Good afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the KLA-Tencor March 2017 quarterly earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you would like to ask a question during this time, simply press star and the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. 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 Bren Higgins, our Chief Financial Officer. We're here to discuss quarterly results for the period ended March 31, 2017. We released these results this afternoon at 1:15 P.M. Pacific Time. If you haven't seen the release, you can find it on our website at www.klatencor.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-Tencor's SEC filings, including our annual report on Form 10-K for the year ended June 30, 2016. In those filings, you'll also find descriptions of risk factors that could impact our future results. As you know, our future results are subject to risks. Any forward-looking statements, including those we make on this call today, are subject to those risks, and KLA-Tencor cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. With that, I'll turn the call over to Rick.
Thanks, Ed, and thank you all for joining us today for our March 2017 earnings call. I plan to briefly cover three things with you in my prepared remarks today before handing off to Bren. First, a quick look at KLA-Tencor's outstanding performance in March, followed by a look at highlights of the very strong market share performance delivered by the company in 2016, then concluding with an updated outlook for industry growth for KLA-Tencor in 2017. Let's begin with the March quarter. KLA-Tencor delivered excellent results in March, thanks to another outstanding performance by our employees in executing the company's growth strategies in what is a very exciting and dynamic period for the company and for the semiconductor industry as a whole.
March shipments, revenue, and diluted GAAP and non-GAAP EPS all came in above the midpoint of our range of guidance, with shipments finishing at a record $909 million in the quarter. During the quarter, we experienced strength across our inspection and metrology portfolio, with growth in market leadership metrics for the March quarter continuing the momentum we achieved in calendar year 2016 and highlighting by the quarter record for our unpatterned wafer inspection products. Working in close collaboration with leading global semiconductor device manufacturers, KLA-Tencor strategies are focused on ensuring our customer success. This effort is helping to address the most complex manufacturing challenges for inspection and measurement in the marketplace today in both development and capacity monitoring applications. These challenges include patterning and process window issues associated with EUV and multi-patterning lithography.
As the industry moves to smaller dimensions and three-dimensional structures to address cost, power, and device performance improvements. Our successful execution of these strategies continues to bear fruit in terms of market leadership and relative outperformance of KLA-Tencor. In fact, the recent market share numbers from Gartner show the overall process control segment grew 11% in 2016, or roughly in line with WFE industry growth in the year. In that period, total revenue for KLA-Tencor grew 14%, and systems revenue grew 18%. The 2016 share data also shows KLA-Tencor increased our market leadership in process control by about 300 basis points in the year, reflecting our focus on market and technology innovation in the most critical applications in inspection and metrology, as well as the breadth of our product and services portfolio. We saw particular strength in 2016 from optical wafer inspection.
Recent successful new product introductions in this flagship market for KLA-Tencor, including the launch of the new 3900 Series broadband plasma platform, plus strong customer acceptance of the 29xx Series platform for leading-edge capacity monitoring, and successful new offerings in laser scanning patterned wafer inspection, as well as unpatterned wafer inspection, together contributed to expansion of the total available market for process control and growth in KLA-Tencor's share of the process control market in 2016. The story for metrology in 2016 was highlighted by the growth in optical CD metrology, which is the preferred technology for an increasing number of CD metrology applications. Optical CD is playing an enabling role in the proliferation of advanced 3D device architectures in leading-edge memory and logic, measuring not only line widths but also profile features on the chip.
The robust market share and relative growth delivered by KLA-Tencor in 2016 are the result of continued successful execution of product and service strategies that address the most complex inspection and measurement challenges in today's marketplace. Through that, KLA-Tencor is helping to drive growth and innovation in a period of solid, sustained performance for the semiconductor industry. Turning to the overall industry environment for calendar 2017, as March results have indicated across the board, the investment landscape in each of the major customer end markets today is solid and broadly based, supporting a growth outlook for the overall WFE industry that's expected to be in the mid-single digits or higher in 2017.
Given the momentum and demand demonstrated in the March quarter results, with upside to the original industry growth estimates for the year coming from a broadening of the competitive landscape in 10 and 7 nanometer foundry, we now see WFE growth favoring the upper end of the initial range of our estimates for 2017. Our preliminary view of the 2018 industry landscape points to a continuation of these investment trends. Given a business model that consistently delivers superior operating leverage and ranks KLA-Tencor in the top tier of leading semiconductor companies, coupled with leadership position in each of the most critical process control markets, the March quarter results show that the stage is set to build on the momentum of calendar 2016 and deliver what we plan to be a year of double-digit revenue growth in 2017 for KLA-Tencor.
Now turning to guidance for the June quarter, shipments are expected to be in a range of $890 million-$970 million. Revenue for the quarter expected to be in the range of $885 million-$945 million, with non-GAAP diluted earnings in the range of $1.46 per share-$1.66 per share. I will now turn the call over to Bren Higgins for his comments. Bren?
Thanks, Rick, and good afternoon, everyone. As Rick highlighted in his opening remarks, the March quarter represented another outstanding period of financial performance and operational execution for KLA-Tencor. Shipments, revenue, 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 manufacturing and service operations. Revenue was $914 million in the March quarter, GAAP diluted earnings per share was $1.61 in the quarter, non-GAAP diluted earnings per share was $1.62. In our press release, you'll 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 March quarter demand environment. Although we are no longer guiding quarterly orders, for the time being, we will continue to share our perspective on the current end market demand picture to give investors insight into industry trends and KLA-Tencor's performance. Upon completion of an upgrade of our internal analysis systems, our plan is to begin providing end market mix detail for shipment results and guidance beginning in the September quarter. At that time, all end market customer mix, business segment, and regional breakdowns will be provided on a shipment basis, we will discontinue all formal order commentary, including disclosure of the quarterly result. For now, for the March quarter, new orders were $990 million.
Foundry was 54% of new system orders in March, 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 orders to be approximately 50% of the total in the June quarter. Memory was 42% of new orders, with investment evenly split between DRAM and NAND. We are currently modeling memory orders to be about 40% of the total in the June quarter, with NAND representing about 60% of the memory mix. Logic was 4% of new system orders and is currently forecasted to be approximately 10% of the June quarter total. In terms of the approximate distribution of orders by product group for the first quarter of calendar 2017, wafer inspection was 56% of new orders. Patterning was 21%. Patterning includes orders from our reticle inspection business.
Non-semi was approximately 3%. Service was 20% of total orders. Total shipments were a record $909 million in the quarter, finishing above the $890 million midpoint of guidance for March. Looking forward, we are modeling June quarter shipments to be a new record at the midpoint of guidance and be in a range of $890 million-$970 million. Current bill plans are supporting quarterly shipment levels in excess of $900 million, and we expect this trend to extend at least through the second half of the calendar year. This outlook has strengthened since the earnings call back in January. Current expectations are for second half of 2017 shipments to be up mid-single digits versus the first half of the calendar year. Turning now to the income statement. Revenue was $914 million in March, finishing above the midpoint of the range of guidance.
We expect revenue to be in the range of $885 million-$945 million in the June quarter. Non-GAAP gross margin was 62.5%, in line with expectations for the quarter. The strong gross margin performance in March is consistent with recent margin trends in terms of mix of product business and operating leverage in our manufacturing and service operations. Compared to the December quarter, the benefit of the incremental sequential revenue was offset by a less favorable product mix in the period. Looking forward to the June quarter, we expect gross margin to be in the range of 62.5%-63.5%, up about 50 basis points at the midpoint versus the March quarter, due principally to the mix of products we plan to revenue in the quarter.
As we highlighted last quarter, going forward, we expect to deliver gross margin results a couple hundred basis points above our 2015 published business model targets due to a number of factors, including customer reception of new product offerings, more efficient new product introduction execution, and improved variable cost management and service in manufacturing operations. Total non-GAAP operating expenses were $224 million in March, up about $3 million compared with December. Non-GAAP operating margin was 38%. We are modeling operating expense levels of between $234 million and $238 million in the June quarter due to higher compensation expenses and prototype materials expenses for current programs. For calendar 2017, we are modeling operating expenses to be around $950 million due to incremental investments in product roadmaps supporting 3D NAND and EUV inspection and metrology opportunities, as well as higher variable compensation expense.
Given our gross margin expectations, we expect to continue to deliver operating margins solidly above our published model for the foreseeable future. Our non-GAAP effective tax rate was 20.7% in the quarter, just below our previously guided 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. You should assume a 22% tax rate going forward for modeling purposes. Finally, non-GAAP net income for the March quarter was $256 million, and we ended the quarter with 158 million fully diluted shares outstanding. I'll now turn briefly to highlights from the balance sheet and our cash flow statement. Cash and investments ended the quarter at $2.7 billion, an increase of approximately $111 million compared with the December quarter. Cash from operations was $225 million in the quarter, and free cash flow was $215 million.
In March, we paid an aggregate of $86 million of regular quarterly dividends and dividend equivalents for fully vested restricted stock units and made a supplemental payment of $25 million towards our outstanding term loan. We expect to continue executing our de-levering commitments over the remainder of the calendar year, consistent with our leverage targets. In conclusion, KLA-Tencor's results in March reflect our market leadership, the critical nature of process control on our customers' growth strategies at the leading edge and in legacy design rules, and our industry-leading business model. This, fueled by record total backlog of $1.7 billion at the end of the March quarter, position the company for another year of greater than market growth in an overall WFE industry environment that is currently forecasted to grow mid-single digits or higher in calendar year 2017.
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 operational core competencies. With that, to summarize, our guidance for the June quarter is shipments in the range of $890 million-$970 million, revenue between $885 million and $945 million, and GAAP diluted EPS of $1.44-$1.64 per share, as well as non-GAAP diluted EPS of $1.46-$1.66 per share. This concludes our remarks on the quarter. I'll now turn the call back over to Ed to begin the Q&A. Ed?
Okay. Thank you, Bren. At this point, I'd like to open the call up to Q&A, and we do once again request that you limit yourself to one question and one follow-up question, given the limited time we have for today's call. Please feel free to re-queue for your follow-ups, and we'll do our best to give everyone a chance to follow up in today's call as time permits. All right, Christine, we're ready for your first question.
Thank you. Your first question comes from the line of Timothy Arcuri from Cowen. Your line is open.
Thank you very much. Bren, I just wanted to ask you about, maybe as you think about updating your model, everyone else is coming out with these financial models that are tied to WFE. It looks pretty obvious that this year, WFE, you guys aren't quite this high, but if you look at the other guys, they're thinking like high 30s, maybe $39 billion. It seems like $40 is now sort of like the new norm almost. I'm wondering, can you give us a sense of what EPS would be in a new model at a $40 billion WFE? I had a follow-up. Thanks.
Well, Tim, we haven't published a new model, it's a little bit difficult for me to answer that in terms of at different WFE levels. I think the way you have to work through that is, as I've said around the revenue performance from an operating margin perspective, I think we're operating a couple of hundred basis points better than what we had published before. The easiest way to model that is if you're talking about in nearer term, I think it's an important assumption, are we talking now or a year from now and so on? If you're just to think in a nearer term, a $40 billion environment, you'd have to think about process control intensity on that. I think in calendar 2016, process control intensity was below 13%, somewhere between 13% and 14%.
The mix of business would be a factor in that. Market share with Gartner just reported 51%. We've got internal objectives to gain share, at least a point of share a year over the next few years. That's certainly a factor there. Our service business, which is currently, would be somewhere around $800 million into calendar 2017. If you put all that together with the operating margin I suggested, I think you can probably work your way to an EPS result.
Awesome. Thanks. I guess, Rick, question for you. There's a lot of concerns, I've actually gotten a lot of questions recently about some perception that there's a lot of reuse between 10 nanometer and 7 nanometer. I guess it sort of ignores all the investment that still has to be made at 10. Can you talk about that? I guess it comes down to how much backfill there is on 10 nanometer, can you just talk about that from a high level? Thanks.
Absolutely, Tim. I think that the biggest issue associated with 10 and 7 is the number of design starts that there are that are ultimately going to land at 7, and 7's a much more significant node than what we saw with 20 going to 16. Therefore, we don't see reuse as being as significant, mainly because there's going to be such an expansion in the overall capacity. We think that'll drive our intensity, and it'll be more like what we saw with the 28 node. When you combine 10 and 7, it'll look more like that. We feel pretty good about how that is playing out. Not only that, you have multiple players in the 10 and 7 race, you've got broad industry support, number of foundries all competing for that, as there are increased starts.
Thank you very much.
Your next question comes from the line of Farhan Ahmad from Credit Suisse. Your line is open.
Thanks for taking my question. My question is regarding the OpEx increase in second half of the year. Can you just talk about what exactly are you investing in? You touched a little bit upon EUV opportunities, and I just want to understand, is there something new that you're doing in that area, or just accelerating some of the programs that you had there?
Yeah, Farhan, thanks. It's a good question. There is some acceleration, I would call it incremental investment. We think there are opportunities for us on the inspection side, well frankly, metrology side as well, for driving more process control into 3D NAND, there are a number of efforts in the company that are focused on that. There's also work that we're doing to enable EUV development activities, there's work there. Finally, the industry has strengthened, certainly the company performance has strengthened, so there's some variable comp dynamics that are part of that. When you add it all up, it looks like it's about $20 million higher for the year than what I was suggesting back in January. Our outlook has strengthened as well.
I think if you look back January versus today, we're probably in excess of $200 million of incremental revenue to where we see things today. If you follow our traditional drop-through model of operating margin, it's an incremental 20 or so in cost. It fits our model, and we see it as an opportunity to invest in some of these big opportunities we think that will help drive process control intensity into 2018 and 2019.
Thanks. Rick, you talked about 2018 outlook looking positive at this stage. Can you maybe touch on some of the product drivers for you that give you confidence of some growth in 2018?
Sure. I think that as you look out into 2018, what you see is the investment timeframe that'll include work on the 5-nanometer, as you get to later in the year, then continued expansion, in addition to additional capacity being brought on by the guys who aren't in the lead in the 10 and 7. That's really from the foundry standpoint. Memory, you have continued investment going on kind of across the board, and our process control intensity is strengthening in memory, we see continued drive from that. Of course, we've all talked about the investment that's going on in China. Right now, it looks pretty good, and our customers are certainly excited about their prospects as we go forward.
Thank you. That's all I have.
Your next question comes from the line of C.J. Muse from Evercore ISI. Your line is open.
Good afternoon. Thank you for taking my question. I guess first question, I imagine you have a pretty good view today in terms of the capital intensity as we migrate down to 7-nanometer. I would love to hear your thoughts on what that intensity looks like for process control vis-a-vis 10 or 14, whichever is easier as a compare for you.
C.J., it's Bren. As we look at 7-nanometer, 7-nanometer has a full shrink. You're shrinking in the front end. You also have your shrinking in back end and transistor wiring. We think that that coupled with the multi-patterning schemes, the process integration structures that customers are dealing with, there's new materials on the back end, will create a number of process window challenges we think will be good for our business. As we move into 7-nanometer, we have a number of new products that'll come out that customers will be able to try to address some of these technology challenges, but also drive cost of ownership. I think process control intensity per wafer goes up somewhere in that 20-ish% range or so.
Obviously the number of wafer starts ultimately over time and design starts will be a factor in that because lots of designs change how customers invest. How we're looking at it now is, I think that to Rick's earlier comments, reuse will be limited, and I think the new product introductions plus the technology roadmap will be a good driver for our business.
Very helpful. I guess as my follow-up, if you make the assumption that your revenues market grows in calendar 2018, will the OpEx uptick we just saw be temporary, or will that continue? Will you continue to invest given the heightened revenues? This is just investments, not including the increase in variable comp.
The variable comp will adjust, right?
Right
That's one factor that will play out as we move into 2018. I think the easiest way for you to think about modeling the company is back to the model that we had put out. We're targeting an operating margin level based on certain revenue targets. We're exceeding the published model because of the strengths in gross margin, which we believe are sustainable. That's what's driving the outperformance. As revenue grows, we will invest. I think that, as I outlined earlier, I think there's a lot of opportunities out there, we'll invest in those. We're committed to the operating model, and that's how you got to think about it.
Thank you very much.
Your next question comes from the line of Harlan Sur, from JP Morgan. Your line is open.
Hi. Good afternoon. Congratulations on the solid results and on the outlook. Last call, you guys talked about the potential for shipments to be slightly down second half versus first half. Now you're expecting second half to be up by mid-single digit percentage points. Maybe you can just help us understand what's driving the better second half view. Is it foundry logic 10 seven, or is it memory? Is it legacy China? Is it a combination of all of the above?
Yeah, Harlan, it's Bren, thank you for the comment. It really is more of an all the above statement. Certainly, logic foundry into the second half of the year has strengthened in terms of the shipment profile. We certainly saw that versus where we were in January. Now looks like it's up a little bit, and it's been really filling out in the December quarter. We feel pretty good about that. I think in China, we continue to be surprised by the customer pull that we see from those customers, so that's a factor in it as well. I think all segments right now are investing and are putting a lot of pressure on us in terms of quick delivery.
I think the good thing about the upside we're seeing is it's quick orders and quick deliveries, which will enable us to drive some revenue performance in the second half. That's basically what's driving it. I think finally, the only other thing is that the order profile, you look at the backlog that we're bringing into the year, the order result in March, what we expect to be a book-to-bill greater than one in June. We've got a fair amount of sort of backlog or runway in terms of what we see coming and how to scale and plan the factory through the second half of the year.
Just to add to that, Harlan, I think one of the things that changed in the last three months is we were anticipating, but not convinced that there was going to be this broad support for the ten seven across multiple customers. We see a lot more evidence of that now, so that really has strengthened the foundry side of the equation, to Bren's point, driving all those things. It was a good quarter from that regard.
Great insights. Thank you for that. Recently on the memory side, we were talking to the CTOs of one of your large 3D NAND memory customers, and when we asked him about his equipment spending intensity going from 2D to 3D, he's saying that most of his buys are 3 areas. Number 1, deposition, Number 2, etch, Number 3, metrology. This was for a 32-layer 3D. They're transitioning to 64-layer now and still saying that metrology tool buys are a very high priority. I know that you guys have been wanting to collect more data on this, but it seems that on the metrology side, whether it's overlay, film thickness measurement, CD, whatever, that your metrology intensity for 3D is increasing pretty dramatically over 2D. First of all, are you seeing this sort of higher metrology intensity on 3D versus your prior assumptions?
Is there any way to kind of quantify that?
Yeah, Harlan. Yes. The metrology side has been pretty healthy. The concern we had was actually on the other side, on the defectivity side, being lower intensity. We're seeing that strengthen, and that's relatively early just due to the offerings that we have. I think that was the area where we think there's more upside because of all the work that people have to do to do destructive tests. As the complexity increases, there's more opportunity. We do think the intensity goes up, and I think that if you look at planar, overall process control intensity for planar versus 3D, they're actually pretty comparable now and likely more upside to that as we go forward.
Great. Thank you.
Your next question comes from the line of Toshiya Hari from Goldman Sachs. Your line is open.
Great. Thanks for taking my questions. My first one is on gross margins. You're guiding Q2 gross margins to 62.5%-63.5%, which continues to be a pretty strong level above levels we had seen two, three years ago. Is this kind of the new normal for the company, and we should expect this to be a sustainable gross margin number? Or going forward, should we expect kind of a reversion to the 59%-60% range?
No, it's a good question. Really, we're seeing benefit in a lot of places. We're seeing improving margin profiles in service, we're seeing improving margin profile across products. New product introduction execution has been very strong in terms of how you manage from transitioning from one product to another. At these revenue levels, I think the scaling of our factory and the leverage that exists in that has all been good. I don't envision a drop-off like you described. Certainly at these revenue levels, I think as I guided, I thought calendar 2017 was sp-
62% ±50 basis points. I think we're probably at the higher end of that guidance range now as we look into next year. I don't see anything on the horizon that suggests that this profile will change going forward. We feel pretty good about it. As I said earlier, I think what's driving how we're looking at our operating model and performance at various revenue levels is not so much about what we're spending, but how much more gross margin we think we're going to generate from our revenue.
Great. Then I had a follow-up on the wafer side of things. I think it's been about a decade since the Shin-Etsu and the SUMCO and the Siltronic have expanded capacity in a meaningful way. We hear more and more about very tight wafer supply these days. Just curious, have you had preliminary talks with your customers about potentially expanding capacity or are they still very disciplined, and it's still a 12-18 months out before they make a meaningful change in their capacity plans? Thank you.
Well, we have ongoing conversations with them as we're critical suppliers to them. There has been levels of investment for technology capability on a routine basis, but we have seen expansion recently, and 2017 looks like it's going to be a very good year overall relative to capacity in support of increased capacity demands. That business is part of the strength that we're seeing.
Thank you.
Toshi, the only thing I'll add to that is that in our unpatterned inspection business, we had a record year in FY 2016, and we just had a record quarter in that business in the March quarter from an order perspective. Now, some of that is 3D NAND, because 3D NAND is driving unpatterned inspection. They basically use these tools to monitor the deposition equipment to ensure cleanliness and so on. Also the wafer activity is a part of that. I think that's starting, and we expect to see that growing a little bit over time here, and it'll be a nice tailwind as we progress through this year.
Thank you so much.
Your next question comes from the line of Romit Shah from Nomura. Your line is open.
Yes, thank you, and congratulations. I think there's been this perception, or there was at least that, as memory spending grew as a % of WFE, KLA's revenue growth would underperform. That's kind of the trend that we saw in 2014 and 2015. More recently, the revenue performance has been substantially better in spite of pretty healthy memory spending. I can't say I appreciate what's the difference this cycle, and if you could talk maybe a little bit about if DRAM continues to grow as a % of WFE, how does KLA do in that environment?
Well, there's really two things. One, what we saw in the period you referred to where it was underperforming, where we underperformed, I think the other thing that happened, in addition to the mix shifting quite fast toward memory, you also had a lot of reuse happening. It was kind of a combination of factors that played against us. What we have now is expansion of capacity continuing in foundry. Foundry continues to be reasonably strong, less reuse, more players, and our memory process control intensity going up over time. Then some other factors like the last conversation we just had, like the OEMs and with the wafer manufacturers investing. Really a broad customer base. On top of all that, we have China, where the process control intensity tends to be higher overall because these are smaller projects.
We got a lot of factors working in our favor that are supportive of our revenue growth performance.
Is it fair, Rick, to say that you're sort of agnostic to the mix of WFE?
Not agnostic. We have a much higher % of adoption in foundry than we do in memory. Unless there's a major shift in terms of the relative performance, we believe we'll continue to perform in line or better than the industry as we go forward.
That's helpful. Thank you.
Your next question comes from the line of Edwin Mok from Needham & Company. Your line is open.
Great. Thanks for taking my question. Recently, one of your customer, and I think we've heard from other people as well, that there's talk about shrinking from 28 to 22 nanometer rather than kind of moving down to 14 and then 10/7. Right? How would that benefit or affect your business? Do you expect that shrink to drive increased process control equipment?
I'm sorry, from 28 to 22, is that what you said?
Yes. Yeah.
Yeah. Sure. I mean, anytime there's any kind of shrink going on, there tends to be increased demand for, especially on the wafer side, wafer inspection side, for finding smaller defects. That'll drive it. You're talking about a relatively small part of our overall market, so you wouldn't see as big a change as you would in a node shift down to seven nanometer, for example, if that makes sense. Sure, any of those trends are good, and especially when the fabs, From our standpoint, if it's the smaller fab doing it, the relative process control intensity is higher just because of where they are on the yield curve and on the volume curve, if that makes sense.
Okay, actually, that's helpful color there. On your guidance outlook, I think you talk about logic order picking up this quarter. Is this kind of a renewal resumption of spending by the logic guys, or is it just kind of one quarter timing of things?
Yeah, I think when you look at across the year, our view on logic spending in 2017 versus 2016 is relatively flat. I think it's a quarterly dynamic more than anything. Yeah, I think we've got orders that are going to get placed and the numbers a little bit higher next quarter.
Okay, great. Thank you.
Your next question comes from the line of Stephen Chin from UBS. Your line is open.
Hi, Rick and Bren. Congrats on the results and the guidance. I just had a follow-up question on WFE spend from China. In China, we are continuing to see satellite pictures of some of these big domestic China fabs making pretty good progress constructing their shells. How impactful do you think domestic China WFE will be this year for pilot line equipment? Thanks.
When you look at our order profile, what we saw in 2016 and what we expect to see in 2017, for the most part, is foundry centric. It was roughly 15% of foundry orders in 2016 and maybe 25% of foundry orders in 2017. I think what's interesting is while the memory investment from a shipment perspective is more of a 2018 and beyond dynamic, we are starting to see memory orders show up in the funnel. As we look, I'm not sure exactly when we'll see those orders book, whether we'll see them book in June or whether we'll see them book in September, but they are for shipments in early 2018.
Your question about progress on the facilities is a good one, and so far as we monitor that and we begin to staff up in anticipation of supporting these ramps, these are factors we watch pretty closely. Right now, there's a lot of activity there, and we're chasing, trying to hire people and ramp up to be able to support those customers in a pretty diverse fab footprint overall across the country.
Okay, thanks, Bren. A follow-up question on the market share gains that KLA saw last year. Do you get the sense that customers were waiting for KLA's new products last year, and the strong gains you saw last year should continue into this year as well? Thanks.
I certainly think we create more momentum with new products in general, than in the industry cycle. A new product cycle is very good for us, and I think that in this case, there are two things. One, there was a large-scale adoption of, in this case, our 29xx Series. Not just that, we brought out the 3900 Series, but also in metrology, we had products that were meeting a need. I'd say that our market share position continues to be very strong. We are investing very heavily in new capability to bring it on. The other thing we've done in response to the demand in China, we've actually restarted some of our product lines that are well-suited for that market, because we believe market share in China is critical going forward.
The other thing that's going on there, and you may be well familiar, is one of the big challenges a lot of our customers have there is talent, and engineering talent. One of the other ways we can help is with the worldwide apps presence and the ability to support them as they ramp. Not only do they benefit, but we benefit from strong share as well.
Okay, thanks, Rick.
Your next question comes from the line of Jagadish Iyer from Summit Redstone. Your line is open.
Thanks for taking my question. Congrats on a solid execution. Two questions, Rick. First, on the 10-nanometer and the 7-nanometer, I was wondering, how should we think of growth between the wafer inspection and metrology? We have new materials being added and new dimensions, with the FinFETs and things like that. I just wanted to get your perspective on the growth between wafer inspection and metrology. I have a follow-up.
Sure. Yeah, the way I think about it is the wafer inspection is really driving more capability in terms of, if you think about smaller defects and the actual scaling is happening going to 7, so not only do they need more capable tools, but they have to run them at higher resolutions, which drives the utilization in a way that they need more capacity. Metrology, there are more layers, especially with multi-patterning, so what you end up with is more capacity buys in addition to increased technology. On a percentage base, both are growing, slightly different drivers between the two, though.
Okay, fair enough. The second question as a follow-up is, I wanted to understand your momentum on your 3900 Series tool, and how should we think about the ramp in calendar 2017 versus calendar 2016? Is there a possibility of seeding 3900 Series into memory at some point? Thanks.
Yeah. 3900 Series is pretty much doing what we thought it would do, and like any new product introduction, not necessarily exactly in the places, because it's kind of had different adoption in different locations, but we've broadened our penetration, and 3900 Series is now at both memory and at foundry and logic facilities, and we've got multiple orders now in both foundry, but also what we're seeing in memory. We feel pretty good about our penetration. We're on the plan that we laid out when we introduced the product in terms of our 2016 objectives. Bren can talk to the details of that. We hope to, through 2017, entering 2018 with a lot of momentum.
I think, as Rick said, it's going pretty much according to plan. We revenued four tools in 2016. Our plan is to revenue eight to 10 tools in 2017. To Rick's point, they're seeded all over in multiple customers, across all the segments. The other dynamic that's driving 3900 Series besides the discovery opportunities, where we compete more directly with E-beam capabilities, is that you're also seeing it deployed in EUV development situations too, because it's used as a tool for reticle verification, where they print wafers and use
The wafer results to calibrate pattern fidelity on the wafer or the reticle. There's an additional use case there that we're encouraged by, and we're in line with our plans. I think by the end of calendar year 2017, we should have somewhere between, I don't know, 15 and 18 tools or so in the field, fully installed. We'll see how many we actually end up with revenue beyond the plan I told you, but they're out there and getting deployed and demonstrating value.
Right. Congrats on a solid execution.
Thank you.
Your next question comes from the line of Atif Malik from Citigroup. Your line is open.
Hi. Thanks for taking my question, and nice job. Rick, in your prepared remarks, you talked about gaining share and seeing strength in unpatterned wafer inspection last year. What drove that strength in terms of end markets? Was it just the volume of wafers being kind of cranked out in 3D NAND, or which end market drove that strength? Then I have a follow-up.
Well, unpatterned really does benefit from 3D NAND. We definitely see demand coming from 3D NAND. We also see it just in general, multi-patterning, there are more layers, and customers have long realized that monitor wafers can be a very efficient way to clean and maintain and come up from downtime on tools to re-verify their process. That's really it. Plus, we saw, as Bren said, we think the momentum continues based on some of the work we're seeing in the wafer manufacturers, which are part of what was driving our March results. We think that continues to be strong for us.
Okay. Then on China, the investor community is still kind of skeptical on these Chinese projects. Obviously, there are 10-plus of these and then five or six more active ones. Overall, when you look at these projects, do you think China has the expertise or the engineering talent to build and run these fabs, or are we going to be seeing everyone build these fabs and just kind of learn through the experience and then kind of stumble or move towards low-end products? I just want to get your sense of how ready China is to build fabs and then run them.
It's a great question. Let's start with, there's certainly a significant commitment. I've been in this industry a long time. I would say I've heard this before out of China, but we're seeing a lot more evidence now of actual commitment. There's also leadership has been put in place from other areas. You have experienced leaders now running a lot of these companies that have demonstrated their ability to run successful organizations in other parts of the world. I think you have that. The biggest gap probably ends up being the engineering workforce to be able to execute. I think in that case, what we're seeing is a lot of these ambitious projects are also coming with requests for support from equipment companies. We're definitely feeling that and are participating.
We are relatively cautious, too. If you take our plans, we don't bake in everything that we hear that's said in China in terms of how we run the business, but we're also positioned to be able to support it should it ramp. I think the most significant part of that expansion to WFE is not in 2017 or 2018. It's actually toward the end of 2018, 2019. I think it's still early. Right now, we feel very good about the prospects for 2017 and the early 2018 numbers look very doable from our standpoint.
Very helpful. Thanks.
Again, if you would like to ask a question, please press star and the number 1 on your telephone keypad. Your next question comes from the line of Patrick Ho from Stifel Nicolaus. Your line is open.
You answered this a little bit when you talked about the 3900 Series product and some of the applications that you're getting adoption for that product. Given the continued success of the 29xx Series, is that slowing any of the, I guess, the product momentum for 3900 Series and that adoption, given that the 29xx Series is still, I guess, a workhorse tool for even these next-generation nodes?
Not really. I think that goes to two things. One is our customers have always sought the lowest-cost solution for solving the inspection problems. If we had not expanded the 29xx Series, then maybe that would be the case. The 3900 Series in its development isn't yet at a point where it could have offloaded those inspections. Whenever we do introduce a whole new technology platform, we almost are forced to reduce the functionality of it on introduction, which is the case here. It has capability, but it doesn't have the same breadth of capability that a 29xx Series would have. That will happen over time, and as that does, the 3900 Series will take more and more of the layers as we go forward.
Great. As a follow-up question, given your strong exposure to the foundry segment, today we're seeing the second-tier foundries building out their 28-nanometer capabilities. How much of, I guess, your expertise in that node, given that you've helped the other leading players ramp up on that years ago, how much are you helping out those second-tier players, and how is that helping provide potential incremental business or even services opportunities with these second-tier foundries that are trying to get ramped up?
Well, we definitely have a close partnership with many players across the board on, say, 28, I do think we support them as best we can. We don't really make money on services from that. What we do is we support them with tool sales. Our market share tends to be pretty good, we're committed to doing Helping them with best practices in terms of ramping their facilities. These are very capable people, they do often appreciate the support. The other thing I mention is, in some cases, we've actually restarted some of the older products to be able to support them, with exactly the capabilities that they need. We're not selling the latest generation in general into those facilities. We'll sell a mix, some new and some of the maybe Gen 3 kind of product line.
Great. Thank you.
Market share, just the only thing I'll add is market share tends to be stronger with those customers, and so what comes with that is, to Rick's point, the need for some additional support as we work through it. We have applications engineers and fabs all around the world, and they get deployed in these opportunities, and we think we benefit pretty well from the market position we have on the tools, and these folks help the customers get value out of the tools.
Great. 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, and thank you all for joining us here on our call today. Just a reminder, an audio replay of today's call will be available on our website later on this afternoon. Once again, we appreciate your interest in KLA-Tencor. Thank you.
Thank you. This concludes today's conference call. You may now disconnect.