All right. Good morning and good afternoon, everyone. This is Krish Sankar from Cowen. I'm the Semi Cap Equipment analyst. We are fortunate enough to have KLA, KLAC, the next company presenting, we are very lucky to have Oreste Donzella, EVP, and along with it, Kevin Kessel and Ed Lockwood from the IR team at KLA. With that, I'll quickly turn it over to Kevin for a quick intro. Kevin?
Thanks, Krish. KLA is very pleased to be here and have the opportunity to speak with you and the investors that are listening. For those of you who don't know us, we're a worldwide leader in process control equipment for the semiconductor industry. We sell products into the foundry and logic manufacturers, as well as the memory industry, that provides critical inspection and measurement capabilities. Our products help drive the leading-edge semiconductor development as it continues to advance through EUV, as well as other technologies. As you mentioned, I'm very lucky to have Oreste Donzella with us here today. He's our EVP in charge of our newly formed EPC group, and he'll talk more about that. He's also our executive in charge of industry forecasts and collaborations.
Oreste spent over 20 years at KLA in a variety of different roles of exceeding responsibility, and prior to KLA, Oreste worked for both TI and Micron in their fabs. His perspectives on the industry are also a benefit to the SEMI North America organization, where he serves on its advisory board. Before I turn it over to Oreste, I just wanted to mention our safe harbor language that can be found on our investor relations website and in our SEC filings, and it pertains to today's discussion in the event that we make any forward-looking statements. Oreste, over to you.
Thank you, Kevin, for the introduction. Thank you, Krish, for hosting us today. Hello, everyone. I hope you and your family are safe. In the last few months, we have all been facing unparalleled challenges, yet KLA continues to perform well and deliver on our commitments, demonstrating strong resiliency under these extraordinary circumstances. Our market leadership and strong business performance showcase the company's ability to execute our long-term strategic objectives and help customers and partners advance their technology roadmaps and achieve their financial goals. We remain very focused on delivering differentiated innovative solutions to tackle the technical and cost challenges that our industry is facing. The strength of our broad product portfolio, combined with the strong customer engagement, has been demonstrated by the market share gain that was mentioned in the most recent Gartner annual report.
We closed the March quarter with a record backlog. We differentiate among peers in our ability to provide guidance for the June quarter as a further evidence of the resiliency of our business. We feel well-positioned for the balance of the 2020. We are confident relative to the long-term targets we articulated in our September 2019 Investor Day. As Kevin said, I'm particularly excited to be here today in my first investor conference as the head of the company's newly formed Electronics, Packaging and Components group, leveraging the KLA operating system and the new group that brings together the Orbotech, SPTS, and ICOS organizations, targeting growth in new and faster-growing markets. I'm thrilled with these opportunities and looking forward to discussing in greater detail with you today. In conclusion, there is no doubt that we'll continue to face significant challenges in this new COVID world.
Given the close collaboration with our customers, pipeline of new exciting products, and our track record for strong and predictable execution, we feel KLA is in a good position to successfully execute our growth strategies and demonstrate resiliency in these extraordinary times. Let's start with your question, Krish.
Thank you, Oreste. Thank you very much for that. I got to say, since you wear multiple hats, I do have a question on variety of topics. Let me start with one that has been on top of most people's mind, and I understand that there's no real good answer to this, but the whole China trade Commerce Department ruling, and I understand there are a lot of unknowns. I think the main questions investors have been grappling with is, one is the Military-Civil Fusion regime in China. The other one is the foreign direct product rule targeting Huawei shipments via TSM. From your vantage point, how do you see this impact KLA?
Well, you are starting with easy one. Krish, you are right. There are still many unknowns and the potential outcomes of these two rulings. We previously stated that KLA will comply with all laws. We are working in concert with our peers and industry trade organizations, and we are waiting for additional guidance from U.S. government regarding the scope and the practical applications of these new rules. Once we have clarity, we can better determine the impact of our business, if any.
Got it. All right. The other common theme we have seen emerge during this earnings season, both from you and many of your peers, has been that demand is still very strong. Most of it has been supply-constrained. How is that supply constraint looking? Has it eased up? Given what happened in the last few months, does it make you revisit your supplier base, or do you think this is a one-time exogenous event that it should not change anything in the long term?
Yeah, I think that since last quarter, we have been able to mitigate the supply chain issues relative to COVID. As demonstrated by our strong execution March quarter, we said also openly that we didn't miss any shipment in the March quarter. It was a big proof of our ability to manage through these very, very stormy waters. Longer than industry average lead time, of course, the hedging strategies provided us with extra flexibility to ensure business continuity. I believe the supply constraint is easing right now, but we remain vigilant and maintain a very close communication with our suppliers to identify potential pressure points and eventually trigger any options whenever they are needed. I would say we see the management of our supply chain as a competitive advantage.
One thing that we are doing, especially with me in the new role, is leveraging the common process across all KLA divisions, including the former Orbotech subsidiary, is to make sure that we identify any potential problem, then we react very quickly to that. In conclusion on this topic, we remain confident on our ability to meet the ship and demand and successfully support our customers in the future.
Got it. All right. On the topic of around the second half and foundry logic strength, on the earnings call, you guys mentioned how second half is still looking balanced on the foundry logic side, despite the fact that TSMC spent almost 40% of its CapEx in Q1. I thought that the commentary was pretty interesting. Where do you actually see pockets of strength and weaknesses in the second half of this year?
First of all, let me say, we will not provide any specific number relative to industry outlook for the second half of the year because of the uncertainties around the COVID. To the best of our knowledge, we see continuous strength in the foundry logic segment, which leads to our view of balanced CapEx throughout the year after a very strong 2019. At the advanced node, we see a broadening of the demand among multiple customers. You mentioned TSMC frontloaded, we have other advanced customers that are going to make some buy commitment in the second half to advance to the next design and successfully implement EUV lithography production. These are on advanced node. When you look at the trailing edge nodes, we see an increased adoption of specialty devices like RF for 5G, for example, MEMS for medical applications.
The bottom line, the real story here is when we entered the so-called data era a couple of years ago, we emphasized that we will transition to a more diversified NAND demand with expansion of trends with AI, 5G across multiple industries, all the industries requiring a higher content of semiconductors. As a result of this transformation, we saw, and we said, equipment reuse decreasing and the demand of new products increasing. It was a big argument, big topic, maybe three, four years ago, about how much of the existing equipment was going to reuse for next node. We didn't see that starting from seven nanometer because the diversification, the broadening of end market. Also when you look at the particular situation where we are today, work from home, virtual interaction, telemedicine, are also requiring faster connectivity, reliable networking, more automation, more advanced computing storage.
I want to respond to your question also making a more long-term secular statement here. The market diversification remains a strong drive for equipment demand, especially for foundry logic, but not only limited for foundry logic. As you know, KLA is very well positioned to capitalize on this.
All right. That's very helpful, Oreste. Along the same path, the thought process on the memory side, especially with DRAM, interesting because your own numbers for DRAM seem to be improving. Micron just positively pre-announced at a conference. There's also some concern that maybe DRAM pricing might slow down into the back half. How do you look at DRAM spending trends into the second half and into 2021 from where we are today?
Let me give you a picture of the entire year. Memory market went through, I would say, five, six quarters of inventory correction, resulting in a very steep decline into 2019 spending, as you know. In the last few months, supply and demand appeared to rebalance, and we saw more stabilized speed, for example. There is an expectation of higher spending in the second half of this year, but the extent of this recovery will depend on the 5G market. Given the high exposure to smartphone unit sale, we saw for sure an acceleration of DRAM in the first half of the year because of data center demand. We believe that the inventory has already been digested in 2018 and maybe the second half of 2017, 2019, sorry, in the second half of 2018. We expect that the memory will recover.
Again, it depends on the number of the smartphone units that we will see by the end of the year. What we know for sure is that the complexity in both advancing DRAM to the next node and also adding more layers to NAND will need more advanced process control. KLA is very well positioned to take advantage with the new products pipeline specifically designed for memory customers.
Got it. All right. That makes sense. Just sticking with memory, more a question on the process control intensity. There's a general view that KLA is a more foundry logic-focused company, but people tend to forget that you have very good NAND exposure also. Can you talk a little bit about NAND exposure? I'm more curious to know, how do you think KLA's NAND exposure would evolve this cycle compared to the last 3D NAND cycle when you had your customers spending a lot to get into 3D NAND, and now it's going to be more layer count going to 128 and beyond?
It's true that we are more exposed to foundry logic because of a higher process control intensity. You are right. I would like to remind that when the NAND technology moved from 2D to 3D, we saw an increase in process control intensity for a couple of reasons. First of all, there were more number of film layers to be monitored and inspected, and the second reason was the challenges around the profile measurement wafer size. We saw a pretty interesting boost in the metrology business in that transition. We see this process control intensity to remain kind of stable even after our customers started to ramp and produce more and more of these 3D NAND technology and products. We see the 3D NAND process control intensity will not go down because the challenge will still there when you add more layers.
Eventually there will be some changes in the architecture of NAND that will drive more need for advanced inspection metrology tools. During the Investor Day in September, we said that we are working on new products, new pipeline of interesting products to serve both the NAND and the DRAM market. In particular, we mentioned the X-ray metrology platform to accurately measure the profile of isolated retention structures. Of course, we decided to launch a couple of tools in the field just to learn about potential applications and value of this platform. The first results have been very encouraging, and we expect this product to become mainstream production next year. We see an opportunity in this time frame and also in the future to increase the process control intensity in NAND and even in DRAM.
I want also to remind you that DRAM is going to increase utilization of EUV as well, same as logic. In that case, even if this implementation of EUV in DRAM is limited to few layers, but because of the volume, this may lead to a meaningful business in inspection metrology to control EUV DRAM as well.
Okay, that's very interesting on the EUV angle. On the EPC, the electronics packaging component business which recently took over, congrats again on that, Oreste. How do you think the legacy Orbotech business, I believe it's part of the EPC and within the Orbotech, I remember it used to have flat panel PCB, more the semi specialty segment. How should we think of that business evolving over the next 6- 18 months or so?
Krish, thanks for the congratulations, first of all. As I said in the opening remarks, I'm excited the opportunity to grow the KLA business beyond the cost of that process for market with the creation of the new EPC group. The organization is a part of a well-thought management transition process that we have been planning over the last several months to leverage the KLA operating system. I've been working at KLA for more than two decades, and I was a customer for seven more years before then. I have a great appreciation of the system that we put in place to deliver consistent results by cultural accountability and disciplined process to track both financial results, but also the way how we develop innovative solutions. We are at the beginning of this journey with EPC.
I'm confident that the team will be able to meet the very aggressive long-term goals that we outlined in our September investor conference. Let me talk a little bit about the specifics of the organization. EPC includes four business units operating in four different, somewhat overlapping markets. SPTS is a specialty semiconductor division which operates from Wales, U.K., and is the leader in deposition etch process solution in specialty markets like MEMS, RF, and power, and also is a growing presence in advanced packaging. Out of the historical Orbotech markets, we also have two divisions headquartered in Israel, to serve printed circuit board and the flat panel display markets.
While the display market is showing weaknesses due to highest push to consumer market in this COVID world, PCB is showing resiliency driven by a strong service business and also an expansion upstream into the so-called IC substrate market that is very, very critical for packaging. Finally, we include an EPC ICOS division, which was a company we bought more than 10 years ago. It's the leader of final component inspection accepted test. We have already seen a strong pull from the top KLA semiconductor customers to partner in these new areas, for example, packaging or substrates. We see this as a part of the narrative around the acquisition of Orbotech. As we said in Investor Day, New York, one of the reasons why we bought a good company like Orbotech was because we expect to make them better. We expect to make them great.
By applying the KLA operating system or operating model, we believe that we can inject what is good at KLA in terms of financial rigor, in terms of the way how we are disciplined to build new products, new technology, and interact with the customers. Also opening the door to the top semiconductor customers because we know them from the front end part of our business. Again, I remain very excited about the Orbotech acquisition. I am super proud and thrilled to be in charge of this organization.
Oh, that's very good to hear, Oreste. I just want to ask one more question on the EPC, or I should say Orbotech, specifically SPTS. The bull argument is that it gives you a good exposure to the 5G side. If I just want to play the devil's advocate and look at SPTS, it seems like a low-volume product, mainly on the ICP plasma etch and PVD for packaging. PECVD, these are all typically traditionally viewed as processes that are not KLA's focus, KLA is more on the process control inspection side. I'm kind of curious, do you still think SPTS is a strategic fit? When would you expect this segment to blossom as 5G comes on?
I believe it is. Actually, it gave me the opportunity to go back to 20, 25 years ago when I was in charge of process integration in the fab. Now I go back in my past of a process guy, not only process control person. It actually given me the opportunity to double down on SPTS that I'm very excited about it. Actually, the more I work together with the team in U.K., more I talk to the customers around the world, I get excited about the potential growth ahead of us. SPTS is in a very unique position. It's the leader in plasma-based etch and deposition solutions for these markets that are fast-growing markets. We are really at the right time, in the right place because with also the COVID pandemic crisis, we are seeing, in particular, these markets accelerate.
You mentioned RF that is instrumental for the 5G connectivity, but also we have seen in the last couple of quarters a huge increase in the MEMS business. The MEMS are everywhere because MEMS are sensors you can deploy in the industry, you can deploy in the medicine, you can deploy in many areas of our culture and society. That's the reason why I believe strategic, because it gives us the opportunity to play in these fast-growing markets, and also give us the opportunity to enlarge, expand our reach into the semiconductor, not only limited in the process control, but also in the process solutions where we are leaders, in particular in these niche markets. That's the reason why strategic, twofold.
It's strategic because it gives us the opportunity to double down in this fast-growing market, but also to learn and understand the processes, the tool market from a leadership position. That's the reason why I expect SPTS to deliver excellent top and bottom-line results in the calendar year. I remain very confident in the long-term growth of this business.
A very interesting perspective. Got it. Talking about you wearing multiple hats. If I remember right, you used to be the former general manager of the e-beam business. Can you talk a little bit about update on KLA's e-beam product and the competitive situation with HMI, which is part of ASML, and also Applied Materials?
Yeah. I was in e-beam 2004- 2007, a long time ago. I'm happy to do so. We have been very consistent with our message around e-beam inspection. We have been saying for years that we would have entered this market again only with a differentiated solution, and this is what we did last year. We believe we have a superior hardware and software technology to tackle the small physical defects detection challenge in conjunction with our best-in-class Gen4 and Gen5 optical wafer inspection platforms. As you may know, e-beam inspection is split in many sub-segments. There is the small physical detection, there is the voltage contrast electrical defect detection, some metrology.
The space that we are targeting our solution, at least initially, is in the small physical defect detection because we can leverage this tight coupling between wafer inspection, optical-based technology, and the e-beam-based technology. At KLA, these two technology work very close to leverage each other's strength, sharing advanced and machine learning-based algorithms, for example. We are very encouraged by the strong customer's pull for the new e-beam inspection technology after we successfully demonstrated value, a unique differentiation in several beta sites last year. We are excited about to be back in e-beam. For me, in particular, is a reason to be proud because I've been there many years ago. I was not happy to see the gap in our report, e-beam inspection KLA at 0% share for many years.
Last year, we gained a little bit of share, and I expect to gain more share in the coming years.
All right. That's very interesting. Just one follow-up question on e-beam. I think ASML and AMAT have publicly spoken about going the multi-beam approach or some of them are bringing multi-column. I'm kind of curious where you guys take out on that standpoint for e-beam.
Making a multi-column wafer inspection, e-beam wafer inspection has no sense. A multi-beam, of course, people are trying, and they've been the desire for our competitors for many years. There is no proof that a wafer inspection multi-beam or multi-column e-beam technology works yet. My take is very different. We would like to have the most differentiated and providing the highest value e-beam inspection technology to our customer. It doesn't matter which technology you use. We believe our technology is highly differentiated to serve the customer needs, and we will stick to our technology for now. On the other hand, I want also to mention that on the reticle inspection side, however, we are developing a multi-column e-beam reticle inspection tool that will be in the market the next year.
Got it. Makes sense. A couple of questions on the non-technology side. One is on OpEx. Clearly, what you're seeing is that demand is still very strong. There are some people concerned about a recession. If things do head south from here, how much flexibility is there on the OpEx based on market conditions? Within that also, one other question is that you're seeing with COVID, there's been some headwinds in the form of higher freight and shipping costs. There've been probably some tailwinds in the form of lower travel expenses. If you roll it all together, how flexible is the OpEx of the margin structure?
I'll start to say that we published our business model in the last September investor conference outlining margins for various revenue ranges, as you know. We'll continue to operate our company based on our capital allocation priorities. We have flexibility in managing our cost structure through variable compensation. You mentioned travel, of course, also the annual bonus payout is another variable compensation lever we have. I would say yes, we have the room. You asked about flexing the OpEx. We have room for flexing our OpEx in this market condition. Again, I want to make sure that the capital allocation priorities are clear, and we start from allocating, deploying our cash for R&D in particular, deploying in our business and eventually we're doing also in this time frame.
Got it. Then, Oreste, one quick question on lead times. With the whole COVID, have you seen lead times stretch for you because of supply chain inefficiencies? There is also the assumption. My view was that part of your long lead times for inspection had to do more with actually testing the tool rather than actually just procuring the materials to build it. Is that true? Given all of that, how do you see lead times today in a COVID or post-COVID world?
Well, we have a very broad portfolio. It depends on the products. Some products have shorter lead times, some products have longer lead time. I don't want to say that the lead time is long because of testing only. The lead time is a combination of procuring the parts and building the machine, integrating the parts, and eventually testing the machine before we ship it to customers. I don't really see any change, actually. As I said in the previous question, we have been quite successful in managing the supply chain through these incredibly painful times. Frankly speaking, I don't see any change in the future in the way how we manage our supply chain and the way our lead times have changed.
Got it. My final question, given in the interest of time, my last question for you is, looks like you have about $1 billion left in the buyback. Are you continuing to buy back shares in this environment, or are you slowing it down during this COVID period?
As I said earlier, redeploying our business and eventual allocation for M&A transaction to achieve our top-line group objectives are top priorities of our capital allocation strategy. The rest is returned to shareholders under either forms of dividends or share repurchases. As you know, we have a long history of increasing dividends year after year. Our goal is always to return over 70% of the free cash flow. In the March quarter, we returned much more than that. We returned more than 100% of the cash flow, including at that time, $316 million in repurchases. It was higher than historical average. As you said, we still have approximately $1 billion remaining under our share repurchase authorization. We have scaled back the pace of this quarter to be more prudent given the global macro uncertainty.
Got it. Oreste, I think with that, we are right at the time. Oreste, thank you very much for your time and input and hope you guys have a good rest of the day. Thank you, Oreste and Kevin.
Thank you, Krish.
Thanks, Sankar, and guys.
Thank you.