Now like to turn the call over to Mr. Ed Lockwood. You may begin your conference.
Thank you, Mariama. 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 Q2 results for the period ended December 31, 2016. 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.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 on KLA Tencor's IR 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 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.
Good afternoon, everyone. Today, I'm pleased to announce that KLA 10 Core's business continues to perform at a very high level, and we delivered another outstanding result in the December quarter, exceeding our guidance for shipments, revenue and non GAAP diluted earnings per share for the period. In addition, new orders topped $1,000,000,000 for the first time in Q2, reflecting KLA Tencor's market leadership and the critical role process control plays in enabling our customer success at the leading edge and in legacy nodes. For the full year in calendar 2016, KLA 10 Core grew revenue 14% compared to mid to high single digits growth for the wafer fabrication industry. Our exemplary performance, both in the December quarter and for the full year in 20 16 as a result of KLA Tencor's market leadership and coupled with our record backlog of over $1,600,000,000 sets the stage for another year of strong top line and earnings growth for the company in calendar 2017.
As our record order and backlog numbers demonstrate, KLA Tencor is experiencing unprecedented levels of demand in our end markets, particularly in foundry and memory. Memory was notably strong in the December quarter, driven by both DRAM and 3 d NAND investments in Korea, where we are experiencing higher adoption of bare wafer inspection along with thin film and critical dimension measurement solutions as a result of more films being deposited in vertical memory. KLA Tencor's growth and market leadership is fueled by the successful execution of a product strategy that is focused on differentiation and intersecting market needs with a portfolio of complementary solutions. This ongoing investment innovation and technology leadership helped to drive these strong results in 2016 and is a critical component for our long term growth strategies. For example, KLA Tencor's 2 latest broadband plasma optical inspection platforms, Gen 4 and Gen 5, together address the most challenging defect detection issues for development and capacity monitoring applications of current and next generation devices in the marketplace today.
We are now on our 4th major product upgrade for the Gen 4 optical inspection platform with multiple tools placed in every advanced production fab in the marketplace. And one of the key highlights of the year 16 was the successful launch of Gen5, our new flagship broadband plasma inspection platform. Gen5 is being deployed by customers to address early yield learning and engineering analysis applications for advanced optical lithography design rules and for EUV development. Calendar 2016 was a record year for the broadband plasma product family and we see momentum continuing through 2017. In addition to supplying wafer inspection capability for EUV layers, KLA 10 Core is also playing a critical role in reticle inspection for EUV.
Our customers are relying on us as a trusted partner to enable success of the important technology transition to EUV, a move that will allow for lateral scaling and more economical device roadmaps at the leading edge. The new challenges inherent to EUV specific process control applications such as mask inspection, reticle requalification and scanner control, just to name a few, present new market opportunities that we believe KLA Tencor is uniquely positioned to address, given our market and leadership in technology. EUV promises to be a positive catalyst for growth at the advanced process control market and for KLA Tencor. So to summarize, KLA Tencor's December quarter and calendar 2016 results demonstrates our strategies are working and the company is operating from a position of strength as we venture into another year of expected strong growth and earnings generation. Given a business model that consistently delivers superior operating leverage ranking KLA 10 Core among the top tier of leading semiconductor companies and with our strong leadership position in each of the most critical process control markets, the stage is set to build on the momentum of calendar 2016 and deliver what we plan to be another exciting year in 2017.
We believe KLA Tencor is well positioned to successfully execute our strategies and meet our or exceed our long term revenue growth objective of 5% to 7% in 2017 and what is expected to be another year of solid growth for the wafer fab equipment market. Now turning to the guidance for the March quarter. Q3 shipments are expected to be in the range of $850,000,000 to $930,000,000 Revenue for the quarter are expected to be in the range of $860,000,000 to $920,000,000 with non GAAP diluted earnings in the range of $1.42 per share to $1.62 per share. I will now turn the call over to Bren Higgins for his comments. Bren?
Thanks, Rick. Good afternoon, everyone. As Rick highlighted in his opening remarks, the December quarter represented another outstanding period of financial performance and operational execution for Kaley Tencor. Shipments, revenue and non GAAP diluted earnings per share each finished above the range of guidance in the quarter. This result was driven by strong demand across our product portfolio with particular strength in our flagship wafer and mask inspection product lines as well as solid execution and cost management in our manufacturing and service operations.
Revenue was $877,000,000 in the December quarter. Non GAAP diluted earnings per share was $1.52 and would have been $1.57 per share at the 21% guided tax rate. GAAP earnings per share was also $1.52 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 December quarter demand environment.
Although we are no longer guiding quarterly orders, we will continue to share our perspective on the quarterly current quarterly end market demand picture to give investors insight into industry trends in KLA Tencor's performance. We eventually plan to provide end market mix detail for shipments results and guidance and expect to have that information available once we complete an upgrade of our internal analysis systems sometime in the coming few quarters. At that time, all end market customer mix, business segment and regional breakdowns will be provided on a shipment basis. In the interim, we will continue to provide additional detail on order mix by end market. New orders in the December quarter were approximately $1,100,000,000 Memory was 61 percent of new orders and in line with our forecast for the quarter.
Demand was roughly evenly split between DRAM and NAND. We are currently modeling memory orders to be 34% of the total in the March quarter. Foundry was 37% of new system orders in December, also as expected, and Foundry is forecasted to grow to 63% of orders in March. We are currently modeling solid growth in Foundry orders in the first half of calendar 'seventeen fueled by 10 nanometer production and 7 nanometer development from multiple foundry customers and by continued investment in legacy technology nodes. Logic was 2% in new system orders and is currently forecasted to be at a comparable level in the March quarter.
In terms of the approximate distribution of orders by product group for the Q4, wafer inspection was 45% of new system orders, Patterning was 35%. Patterning includes orders from our reticle inspection business. Service was 18% and non semi was approximately 2%. New orders in the first half of calendar year twenty seventeen are expected to be roughly flat compared with the second half of calendar twenty sixteen. Total shipments were $887,000,000 in the quarter and just above the guided range for the quarter of $800,000,000 to 880,000,000 dollars Looking forward, we are modeling March quarter shipments to be approximately flat at the midpoint compared with December and be in the range of $850,000,000 to $930,000,000 Our current build plans are supporting quarterly shipment levels at or around $900,000,000 for the next few quarters.
Turning now to the income statement. As I mentioned in my highlights, revenue was $877,000,000 in December, finishing above the range of guidance. We expect revenue to be in the range of $860,000,000 to $920,000,000 in the March quarter. Non GAAP gross margin was 63.8% and a new quarterly record for the company. The better than modeled gross margin performance in December was largely a function of strong product mix on the incremental revenue delivered in the quarter and operating leverage in our manufacturing and service operations.
We expect gross margin to be in the range of 62% to 63% in the March quarter, down slightly versus the December quarter due principally to the mix of products we plan to revenue in the quarter. Going forward, we expect to deliver gross margin results a couple of 100 basis points above our published business model targets due to a number of factors, including product positioning, new product introduction execution and cost management. We are currently forecasting gross margins in calendar 2017 to be approximately 62% plus or minus 50 basis points. Total non GAAP operating expenses were $221,000,000 flat compared with September and non GAAP operating margin was 38.6%. We are modeling operating expense levels of between 220,000,000 dollars 225,000,000 in the March quarter and in a range of $900,000,000 $920,000,000 for the full year in calendar 2017.
Given our gross margin expectations, we continue to deliver operating margins at the upper end or above our published model for the foreseeable future. Our non GAAP effective tax rate was 23.5 percent in the quarter, above our previously guided long term planning rate of 21%, reflecting the higher mix of revenue from products manufactured in the U. S. And other discrete items impacting the tax rate. We are planning for this product mix trend to continue through calendar 2017, which will put some pressure on the tax rate.
You should assume a 22% tax rate going forward for modeling purposes. Finally, net income for the December quarter was $238,000,000 and we ended the quarter with 157,000,000 fully diluted shares outstanding. I'll turn now to highlights from the balance sheet and our cash flow statement. Cash and investments ended the quarter at $2,600,000,000 an increase of approximately $100,000,000 compared with the September quarter. Cash from operations was $222,000,000 in the quarter and free cash flow was $214,000,000 In December, we paid an aggregate of $85,000,000 in regular quarterly dividends and dividend equivalents for fully vested restricted stock units and made a supplemental payment of $40,000,000 towards our outstanding term loan.
To date, the total amount of payments of principal on our term loan has amounted to approximately $254,000,000 since it was added in the December quarter of 2014. In conclusion, KLA Tencor's results in December 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, coupled with almost $1,100,000,000 in new orders in the December quarter positioned the company for strong relative growth versus the wafer fab equipment market in calendar year 2017. Current forecasts are for the wafer fab equipment market to grow mid single digits in 2017. Against this industry backdrop, we are modeling the company's revenue to grow slightly better than the broader market. This performance demonstrates the company's market leadership, acceptance of a portfolio of solutions addressing the most critical yield requirements at the leading edge and our operational core competencies.
Given our record backlog and expectations for new orders, KLA Tencor is well positioned for another year of solid growth in 2017. With that, to reiterate, our guidance for the March quarter is shipments in the range of $850,000,000 to 930,000,000 dollars revenue between $860,000,000 $920,000,000 and non GAAP diluted EPS of $1.42 to $1.62 per share with GAAP EPS of $1.40 to $1.60 per share. This concludes our remarks on the quarter. I will now turn the call back over to Ed to begin the Q and A.
Okay. Thank you, Bren. At this point, we'd like to open the call up for questions and we once again request that you limit yourself to one question and one follow-up given the limited time we have for today's call. Feel free to re queue for your follow-up questions and we'll do our best to give everyone a chance to participate in today's call as time permits. All right, Mariama, we are ready for the first question.
Your first question comes from the line of Tim Arcuri of Cowen and Co. Your line is open.
Thank you. Rick, I wanted to get a sense of, obviously memory orders were really, really strong in the quarter. You guys have talked about that being the case. Is that more cyclical or is there something secular going on? And I guess I'm particularly asking about 3 d NAND because it seems like you guys maybe are preparing a new solution that's going to help improve yields there.
So I'm sort of wondering maybe what your outlook generally is for how your exposure is going to grow in memory? Thanks.
Thanks, Tim. Yes, we had some success recently with 3 d NAND. I think both in terms of existing products, which we're finding more application as our customers first, the technology is being more broadly deployed by our customer base and the second is some of the yield challenges they're facing. We think later in the calendar year, we'll actually have more offerings to support 3 d NAND. So we think if we execute properly by the end of 2017, we should have a larger adoption of inspection to 3 d NAND.
So we think that there's upside to our current levels of concentration now.
Thanks for that. And then I guess, Bren, question for you. Everybody else likes to put up these financial models and link their revenue to wafer fab equipment. I know it's a little harder for you because it depends on mix. But if WFE is going to be $37,000,000,000 Yesterday Lam talked about that.
Can you talk a little bit can you try to map for us WFE or your revenue relative to WFE? It seems like if you don't gain any share
at all, it seems like
you could do $3,700,000,000 pretty easily in a $37,000,000,000 environment. So I'm just wondering if you can map revenue, your model to WFE? Thanks.
Yes, Tim, it's a good question. I mean, as we look at calendar 2017, we think WFE is probably up somewhere in the mid single digits. When we do our math, we end up somewhere around $36,000,000,000 And so against that backdrop, as I said in the prepared remarks, we think that we should do better than the broader market. So somewhere in the high single digit growth rate versus calendar 2016. So we feel pretty good about that.
I also said in the prepared remarks that over the next few quarters, we expect that we'll be shipping consistently in and around $900,000,000 I think as we get further out into the second half of the year through December, I've got pretty good visibility to my bill plans through September. And as we get to December, we'll see how the second half order book ultimately fills out. But I think we're in a position for a good year. And I think depending on how the second half plays out, particularly around December, the numbers that you're mentioning aren't inconceivable to see if that were to play out that way. But I think as of now, as I said, we based on a mid single digit type growth rate, we think we'll do we should do better than the broader industry for a second consecutive year.
Okay, guys. Thank you.
Your next question comes from Farhan Ahmad of Credit Suisse. Your line is open.
Hi, thanks for taking my question. My first question is on EUV. Rick, you mentioned that you're seeing good activity for Gen 5 being deployed both for OPC and EUV development. Can you talk about what progress you're seeing there and how far along do you think you are in the qualification process? And is that something that can materialize in 2018 in a meaningful way?
Farhan, thanks. Yes. EUV, we've had some momentum based on the fact that there's more activity going on in development now in multiple places, multiple sites for our customers and also the fact that Gen 5 is now out and being deployed especially in the area of qualifying the images that are being printed by EUV lithography. I also mentioned that in mask, we have some success with the 6XX platform that we have serving the EUV mass qualification market. And we think that as the activity continues to pick up on EUV that that part of our business should grow over the next couple of years.
With the expectations of high volume manufacturing of EUV by 2019 or 2020, we'll continue to see ramping of those capabilities and we'll move from characterization to be more part of the production flow as we get into those out years. And we should see adoption of things like Gen 5, especially in the back end of the line, supporting the ramps, middle end and back end of line supporting ramps as EUV comes into production.
Thank you. And then one question on the 3 d NAND product that you mentioned for back half of the year. Could you give us some sense of how big is the growth opportunity for you in 3 d NAND? Maybe just in terms of like what portion of the market do you address currently and what sort of opportunity the new products can bring?
Well, Farhan, I think you know we've talked about essentially memory being at about half the adoption rate of foundry in terms of process control adoption. However, it has it stands to grow faster in many respects for two reasons. 1, it looks like there's more capability certainly that we can bring to solve some existing problems that people are not using process control to solve right now. And that I think we can grow that adoption. So we think that the adoption rate in or the process control intensity grows in 3 d NAND depending on how much ongoing investment there is that sets that market size.
But we think it can contribute to our overall outperformance in the industry. 3 d NAND recently, process control intensity has kind of mapped to what 2 d planar was as some of the complexity of the process is being understood by our customers. So for us, there's not really a big difference in process control intensity for planar versus 3 d NAND as 3 d NAND is actually picking up for us as we go forward.
Got it. Thank you. That's all I had.
Thank you.
Your next question comes from Harlan Sur of JPMorgan. Your line is open.
Good afternoon and congratulations on the solid results and record bookings. On the profitability profile, assuming you guys slightly outgrow the WFE market this year, that would imply roughly kind of $3,000,000,000 $3,500,000,000 in revenues. You guys drove 38% operating margins in December, 38% operating margins implied within your guidance in March. Gross margins for gross margins for the year and your level of OpEx, which would sort of imply operating margins in that sort of 36% to 37% range? In the last earnings call, you kind of talked me down to a level of 35% -ish.
But should we expect kind of 36%, 37% operating margins on the parameters that you just gave us today? Is that kind of the right way to think about it?
Harlan, it's Brent. Yes, in the prepared remarks, I wanted, as we're heading into a New Year, is to give a little bit more perspective on how we're sizing the business. We've been doing obviously a lot of work on our strategic planning, so we've got a deeper view and understanding of the mix of business going forward around certain products. And of course, the backlog at the level of that does give us pretty good visibility as we move through the year. So I wanted to go ahead and provide some of that information.
I think the numbers that you're coming up with seem to make sense based on the numbers I provided. I think in terms of how we're sizing the business, I don't see how that changes very much going forward. Significant swings would cause it to go up and down, but in terms of where we're at today versus what we expect, I don't think that, that will change all that much. Gross margin is always a little bit with a business like ours and the mix of products we have, depending on the mix of products can have some influence on gross margin in both directions. But the way you're thinking about it, I think makes sense.
And given the funnel and where we're loaded today, I feel pretty comfortable with the guidance I provided.
Yes, great. Thanks for the insights there. And you guys had a record year, fiscal year 2016 from China. It seems like there's more China domestic foundry spending coming online this year. Question is, is China still a tailwind for KLA this calendar year?
And even though these are more legacy type nodes like 28 nanometers, Are these guys still tending to buy up the stack and purchasing your latest Gen 4 tools, which we obviously know have the richer ASPs?
They're investing for not only the nodes that they're starting on, but they're also trying to invest to be able to migrate those nodes as they go forward and they expect to continue to migrate their design rules down. So the answer is yes, they're buying they're not buying Gen 5, but they are buying we're seeing Gen 4 purchases. And also I think for the metrology challenges that they feel like they're going to face, we're having pretty good penetration there. So we feel good about China as it goes forward. It feels pretty sustainable based on the conversations we're having with customers and the success we've had to date there.
And the other thing
I would add is the second half of 2016 was a little bit slower in China, so there was some digestion. But as we look at calendar 2017 from an order perspective, I think China indigenous China or native China business will be up pretty significantly from what we experienced in 2016. To Rick's point across a number of nodes and very foundrylogic centric, don't expect to see much memory investment in 2017. I think that's more of an 2018 event. But we think China is one of these factors of why we think that at least for us, as we look at foundry business into 2017 that we've got an up profile from not just the diversity of other customers investing at the leading edge, but what's happening here.
Great. Thank you very
much. Your next question comes from Edwin Mok of Needham and Co. Your line is
open. Hi, thanks for taking my question. So first question I have is on your mass inspection product. You talked about how customer revenue you're seeing some demand for the 666 product. I'm curious, is there a way for us to think about that?
Like ASML talked about how many tools they're shipping this year? And is there a way to think about how much capacity customer would need as they take these EUV tools?
Well, historically, there's been a ratio of about we used to model about 10 scanners per reticle tool. But sometimes that could be front end loaded when there's we're doing development work. Part of what's interesting about the scanners is a lot of the scanners are in the field today weren't really driving much capacity they need because I don't think they were really pushing designs very much on the EUV capabilities. We're seeing more advanced designs now on EUV. And so I do think that if we go back to that ratio, that's not a bad model.
Even though we're not at wavelength with this reticle tool, it does seem to be tracking relatively consistent with that.
Okay. Actually, that's helpful color there. And then, I guess the question I have is, one of your peers yesterday talked about pretty a bigger falloff the WFE in the second half of this year and they're associated with just being more front end loaded spending on that. Just curious, are you guys seeing the same trend in the industry? Do you expect similar top out trend for your shipment for this year?
Yes. I think the second half looks maybe marginally weaker from a shipment perspective than the first half, but we're talking about a very low single digit percentage today and so that could change pretty quickly. So I don't see it as a pronounced shift. And then when I look through to revenue, I think revenue is sort of half to half in terms of how I'm modeling today with the WFE assumptions I talked about earlier, somewhat flattish. So I don't think it's a significant downtick, and I think a lot of it also depends on what happens in the second half of the year around some of these other the timing of some of these other investments.
And I think 7 nanometer development could be a wildcard for us that could strengthen into the second half, and we just don't have a lot of visibility into some of that incremental business yet.
Great. Thank you.
Your next question comes from Stephen Chen of UBS. Your line is open.
Hey, guys. Thanks for taking my question. This is Neil on for Stephen. I actually have a question on image sensor customers. We've seen some higher equipment sales done in the past.
Wondering if you're seeing anything with customers that can give us some sort of an outlook on sales to image sensor customers?
Image sensor, is that what you're asking?
Yes.
I'm sorry your voice broke up a bit. We have had good participation from in general, I think about the IoT, the automotive markets, image sensors kind of in that category of IoT stuff. That's actually been pretty good for us. Often what we see there is, if you think about Gen 4, it's more like in the inspection product line, it might be Gen 3 products supporting that. But it's relatively episodic.
So you'll get somebody that's investing for a particular capacity demand. So we can't count on it every year, but it's actually been pretty good business when it comes along. And I think we work closely with those customers to support them when they're bringing out new technologies. So that's been a steady part of our business over the last couple of years.
Thank you. And one follow-up, Another challenge you've been seeing is higher customer demand for 200 millimeter equipment. Can you talk about maybe the mix that 200 millimeter equipment makes up for your sales? And maybe comment on the type of services revenue that you get from 200 millimeter customers?
Yes. I think that one of the surprises I'd say for the last several years is the fact that 200 millimeter, 2 things have happened. 1, those fabs are being extended longer. And so what we're seeing is as part of supporting those customers as our service business grows. And we would have expected in a general transition to be down almost 0 in terms of percent of 200 millimeter.
And I'd say probably it's 5% to 10% of our business in systems now can be approaching 200. There are also some older fabs on 300. So kind of look at it more as the lagging technology. But yes, there's some business on the 200 millimeter that continues to get developed. They're not very big purchasers of capital, but there are often KLA 10 Core tools there.
And so part of our business there is upgrading capability and supporting them as they go forward.
Your next question comes from Patrick Ho. I apologize. Your next question comes from Patrick Ho of Stifel. Your line is open.
Thank you very much. Rick, a big picture question. The last time you when we went through the industry ramp of 28 nanometers, you saw a large buying spree, particularly from the leading edge, but one that also continued for several years. As we begin this transition to 10 and 7 nanometers, what is your perception of that node? And could it be as large as the 28 nanometers, which will give you guys not only a near term boost, but also one that's a little more sustainable?
It certainly feels that way. I mean, when we talk to customers, there are now multiple customers that are playing at 7 nanometers and really no significant buys for 7 right now. I mean there's 10 nanometer buys that are going to be applied to 7 later. So I think we're early days on 7, but it does feel like there'll be a wave of multiple players trying to pursue that node. So it's very hard for us to size it in general, but our customers seem very enthusiastic because it's a node that gives both performance and also economics value to our customers and there are multiple designs being started on 7.
So we feel pretty good about the extendability of that node and the support for our business as we go forward.
Great. That's helpful. And maybe Brent for you in terms of OpEx going forward, I think in your prepared remarks, you talked about some of the new opportunities and some investments, particularly as EUV gets more traction with customers out in the field. How can how do we look at overall R and D spending as it relates to EUV versus what you presented in your long term model?
Well, we're absolutely investing more. I mean, as you look at the numbers that I provided in the prepared remarks, we do think given the revenue level we have, we think the opportunities that are out there, there is an opportunity for us to invest in some of these capabilities, not just in EUV, but Rick talked about 3 d NAND earlier. And so there's some opportunities there. In terms of EUV, there is some work going on. But as we've said, and I'm sure Rick can add more to this, but as we've said over the last couple of years or so that any substantial investments to support EUV at least around the reticle side of things that we would be looking for customer participation just due to the business model dynamics there.
But in terms of being able to drive higher levels of sensitivity through our product portfolio to be able to address what should be good opportunities for linear scaling again in an EUV environment. We're continuing to invest as we always have to deliver that capability.
Great. Thank you.
Your next question comes from Atif Malik from Citi. Your line is open.
Hi, thanks for taking my question. Good job on results and guide. Rick, if I look at the size of the GPUs, the graphic processors, they're about 2x to 5x bigger than an A10 like an application processor. Are you guys seeing demand for your tools increase as there's intrinsically lower yields on bigger die sizes with the penetration of high performance computing and gaming?
Great question. And we're I think in the early days of some of those designs playing out at 10 nanometers. Certainly, the adoption level of process control at 10 nanometers in support of those new GPUs is higher than it has been at prior nodes. The question will be what happens when those ramp in terms of does the intensity come back to more historic numbers. And I think that that will depend a lot on the customer's actual experience in terms of how they perform and what kind of yield they get.
But to your point, intrinsically, there's more value and more challenge associated with getting the larger diet yield. So we wouldn't be surprised if there was more support. Certainly, there are more applications being applied to try to make sure that those designs work. That is more work going on with the customers. So we think there is a good opportunity, but it's still relatively early to know how the story plays out in terms of total adoption.
In our planning, just so you understand, in our business that Brent has laid out, we're not assuming the adoption goes up. We're assuming that would be upside to our
plan. Okay. And then as a follow-up, you mentioned that you can help improve the device yields on 3 d NAND. Can you just tell us in kind of basic terms of what are the issues on 3 d NAND yields for customers?
Well, I think the most basic way to think about it is, if you think about the way these structures are built and you're going vertical versus what was horizontally shrinking, now you're not shrinking as much, but you're going deeper. There's a lot of ways that those materials will break down under the stress of manufacturing. So you'll get defects that would be partway down or all the way down the stack. And for customers, it's very hard to see those. It's very hard to understand how to improve the process.
So part of what happens is they have to go through destructive that is electrical test or other means of de processing the wafers to identify the problems. If we can visualize that for them in the fab, which is a different kind of inspection challenge, it allows them to have faster corrective action to get the yields ramped up. So it's not so much a size of a defect problem, it's a depth of the defect problem. And that's where we've had to modify some of our technology to support that because for as long as we've been in the industry, it's about finding smaller defects, not necessarily these high very high aspect ratio defects.
Your next question your final question comes from Mehdi Hosseini from Susquehanna. Your line is open.
Good afternoon, guys. This is Bill Grinstead in for Mehdi. Just a question on reuse, equipment reuse as one of your customers' customers migrates from 16 nanometer to 10 nanometer. What kind of impact do you guys think that could have? Thanks.
Well, from 16 to 10, virtually no reuse. I mean, that was more of a dynamic we saw from 2020 to 2016. So you have new tool sets, you have more complicated patterning challenges in FinFET. So you have a change in lithography and you have a change in the back end of the line too. So those are all new tools.
Their customers are always trying to optimize their capital. And so to the extent they can always reuse tools or anytime they can, they will try. So we think going forward from 10% to 7%, there could potentially be some. We've tried to model that into how we think about it. And so that's modeled in how we've outlined the financial performance for the next few quarters.
But I think that that I think we feel pretty comfortable that what we experienced at 20% to 16%, 14% will was a bit unique and that we won't see that going forward. Even from 10% to 7%, you've got smaller or you get taller FinFETs, you've got new materials in the back end, you've got complicated multi patterning techniques, very significant process window challenges. So we think that there's a lot of additive opportunities there. And as we introduce new products, customers will quickly try to take up that capability and try to improve their costs too. So I think that the new product cadence helps insulate from some of that as well.
And I think the challenges going forward are going to be pretty tough. Got it. Thank you.
There are no further questions at this time. I will turn the call back over to the presenters.
Thank you, Mariama. And on behalf of everyone here, I'd like to thank you all for joining us on the call today. An audio replay of today's call will be available on our website shortly following the call, and we look forward to speaking to you all soon. Thank you.
This concludes today's conference call. You may