Thank you. Mr. Ed Lockwood with KLA Tencor Investor Relations, you may begin your conference.
Thank you, Christine. Good afternoon, everyone, and welcome to our conference call. Joining me on our call today are Rick Wallace, our President and Chief Executive Officer and Brent Higgins, our Chief Financial Officer. We're here today to discuss quarterly results for the period ended June 30, 2017. We released these results this afternoon at 1:15 Pacific Time.
If you haven't seen the release, you can find it on our website at www.kla10cor.com. A simulcast of this call kla10cor.com. A simulcast of this call will be accessible on demand following its completion on the Investor Relations section of our website. Today's discussion of our financial results will be presented on a non GAAP financial basis unless otherwise specified. A detailed reconciliation of GAAP to non GAAP results can be found in today's earnings press release and in the investor presentation on KLA Tencor's Investor Relations website.
There you'll also find a calendar of future investor events, presentations and conferences as well as links to KLA 10 Core's SEC filings, including our annual report on Form 10 ks for the year ended June 30, 2016. 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 risk. Any forward looking statements, including those we make on the 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 forward looking statements.
With that, I'll turn the call over to Rick.
Thanks, Ed. We're very pleased to report that June marked yet another exceptional quarter for KLA Tencor, with shipments, revenue and earnings per share each finishing at or above the range of guidance. New orders exceeded the $1,000,000,000 mark for the 2nd time in the past three quarters. Shipments were a record $971,000,000 and we ended June with backlog of $1,800,000,000 which was also an all time high level for the company. These numbers were once again driven by KLA 10 Korn's ongoing market leadership and strong execution of our strategic objectives and are also reflective of the broad strength of today's overall WFE industry environment.
One factor that may not be evident in the reported numbers, but which is key to our positive outlook for continued strength in the overall demand environment is the growing momentum in orders we've experienced in the first half of calendar twenty seventeen. In fact, since January, we have adjusted KT's internal order forecast for CY:seventeen to the upside by almost 20%, reflecting strengthening customer demand driven by new products across each of our end markets and leading to another excellent year of growth for the company in 2017, while setting the stage for continued momentum into 2018. Judging by the positive announcements recently of overall industry growth projections provided by our peers and other market participants, the strength KLA has experienced today is also broad based, which bodes well for the industry as we move ahead in the year. Turning now to a discussion of some of the key areas of near term focus for the company as we execute our growth strategies. As a market leader in process control, KT plays an enabling role in driving our customers' growth strategies and long term success.
We do this by investing at a high level to drive innovation and process control and supply our customers with the advanced inspection metrology products and services that they require to advance their device technology roadmaps and also resulting in expansion of the served market opportunity for KLA 10 Core in the most critical applications in process control. Along with the ongoing focus on investment and innovation, we're also continuously executing our strategies for operational excellence and converting our growth and market leadership into industry leading margins and cash flow, providing the fuel for future investment and resources for the ongoing strong cash returns to stockholders. Drilling down a bit on the factors that are driving KLA Tenkor's performance, I'll focus on 3 key drivers of our growth. 1st, expansion of the served market opportunity in memory driven by new products. Today, we are developing 5 new technology platforms, 2 of which are targeted specifically at memory, and we're expecting higher process control adoption and record revenue from memory customers in CY:seventeen.
Growth from memory customers is already contributing to the record business levels we're experiencing in our bare wafer inspection and metrology markets, and we expect revenue from memory customers to continue to grow with the market. 2nd, growth in China, which is seen by many as the next major new market inflection for WFE. We believe China could represent a generational opportunity in terms of investment and growth for our industry. Business levels in China for KLA 10 Core are expected to more than double in CY 17. China represents a tremendous growth opportunity for KLA 10 Core and for process control as our customers in this region are adopting process control at a high level to speed yield learning in their development efforts and accelerate market entry.
And finally, services. Growth in the service business is historically driven by the expansion of our installed base of systems in the field and this represents an annuity growth model to complement our systems business. Services growth is also driven by expanding investment in the trailing edge. This is resulting in legacy node fabs running at full utilization and putting pressure on the equipment base to service, refurbish, remanufacture and upgrade process control systems as our customers continue to derive value from these assets. Quarterly service revenue topped $200,000,000 for the first time in the June quarter, and we're modeling an annual revenue growth rate of 7% to 9% in services for the foreseeable future.
To sum up today's results before I turn the call over to Bren, June was another record setting quarter for KLA Tencor, demonstrating the company is executing well in a strong industry environment. Given our backlog and with the momentum we are experiencing in the marketplace, 2017 is shaping up to be an outstanding year for us. We're delivering a steady cadence of leading products, expanding our served market and delivering strong profitability and cash flows. We're growing our revenue with memory customers and we expect to see very strong growth in China as customers view process control as a competitive advantage in their market growth strategy and they look to KLA Tencor as the market leader and partner. I'll now turn the call over to Bren for his comments.
Bren?
Thanks, Rick, and good afternoon, everyone. As Rick highlighted in his opening remarks, the June quarter represented another outstanding period of financial performance and operational execution for KLA Tencor. Shipments were a record $971,000,000 finishing above the range of guidance, and revenue and GAAP and non GAAP diluted earnings per share each finished above the midpoint of the range of guidance in the quarter. This result was driven by strong demand across our product portfolio as well as solid execution and cost management in our engineering, manufacturing and service operations. Revenue was $939,000,000 in the June quarter.
GAAP diluted earnings per share was $1.62 in the quarter and non GAAP diluted earnings per share was 1.64 dollars In our press release, you will find a reconciliation of GAAP to non GAAP diluted earnings per share. With the exception of when I explicitly refer to GAAP results, my commentary will be focused on the non GAAP results, which exclude the adjustments covered in the press release. Now turning to highlights of the June quarter demand environment. Although we have discontinued guiding quarterly orders, beginning this quarter, we will begin to offer greater detail on our shipment results and guidance to provide more information and color on the current business environment to give investors insight into industry trends and KLA 10 Core's performance. For historical shipments mixed data, please refer to the supplemental information posted with today's press release on our website.
So as a reminder, the following details are related to shipments. Total shipments in the June quarter were a record $971,000,000 up 7% on a sequential basis and finishing above the guidance range. Foundry was 64% of shipments in June, driven by an anticipated broadening of the customer base for investment in 10 nanometer production and 7 nanometer development and by continued investment in legacy technology nodes. We are currently modeling foundry shipments to be approximately 42% of the total in the September quarter. Memory was 32% of shipments, with deliveries evenly split between DRAM and NAND.
We are currently modeling shipments to memory customers to be about 43% of the total in the September quarter, with NAND representing about half of the memory mix. Logic was 4% of shipments in June and is currently forecasted to be approximately 15% of the September quarter total. In terms of the approximate distribution of shipments by product group, wafer inspection was 50% of shipments, Patterning was 25%. Patterning includes orders from our reticle inspection business. Non semi, which includes our back inspection business, was approximately 4% and service was 21% of shipments.
Looking forward, we are modeling September quarter shipments to be in the range of $945,000,000 to $1,025,000,000 Current bill plans are supporting quarterly shipment levels of $900,000,000 to $1,000,000,000 and we expect this trend to continue into calendar year 2018. This outlook has strengthened since the earnings call back in January, consistent with the upside in orders we've experienced year to date. In fact, compared to the outlook we provided back at our earnings call in April, the CY 2017 order forecast is over $225,000,000 higher than 3 months ago, and shipments for the second half of calendar year twenty seventeen are expected to be up mid single digits compared with the first half, inclusive of the stronger than guided performance in the June quarter. Turning now to the income statement. Revenue was $939,000,000 in June, finishing at the upper end of the range of guidance.
We expect revenue to be in the range of $910,000,000 to $970,000,000 in the September quarter. Non GAAP gross margin was 63%, in line with expectations for the quarter. The strong gross margin performance in June is consistent with recent margin trends in terms of mix of product business and operating leverage in our manufacturing and service operations. Looking forward to the September quarter, we expect gross margin to be in the range of 62.5 percent to 63.5%, flat at the midpoint compared with June as we expect a similar mix of product revenue with slightly higher manufacturing costs offset by an improved service mix quarter to quarter. Total non GAAP operating expenses were $238,000,000 in June and non GAAP operating margin was 37.6 percent.
This operating margin result is in line with the updated target model for annual revenue levels in the to $3,900,000,000 range as we outlined earlier in this quarter. We are modeling operating expense levels to be approximately $250,000,000 in the September quarter due to increasing R and D headcount and prototype material expense for current programs as well as approximately $2,000,000 to $3,000,000 of incremental operating expense associated with the acquisition of Zeta Instruments, a privately held company that designs and manufactures optical profilers and defect inspection systems for the advanced wafer packaging, LED and data storage industries. We completed this small transaction in early June. Our non GAAP effective tax rate was 21% in the quarter, just below our long term planning rate of 22%, reflecting the higher mix of revenue from products developed or manufactured offshore and other discrete items impacting the tax rate. We are modeling the September quarterly tax rate at 20% due to a non recurring tax benefit expected in the quarter.
However, you should continue to model a long term tax rate of 22% going forward. Finally, non GAAP net income for the June quarter was $259,000,000 and we ended the quarter with 158,000,000 diluted shares outstanding. I'll turn now to the highlights from the balance sheet and our cash flow statement. Cash and investments ended the quarter at $3,000,000,000 an increase of $313,000,000 compared with the March quarter. Cash from operations was a record $463,000,000 in June and free cash flow was $452,000,000 As mentioned earlier, we completed the acquisition of Zeta Instruments in the June quarter.
Total purchase consideration was approximately $37,000,000 including cash paid of almost $32,000,000 at closing. And finally, during the quarter, we paid an aggregate of $85,000,000 in regular quarterly dividends and dividend equivalents for fully vested restricted stock units. In conclusion, KLA Tencor's results in June reflect our market leadership, the critical nature of process control and our customers' growth strategies at the leading edge and in legacy design rules and our industry leading business model. This, fueled by a record total backlog of $1,800,000,000 as of the end of the June quarter, positioned the company for another year of growth in a strong and stable overall WFE industry environment. This performance demonstrates the company's market leadership, the strong customer acceptance of a portfolio of solutions addressing the most critical yield requirements of leading edge and our focus on operational execution across our business.
With that, our guidance for the September quarter is shipments in the range of 945,000,000 dollars to $1,025,000,000 revenue between $910,000,000 $970,000,000 and GAAP diluted EPS of $1.48 to $1.72 per share as well as non GAAP diluted EPS of $1.50 to $1.74 per share. This September quarter EPS guidance range assumes a 20% tax rate in the quarter. This concludes my remarks. I will now turn the call back over to Ed to begin the Q and A.
Okay. Thank you, Brent. At this point, we'd like to open up the call to the questions. We do once again request that you limit yourself to one question with one follow-up given the limited time we have for today's call. Please feel free to re queue for your follow-up questions, and we'll do our best to give everyone a chance to reenter the call as time permits.
All right, Christine, we are ready for the first question.
Thank you. Your first question comes from the line of Farhan Ahmad from Credit Suisse. Your line is open.
Hi, thanks for taking my question. My first question is regarding UV and what trends you're seeing in the business there. ASML recently talked about potentially using single lithography etch, which I would assume would require a lot of inspection as well because there is no patent inspection. So maybe the need for the wafer inspection is at a higher level. So maybe can you just talk about UV trends that you're seeing in the business?
Yes, Farhan, it's Rick. Thanks for the question. We do see a lot of work around EUV still from our customers working in the pilot phase and the technology development phase, but a lot of work whether it's in reticle qual, which is still something that there's a lot of challenges getting defect free reticles. And then in terms of lithography qualifications when they're testing out the lithocell. But as you know, we're ways off from production, so it's pretty hard to anticipate exactly what the production use cases are going to be.
But we've certainly seen an increased amount of interest in our customers and kind of continuing our belief that we'll see HVM by 2019 2020.
Got it. Rick, you mentioned that you guys are working on 5 new platforms and 2 of them in specific to memory. How should we be thinking about the ramp of these products? And are any of these products something that will affect the revenues in 2018?
2018, probably by the mid layer part of calendar year, we'll see some impact. I think we've talked before about the overall increase in memory intensity. And I think if we look out, we're modeling about a 200 basis point increase in the intensity as we ramp these new products over the next couple of years. We'll already have a record for memory in calendar 2017, and we continue to see strength as we go forward.
Yes, Farhan, it's Brent.
I think the only thing I would add to that is we're still waiting for these products and that contribution, but we have from a 3 d NAND perspective from planar NAND, we have seen intensity improve. If you think about the peripheral products around bare wafer inspection and in metrology, where wafer flatness is really, really critical to advanced layer development, 3 d NAND, film measurements, CD measurement, laser scanning opportunities around defect inspection. Some of the bigger challenges are still out there that these platforms hopefully will address, but we're encouraged by what we're seeing so far. And as Rick said, it's a big part of our calendar 2017 view.
Thank you. That's all I had.
Thank you. Your next question comes from the line of Harlan Sur from JPMorgan. Your line is open.
Hey, good afternoon. Thanks for taking my question and great job on the quarterly execution. As it relates to the financial model, if I look at your free cash flow generation for the quarter, It was was it $400,000,000 was it $452,000,000 in free cash flow for the quarter? Sorry if I missed that number.
Yes, that's correct. It was pretty high. I mean, as you know, free cash flow can be pretty lumpy, but the linearity of shipments enabled a record collection quarter. So that was a big part of it this quarter. So we're real pleased with it.
That's a 48% free cash flow margin. So maybe you can help us level set, Brent. So in an environment where you're sort of operating sort of 36% to 38% operating margins. How do we think about the free cash flow margins underlying that?
Well, it's a great question. And I think as our business has been so stable, at these levels, we're not having to make significant investments in working capital. Obviously, we invested a lot in ramping inventory to prepare to be able to ship it $900,000,000 to $1,000,000,000 where we are today. And so now you're seeing modest increases in inventory to support that activity. So then as a result of that, given our capital position and so on, we see a fair amount of the operating margin dropping through.
So the way I think about it, I mean, when I look at calendar 2017, I probably see free cash flow probably in excess of $1,100,000,000 and we're talking about revenue levels of $3,600,000,000 to $3,700,000,000 if you take our guidance and expectations around the December quarter. So you're in the 30th percentile range, I think if I do the math quickly. So I think that's probably how we ought to think about it. I think if you see an inflection, obviously, we'll have to invest into that. But the resiliency of the model is pretty strong.
The margin profile of the business is good. And I think that a lot of the trends that I've outlined around gross margin is, I think, is fairly sustainable going forward. So we feel pretty good about the model moving forward and the cash flow generation that comes from it.
Yes. Thanks for the insights there. And then on China domestic memory, there are a number of programs that are going to start to put up either development lines or early production capabilities in 2018. You guys typically have a bit longer lead time. So I'm wondering if you're starting to see orders or at least tools showing up in your second half pipeline to support some of these early China based memory programs.
And as you've highlighted previously, China spending intensity for process control in general tends to be a bit higher. And I'm just wondering on these new memory programs, are you seeing that sort of higher spending intensity level?
Yes. Harlan, as we mentioned in the call, the orders, the new bookings for the quarter were very strong, driven in part by activity in China, as you say, in anticipation of having deliveries late calendar or maybe early in 2018. So yes, we are seeing that and agree with your suggestion. Part of what we see overall in the strength of China going forward is broad participation across the board and these projects are absolutely real and they're backed with funding and we're pretty excited about the opportunity there.
Yes, Harlan. I think the only thing I'll add to that is that the first part of well, all of 2016 and part of 2017 was very foundry centric. We thought most of the memory bookings we would start to see in calendar 2018. And I think one of the things that we've been encouraged by is the strength of what we've seen from an order perspective, both in the June quarter, but also what's in the funnel over the next couple of quarters. So those are tools that are slotted to ship early in 2018.
So from a shipment and revenue perspective, they're into next year. But as Rick said, those projects are clearly real and are moving quickly, and we're preparing to ship into that in the 1st part of next year.
Good to see the traction. Thank you.
Thank you.
Your next question comes from the line of C. J. Muse from Evercore. Your line is open.
Yes, good afternoon. Thank you for taking my question. I guess first question, as you think about China and their emergence as a key spender here on equipment, Historically, you guys typically see roughly half your revenues early on around R and D and then half as you start to ramp. Curious if that's how you see spending patterns there or might it be different?
Well, I think that it's not as much R and D, first to start with that. A lot of these are established processes. So I think we're seeing it maybe more pilot and then when you're talking about the ramp up, so not quite the same profile as you would have in maybe a more established company. Most of these are ramping trailing edge or not leading technologies. So a little bit smoother I think from that regard, but definitely front end loading the metrology capability just to be able to ramp the equipment.
So for sure we're going to be one of the earlier ones to see it.
And then I guess as they ramp, would you expect that ramp to be similar to what you see with non domestic Chinese customers?
Probably a little stronger simply because the scale of these fabs tends to be smaller. And I think from the standpoint of on a relative basis, I think that you would see the concentration being higher. I mean, when our participation really slows is when you're talking some mega fabs that have got many, many years of experience. These fabs are newer and they're greenfield, so the ones we're dealing with right now. So I wouldn't expect it to fall off the way it might have been a more traditional, very, gigafab.
That's great. That's helpful. As a follow-up, as you think about calendar 2018, it looks like you're working from a backlog of 7 months today and other front end guys, I presume including yourself, have fairly good visibility into Q1. How are you thinking about the trajectory for revenues into 2018?
Yes, C. J, I mean, it's a little early, but you're right. I mean, given the backlog position we have and what we expect in terms of the order outlook over the next 6 months, We'll see where WFE is. I think we've got a view that a lot of the dynamics that are driving the industry today continue into next year. Obviously, NAND flash will probably be a higher level of investment next year.
China is probably bigger. DRAM is probably flat to a little bit lower. Foundry is probably on the margin a little weaker. So, I think as we look at all that, we see sort of this continuation of these trends. And so we're sizing the company and modeling similar levels of output.
So I don't think it's right now, I'm not seeing anything that leads me to believe that it's not flattish or a little bit better than that.
Very helpful. Thanks, Brent.
Thank you.
Your next question comes from the line of rahmet shahal from Nomura Instinet. Your line is open.
Okay. Yes, thanks very much. I also wanted to ask about WFE spending. Last fall, it seemed like the industry wasn't contemplating anything more than 35,000,000,000 WFE through really through next year. And today we're on track to see more than $40,000,000,000 in spending in 2017.
So basically, you've seen over the course of 9 months an incremental $5,000,000,000 plus in WFE relative to what people were thinking back then. And I know that you along with your peers are positively biased for next year. But I guess my question is, how do you get comfortable that the increase that we've seen so far over the last few quarters hasn't been borrowed from the future?
Yes, that's a great question. I think a good way to think about it is where it's coming from. One of the biggest changes in the profile is relative to what's happening in China overall. And that investment is not really against leading edge. And so that's less about coming from the future and more about it may affect some other people's trailing edge once it comes up and be a revenue battle for some of our customers.
But it's kind of new capital and we'd all heard about China spending for many years and just hadn't materialized and now we're seeing a lot of those projects. So that's part 1. The other part for us is the broad participation across the 7 and 10 nanometer of logic in the foundry space. And so that's a little bit different too and just a bigger commitment to that node than we saw in the last cycle. But of course, there's a cyclicality associated with these businesses.
So I think there'll be ebbs and flows. For example, NAND probably softens in 2018 because of all the capacity that's coming on or at least stays flat.
And your backlog, I thought C. J. Mentioned it was like 7 months. Is that I mean, is that pretty locked in? What portion of that is actually cancelable?
Well, I mean, normally our business runs it's a little bit hotter now because the order strength over the last couple of quarters has been pretty significant. I mean, we've had 2 out of 3 quarters over $1,000,000,000 So we'll start to ship down on that. I mean, we generally run between 5 6 months. I guess any of the backlog, I mean, what customers do is they don't usually cancel. What they do is they push, right?
That's usually the indicator. So you'll see them start to push orders out. And then at some point, then they'll start to convert those to newer versions of the products they had as they get ready to receive those tools. But if you look at what's loaded in the factory, I would characterize the environment as customers generally pulling to get the tools quickly. And so far, we feel pretty comfortable with what we're seeing.
And as we spend a lot of time looking at indicators and all the different things that are out there and we feel pretty good about the underlying fundamentals of what we're seeing today. And a lot of what's going on in China is, I'm not sure, is really contributing to the global sort of supply demand dynamics, at least at this time. And so that's future investment for the long run. And so I don't think that that necessarily worries us from an overheating perspective at least early on.
Okay. If I could just sneak in one more. Rick talked about NAND and foundry logic. How does DRAM fit into the 2018 equation?
Well, as we were saying, I mean, DRAM has bounced back this year from 2016. The leader didn't invest a lot in 2016, so we've seen some investment. I think, look, it looks like it's an undersupply. So I don't think DRAM is going to be up as we move into next year. Maybe it's flat, maybe it's down a little bit.
I don't see a change in a lot, but hard to see how it's up a lot from where it's at right now, at least just generally how we see it.
Okay. Thanks very much.
Your next question comes from the line of Toshiya Hari from Goldman Sachs. Your line is open.
Hi, thanks for taking the question and congrats on the strong results. I had a follow-up on China as well. Unless I heard you incorrectly, Rick, I think you talked about your Chinese business in calendar 2017 doubling year over year. I was wondering if that included some of the multinational spending or was that a pure local number? And if you can talk a little bit about the preliminary outlook into 2018 for your China business that would be helpful.
Yes. The doubling we're referring to is native Chinese investment. We also have the multinational, but we're talking about what's going on there. And in terms of 2018, if you think about some of the ordering we're seeing is for the first phase, what these customers will tell you is there's a subsequent phase planned. So we think that China continues to be strong as we go forward into 2018.
But whether or not internally, we discount the numbers that we've heard in CapEx from China over the next 5 years and it's still pretty strong if you even discount them
in half based on what some of these players are saying
they're going to do. Question on your bare wafer
inspection business. I appreciate it's not necessarily a big part of your business today, but
if and when some of your customers decide to expand capacity, I think it could be
a pretty nice business for you guys given the gross margin profile. Can you talk a little bit about what you're seeing today from those customers and what the outlook is into the second half and potentially the 2018? Thank you.
Sure. Yes. No, it's actually it is an important business for us. It's a strong business. And not only that, what we're seeing is demand both from wafer manufacturers, but also from customers, IC customers who are qualifying tools for ramps.
It is an important part of the business. It is part of the uptick and we're seeing in orders and it will come in revenue as we go through. So it is it has been strong and that's both for defect and also for flatness. So it's an important part of our story going forward.
Thank you.
Your next question comes from the line of Patrick Ho from Stifel Nicolaus. Your line is open.
Thank you very much. Rick,
the last time
you saw this kind of really surge in sustained business was when the 28 nanometer node rolled out. Maybe a 2 part question there. Do you believe based on your customer conversations that the 10 nanometer and 7 nanometer node will be as large as 28 nanometer? And secondly, can you given the strength that you see in the last few quarters, what is the capital intensity change or increase from 28% to the 10.7%?
Yes, great question. I think that the first part of that answer is there certainly is a lot of broad investment for the 10 and 7. What's interesting about it though if you unpack a lot of our orders, the strength in our orders is really not as much from 10 and 7 as it is what we're seeing in memory and some of the other segments that we're in. So it is strong, but we haven't actually seen the same kind of surge we saw in 20 28 as we're seeing in 10/7. That said, it's pretty broad right now and we think there are at least 3, maybe 4 players that are going to be involved in that that we'll see going forward.
We are hearing from customers. They think the size is going to be similar, but it's still early for 7. And right now, what we're seeing is pretty intense investment around the 10 node.
Great. That's helpful. And maybe as my second question, in terms of the services business, where you've also seen the revenues ramp over the last few quarters, given that process control isn't like a process tool like Etch that basically eats itself up, what type of offerings or what type of solutions are you offering customers on the services end that will help grow that business to that 7% to 9% growth rate you've talked about?
Yes, Patrick, it's Brent. It is a different business than our process tool peers. And so what you typically have is so 75% of that revenue stream is contract, right? So we have customers that buy service contracts that with different levels of coverage across either certain tools or broadly across a fab. And so most of that revenue is repeatable and it allows us to staff and right size those fabs to maintain good utilization, but also to get pretty good predictability about part failure and so on.
So but what we end up selling is we replace parts, right? And so then there's the parts and as those parts those parts fail over time, and you have lasers that have useful lives and so on. So that's really the biggest part of the business. But it isn't traditional break and fix in that it's billable, it's really contract. So it really works for us and works for customers because we can keep the tools up and keep them optimized and run preventative maintenances and those kinds of checks on them over time to keep them running and it works out on both ends.
One of the
other things is the decay rate. You think about service contracts on tools and how long you service them, part of what's happened is people are keeping them in production longer. So if you think about fully utilized older generation fabs that for many of our customers are just printing money because they're fully depreciated, the tool life is longer than we expected, which the decay rate on the back end is slower, which is part of the contributor to the growth because you have stuff coming in and you don't have as much stuff coming out and that's really the benefit we're seeing from IoT.
Great. Thank you.
Your next question comes from the line of Edwin Mox from Needham and Company. Your line is open. Great.
Hey, thanks for taking my question. So first question, I want to kind of get an update in terms of your view about Gen 5. We talked about it before. And I think right now, you talked about mostly still being used on rebuild. How do you kind of think about that too into production?
Are we still have to wait until 5 nanometer? Or is it UV the big kicker for that? If you can give us some color on that?
Well, the good news is we're kind of doing what we wanted to do with Gen 5 in terms of we're having broad shipments across a number of customers and we're basically on a 1 a month shipment rate. And so we continue to do that. I think the time when we would ramp that up is when we'd see it going into larger scale production. So there are some customers that are talking about production for it, but it's a limited number of layers. And when that happens, then we'll see multiple tools.
But right now, we're seeding the market. We're penetrating the market. It's a tricky supply chain situation, so we're keeping it at 1 a month right now as we go forward and we'll ramp up. It's hard to say preliminary results are good. There's a lot of use cases for customers.
But we stick to what we said before where we think it is a tool that ramps into production out a couple of years, high volume really when EUV is kicking in, so you'd say 2019, 2020.
Okay. Actually, that's helpful color. And then on the surface side question actually, so one of your peers, right, or some of the company in the supply chain, right, they will charge customer or they will kind of write a contract to customer where they do almost a yield based or performance based contract with customer. For example, I think Simon used to do that. So I'm just curious, is that something that you guys entertain or is within the 75% of your services and fee in contract?
Are you guys starting to look at doing that in your service contract or is it still kind of mostly fricking fixed type of contract?
So we have a lot of key metrics that were that we agreed to with customers, largely around availability of the tools and response time and service. And so we've historically done that. And of course, as these tools become more mission critical for our customers, that's part of the arrangement that we have. So when it comes to extending the life and working very hard to make sure we don't disrupt production, we already do that. That is part of the benefit the customers have from going contract.
There are things we're doing to enhance the business we talked about in the last question. And some of them have to do with older fabs where we continue to offer enhancements to the tools. A lot of tools have been in the market for a long time, have upgrades available for customers and we'll continue to offer those as we go forward. So I'd say we already have that as part of the offering.
Okay, great. That's helpful. Thank you.
Your next question comes from the line of Jadeesh Iyer from Summit Redstone. Your line is open.
Yes, thanks for taking my question. Two questions, Rick. First, historically, September quarter has been a weak one for you guys, but you have a very strong guidance. So the question is, are there any greenfields that are driving that? And as a part of the question is that, can you provide some color on how many greenfields you have for this year?
And are there any thoughts on for next year? And then I have a follow-up.
Yes, Jagadish, it is a little atypical to see the strength in September compared to the last few years. So we're encouraged by that. I don't have the actual number in front of me. I think we'll be shipping a fair amount. And I think from the second half has a fair amount of memory in the mix of shipments.
There's obviously some additional 10 nanometer investment on the foundry that's shipping as well. So most of the China stuff, which is greenfield, is not shipping for a little while. I guess that's how I'd characterize the shipment profile next quarter. But as I said in the prepared remarks, strong and stable and we see a second half shipment profile that's up a little bit versus the first half. So evenly weighted across the years and probably more memory centric in the second half of the year versus what we saw in the first half.
Yes. One other interesting attribute of our business environment, we looked at this recently and the concentration from the top customers is actually down. We actually have broader customers. So when we look at the top 10, the percent they make up of the business has decreased in this calendar year and it was slightly down last year and we anticipate that broadening. So the good news is I think we have more customers and more locations and more offerings for them.
Okay, excellent. And just as a follow-up, you talked about, Rick, in your prepared remarks about new products and particularly for the memory segment. If hypothetically, if you assume that WFE is up, say, 5% for next year, would it be fair to say that you could outperform WFE as these new products start to bear fruit? Thank you.
Actually, I'll let Bren take that one.
Yes. I mean one thing is about next year is it looks like next year's WFE mix is a little more memory centric. And as you know, the process control intensity in memory, while it is getting better, isn't near foundry. So $1,000,000,000 of WFE depending on the segment is not created equal for us. So but we've seen some improvement on the memory side, which we're encouraged by.
I think these new products given the timing of when they'll ship and go to market and we'll actually pretty small amount. But as I look at our plans for next year, I look at the funnel, I don't see any reason why KLA shouldn't grow in line with at least in line with the market as we move into 2018.
Congrats on a solid execution.
Thank
you. Your next question comes from the line of Atif Malik from Citi. Your line is open.
Thanks for taking my question. And Rick, good job in kind of refocusing clearly on memory in China after the merger breakup. My question is on 3 d NAND yields. Can you help us understand where the 3 d NAND yields are on Gen 1 NAND at 48 layer, just kind of blended across all 4 guys and where the yields are on 2nd generation 64 layer NAND? And is there a reason to believe that there is something structural about migration from 48 to 64 to 96, which will keep the yields kind of low for a sustainable period of time?
Well, as you know, one of the biggest challenges is one of the ones we're trying to address, which is the ability to catch defects in the process. So as a result, when customers have process problems, they have to go through some pretty rigorous analysis to unpack those problems. So you see 2 things. 1, you see actual wafer yield is sometimes probably it is averaging lower than what you would see on 2 d. And it's probably it depends on customers somewhat how that is, but it is lower.
But it's still pretty good and you see that because they're having success selling them commercially. But the other thing is you see line yield busts, which is a little different, which is when you have a number of wafers that are actually bad and have to be scrapped. And for many customers, that's very disruptive to their business. So I'd say that, yes, structurally, it's very hard to build these, especially as you're going up in layers, the devices for two reasons. 1, the process technology is very tricky and the second one, you don't have a lot of visibility into it.
And it's kind of like the old days of semiconductor manufacturing when we didn't have as much in line and people had to use destructive means or short loops to try to figure out what was wrong with their process. So there is opportunity. I think we've repeatedly said that if we could help with solutions that help customers gain a few points of yield that's easily justifiable on their end. But I would say yields are in the range of probably if you'd see them over 90 a degradation as you go to the 3 d. So you'd see a degradation as you go to the 3 d.
Very helpful. As a follow-up,
you know that the bifurcation leading edge foundry versus lagging edge is expanding, UMC CapEx and have decided to actually focus on the lagging edge. So when you're talking to the Chinese domestic foundry customers, are they asking for 28 nanometer equipment or they're asking for the latest 10, 14 nanometer equipment?
It varies. I mean, they definitely have ambitions to advance nodes down the road. So you do see some interest in the advanced and you'll see customers doing in that case in the foundry some R and D or at least some of them doing some. But by and large, it's the older tool sets because they do have capital cost to manage and they've got to try to hit the cost per wafer targets that everybody else has. But you do see some interest in the advance and they also want to have a path and a road map.
The good news relative to our equipment is we have upgrades available on things like our Gen 4 wafer inspection as an example where we can continue to add value to a toolset that they buy.
Thank you.
There are no further questions at this time. Mr. Ed Lockwood, I turn the call back over to you.
Okay. Thank you, Christine. Thank you all for joining us here today. Just a reminder, there's an audio replay of the call and it will be available on our website later on this afternoon. Operator, this concludes our call.
Thank you.