Thank you. Ed Lockwood with KLA Tencor Investor Relations, you may begin your conference.
Thank you, Connor. 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 to discuss 4th quarter results for the period ended June 30, 2015. 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 or call 408-875-3000 to request a copy. A simulcast of this call will be accessible on demand following its completion on the Investor Relations section of our website. This quarter, we prepared a brief slide presentation to supplement our earnings call, including a reconciliation of our GAAP and non GAAP financial measures.
These slides can be found on KLA 10 Core's Investor Relations website. There you'll also find a calendar of future investor events, presentations and conferences as well as links to KLA-ten Core's SEC filings, including our annual report on Form 10 ks for the year ended June 30, 2014 and our subsequently filed 10 Q reports. 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 that 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 our forward looking statements. With that, I'll turn the call over to Rick.
Thanks, Ed. Thank you all for joining us for our call today. I'll focus my commentary on summary highlights and our view of the demand environment in the second half of calendar year twenty fifteen and provide guidance for the September quarter. Then Bren will follow with a more detailed review of the Q4 financials. KLA Tencor executed well in Q4, delivering bookings and revenue just above the midpoint of guidance and non GAAP earnings per share at the upper end of the guided range, reflecting our market leadership, strong gross margin performance and focused cost discipline.
New orders for June were in line with our expectations at $672,000,000 driven by stronger than expected demand from memory customers focused on 3 d for the second half of calendar twenty fifteen, memory investments focused primarily on 3 d NAND capacity additions and is expected to increase and broaden out among the market leaders in the second half of the year. Capacity investment in DRAM is expected to moderate in the second half of the year with customers focused on technology conversions and process migration. In foundry and logic, investment in the second half of the year is expected to be focused on FinFET capacity additions by the market leaders as well as incremental new capacity expansion for 28 nanometer foundry. However, uncertainty over the timing and magnitude of leading edge capacity ramps for the 2 major foundries continues to create headwinds for foundry CapEx in the remainder of calendar year 2015. With the recently announced reduction in logic CapEx budget for 2015, leading edge logic investment is seen to remain at low level for the rest of the year.
Our current expectation is for KLA 10 Core to begin shipping process control equipment for 10 nanometer development in the first half of calendar year twenty sixteen. For KLA 10 Core, our mission is to help our customers navigate the ever changing landscape of increasing device complexity and yield challenges that accompany each major node transition. The focus of our strategy is on a long term revenue growth objective of 5% to 7% per year, driven by leading technologies and differentiated solutions and fueled by a high level of R and D investment in one of the industry's leading business models. At Semicon West this year, we discussed some of the structural changes we have implemented in our global organization to streamline our go to market strategies and focus product development efforts on the best opportunities in pursuit of these strategies. We expect these actions to begin to produce results over the next few quarters and we plan to receive initial orders for our latest generation flagship optical inspection platform and see the benefit of our recent OpEx reductions reflected in our earnings in the second half of fiscal year twenty sixteen.
Turning now to our outlook for the Q1 of fiscal year 2016. We expect September quarter bookings to be in the range of $450,000,000 to $650,000,000 Guidance for revenue in the September quarter is in the range of 595,000,000 dollars to $655,000,000 and non GAAP earnings per share is projected to be in the range of $0.46 to $0.66 in the quarter. With our current backlog and the anticipated order profile for the second half of the year, we expect bookings shipment and revenue growth to resume in the Q4 of calendar year 2015. And with that, Bruce?
Thanks, Rick, and good afternoon. My remarks today will focus on highlights of the financial results for Q4, my perspective on current trends in the marketplace and our outlook for the second half of calendar year twenty 15. Revenue for Q4 was $756,000,000 above the midpoint of guidance and fully diluted GAAP earnings per share was $0.89 Non GAAP earnings per share finished the quarter at the top end of the guided range at $0.99 per share. In our press release and in our supplemental financial data accompanying our results, you will find a GAAP to non GAAP reconciliation of the difference in EPS of $0.10 My comments on the quarter will be focused on the non GAAP results, which exclude the adjustments covered in today's press release. Turning now to customer segment commentary for the June quarter.
New orders in Q4 were $672,000,000 also above the midpoint of the guided bookings range for the quarter of $550,000,000 to $750,000,000 as we saw strength in NAND flash orders in the period. Memory was 62% of new system orders in June, up strongly on a sequential basis both in terms of percentage of total orders compared with the March quarter. Memory demand in the June quarter featured strong NAND flash demand with orders from multiple customers supporting 3 d NAND expansion projects highlighting the results. Foundry demand was 33% of new orders for Q4 and moderately below our expectations for the quarter. Logic was 5% of new orders in June, down sequentially and down compared with our original forecast.
Turning now to the distribution of orders by product group. This breakdown by product group now reflects the new organization structure we introduced 2 weeks ago at Semicon West. For the purpose of comparison, the wafer inspection group is largely comparable to the order breakdown previously categorized under the same name. And the patterning group now includes both the former metrology and reticle inspection categories. In the Q4 of fiscal year 2015, wafer inspection was approximately 47%, patterning was approximately 24%, service was 27% and non semi was 2%.
Total shipments in Q4 were $739,000,000 and below the guided range, principally due to a delay in buyout timing of a high ASP leading edge mask inspection system, changing customer requirements for sub-twenty nanometer shipments to a foundry customer that occurred late in Q4 and an accident in a customer fab that led to shipment delays into the September quarter. Although current shipment backlog is strong at $984,000,000 the scheduled backlog is concentrated among a few customers who have recently been adjusting their scheduled delivery dates, impacting our visibility on a quarter to quarter basis and leading to shipment delays of tools originally expected to ship in the June September quarters to later in our fiscal year. In total, we ended Q4 with over $1,200,000,000 of total backlog comprised of $984,000,000 of shipment backlog or orders that have not yet shipped to customers and expect to ship over the next 6 to 9 months and $221,000,000 of revenue backlog or products that have shipped an invoice, but have not yet been signed off by customers. Looking forward, we are modeling September quarter shipments in the range of $610,000,000 to $690,000,000 Turning to the income statement. Revenue for the quarter was $756,000,000 up 2% sequentially compared with the March quarter and above the midpoint of guidance.
We expect revenue in the range of $595,000,000 to $655,000,000 in the September quarter, driven by the lower shipments forecast resulting from certain customer shipment delays and timing of customer product acceptances required for certain tools in the quarter. Gross margin was 58.5 percent, a 150 basis point improvement compared with the March quarter, benefiting from a more favorable product mix and service mix than originally modeled. We expect gross margin to be in the range of 56% to 57% in September, largely a function of the lower expected revenue levels for the quarter, but in the range of our targeted 60% to 70% incremental gross margin model. Total operating expenses were $214,000,000 down $4,000,000 compared with the March quarter and down approximately $17,000,000 on a year over year basis compared with the June 2014 level. Operating margin in the June quarter was 30.2%.
The lower operating expense levels in Q4 reflected some the benefit of the actions we have taken to adjust our global operations to match a consolidated customer environment and to focus our R and D investments on our best opportunities, while maintaining our incremental operating margin model of 50% to 60%. As Rick mentioned, our long term objective is to grow revenue in the range of 5% to 7% per year through cycle over the long term, with a focus on market leadership, strengthening our position in our core markets and continuing to drive opportunities for growth in our service business. Accompanying that goal is the objective to grow operating income at twice the rate of revenue growth over time. Results of the June quarter demonstrate good cost discipline and strong execution towards our long term profitability growth objective. Accordingly, we are currently forecasting a $2,000,000 sequential decline in cordial operating expense to the $212,000,000 level in the September quarter.
This would represent a $28,000,000 reduction in operating expenses compared with the Q1 of fiscal year 2015 at similar revenue levels. Our effective tax rate was 21% in the quarter, in line with our long term planning rate of 22%. In fiscal year 2016, you should continue to use 22% as a long term planning rate for KLE 10 Core. The planning rate does not include any benefit from the RD tax credit in the United States. In the event that this tax credit is extended, we'll modify our planning rate assumption.
Finally, net income for the June quarter was $159,000,000 or $0.99 per fully diluted share we ended the quarter just under 160,000,000 fully 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 $2,400,000,000 an increase of $47,000,000 compared with March. Cash from operations was $317,000,000 in the quarter, up $75,000,000 sequentially over the March quarter and free cash flow was 308,000,000 dollars In the quarter, we paid $80,000,000 in dividends and repurchased $168,000,000 of shares of our common stock in the period. We also made a supplemental payment beyond the required loan amortization of approximately $20,000,000 towards our outstanding term loans in Q4.
Additionally, in July, we announced that our Board of Directors had authorized an increase in the level of our quarterly dividend of $0.52 per share, the 7th increase in our regular dividend since it was first instituted in 2,005. We believe this reflects the Board and management's confidence in our long term growth strategies and target business model and is consistent with our ongoing focus of returning value and rewarding our long term stockholders for their commitment to Calytencore. With that, to reiterate, our guidance for the September quarter is bookings are expected to be within a range of $450,000,000 to $650,000,000 but our current view that the second half of calendar year twenty fifteen is roughly flat with the first half. Shipments of $610,000,000 to $690,000,000 revenue between $595,000,000 6.55 $1,000,000 and non GAAP EPS of $0.46 to $0.66 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 up the call to questions. We do once again request that you limit yourself to 1 question and 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 for follow ups in today's call as time permits.
So Connor, we're ready for the first question.
Cowen and Company. Your line is open.
Thanks a lot. I guess first thing, Brent, just to clarify something you just said. You said calendar second half flat with calendar first half. You mean shipments. Is that right?
So that would imply that shipments in December are like $800,000,000 No, I meant orders, Tim.
Orders, okay. The order profile for
the second half of the year is in line with the first half of the year. Obviously, we're seeing these seasonal effects in September with strengthening in the Q4.
Okay. Then I guess just a big picture question for Rick. So I'm just looking back at if I strip out the service number, if I just assume that service grows a bit and I look at just your systems revenue for September, it's as low as it's really ever been since the 2,009 downturn and nobody else is really anywhere close to that. So I guess from a strategic point of view, obviously right now you guys aren't super exposed to some of the 3 d NAND things that are happening. And whenever in the past we've talked about maybe getting exposure to that area maybe via partnership with a films company.
At the time, the argument was that you wanted to remain independent process neutral third party. But does that logic hold anymore? Do you think that now given some of the changes in device architecture that maybe it does make sense for a process control company to work together or merge or combine with a films company?
I think there's definitely benefit in working closely with process equipment providers in terms of helping create products and processes and solutions that support some of the challenges customers face. But it's actually a pretty broad spectrum. I think that as a company, we actually do partner with a number of players, both in Edge and Dapp and have found ways to create value. I think that's very different than putting 2 companies together. And so we still don't see the value or the strategic the way you get the investment back if you were to pursue that path.
So I don't the M and A front hasn't changed, but definitely there is interest in people using metrology and inspection foundry and logic exposure we have and the fact that there's just not a lot of investment going on with those customers right now. We do anticipate that that will come back when we get into the 10 nanometer ramp, which we think happens in calendar 2016. But certainly right now it's a soft spot for us.
Okay, guys. Thanks so much.
Your next question comes from the line of Harlan Sur with JPMorgan. Your line is open.
Good afternoon. Thanks for taking my question. You talked about second half orders equivalent to first half orders. Last call you articulated a view of shipments and revenue second half being relatively balanced. Based on your commentary today, it seems like second half is going to be lower now even with the December quarter inflection.
So I guess first question is, is that a fair statement? And it sounds like most of this is foundry push outs. So if you could just help us, is this more 14, 16 nanometer FinFET push outs? Or is it more the legacy 28 nanometer technology?
Yes, Harlan, it's Bren. Your assessment is correct. From an order perspective, we think it lines up fairly consistent with what we had seen last quarter. But certainly shipments and revenue, we did have some sizable shipments that pushed out of the revenue forecast in the second half of the year for sub-twenty nanometer foundry activity that is largely responsible for the reduced outlook in terms of our views on shipments and revenue into the second half of the year.
Okay. And then your one large logic customer pushed out the timing of their 10 nanometer high volume production ramp by about a year. On the flip side though, it does seem like the other two major foundry suppliers are still aggressively going to try and roll out 10 nanometer next year. How has this sort of changed your view on 2016 and the 10 nanometer contribution to the business? You mentioned 10 nanometer developmental shipping in the first half.
Is this going to be more boundary or logic biased?
I think it's a little early to call 16 at this point. I mean, clearly, our view is that we'll see the 10 nanometer ramp again in the first half of twenty sixteen. So you'll start to see activity there. Order timing is always a question. We need to see those orders.
On the logic side, we tend to get a little bit more lead time than we do on the foundry. So in terms of how we're looking at how the shipments rollout, I think the shipments rollout largely consistent across both segments. But it's a little bit early at this point. But I think our views we talked a lot about it at Semicon a couple of weeks ago. I don't think our views around 10 nanometer interest and timing have changed all that much.
It's just it's hard for me to see how you see any of that activity begin in this calendar year from you might start to see some orders at the tail end, but certainly don't expect to see any shipments in 2015 for that.
Okay, great. Thanks a lot.
Your next question comes from the line of Krish Sankar with Bank of America. Your line is open.
Yes. Hi. Thanks for taking my question. 2 of them. First one, did you guys say that you expect some of your Gen 5 optical inspection orders in the second half?
Or is it more tied to 10 nanometer?
Yeah. Chris, it's Brent. I don't know if it's tied exactly to 10 nanometer. It's really tied to the timing of those introductions. Typically new products create their own weather in terms of timing of interest by customers.
We would expect to see orders in the towards the end of our fiscal year and perhaps we'll see some revenue too towards the tail end. I don't think you fully see full scale sort of ramp and adoption until you move into the second half of twenty sixteen, but we should see some activity in the first half. And Krish, as
you know, with a new product, it's often the case that that is shipped and it's under a contingency provision that when it achieves the milestones that you both recognize the revenue and the bookings. So less likely to see the bookings in the first half of the fiscal year because of that.
Got you. And then a follow-up for Brent. If I look at your June quarter, over the last 6 months, your OpEx is down 7% from December and you guys have done a 10% headcount. The June quarter numbers look similar to your target model. So is it fair to assume that you already started seeing the benefits of the restructuring?
Or is there still more room to cut costs here?
I think it's fair to assume we're starting to see some of it. The part of our assessment of where we were on a normalized basis, we were trending before we started the actions. And when I say normalized, I mean, in terms of you think about variable compensation adjustments and so on, somewhere around $225,000,000 a quarter. And we see that trending down in terms of a fully loaded operating level of about $205,000,000 to $210,000,000 And we should see that progression, of course, across the fiscal year from here. So I think there's still room from where we're at now as we start to see those some of those costs come off the books over the next quarter or so.
And then we expect it to stay in that ballpark with some of the other actions that we have planned and are in process of executing.
Got it. Thank you.
Your next question comes from the line of C. J. Muse with Evercore. Your line is open.
Yes, good afternoon. Thank you for taking my question. And apologies for the voice. Curious your thoughts on 10 nanometer. We heard from one of your competitors talking about capacity being brought online in 2016 through 2018 and roughly 150,000 wafer starts versus call it 250,000 at 16, 14, 20, and 300 at 28.
And we'd love to hear your thoughts on the puts and takes in terms of rising intensity, but in elongation of the node and smaller amount of wafer starts and what that means for annualized spend at the next node?
So, C. J, we haven't done the work on how we're looking at 10 nanometer starts. I mean, clearly, what we've seen so far in the sub-twenty nanometer is not a lot of end market movement towards 2016, 2014, which is obviously impacts that start level. So depending on the level of adoption that you do see will impact what customers are able to do as they move to 10%. But so far 2020 outside of a couple of high volume products, we haven't seen a lot of activity, which has enabled customers to use some of those tools at 14 2016.
So, a lot of it, I think, depends on not only the end market activity, but also the competitive dynamics at that node that drives ultimately the overall size of it. So, we think 10 nanometer will be a bigger node, given that it's you have a full shrink to that node And that the ability to reuse tools is not the same as it was at 2020 2016 given that you had effectively the same back end processes at 2020 down to 201614. So we're optimistic about 10 nanometer both from
more starts in our work with the mass shops. We've seen more 10 nanometer designs than we might have thought at this time. And it does appear to be the true that the fabless guys view 10 nanometer kind of to Bren's point because it's more of a shrink as actually being more of a real node and more advantageous to go to. And I think that, that was part of what happened in 2016, 20 16 nanometers. So, we see that.
The negative, of course, is people have not yet really determined how difficult it's going to be in terms of the ability to get yield and the impact that will have on all the cost per wafer. So I think you might see cost per transistor come down if people can figure out the yield challenges. But the negative to that is we saw an earlier player push it out and partly due to some of those challenges. So we think there's going to be interest in getting designs going and hence a bigger node, but the timing is harder to predict and we know there's been push lately.
That's very helpful. And as a quick follow-up, I guess a short term question. Given the lower utilization at many foundries, how do you think about your service revenue trajectory into the back half of the year?
Yes. C. J. That tends to be be pretty linear. I don't expect to see an acceleration there.
I expect to see it continue along the trajectory that we've seen somewhere between 6% 8% per year, and growing quarter on quarter generally. Yes. Part of what's happening, of
course, as you know, is some of the fabs extended longer that are not the leading edge. So if you look at the contribution, the service business from the very leading edge and even some places where the utilization is slightly lower, it's actually, to Bren's point, it responds slower. So we're seeing pretty good signs out of our service and our interactions with customers. Plus, we've identified a number of places where we can do upgrades and give more productivity to those customers to give us some upward pressure on the growth rate.
Thank you.
Your next question comes from the line of Rameet Shah with Nomura Securities. Your line is open.
Yes. Thank you. If you look at gross margin relative to your competitors, there's your margins are about 10 to 15 points higher. And your competitors are saying while true, their revenue growth is better. So it's sort of implying that there's a direct relationship between margins and top line growth.
And I'm curious what your take is. Do you feel that gross margins at these levels are holding back the revenue growth to a certain extent?
Yes. It's a great question and one that we've reviewed over time. I think the challenge is it doesn't appear to be the case that demand for process control is elastic. So if you were to offer if you were to reduce prices, it's there's no evidence to support that there'd be more business there. I think people find the level they want to be at in terms of investing to get their process to ramp and to keep it under control.
And they're going to pay for that with based on the returns they get. Whereas in a process situation, if I'm getting designed in at a node and the customer has a very strong view of how many they're going to buy, they're in a very good position to negotiate that price over the life of that particular node. And I think that's why you don't see the margin expansion to
get
to get that beneficial pricing. With us, it's really a question of if you need it and if you don't need it, you're not going to buy it. And if you do need it, it's going to be a value exchange. And that's where we see the strength in our business model.
Rick, on that point, you have talked about market share, which you ceded a couple of points last year. And I know the expectation internally is that you'd like to grow share. So does margins and pricing play a role in improving your share and process control over
time? It hasn't historically. And the reason I say that is we've never been tool for tool, low cost and competed on price. What we have to do is differentiate on performance. And if the performance is there, we can typically we can have higher productivity than the alternative.
But since we don't really make the same tools, these when you look at our tool compared with our competitors, they're not the same tools. They're different approaches, different technologies. The most extreme example would be Gen 5 against the e beam alternative that's out there. If we can demonstrate capability and higher productivity, it's again not a function of price. So what we're not going to do is chase the markets where there it's based on a pricing decision because that's not consistent with our model.
So we have this is why we invest heavily in R and D to have that differentiation. So two things we say, 1, you got to have differentiation and the differentiation has to matter to the customers in a way that they see benefit in buying it. And we think there are those opportunities for us.
Okay, terrific. Thank you.
Your next question comes from the line of Mehdi Hosseini with Susquehanna International. Your line is open.
Yes. Thanks for letting me ask the question. Rick, I want to go back to the 10 nanometer commentary. There seems to be some confusion out there as to how the die size not so much of the cost per transistor is going to change. Based on the tape outs you've seen, do you have any color, anything you can share with us as how the die size is going to be impacted by adverse impact of multi patterning and I'm referring to over provisioning that limits the die size shrink.
And is that a factor that is going to somewhat reduce the scaling that we're all hoping to happen at 10 nanometer? And I have a follow-up.
We've seen a range. As you know, when you think about advanced design rules for logic or for the foundry market, often one of the biggest drivers for those tends to be and has been historically FPGAs, which utilize tend to utilize large die. And I think that for those, they're still going to be pushing performance and wanting scaling. But there are a number of other chips, of course, that are going to drive various ranges of die size. So we have not heard that.
I think it's an astute insight, but we have not heard that as being a limiter for the 10 nanometer rollout as we've seen these increased number of designs. But to your point, it's also pretty early. So we haven't I think it's still early days.
Got it. And this is my follow-up question. The reason I ask is when we migrated from 28 to 20, there were some yield challenges. And despite lower wafer start, you were actually able to do relatively okay. It was much better environment than converting than migrating to sub-twenty.
And now that we're a year or so away from 10 nanometer, is it true shrink? And I'm just wondering if some of the opportunities would go away. Is this something that we're going to learn more about the impact of die size, the 10 nanometer? Learn that when the wafers come out of the pilot line in the spring timeframe? Or are you going to be able to provide some color by October timeframe?
I don't know how much color we'll have by October, but I can give you my take on the last migration. I think a lot of what happened was, as we know now, looking back, 2020, we did do reasonably well going to 2020, but it didn't carry over to 2016 because as we went to 2016, of course, we were left with reuse. I think the challenge in 2010 is for customers, it is a full shrink, so they're going to be challenged by But then as we think about 7, the question is, are they going to have reuse opportunities there? And so part of the way we plan on addressing that is with new products. And I think the new products will give us this catalyst for driving new capability and creating more of an opportunity for us to grow.
Got it. Thank you.
Your next question comes from the line of Mahesh Sangerinella with RBC Capital Markets. Your line is open.
Yes. Thank you very much, Rick. The question on your December outlook was you're looking for a pretty substantial increase in order in December. Can you give us a little bit of color on what's driving that? Is it order for the new product you're looking at?
Or is there a segment specifically that's driving the order growth? Because we kind of know the 10 nanometer is a little bit far out.
Yes. Mahesh, it's Brent. So in terms of how we're sizing, I'm not really guiding the December quarter as I said, it looks roughly flat in terms of half to half, so strengthening into December. We think obviously memory continues to be solid, but we do expect to see some foundry activity start to pick up in the December quarter as well. There's some timing of some trailing edge projects that are out there that looks like we might see some of that activity start to book in the December timeframe.
So a combination of things across a couple of segments that gives us confidence around December being a solid increase versus September at this time.
And then a follow-up on that. Usually you have a much longer lead time, but it has been shrinking for a while. If you see a order pickup in December, I would say the is the shipment pickup significant shipment pickup happens in March or is it something that can happen in December?
It tends to be customer specific. So harder to say at this point. Not sure I can guide the second half shipment profile right now.
All right. Thank you.
Your next question comes from the line of Edwin Mok with Needham and Company. Your line is open.
Hey, thanks for taking my question. Just I guess a follow-up question on the memory order, very strong this quarter and you guys attribute that to 3 d NAND. I understand some of the customers might be looking to convert planar NAND fab to 3 d NAND rather than build in Grintill. To the extent that they do that, is that a lot of reuse can happen and would that kind of limit the opportunity on the NAND fab?
In the quarter, we had your 3 d NAND was solid. Also we had some DRAM activity that was good as well. I think you're going to see some conversions, but most of the activity that we're seeing so far is more greenfield focused.
It also has more variation. I mean, 3 d NAND inherently doesn't necessarily have a lot more process control intensity, But the decision by our customers to upgrade or try to reuse often depends more on the age of the fleet and what's out there and when they did their last process control wise. So memory was pretty soft for a while, so there become more opportunities. And when they're spending, we're on the list of opportunities that they're looking at. So it's not quite as simple as the reuse because in those cases, the memory guys have invested at a lower level historically than we saw in foundry.
Great.
That was a good color. And then my follow-up question is on 10 nanometer. Our understanding is that there's a change in ski time. Obviously, when you go to 10 nanometer, we have more multiple patterning steps. And I understand there's a pretty big step up in the number of patterning steps.
How are you guys capitalizing on that opportunity with this new organization focusing on patenting?
Well, I think that part of what customers are looking at as they look ahead is the metrology challenges both the and really starting with the definition of the patterns with masks and the interactions that you see on multi patterning, how much the pressure there is on the overlay budget and film controls budget is they're really looking for the ability to synthesize and integrate the different tools in the portfolio. We're now organizationally set up in a much better way to support that because it's really aligning with our customers. And many of our customers, you'll find someone who is the exact counterpart to the new organizations that we've set up. So we're in a better position to support that as opposed to them having to deal with 3 or 4 different representatives from different divisions. So the customer response to our reorg has been just flat out either very good or really good, because I think from their standpoint, it's just better.
It's easier for them to deal with. So I think that gives us opportunity. And then of course, we have the products in place, but we're pretty well aligned with the 10 nanometer challenges. And there is a huge push for increased overlay control as they go down to 10. And the fear of what that is going to look like in terms of some of the errors induced, starting with how the masks look.
Great. That's good color. Thank you. Appreciate
it. Your next question comes from the line of Jagdish Iyer with Redstone Research. Your line is open.
Yes. Thanks so much for taking my question, Rick. Two questions. First, I just wanted to understand ASML has been pushing and pushing its EUV to its logic customers and several customers. Just wanted to understand what is the status of the EUV mask kind of scaled back a little bit kind of scaled back a little bit on the EUV.
Just wanted to get your latest thoughts on that.
Well, we think we have
a pretty compelling answer to reticle verification for EUV, but it doesn't require a reticle an EUV reticle tool. It requires the 6XX platform that we have and our ability to do print check on devices once they're printed. And so from our perspective, that is the answer to support the customers as they go through and the degree with which they adopt EUV. We're already supporting that in terms of the work that's going on in the reticle tool and then we can support them when they print it on the actual wafer. So that is our answer.
Okay. Thank you. And just a follow-up. I just wanted to understand fundamentally if you look at all the patterning opportunities that your competitors like Lam and Applied have laid out in terms of their growth in the patterning step, you would imagine that etch and deposition, which are intensive for several of these applications, would definitely need process control. Just want to get your thoughts into why the process control market hasn't really grown as what one would have imagined?
Is there anything that we are missing something like that? I would appreciate your input on that.
Well, I think it's much more a function right now the mix between memory and what we're seeing in terms of customers investing in memory versus investing in logic. And logic and foundry, our intensities are pretty good. It's just those customers are in a bit of an air pocket right now for us, whereas the most of the investment has been along memory where there's also multi patterning opportunities. But that's when you break down our process control intensities by different technologies, whether it's memory, logic or foundry, that shift to higher percentage of memory is really explains the shift in our demand environment.
Yes, we're pretty comfortable with what we're seeing on the foundry logic intensity changes node to node. I think the biggest issue right now is that you are dealing with very similar tool sets at 20 and below. And so the ability to migrate the capacity that was acquired for 2020 down to 16, 14 with no backfill of design tape that's where that capacity has enabled customers to reuse some of that equipment. But in terms of the intensity that we've seen on those purchases, it is in line with what we were expecting to see at 1x.
Thank you.
Your next question comes from the line of Patrick Ho with
Thank you very much. Yes, sorry about that. Rick, kind of a bigger question in terms of multiple patterning and traditionally where you get process control intensity. DRAM is seeing more and more double and multiple patterning steps that should drive increasing, I guess, process control intensity that you've seen in the foundry logic space. I guess, why has the DRAM space or the memory guys adopted more process control in I guess in line with that transition?
Well, so there's 2 things if you think about process control. 1 is around the metrology space and the other one is around the defectivity space. And if you remember our SEMICOM West presentation, we talked about in patterning, our market share is probably in the 40% So the capital intensity is higher in patterning and our share is not particularly strong and it hasn't actually gone up that much in memory and for process control intensity. What's the other side though is defectivity and defectivity for multi patterning is doesn't really depend so much on multi patterning as much as it does on the device type. So when you're making memory, these guys are almost at 100% repair when it comes to DRAM.
And so you're not going to see as much and we haven't for many, many years see the adoption as high in DRAM. And then 3 d is a different decision because for them, because there they really want 3 d capability to look through the stacks and that technology just doesn't exist. So it's more a function of the process control intensity on defectivity and our market share in terms of the patterning and the relatively lower level of intensity and patterning as well in terms of what we see in memory. So really those combination of factors. Does that make sense?
No, that's actually really helpful. And maybe again a bigger picture question for you. There's been a lot of chatter and one of your largest customers talked about Moore's Law cadence being kind of pushed out. From your perspective maybe both for KLA specifically and Process Control, how does that change where they've talked about 2 to 2.5 years potentially impact you guys?
Well, we're pretty dependent on node transition. So obviously, if they if that pushes out, then we end up in a soft spot like we're in right now. Really the question is when for us the real question coming up is the 10 nanometer adoption because our belief is we're going to be in a relatively softer position for the next quarter and then we'll start seeing some improvement in the December timeframe. But what we're going to have to depend on is the 10 nanometer is going to happen in calendar 2016. Then the question is how much of a stretch is it from 10 to 7 and what's beyond that?
It's pretty hard to say at this point.
Great. Thank you. Your next question comes from the line of Faran Ahmed with Credit Suisse. Your line is open.
Thanks for taking my question. I wanted to understand a little bit of the shipment profile of the 3 NAND orders that you received in the June quarter. Is it pretty much timed in September quarter? Or is it going to be spread out over the next few quarters?
I think around that segment most of those orders will ship in the next over the course of September and into December. So lead times being 3 to 6 months on those tools.
Got it. And then one high level question. Look, if we just look at like the yield problems that are going on in whatever segment we look at there are yield challenges that are kind of slowing down the ramp plans. Like if you hear about DRAM 20 nanometer being like an issue for a lot of customers and on NAND, 3D NAND obviously is having issues. And in foundry since it doesn't seem like yields are progressing as well as people would like.
So the question really is like despite the yields being challenged, why are we not seeing like an increase in process control intensity as one would have imagined like few years ago? It used to be like whenever you have use challenges process control used benefit. Is there some change going on here? And is there a different way that we need to think about when yield challenges are there and not just the process control segments that KLA is serving at?
Yes. Well, I think if you recall, we laid out the process control intensity model over a year ago at Semicon and talked about the difference between what we'd see at foundry and logic and what we'd see in memory. And the biggest change in terms of our demand environment has really been associated with the shift toward an increase in memory concentration, which inherently, although the new nodes have more process control intensity than the prior nodes, they're almost half of what you see in logic and foundry. The logic and foundry intensities have been, in general, okay. But what we've seen recently is logic is almost at a historic low in terms of at least for the last 10 years, their investment right now is they're on pause.
The other thing that happens is in foundries, they might have a big focus on yield, but if then the business isn't 1, then what we see is the investment then stops altogether because it went somewhere else. So we have experienced some of that as well.
Yes, Fahren, the only other thing I would add to that is that so far the process control intensity in a high mix foundry is higher than let's say a high volume logic fab. And given the level of activity we've seen with design starts so far at 20, fourteen, twenty sixteen, most of the behavior has been more in line with the high volume logic like adoption levels where customers are running high volume products. And so end market activity is a driver of process control adoption and the limited end market activity so far has had an impact on the intensity for sure.
Thank you.
Your next question comes from the line of Mark Heller with CLSA. Your line is open.
Thanks for taking my question. I was wondering if you have any view on the order mix for calendar's 3Q?
Yes. So for September, September, looks like 43 5% logic 22%.
Got it. And then where do we stand on the buyback? And when do you expect to complete that authorization?
Authorization. We repurchased 168,000,000 dollars in the June quarter. So we see a continuation over the course of the year. And our approach is to do a what we call a dollar cost average like approach towards that over time. And so we'll continue to do it quarter in quarter out.
Certainly, as we manage our overall cash relative to our U. S. Target, It does have an impact in terms of cash needs and in terms of where we ultimately end up around share repurchases. And we are going to start to pay down the debt. We started to do that in the last quarter.
And so that will be an aspect to the cash management going forward as well. So we're about halfway through, a little over halfway through and we'll see it continue over the course of the next 12 months or so.
Thank you.
Your next question comes from the line of Stephen Chen with UBS. Your line is open.
Yeah, thanks. Just a follow-up question on the impact of Intel's CapEx cadence change. It wasn't clear to me. Does this impact how you run KLA at all? Do you guys maybe throttle back manufacturing output?
Or is the impact just not that meaningful since logic has been, I think you said, a smaller part of your orders recently? Thanks.
Well, obviously, if anyone is reducing their CapEx and our sensitivity to process control intensity is higher in foundry and in logic than it is in memory, that's we don't consider that a great thing. So that dials us back a little bit. If you think about the restructuring that we did, we talked about 2 motivators. 1 was to position the company better to deal with our customer challenges to get to market and be easier for our customers to deal with us. But the other side of that was to reduce our cost base and we've done that.
And if you look at where we are from the peak, we're down pretty significantly. So our view is that in the event that this continues, we want to be positioned appropriately for our investments to support it. But we never know how long these things are going to go. There are many examples in the past where customers give one direction and then change directions based on the way things go and we're prepared for either one. But I think that we have taken actions to deal with for us what was a lower end market demand environment than we would have hoped for a couple of years ago, but we also think that in 2016, we will see resumption of the investment.
Okay. Thanks for sharing that, Rick.
There are
no further questions at this time. I will turn the call back over to Mr. Lockwood.
Thank you, Conor. On behalf of the management team, I'd like to thank everyone for joining us here today. An audio replay of today's call will be available on our website later this afternoon. And again, we appreciate your interest in KLA Tencor. Thank you.