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KLA-Tencor (KLAC)

Q3 2007 Earnings Call

April 26, 2007 5:00 pm ET

Executives

Jeff Hall - CFO

Rick Wallace - CEO

John Kispert – President & COO

Analysts

Timothy Arcuri - Citigroup

A.J. Safalow - J.P. Morgan

Satya Kumar - Credit Suisse

Brett Hodess - Merrill Lynch

Mark Fitzgerald - Banc of America Securities

Edwin White - Lehman Brothers

Gary Suing - CIBC World Markets

Steven Ballero - HSBC

Mahesh Sanganeria - RBC Capital Markets

Peter Kim - Deutsche Bank

Ben Pang - Caris & Co

Jagdish Iyer - UBS

Mark Bachman - Pacific Crest

Presentation

Operator

Good afternoon. My name is Marvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA-Tencor Corporation Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session (Operator Instructions).

Thank you. I would now like to turn the call over to Mr. Jeff Hall, CFO, sir you may begin.

Jeff Hall

Thank you, Marvin. Good afternoon, and welcome to KLA-Tencor's third quarter fiscal year 2007 earnings conference call. I'm Jeff Hall, the Chief Financial Officer. Joining me on our call today are Rick Wallace, our CEO, and John Kispert, our President and COO. We're here today to discuss our third quarter results for the period ended March 31, 2007. We released these results this afternoon at 1:15 p.m. Pacific time. If you haven't seen the release, you can find it on our web site at www.kla-tencor.com or call 408-875-3600 to request a copy. Rick will lead off today's call with a discussion of industry developments and KLA-Tencor's recent progress and strategy.

Afterwards, I'll review the financial results for the third quarter and then I'll open the call up for questions until 3:00 Pacific time. On the investors section of our website you will find a simulcast of this call which will be accessible on-demand for 90 days. On the web site you will also find a calendar for investor events and presentation at investor conferences. You will also find links to KLA-Tencor's security filings.

In those filings you will find descriptions of risk factors that can impact our future results. And as you know, our future results are subject to risks and any forward-looking statements we make are subject to those risks. KLA-Tencor cannot guarantee that those forward-looking statements will come true. And although we take no obligation to update those forward-looking statements, you can be assured that any updates we do make will be broadly disseminated and available over the web.

And with that, I'll turn it over to Rick.

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Rick Wallace

Thank you, Jeff and thank you for joining our earnings call for the third quarter of fiscal year 2007. Today I'll be discussing highlights from the March quarter, updates on key product activity, and guidance for the June quarter. In the March quarter, KLA-Tencor continued to execute and deliver new products to market and producing solid financial results. I'll begin with a quick run down on the numbers and then I'll provide you my perspective. Orders for the March quarter were $689 million, down 5% from the December quarter, and at the point of our guidance. Revenue was strong at $716 million.

Net income was $171 million or $0.84 per diluted share including stock based compensation and excluding charges. KLA-Tencor's continued strong performance is the result of meeting our customer's needs with the right products and services to help them be successful. Memory was above 55% of orders, and again the strongest segment in the March quarter with significant D-RAM investment.

As expected NAND bookings remained soft at only one-third of our memory bookings. Foundry was about 25% of bookings as a result of increased investment to build out 65 nanometer production capacity. Logic was lowest at around 17% of orders, as demand for 45 nanometer is not expected to pick up until later in 2007. In spite of softness in some specific markets, our outlook for CapEx to be flat to up 5% in calendar 2007 remains unchanged at this time.

Let me now give you a couple of updates on our product activity as we continue to demonstrate our product leadership at the leading edge. In the quarter, we introduced our new TeraScan HR Reticle inspection product, which is already installed at several of the world's largest Reticle manufacturers. It is the industry's first 45-nanometer production capable photomask inspection system. The TeraScan HR extends the marked proven TaraScan platform, adding auto focus, new database algorithms, accurate modeling of small low PC and advanced Reticles and wide spectrum extendibility to range from 130-nanometer to 45-nanometers nodes as well as 32-nanometer R&D.

Our 2800 bright field inspection systems won several head to heads at Asian foundry and memory customers ramping 65-nanometers. Customers are selecting the 2800 because it is the only optical inspection tool capable of detecting critical defects in line using broadband DUV illumination.

Customer demand for our Puma system continued to be strong. A leading memory customer is migrating Puma from an incumbent for nine critical layers because the Puma combines the high through put characteristics of star field inspection with the high sensitivity imaging necessary to capture defects on a small design.

KLA-Tencor is the leading inspection and metrology company and our continued commitment to differentiated products was illustrated by clue KLA-Tencor's market share gain in the recently release State of Quest 2006 market share report. I'm proud of this achievement, which is a result of our employees' dedication to delivering the products and services our customers require to increase their yields and profitability.

Across the industry, the problem and challenges of qualifying 45-nanometer are significant. We're actively working with customers on multi aspects of 45-nanometer adoption. As always, we have a number of new products under development and plan several new product introductions over the next several months that are critical to 45-nanometer. We believe the company is strongly positioned to continue to outgrow the industry in 2007.

Wrapping up, let me give you our guidance for June. Orders down 5% plus or minus 10% from our March quarter. Revenue between $700 and $715 million and EPS of $0.84 to $0.86 including stock based compensation and excluding charges. Now I will turn the call over to Jeff Hall.

Jeff Hall

Thank you, Rick. Let me start by going through the quarter in a little more detail. Net bookings for the March ending quarter were $689 million, which is roughly 5% lower than the December ending quarter. And 12% higher than the quarterly results from one year ago. Every quarter, we review our backlog in detail and debook in accordance with our booking policy that restricts actual become bookings to a set criteria. The set criteria mandate that technical specifications are signed off, valid turns and conditions are finalized and delivery is scheduled within 12 months. This quarter, we debooked $11.5 million of orders. Total backlog remained approximately flat quarter-over-quarter at $1.6 billion.

Remember, we do not include any service bookings in this backlog number. Shipment backlog, tools for which we have taken orders but have not shipped, was at $1.05 billion, or approximately 5.5 months. Revenue backlog, tools that have shipped but have not yet been accepted for revenue, was $509 million or approximately three months.

We remain confident that we have a strong backlog of shippable over the next six to nine months. Our ability to maintain this significant level of both shipment and revenue backlog continues to help KLA-Tencor sustain profitability throughout any business cycle.

The regional distribution of orders for the March quarter was as follows. The U.S. was 17%. Lower than its historical average of 25%. Taiwan was 31%, higher than its historical average of 20%. Korea, China and Singapore combined were 16%. Lower than their historical average of 20%. Europe was 8%, lower than its historical average of 10%. And Japan was 28%, higher than its historical average of 25%. The product distribution of orders was, Wafer inspection was approximately 48%. Reticle inspection was 16%. Metrology was 18%. Data storage was 2% and service was 16%.

Before I start with the income statement, let me summarize the special charges in the quarter. The charges fall into three buckets. First, we had $18 million of non cash charges related to acquisitions, primarily ADE, $10.5 million is included in cost of goods sold, $2 million is included in R&D, and $5.4 million is included in SG&A. In the June quarter we expect charges related to acquisitions to decline by about $4 million. These estimates exclude potential charges for Thermo Wave. Second, we had $15.3 million of one-time charges related to our stock option investigation, $1.7 million is included in cost of goods sold, $2 million is included in R&D and $11.5 million is included in SG&A. These charges are for legal and investigative costs; costs related to the resolution of employee tax issues resulting from IRS Section 409-A for non-executive employees.

And compensation expenses for -- compensating non-executive employees for lost benefits due to the suspension of the employees' stock purchase plan. Finally, we had $5.4 million in one-time tax benefits resulting from the closure of several audits.

Now, turning to the income statement. Revenue for the quarter was $716 million, up about 10% quarter-to-quarter and up 38% from the same quarter last year. GAAP gross margin for the quarter was 57.2%. This includes $10.5 million of charges for acquisition and deal related amortization and $1.7 million for stock option investigation related charges.

Excluding theses items gross margins including stock options was 58.9%, up about 240 basis points from Q2 as inefficiencies and bubble costs related to the integration of acquisitions and the movement of operations to Asia were more than offset by reductions in cycle time and other operational improvements.

GAAP operating expenses including both SG&A and R&D were $227 million. This number includes $7.5 million of charges for acquisitions and deal related amortization and $13.5 million for stock option investigative related charges.

Excluding these items, operating expense was $205.8 million, down $2 million from the prior quarter. As efficiencies realized in the quarter, more than offset increases from the first full quarter of ADE and the addition of OnWafer and SensArray. For the quarter, other income was $20.8 million. The effective GAAP tax rate was 23.9%. This rate is lower than our ongoing tax rate of 28% as a result of the one-time charges and the $5.4 million of discrete items discussed earlier.

GAAP net income for the quarter was $154.8 million, or $0.76 per fully diluted share. Excluding the one-time charges previously discussed, net income was $170.8 million, or $0.84 per fully diluted share. This number includes share based compensation expenses of $0.10 per diluted share and the approximate breakout is cost of goods sold $0.03, R&D $0.05, SG&A $0.06, and a tax benefit of $0.05. In the June 2007 quarter, we expect expense for share-based compensation to be similar to March.

Now turning to the Balance Sheet. Cash and investments ended the quarter of $1.6 billion, a decrease of $558 million quarter to quarter as a result of the previously announced $750 million accelerated share repurchase plan, which is expected to be complete by the end of the June quarter.

Inventory decreased by $34 million to $530 million. Accounts receivable increased in the quarter by $51 million to $499 million, principally as a result of the increase in tools awaiting acceptance in Japan. Capital additions related to fixed assets were approximately $24 million for the quarter, as we continue the construction of our new facility in Asia. Depreciation was $15 million.

On a net basis, including retirements, fixed assets increased by $9 million over the quarter. Cash generated by operating activities was $198 million. We paid a dividend of $24 million headcount ended the March quarter at approximately 6,000.

Finally, to recap the guidance Rick gave for June, and again, all excluding Therma Wave. Bookings was down 5%, plus or minus 10%, revenue between $700 million and $715 million, operating expenses approximately flat, interest income of approximately $16 million, shares outstanding of approximately $194 million, and EPS including share based compensation but excluding one time charges and deal related amortization of $0.84 to $0.86.

This concludes our remarks on the quarter. We will now open the call for questions. Before I turn the call over to Marvin, to give the polling instructions let me request that you refrain from asking multipart question to give others some time. As always we are all on a tight schedule.

Marvin, can you begin the polling, please?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Tim Arcuri with Citigroup.

Timothy Arcuri - Citigroup

Hi, guys. Two things. First of all, Jeff, obviously the EPS guidance here is very strong. How do you -- when you look at your cost structure relative to the financial model that you put up at Semicon West last year, where do you think you are right now relative to that model? Are you almost of to it? Are you at it?

Jeff Hall

Yes. Thanks, Tim. The way we look at it is obviously we've made some progress but we're about where we want to be to slightly ahead of the model at this point but still a lot of hard work to do from here.

Timothy Arcuri - Citigroup

Okay. Okay. So actually relative to that model, you're even -- if there are incremental expense steps taken from here going forward, that's going to put you even above that model, right?

Jeff Hall

Our plan is to continue marching to the model that we laid out about a year ago.

Timothy Arcuri - Citigroup

Okay, and then last thing from me. Have you seen any push-outs recently? There's been a couple. I think there was one in memory and there has been a couple foundry related. Have you seen any push outs lately. Is your guidance meaning fully different in terms of orders today then it would of been say a month to 6 weeks ago?

John Kispert

Hey, Tim. I think there is two things we've seen over the last 90 days. Over the last 30 days. One is in the microprocessor logic space where you've seen some changes in strategy. A handful of customers, European customers, Japanese customers and we've seen some orders that would have expected not only in the March quarter but some in the June quarter, probably sitting now in firmly in the second half of the calendar year. Not a big number but certainly some movement and that's really folks changing where they want to get things built or changing maybe the fact that they're not going to do R&D in one particular facility and do it different way.

I think the other change across the industry has been to your point in the last 30 days and that's been in the memory space. I think that one has us more focused. It hasn't been huge to this point. The orders are still within the calendar year. It looks like if I were to characterize it stuff that we would expect to kind of in this time frame, in the June ending quarter is moved out to more into the September, October, November timeframe. Again, not a big number and very isolated to one or two customers.

Timothy Arcuri - Citigroup

Okay. John. Thanks a lot.

Operator

Our next question comes from the line of A.J. Safalow with J.P. Morgan.

A.J. Safalow - J.P. Morgan

Hello, good afternoon. John, just a follow-up on that particular question. Are you seeing any foundry push-outs and do you expect the foundry demand to trend higher from here?

John Kispert

A.J., foundry numbers you hopefully can tell with the numbers that Jeff gave you, we saw a nice up tick in foundry in the March ending quarter. I think if anything, the number will be about the same in the June quarter, if not some upside to it. It looks strong into the second half of the year. The thing we're trying to figure out here is as you see changes with other folks' strategies how will that show up in the foundry, spanning through the second half of this calendar year. That's something I wouldn't be able to answer right now but we are certainly looking at it.

A.J. Safalow - J.P. Morgan

So basically no recent weakness in foundries, correct?

John Kispert

Not on the order front or the shipment front, no.

A.J. Safalow - J.P. Morgan

Okay. Good. Then my second question is, is the difficulty in technology transitions to either 65-nanometer for foundry or 70-nanometer for DRAM, is it causing or is it likely to cause any sort of non-demand related slowdowns in the capacity rounds?

John Kispert

A.J., You're talking about memory?

A.J. Safalow - J.P. Morgan

Yes. I'm talking about both memory and DRAM. In the case of foundry going to 65-nanometer and in the case of DRAM going to 17-nanometer, if people -- do you see people having technical problems in bringing the yields up that you think might cause them to push out their plans, which has nothing to do with the end demand?

Rick Wallace

A.J., it's Rick. Great question. In fact, what we do see is people very concerned about their yield challenges as the two notes you talked about and that has really got us engaged with a number of customers, trying to help them work through that. Certainly nobody wants to slip out their production because they struggle with yield and that's really caused us to get very involved and has driven demand for some of our leading edge products to help them do that. We don't see a push out as a result but we do see it as one of the drivers for increased investment in process control as a result.

AJ Safalow - J.P. Morgan

Just a quick follow-up to that question. If we see DRAM prices and/or demand start to rebound, do you think some of the second tier DRAM makers would actually do more at 90-nanometers rather than scramble to accelerate the 17-nanometer.

Rick Wallace

When we talk with customers, what we find is they -- all of them, figure particularly in the memory space, think the advantages are pretty compelling on the leading edge so they're pushing really hard to meet the demands an the demands continue to be strong on the leading edge. I think there's more capacity in place for the 90-nanometer note, as you know. So really we don't see that trend to be backing off. But I think what people are trying to figure out, get the new process up and ramped and win design ends. So we haven't seen that trend you're talking about. Not saying that it's not there.

Jeff Hall

Thank you. Marvin, who is next.

Operator

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

Satya Kumar - Credit Suisse

John, three months you were talking about orders being flat to up in June you talked about seeing some microprocessor and memory push outs. The fundamentals for your customers has gotten significantly worse in the last three months and June is your seasonally strong quarter. How does the order look in the back half of the year, particularly as you look at September, is there a possibility that you could see more than a double-digit decline in orders?

John Kispert

Yes, that's the key question; certainly we're focused on it. The -- it is those two buckets, if you will, the logic microprocessor thing that we're watching. I think that one will play itself out really well. I think the key things you look for are pricing an inventory. I think those are all healthy. It's just a matter of decisions being made and investments being made. The second bucket that's probably more concerning. And one that we're going to just stay focused on.

We've been focused on it for many years and clearly declining returns for our customers are going to eventually lead to lower capital investments. The feeling we get talking to our customers is that investments they're making are strategic. They see the demand at the leading edge as Rick was saying. We don't see people blinking or pulling back. I think that's evident in our ship rates and in our guidance that on the memory side that they are pushing forward. But we're going to keep our eyes on it for obvious reasons.

Satya Kumar - Credit Suisse

Quick follow-up to that. Typically when you see the possibility of the customers particularly the memory bucket weaken as much as it has, you start to see them cut CapEx or ask for better pricing and there's a couple memory companies that are talking about getting better equipment pricing from Japan and Korea and talking about getting volume discounts. Are you seeing any changes in your pricing environment that out of the realm of normal course of action over the last three months?

John Kispert

No real changes. You've changed jobs, you're now in procurement, sounds like. No, we're forever dealing with delivery and pricing and economic terms and conditions that we're forever trying to increase the value that we create in fabs. I think very key as Rick said is for us to keep coming out with newer products, the more unique defects that cost our customers lots of dollars.

We're excited by things like immersion and double patterning and certainly the issues that still surround high K materials and changes there and different architecture changes. I think the value that is represented in tracking these things and measuring them is continuously increasing. We probably see less pressure than other folks in the equipment industry

Satya Kumar - Credit Suisse

Thanks a lot.

Operator

Our next question comes from the line of Brett Hodess with Merrill Lynch.

Brett Hodess - Merrill Lynch

I was wondering if you could take a shot at sort of sizing. In the past you've given us what the opportunity for fab is as you move down the technology curve. Now that you're getting more insight into the 65-nanometer and 45-nanometers nodes, how those compare to what your sales opportunity is per fab or as you move down to those areas.

Rick Wallace

Hey, Brad, it's Rick. I'll start that and let Jeff come back with some numbers. I think in general it tends to be playing out pretty much as we anticipated with the focus being very heavily on trying to get quick yield ramps for our customers. But we're clearly seeing the increased number of places that people want to measure and inspect and particularly people are very concerned about the yieldability of the 45-nanometer node. 65, people had more progress on that so we're clear on the profile. 45 is a bit less clear because as you know, they're really earlier in that development. But we're seeing it play out pretty much as we thought and we're getting a lot of traction with our advanced customers as they struggle with some of the challenges and obviously you know Immersion is a great example. And that's playing out as we anticipated. Jeff, you want to --

Jeff Hall

Brett, we look at these and obviously there's no standard average fab but as we try to look at what an average fab would do, the way we look at it is going from 90 to 65, our opportunity grew about 20%, plus or minus and from 65 to 45 we think our opportunity grows 30% plus.

Brett Hodess - Merrill Lynch

So a little bit bigger leverage than what you've seen in the past, given some of the new issues that Rick was just mentioning?

Jeff Hall

65 to 45 looks better than 90 to 65.

Rick Wallace

Yes, I agree with that. As you know, Brett, there are nodes in the past that were particularly challenging. Everybody I talked to that's been around it a while feels that 45 is as tough as any have been.

Brett Hodess - Merrill Lynch

Great. Thank you.

Operator

Our next question comes from the line of Mark Fitzgerald with Banc of America.

Mark Fitzgerald - Banc of America Securities

Two quick questions. The memory guys are all advertising their CapEx as front end loaded. Do you guys see that in your own business at this point? Is it a factor how they announce their CapEx not material to where you guys book business and ship?

John Kispert

You know, Mark, it's something that we've wrestled with for years, as you know. As I look out over -- let me just say the next six months, memory looks to continue to be roughly 50% of our business. It's not 60 but 50%. So.

Mark Fitzgerald - Banc of America

50% lower levels?

John Kispert

Lower levels but still very healthy.

Mark Fitzgerald - Banc of America Securities

Okay. So I mean, the way they're advertising they're forecasting, you are expecting to see that in your own business in the second half?

John Kispert

I think in the second half; memory orders will probably be lighter than they were in the first half. I think foundry will probably be picking up. Certainly that's the communication we're having.

Mark Fitzgerald - Banc of America

And then just one quick question on the share count, Jeff, that you gave the guidance. It was $194 million. Is that based on the buy-back that's been completed as of the quarter you just reported. Doesn't account for anything that might be done this quarter?

Jeff Hall

That's correct. It just accounts for the buy back that's currently in progress.

Operator

Our next question comes from the line of Edwin White with Lehman Brothers.

Edwin White - Lehman Brothers

You were talking about the than NAND flasher be relatively weak in the quarter. How do you see that, as you look to the second half of the year? Is it your opinion that that comes back as far as your business is concerned or not?

John Kispert

Let me start out, Ed. It was about 30% or so of memory this last quarter.

Edwin White - Lehman Brothers

Yes.

John Kispert

And then my best guess right now would be maybe 40% in the June quarter. So I think it's probably a little bit stronger and as we look out into the second half of the year it gets pretty foggy. I think as you know, customers can move it back and forth relatively quickly. It's a difficult thing to call maybe further than 90 days out. Right now I'd say it's probably stronger than, say, 90 days ago.

Edwin White - Lehman Brothers

Okay. And then a question for Jeff. Any way to think about how to model the impact of Therma-Wave. Any way to look at that?

Jeff Hall

It's going to be a little bit dilutive for a couple of quarters. There's some pretty big integration to do there. It certainly could bring gross margin down a tiny little bit in the beginning as we move through the integration. As you saw with ADE, we think we're work it through pretty quickly.

Edwin White - Lehman Brothers

Okay. Great. Thanks.

Operator

Our next question comes from the line of Gary Suing with CIBC world markets.

Gary Suing - CIBC World Markets

Thanks for taking my question. Instead of slicing and dicing fundamentals by memory foundry logic buckets, thought I'd look at wafer inspection metrology and Reticle inspection.

Specifically, Reticle inspection, we saw a little bit of an up tick here in terms of Reticle inspection orders in the March quarter. If I look historically, retical inspection orders are nice kind of leading indicator for inspection and metrology orders. Where are reticale inspection orders going in June and given the kind of long lead times there in that business.

Do we have sort of visibility on what the ultimate peak could be in the back half of this year? Just remember the last time you peaked in terms of retical inspection orders they peaked at roughly $150 million. Do we have visibility on a ramp in Reticle inspection to that kind of prior peak level?

Rick Wallace

Great question. There are some positive signs we see in our Reticle world based on all the work that's going on with the advanced design roles. As you know it's a relatively small number of key customers and work with very closely with them.

That being said, from our vantage right now, it looks to be pretty flat going forward, which is healthy and as you know, because of our lead times, we're working very closely with customers to map out their needs and our capacity. So we don't see in particular a lot of particularly changed coming up.

We also see that there's a lot of work going on at the advanced nodes and that's really driving customers to the TeraScan HR which I talked about earlier so we're seeing a lot of the new product activity. At the same time, Reticle also goes in the fab line and we've had some pretty healthy performance there as well. But flat is kind of how we see it.

Gary Suing - CIBC World Markets

I mean, thanks for the answer. Is there any kind of mix shift going on? Any kind of volatility, Is there any kind of mix shift going on? Any kind of volatility, kind of making that flat in the back half and just given sort of the ramp and the foundries at 65-nanometer, the 70-nanometer ramp and NAND flash it just seems like there's a hell of a lot of design transitions going on.

I would have thought that number could have moved up throughout the rest of this year. Any other kind of mix changes that might be kind of offsetting any kind of benefits in the back half?

John Kispert

Gary, we don't see particular shift, other than the traditional shift as people are bringing in their newer designs as you. That's really leading customers towards the latest generation product but not anything that would substantially move the overall level of the business.

Gary Suing - CIBC World Markets

Okay. Perfect. Thank you.

Operator

Our next question comes from the line of Steven Ballero with HSBC.

Steven Ballero - HSBC

First some housekeeping questions here. Does the ongoing EPS of $0.84 for March, is that based on a normal tax rate or is that including the benefit there? And then what's your tax rate assumption for June?

Jeff Hall

The guidance is assuming a 28% tax rate, which is my assumption.

Steven Ballero - HSBC

And the just reported $0.84 ongoing,

Jeff Hall

Also 28%.

Steven Ballero - HSBC

That was on 28. And then I don't know if this is more for John or you Jeff. Shipments in March and June, what are your thoughts there. And lastly specifically for you Jeff, would you just remind you of your model and your margin outlook.

Let's just say if you held $700 million in revenue for the next four quarters. What kind of gross on operating margins could you do?

Jeff Hall

Shipments about 670 in the March quarter. June quarter, 670 to 700, in that range. You know, gross margin, we keep working on it here. We're in transition on a bunch of things. So we'll see it at about these levels, if revenue holds.

Steven Ballero - HSBC

Okay. And maybe I'll just…

Jeff Hall

Revenue goes up, it goes up 60 to 70%.

Steven Ballero - HSBC

Okay. I'll just sneak in one more. You generated $200 million in operating cash flow. Brought in back $750 million in stock. That kind of cash flow generation, you're really not putting a dent in your large treasure chest of cashier. Any plans beyond the 750? Or maybe plans for a dividend increase?

Jeff Hall

Certainly it's getting a lot of discussion here internally. Obviously we've done a lot here recently over $500 million of good accretive deals here recently. We did the $750 million buy back in February.

We've still got another $13.5 million shares authorized past that. Certainly gets active discussion here but nothing that we're talking about announcing on this call.

Steven Ballero - HSBC

All right. Fair enough. Thanks, guys.

Operator

Our next question comes from the line of Mahesh Sanganeria with RBC capital market.

Mahesh Sanganeria - RBC Capital Markets

I just want to build a little bit more on the second half. If you look at the foundry, the already pretty strong in terms of ordering the order close to $1 billion in Q1, about to order about $73 million in Q2.

With UMC and Charter being weak, I don't understand how foundry’s can provide upside and on the logic side we have just the Intel and EMD being weak and Intel being usually flattish. I can't come up with any logic customers who can give the upside so I'm having difficulty figuring out what's going to fill in the gap for memory if the second half.

John Kispert

I am not going to talk about specific customers. It's difficult to answer the question without talking about specific customers but the drivers are very consistent in that 65-nanometer capacity and 45-nanometer in some case pilot and other cases ramping. It's those orders that we're talking about across a multitude of customers.

Mahesh Sanganeria - RBC Capital Markets

Okay. Thank you.

Operator

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

Peter Kim - Deutsche Bank

Hi. First, I wanted to just cover the shipments. It looks like shipments fell a little shy of what you had expected. Could you characterize that for us?

John Kispert

Sure. I missed the name.

Peter Kim - Deutsche Bank

Peter Kim.

John Kispert

It's really shipments were as a number were a little bit lighter by $30 million or so the March quarter and it was really two things. One was a fab that wasn't ready. It wasn't fit. So we actually have shipped it already here in the -- this month. It just didn't get shipped last month.

It's a set of products going to a fab that just wasn't frankly electrically ready so we held onto the inventory. The other half of the $30 million or so was in the Reticle business and it was a product that wasn't signed off and got signed off the first week of this quarter and so we'll count it this quarter.

As far as the guidance that Jeff just gave you for shipments or what we're kind of shooting for, it's a number about that $700 million range, because that's kind of where the business is running right now. And that's a capacity we have in place and I would assume it's going to be a number somewhere around there, depending upon delivery times for our customers.

Peter Kim - Deutsche Bank

Great. Thank you. If I could just follow up with a quick follow-up question. In the past you talked about Reticle inspection penetrating the fab, as the geometries get smaller. How do you see the fab penetration of your Reticle inspection tools at that time 45-nanometer versus 65?

Rick Wallace

Peter, great question. I think at 65 we definitely saw adoption. Remember what's driving that is the concerns about the crystal and defects continuing to go through the process and the most customers that have experienced that -- so we have two kinds of customers, the ones that know that ahead of time and the ones that suffer through that and try to get tools to deal with it.

At 45 everybody is pretty educated on the challenges. We expect to see earlier demand for that as people start working through their plans and that's -- but the timing for 45 production becomes much later. So we think that's something that's ongoing, will build the business going forward. But the Reticle and fab has been part of the story for Reticle inspection.

Peter Kim - Deutsche Bank

Great. Thank you.

Operator

Our next question comes from the line of Ben Pang with Caris.

Ben Pang - Caris & Co.

Quick question in terms of our pro fab opportunity 30% that you commented on 45-nanometer to 65-nanometer. How much of that is due to more tools and how much of that is due to higher prices for your tools? How should we think about that?

Rick Wallace

Rick again. I think we thing about it 50/50. On the one hand there's more tools because there's more capability required. Some people are running them at higher sensitivity. And there are more place that's they want to run them.

Additionally, the mix toward the higher end tool increases and that of course drives newer technology and the ASPs that go along with that. So those are the two factors that have been driving us as we look forward. And similar factors that have driven us in the past.

Ben Pang - Caris & Co.

And when you mentioned like the higher capability tools. Is that in any specific area between metrology and inspection?

Rick Wallace

No, it's really in all of them. If you look at our product life cycle, this is -- as a company we develop maybe 10 or 12 new products a year. And what they typically are the latest generation tools, which build on the existing.

Usually by adding throughput or new algorithms or new sensitive. What happens over time is the customers upgrade to the mix, it's more biased toward the latest tool. So it really is across our product line.

Ben Pang - Caris & Co.

Thank you very much.

Operator

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

Jagdish Iyer - UBS

Hi. This is Jagdish Iyer on behalf of Stephen Chin. I have two quick questions. Rick, you had mentioned that NAND flash was softener the March quarter. Given the announcement by some of the memory customers to migrate toward NAND flash in the second after '07 do you see any challenges, do you see in terms of opportunity being increased given that some of the NAND customers are facing challenges in terms of improving yield? That is my first question. And my second question I have a quick follow-up, please.

Rick Wallace

Yes, sure. There's no question that NAND in particular is driving people from a yield and defectivity standpoint because they tend to drive more advanced design rules. So that presents opportunities. That being said, DRAM have not been an easy transition either. I don't know that the switch to NAND particularly drives our business more but I know the focus on yield management has been steadily increasing.

Jagdish Iyer - UBS

I have a quick one on metrology. I just was wondering why March was a little bit lighter than the usual. Just a seasonal thing that we should be looking not more than in? It.

John Kispert

It tends to be a lumpier business for us with larger capacity buys. It's really timing on particular orders, nothing that -- nothing abnormal.

Jagdish Iyer - UBS

Okay. Thank you.

Operator

Our next question comes from the line of Mark Bachman with Pacific Crest.

Mark Bachman - Pacific Crest

I was wondering if you could give me a little bit more color on the progress on your overseas expansion plans?

John Kispert

One more time. I'm sorry.

Mark Bachman - Pacific Crest

I was wondering if you could give us an update on your overseas expansion plans?

John Kispert

Sure. I think for everybody else, Wes, I'm going to say this so we're all on the same page. The company has been focused I'd say over the last year on expanding and refining our worldwide footprint so we can focus on being closer to our customers, working closer with them.

Obviously tapped into technologies and talents throughout the world and I think thirdly manage our costs now and into the future. We've done a bunch of things, one of which is to open up a new training and manufacturing and service facility in Singapore. Very aggressive schedule on the facility itself.

We now are about two months away from actually opening the facility so later on this quarter we'll announce the opening of it. We plan to be shipping product out of it within the following quarter and ramping steadily.

We have a list of products that we'll begin to move out of different parts of KLA-Tencor around the world into the Singapore facility and we're very focused on the efficiency, productivity of that organization and think it will add not only to the career paths at KLA-Tencor and the capabilities of KLA-Tencor, but the cost structure of KLA-Tencor.

Mark Bachman - Pacific Crest

Okay. Great. And how about on India, I guess, is there a -- I don't know if you've talked about a facility in India for engineering.

John Kispert

Yes, we have about 450 folks in India, have for a while. It's a combination of engineering and what's called applications engineer at KLA-Tencor. Those are the folks that really work with our products, our tools and help our customers with yield.

And of course a lot of back office kind of support, tremendous amount has happened at KLA over the last year or so in that regard. It's going very well. At this point don't think we'll be adding a tremendous amount more to it. We've done a lot of that.

I think Jeff mentioned earlier that we right now we're suffering through some what we call bubble costs in that the inefficiencies of having organizations getting moved over time, there are inefficiencies. But we're getting through that and that gives us confidence in the management team in the entire company that we're going in the right direction because we see steady improvements and improved productivity and efficiency.

Mark Bachman - Pacific Crest

Okay. Thanks.

Operator

(Operator Instructions) Our next question comes from the line of Timothy Arcuri with CitiGroup.

Timothy Arcuri - CitiGroup

Hi, guys. Just on -- there was a recap announced in the semi space. You look at what Linear Tech did. They issued a pretty significant amount of debt and they used it to basically buy back their stock.

I know that if you actually run the numbers, have you a much greater capacity to even do something like that than even they do. So with the stock where it is, there's a lot of reasons of believe that it's pretty attractively valued down here.

So I'm wondering how you think about all the different option that's you have, be it a straight buy back, be it a leveraged recap or be it a higher dividend. How do you think about those different options? Thanks.

Jeff Hall

Thanks, Tim. Yes, we spend a fair amount of time talking about various alternatives here, both internally and of course with our board. Conference call is probably not the most appropriate time to air out all of our thinking on that. But you can rest assured we keep thinking about it.

If we think that -- if we think and our board think that there's a good move for our shareholders we'll execute like we have in the past.

Timothy Arcuri - CitiGroup

But I guess more specifically, was that specific deal, was that surprising to you that it was that big?

Jeff Hall

Tim, I don't follow linear so it's hard for me to comment. All right. Thanks.

Operator

There seem to be no further questions.

Jeff Hall

Thank you, Marvin. Thank you, everyone for joining the call today. We look forward to talking to you again next quarter.

Operator

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

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