and to lower cost. This technology focus plays in the K-T strength as the market leader in process control, as we play a critical role in helping our customers address the increasingly more difficult challenges associated with improving yields and lowering costs of leading edge. In this environment, the long-term outlook for process control investment remains solid.

Turning now to our outlook for the first quarter of fiscal year 2012. For bookings, we have adjusted our internal forecast to reflect further deterioration in the market environment subsequent to SEMICON West. And we now expect September quarter bookings to be in the range of down 35% in the quarter, plus or minus 10% and bookings in the second half of 2011 to be down more than the 15% to 20% range we originally indicated. Guidance for revenue in September is in the range of $770 million to $820 million, and non-GAAP earnings per share are projected to be in the range of $1.10 to $1.24 in the quarter.

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

Mark Dentinger

Thank you, Rick. Consistent with our recent history, we present our income statement in 2 formats: one under U.S. GAAP and the other in a non-GAAP format, which excludes amortization and write-downs of intangible assets associated with acquisitions, any expenses associated with our stock options-related litigation and certain costs and expenses which are outside of our core operations, such as restructuring charges and unusual tax items.

There was a $0.07 per share difference between this quarter's GAAP and non-GAAP earnings. Our balance sheet and cash flow statements are presented in GAAP format only. Most of my prepared remarks on operations will refer to non-GAAP information but where I reference GAAP numbers, I'll make the distinction. A reconciliation of our GAAP to non-GAAP income statement is attached to our press release and available at our website.

Q4 new orders were $853 million, essentially flat with last quarter. And net orders were $847 million, down slightly from $856 million last quarter. The regional distribution of new systems orders and the quarter-to-quarter change in distributions were as follows: the U.S. was 32% of new systems orders in Q4, up from 25% in the March quarter; Europe was 8% of new systems orders, down from 16% in Q3; Japan was 22%, up from 17% last quarter; Korea was 13%, up from 9% last quarter; Taiwan was 21%, down from 23% last quarter; and the rest of Asia was 4%, down from 10% in Q3.

The Q4 distribution of new systems and services orders by product family and the quarter-to-quarter change in distribution were as follows: wafer inspection was 42% compared to 48% last quarter; reticle inspection was 17%, up from 10% last quarter; metrology was 18%, down slightly from 19% in the prior quarter; solar, storage, LED and other non-semi were 6%, even with last quarter; and services was 17% of new orders in Q4, also even with the last quarter.

Finally, for semiconductor systems, the distribution of new orders by market and the quarter-to-quarter change in distribution were: 43% of new systems orders in Q4 were for foundry customers versus 58% in Q3; logic customers were 27% of orders in Q4 versus 15% in Q3; and memory orders were 30% in Q4, up from 27% last quarter.

Looking forward, we expect that new orders for Q1 will be down by 35% plus or minus 10% from Q4 new orders, or a range of $470 million to $640 million. In Q4, we shipped $892 million versus $823 million last quarter. The shipment number includes both systems shipments and services revenue. And we expect shipments between $725 million and $750 million in Q1. Total backlog at the end of Q4 decreased slightly for March 31, and we ended the quarter with $1.4 billion in systems backlog. Backlog at June 30, 2011 included $382 million of revenue backlog or products that have been shipped and invoiced but have not yet been recognized as revenue and a little under $1 billion in system orders that have not yet shipped.

Total revenue for Q4 was $892 million, up 7% from $834 million last quarter. Systems revenue for Q4 was up 8% to $744 million, compared with $691 million from Q3 and services revenue was $149 million in Q4, up about $6 million from Q3. Our expectation for total revenue in Q1 is a range between $770 million and $820 million.

Non-GAAP gross margin was 60.7% in the June quarter, down from 61.3% in March. The gross margin percentage decline from last quarter was due to higher parts cost in our services business. For Q1, we are expecting gross margins of approximately 60%. Operating expenses were $184 million in Q4, with the research and development component at $99 million and selling, general and administrative expenses at $85 million. OpEx was down about $6 million from Q3 because we received a $10 million payment in Q4 from the trustee expense in Japan following their bankruptcy in our fiscal 2009.

Without this statement, OpEx would have been approximately $194 million, and our EPS would have been $0.04 lower. We expect operating expenses to increase to about $197 million in Q1. OIE was a net $10 million expense in Q4, about even with Q3. For modeling purposes, we expect OIE to be a net expense of approximately $10 million in Q1 as well. In Q4, our non-GAAP income tax expense is $92 million or 26% of pretax income versus $87 million in Q3, which was 28% of pretax income. The Q4 tax expense percentage was lower than Q3 in part due to the release of certain tax reserves in Q4.

Non-GAAP net income was $256 million or $1.50 per share in Q4, up from $1.31 last quarter. If we apply our model tax rate of 30%, our Q4 non-GAAP earnings would have been $1.42 per share. At the revenue range I've have previously mentioned and using a modeling rate for income taxes of 26%, we would expect our Q1 non-GAAP earnings to be somewhere between $1.10 and $1.24 per share.

At this point I would like to add some commentary on our go-forward, non-GAAP tax rate. As you know, for the past several years, we have used a 30% modeling rate for non-GAAP income taxes. 30% estimate was based on analysis and forecast from several years ago. And on today's call, we are updating this rate to 26%. The new modeling rate is based upon tax planning decisions we have implemented during the last few years and our estimated income projections for the next few years, which includes assumptions about the distribution of earnings between our U.S. and international locations.

Because this rate is an amalgamation of many different rates from jurisdictions where we operate, and accounting rules for income taxes and related reserves are complex, our expectation is that the actual quarterly rate will almost never exactly match 26%. However, for purposes of issuing financial guidance moving forward, you can expect us to use the 26% rate, unless we are aware of specific factors that suggest another rate.

The weighted average share that's used to compute EPS in Q4 were $170.9 million versus $171.3 million in Q3. During Q4, we spent $58 million, repurchasing about 1.4 million shares. And as of June 30, 2011, we had approximately 9 million shares available under our current repurchase authorization. We anticipate continuing to repurchase shares, as well as paying quarterly dividend of $0.35 per share beginning in Q1. For guidance purposes, we are modeling in the same average the share count as Q4.

Turning to the balance sheet, cash and investments ended the quarter at $2 billion, up about $200 million from the end of March. Cash generated from operations was $290 million in Q4 compared with $244 million in Q3. Net accounts receivable ended the quarter at $583 million, up from $566 million at the end of March. DSOs were 59 days at June 30 versus 62 days in March. Both DSO figures are net of allowance for uncollectible accounts and factoring.

Net inventories increased by $19 million from March 31 and ended the quarter at $576 million. Inventory turnover based upon GAAP cost of revenues was 2.5 turns in Q4, which is flat with Q3. Capital expenditures were $15 million in Q4, about the same as Q3. The total headcount at June 30 was 5,492, up from 5,386 at March 31. We expect our headcount will increase slightly during Q1.

In summary, our guidance for Q1 is: new orders down between the 25% and 45% from Q4, total revenue between $770 million and $820 million and non-GAAP EPS between $1.10 and $1.24 assuming a tax rate of 26%.

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

Ed Lockwood

Okay. Thank you, Mark. At this point, we'd like to open up the call to Q&A. [Operator Instructions]. And then with that, operator, we are ready for our first question.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Krish Sankar from Bank of America Merrill Lynch.

Thomas Yeh - BofA Merrill Lynch

This is Thomas Yeh for Krish Sankar. We've been hearing quite a bit about 28-nanometer yield issues at the foundries. How is that benefiting KLAC in the September and December quarter? Are these issues being driven by any specific material changes such as high k metal gate, or is it more broad-based?

Richard Wallace

It's Rick. Yes, there are certainly challenges associated with the new technologies, no question. And we are, as we have in the past, we're seeing that. And it does impact some of the business that we're winning in the foundries. I do think it has a long term or positive momentum for us. But short term, I think we are in a softening environment and that's part of the challenge in the industry. But there's no question, it's new materials. Just the reduced marginality and the process window associated with 28 and 20 nanometers creates opportunities for us. And also in -- and generally, and the overlay constraints are creating opportunities, too. So all those are going to be good for us as people try to roll this technology out in the broader production.

Operator

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

Farhan Rizvi - Crédit Suisse AG

This is Farhan calling in for Satya. Just had a question regarding your Q4 -- regarding the calendar Q4. How does -- how do you see it right now? Can you give some color on it?

Richard Wallace

Yes, sure. We -- obviously we're not guiding for Q4, but our current view is that the September quarter is going to be pretty significantly down as we guided from bookings perspective, and we do anticipate things to improve after that. But there's just not a lot of visibility out there. So it's very hard to call it this early and especially in a market that's as dynamic as this. But we do see a lot of projects on the books. We see a lot of interest from customers. I think that, generally, if customers execute on their plans that they've communicated with us, then December should be a recovery from the September quarter.

Farhan Rizvi - Crédit Suisse AG

And can you specify a little more on like which area among the customer -- like which segment is it foundry or memory that's causing the biggest uncertainty for you?

Richard Wallace

Well, we're seeing certainly some softening in foundry in the recent past. And I -- when we have conversations with them, I think some of that is digestion of some of the capacity they brought online, some challenges they're facing and getting their processors where they want them before they ramp. So, I'd say, probably more predominately foundry than the other segments. Logic continues to be pretty strong. Memory is kind of a different factor, more associated, I think, in the DRAM case, with concerns about PC. And flash, I think, there is just some general conservatism. But you have to look kind of customer-by-customer. But I'd say mostly softening in foundry right now, and there should be some recovery as we go forward after the September quarter.

Operator

Your next question comes from the line of Timothy Arcuri from Citi.

Unknown Analyst -

This is Wenge [ph] for Tim. A couple of things. You mentioned about incremental weakness in the last 2 quarters. Can you provide a little bit more color on that?

Mark Dentinger

Well, yes. Just as Rick had said earlier -- this is Mark, and we can obviously see it in the demand forecast that are rolling up from our field sales operations. As you can see from some of the other semi-players that are out there right now, we're all feeling it a little bit. And I do think you have to bear in mind that we're coming off of a 5-quarter run that was 15% higher than anything we've experienced in our history. So, some sort of a pause is probably an order at some point.

Unknown Analyst -

So Rick, the general view is CapEx for 2011 is lower than people expected at the beginning of the year, but if you look the Big 3s, Intel actually raised their CapEx in the earnings. And TSMC, CapEx only down 5%. And there's some indication that Samsung might actually increase their memory spending. We will see what they say tonight in the earnings. So if the big 3 hasn't cut any CapEx, where have the drop off happen? And then could you just give us some details on which type of customers are actually cutting their CapEx? And how do they compare to the big 3s?

Richard Wallace

Well, yes. I hear what you're saying. I do think that there is still a view out there that you still could have an up year. It's just you have a front-end loaded year, and so you get a down quarter. When we do our analysis, there's a scenario that you can get a 5% up in 2010. I'm talking industry-wide, if you have a 25% down in September followed by a 5% up in December, you'd still have 5% up overall. So you still have an industry growth. Now the question was, during the year, there was a range of 0% to 10%. And then early in the year, people thought 5% to up 10%, and then towards the middle, it looked more like up 10%. And now, I think it's kind of -- right now the current view that we're modeling for industry is probably in the up 5% range. So you'd look year-on-year, but that doesn't mean that the second half in that case is down actually 25% from the first half, on average, even though for a year, you're up. Does that make -- does that math make sense to you?

Unknown Analyst -

Yes, yes.

Richard Wallace

That's kind of ahead, but I think it's early to call whether we really see down 25% in September or not or -- and if we see the bounce back after that.

Unknown Analyst -

Okay. One last question. On the 28-nanometer ramp, compared to the 40 nanometer, we know that foundries have suffered quite a bit on the yield issue in 40 nanometers. Based on what you've seen on 28, is the yield issues getting more difficult, or it's pretty much at the same level?

Richard Wallace

When I talk to customers -- and we have a lot of conversations the last couple of weeks, I'd say more difficult, more challenging. And 40 was interesting because as you know, a lot of people are going to do 45 and then they move to 40, and they were surprised by how difficult the yield was. And that was the catalyst for a lot of business for us. But if you look at 28, it's actually harder. Now they're a little more aware of the challenges, but we're getting pushed very hard to bring out our latest capability and technology to get it in line because I think our customers are pretty aware that they're missing critical defects in areas that are going to cause problems for them. And there's also a metrology challenges. So I think more difficult and a lot of interest in technology buys. And obviously, if we did have a prolonged softening, I think the technology position for K-T plays pretty well into that space because of the yield challenges they're seeing. No question.

Operator

Your next question comes from the line of C.J. Muse from Barclays Capital.

Christopher Muse - Barclays Capital

I guess first question, Rick, you guys are really in the sweet spot of spend from logic and foundry in the first half -- the first 3 quarters of the year. And I guess there is a concern out there that as we go into next year, that foundry won't be quite as robust as a percentage of the mix. We'll see maybe a little bit more NAND in the mix and Intel in there. But that overall, a little less favorable for you guys. So curious whether you agree with that and then if you do, whether you can grow as fast as the industry based on either growth in adjacent businesses like LED, et cetera, or increasing capital intensity at the 28-nanometer node will drive higher spend for process control from foundry and/or increasing intensity on the NAND side. We'd love to hear your thoughts.

Richard Wallace

Yes. Sure, C.J. Great question. I think that -- there is no question, we're seeing a -- maybe a consolidation in terms of the spending that was made in foundry and people are dealing with the digestion, which means for the next 4 quarters, our view is foundry intensity versus the last 4 is going to be lower, even though we think it's probably lowest in the next quarter and then we see some improvement as we go out. We do have some additional kickers which help us in memory, and they're not perhaps as obvious as you might think because we also have some market share wins in areas recently in memory, things like OCD, which I think helped provide additional catalyst. We've got areas like overlay, where we're strong. And so you have to kind of look broadly across the portfolio to see the opportunities for us. But there's no question that the softening right now in the current market environment, our foundry is a little bit softer. And we're working hard in the NAND and we're seeing some wins there. But overall, I think that if you consider that we probably outran the industry -- we're talking about industry growth in 2010 of maybe 5% CapEx and we are probably 20%, I wouldn't expect a 15% delta from overall industry. But I could envision us outgrowing the industry in a 5% kind of target range. But I think it will be hard to get that 15% without the foundry intensity where it was. That said, the foundries, as we talked before on the 28-nanometer yield, we think that the adoption in those is going to continue to be strong as a percent of overall CapEx based on their needs. But it's not. I agree, the intensity level -- it's just hard to make the math work if you have a soft Q1 with a slightly recovering Q2 for us.

Christopher Muse - Barclays Capital

That's very helpful. And if I could just ask one quick follow up. In terms of that $1.4 billion backlog, how should we think about, I guess, the relative out-performance or the help there in terms of your revenue recognition? And then I guess, more importantly, at what point -- and I know this is a tough on to answer, at what point do you think you'll start to build the backlog again?

Richard Wallace

Well, I actually can answer the second question easier than the prior, and that is the backlog builds obviously when the order rate exceeds the revenue rate. So we're -- if we could sort of forward -- fast forward into the second half of this year and the first half of our fiscal, if we were to build orders in the December quarter, that would start to get -- that may get close. It sort of depends on how far down Q3 is. But we actually ate into the backlog a little bit this quarter. We needed to do that a little bit just because we had built so much we needed to ship it out. And it continues to profile out, but most of the backlog should ship out over the next 6 to 9 months. If we were in a prolonged down, we will eat into it pretty considerably. But if it's just a temporary lull in the demand, there's a good chance we'll be dealing with a sizable amount of backlog in the next year.

Operator

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

Mahavir Sanghavi - UBS Investment Bank

This is Mahavir Sanghavi for Stephen Chin. Rick, just one question on the fourth quarter -- I mean, you said 3Q is going to be bottom like -- and fourth quarter you need help from foundry. Did you call 3Q a bottom? Is that right way to read it?

Richard Wallace

I'm sorry. Fourth quarter, you're talking calendar, the December quarter?

Mahavir Sanghavi - UBS Investment Bank

Sorry, yes, calendar fourth quarter. I mean, you need help from foundry? And you called 3Q a bottom, right?

Richard Wallace

Not a lot. Not a lot.

Mahavir Sanghavi - UBS Investment Bank

Got it. Is that -- and as just a quick follow up, is that -- could you give us a breakdown of your backlog in terms of foundry, memory and logic?

Richard Wallace

Yes. We don't disclose that. We do disclose the components in terms of how much of it has been shipped and hasn't shipped, which I did on my prepared remarks. About 70% of it that hasn't shipped yet, but about 30% has.

Mahavir Sanghavi - UBS Investment Bank

Got it. And could you also give us some color on the breakdown of the -- of 1Q fiscal '11 orders?

Richard Wallace

In terms of...

Mahavir Sanghavi - UBS Investment Bank

Foundry, memory?

Richard Wallace

Yes. So we're forecasting for September foundry about 50%. We will see -- and this is all of the semi, probably 30%-ish in logic, and probably 20% in memory. But outside of that, our non-core semi grows to about 7%. And if you'd back up and think about service, which is neither of those 2, service bumps up to a larger number, like in the 27% range in the overall order book based on the way we're modeling it right now.

Operator

Your next question comes from the line of Patrick Ho from Stifel, Nicolaus.

Patrick Ho - Stifel, Nicolaus & Co., Inc.

I know process control has a little bit of a different dynamic versus some of your other equipment peers. But given that there's a lot of uncertainty and fluidity out there in the overall customer base for you guys right now, how quick can you respond? Just looking at your inventory levels, I mean, they still manage really well. But are you going to be able to turn things around should your customers change their mind at the last minute?

Richard Wallace

I was probably thinking about that as we come off a record shipping quarter. We got a lot of capacity available to us in the system. So I don't see that being an issue relative -- in fact, we're still chasing and we're late on deliveries still today. So where -- manufacturing still running pretty full out to satisfy -- remember all the backlogs that we've got, as Marc said, 70% of that backlog is not shipped. So actually, a slight slowdown in demand wouldn't be the worst thing in terms of our ability to respond quickly to customer needs. And our problem has been kind of the other.

Patrick Ho - Stifel, Nicolaus & Co., Inc.

Okay, great. Maybe just a bigger-picture question about EUV and some of the, I guess, the traction or the development there. I know that that's a potentially big opportunity for you guys down the road. But what are some of the potential opportunities should that be delayed and quad patterning takes hold? Is that something that you guys can also capitalize upon before EUV is adopted?

Richard Wallace

Yes, it is. I think that we're in an interesting position because of our -- benefit that we get from the increasing overlay requirements and all the lithography associated, metrology requirements, if you go into additional patterning steps that creates opportunities for us there. There is also even opportunities in registration measurement of radicals. So we have businesses that would benefit from that trend. And we're already seeing -- I think there's a bifurcation, by the way, where EUV, based on its current trajectory, gets used for some layers, and say DRAM first. But there's still additional exotic lithography technologies that are going to push our ability in metrology businesses, in particular. So we are seeing benefit from that. I think that continues. EUV, eventually though, I think the industry does need it to drive -- continue driving down Moore's law. But our expectation is the roadmap is somewhat delayed on the EUV right now, and we do see benefit in the metrology space as a result.

Operator

[Operator Instructions] Your next question comes from the line of Mahesh Sanganeria from RBC Capital Markets.

Mahesh Sanganeria - RBC Capital Markets, LLC

Rick, you took -- a couple of weeks ago, you guided down 10% to 20%, and you think 30% down. And to some extent, that's consistent with what we heard from Lam and I just got off a nanometrics call, and they said they got a call 3 days back, a DRAM customer pushing out. So maybe you can describe to us in terms of what changes in the last 2 weeks, and do you agree with the DRAM customer pushout?

Richard Wallace

Yes. I don't have a specific on a DRAM customer, maybe they just lost some competitive orders. I think that the -- I think that what we're really seeing is a clear sense of softness in the September quarter and then a lot of speculation about what might happen in December based on discussions. And so I share the view of the some of the other peer companies that the visibility is pretty miserable when you get out into the December. So we're basing it on plans that people had in place and discussions. But I don't think we're going to really know a lot about December until we get through, frankly until early September is my expectation because I think there's just enough uncertainty out there right now. But, yes. I mean, when we model it -- and our view is, remember, modeling bookings for us is that different level of scrutiny needs to go into that because of the backlog that we have and for people that are book shipped, it's a different game. And we're able to run revenues significantly above bookings based on the backlog that we've got. And so we do some back-of-the-envelope calculations. But I think if you overly analyze and try to estimate exactly what's going to happen in December, you'd spend a lot of effort on something that's very hard to forecast at this point.

Mahesh Sanganeria - RBC Capital Markets, LLC

And so in terms of your forecasting process, I would assume that one of the inputs probably will be -- what's the foundry utilization? I know it's difficult to call, but do you have a view on how the foundry utilization will track over the next 3 to 4 quarters?

Richard Wallace

Yes. And we have several scenarios for that. But what's interesting is the soft part of the foundry utilization is not in the capitally intensive part of foundries, which is -- it's the 65-nanometer and plus is where the utilization has softened, and that's not where the business is for us. The question then is, does it slow the adoption of the tape-outs that are being done and have been done at 28? And right now the number of tape-outs is still significantly larger at this point in the cycle for 28 than it was for 40 or 45 at the same point in their relative history. So I think it has to do with the confidence of the customers of the foundries to go ahead and place big orders for that. And I think that there's a little bit of waiting time in that to see. So we have different scenarios. And you're right, you have to model that into your assumptions. But in the end, it -- you could try to be as precise as you want, but these things swing in big ways.

Mahesh Sanganeria - RBC Capital Markets, LLC

And so one last question on the wafer side. I think we've talked about this before, and there was some lumpiness. So, do you -- has that -- after the Japan earthquake, has that business now stabilized? And do you expect that to be stable, or it is going to have similar volatility as cap equipment, semi-cap?

Richard Wallace

Well, I think in the sense that they recovered and it's fairly back up and operational, really remarkable recovery there. And our team was part of that. I think that, that has stabilized the uncertainty around supply, which has been very important for the rest of the supply chain. But in terms of the overall wafer, as you know, the wafer guys are going to be driven by starts. And I do think they've had a signal to back off a little bit as people figure out exactly where their capacity orders and levels are going to be. So I think there's a little bit of softness in that. Were benefiting in the wafer because we've introduced new products and new technologies. We talked about the SP3 at SEMICON West as a great example of a product that will sell into a market even if it's not expanding because of the technological capability and the push that our wafer customers are getting from their customers to make sure that they meet the levels of these activities that they can really only ensure with the new product. So I think we've got some -- in addition to the traditional capacity sales in the wafer market, I think we have some technology sales to go along with that. So we feel pretty good about our position there.

Operator

Your next question comes from the line of Atif Malik from Morgan Stanley.

Atif Malik - Morgan Stanley

I'm just trying to understand how should we model the flow and the revenues for the fourth quarter? So I mean, is it -- I mean, is it fair to say that half the shipments are the third quarter will become revenues in the fourth quarter? And half the shipments in the fourth quarter will become revenues in the fourth quarter? They can in those quarters?

Mark Dentinger

Yes, it's -- actually, Atif, this is Mark, and it's -- that's not a bad way to look at it. At least, as we enter the quarter, the shipment linearity, as what we call it, how much we ship the beginning of the quarter versus the end of the quarter will make -- will have a lot of determination on what we ultimately have revenue in December. But your starting point isn't a bad way to look at it.

Atif Malik - Morgan Stanley

Great. And then on the non-semi side, Rick, can you just kind of elaborate where you guys are seeing share momentum and maybe higher-than-market growth in which segments of the non-semi market?

Richard Wallace

Sure. I think the -- so, really, 3 places there. We have back-end packaging, which I think has been pretty solid. We've got a great position in that, and we see continued activity there. We have the solar market, where we have a strong position, but a -- I think a pause there also as people are digesting capacity on the solar. But the High Brightness LED, we've got a really strong position there, very strong product offering from our Candela division that does close monitoring of the epi wafers, which turns out to be very important for yield performance. And that's really been a very successful product for us. And I think we're participating well in the High Brightness LED as a result of that.

Operator

Your next question comes from the line of Krish Sankar from Bank of America Merrill Lynch.

Thomas Yeh - BofA Merrill Lynch

This is Thomas again. Just a quick follow-up from me. And I know you spoke about this a little before, but in light of TSMC's report this morning that utilization is down but could actually start picking up again as soon as the December quarter timeframe, could you add a little bit more color on how that factors into your outlook and how you see that playing out from a foundry spending and order standpoint going into early 2012?

Richard Wallace

Sure, Thomas. As you know, we don't talk about specific customers. But just to give you a view of foundry, maybe generically, our view is that this is a pause period, perhaps a slowdown as people consolidate, as I said, and they've got a lot of capacity on line. I think it's getting that feeling on some of the yield challenges. But then on to the next technology nodes, which means when we forecast out for the next several quarters, we see the September quarter being softer, but then reason for encouragement beyond that based on factors such as foundry recovering. I got asked a question earlier today talking about overall for the next 4 quarters, do you see foundry intensity being as high? And we don't want aggregate it, but if you ask me a year from now do I think foundries are going to be investing heavily? I think if you believe that we're in a long-term positive cycle then, of course you'd see the foundries come back after what would be a very reasonable kind of adjustment after a prolonged long period of investment. So, yes, we would see that phenomenon occurring across the foundry space.

Operator

There are no further questions at this time. I'll turn the call back over to Ed Lockwood for closing remarks.

Ed Lockwood

Thank you, Jessica, and thank you all for joining us today. This concludes our conference call.

Operator

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

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