Ed Lockwood, Senior Director of Investor Relations, you may begin your conference.
Thank you, Candice. 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, 2014. 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 this earnings call, which includes the GAAP to non GAAP reconciliation of the EPS guidance and other supplemental financial information.
These slides can be found on KLA KLA Tencor's Investor Relations website. There you'll also find a calendar of future investor events, presentations and conferences as well as links to KLA 10 Core's SEC filings, including our annual report on Form 10 ks for the year ended June 30, 2014 and are 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 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. More information regarding factors that could cause those differences is contained in the filings we make with the SEC from time to time, including our fiscal year 2014 Form 10 ks and have subsequently filed quarterly reports on Form 10 Q and current reports on Form 8 ks. We assume no obligation and do not intend to update those forward looking statements. However, any updates we do provide will be broadly disseminated and available over the web. With that, I'll turn the call over to Rick.
Thank you, Ed. Good afternoon, everyone, and thank you for joining today's call. KLA Tencor posted solid results that met or exceeded our expectation for the Q2 of fiscal year 2015. Our financial performance in Q2 was highlighted by gross margin and non GAAP EPS finishing above the range of guidance, reflecting KLA Tencor's strong competitive positioning in the most critical process control markets as well as a heightened focus on cost discipline across our worldwide operations. New orders were also strong in Q2, finishing above the midpoint of the range of guidance at $865,000,000 and up 53% compared to Q1.
The recent end market demand trends continued in the 2nd quarter with new orders from leading edge foundry and logic for sub-twenty nanometer production comprising the majority of system bookings in December, followed by 20 nanometer capacity conversions in DRAM. As we look ahead to calendar 2015, with leading edge device demand expected to be strong and customer profitability expected to remain at a high level, we are planning for another year of growth for the industry and for process control with semiconductor WFE investment forecasted to grow in the range of 5% to 10% in the year. In this environment of sustained strong investment in the leading edge, the demand outlook for process control and KLA 10 Core's prospects also remain very favorable. In the near term, however, demand remains fluid, particularly in foundry and logic, where we have recently seen orders from select customers slated for sub-twenty nanometer originally expected in the March quarter pushed to later in the calendar year. We believe these delayed orders reflect yield and process stability issues associated with bringing these advanced device architectures to market.
Demand from memory customers remains robust. And in fact, we achieved our highest quarterly bookings level for memory in Q2. Memory demand is expected to remain strong in calendar 2015 with 20 nanometer conversions in DRAM making up the majority of memory customer activity. NAND projects in calendar 2015 are expected to be largely focused on planar architectures with expanded investment in 3 d plan for later in the year. As always, demand growth in our business is driven by the strong pace of investment in next generation semiconductor device technologies by the market leaders in logic, foundry and memory.
Process control plays a critical role in helping these customers solve the mission critical production problems associated with managing yields in leading edge manufacturing environment. As the market leader in process control, KLA Tencor continues to benefit from these ever more complex and cost yield challenges. So from our perspective, 2015 promises to be an exciting year for KLA 10 Core. Looking beyond these near term we are well positioned in key markets with innovative products to execute our strategies for growth and market leadership and to deliver strong returns to our stockholders. Turning now to guidance for the Q3 of fiscal year 2015.
New orders in March are expected to be in the range of $500,000,000 to $700,000,000 Our current forecast shows orders in the first half of calendar twenty fifteen on par with levels achieved in the second half of calendar twenty fourteen. Revenue guidance for Q3 is in the range of $685,000,000 dollars to $765,000,000 and non GAAP earnings per share in the range of $0.63 to $0.87 per share for the quarter. And with that, I'll turn the call over to Bren for his commentary on the quarter before returning for Q and A. Bren?
Thanks, Rick, and good afternoon. Revenue for Q2 was in the upper half of the range of guidance at $676,000,000 and non GAAP earnings per share finished above the guided range for the quarter at $0.68 driven by stronger than expected gross margins in the quarter and good execution of cost management. Fully diluted GAAP earnings per share in Q2 was $0.12 The GAAP earnings per share in Q2 included $0.53 of charges related to the leveraged recapitalization transaction, which we completed in Q2 and $0.03 of restructuring and acquisition related charges, net of the income tax effect on these adjustments. My comments on the quarter will be focused on the non GAAP results, which exclude these adjustments. A detailed reconciliation of GAAP to non GAAP earnings per share can be found in the press release and supplemental materials posted on our website prior to this earnings call.
New orders in Q2 were $865,000,000 above the midpoint of guidance of $700,000,000 to $900,000,000 for the quarter. We continue to experience a high degree of variability in order timing and delivery date commitments from our customers. We believe this is the new normal for our industry with our top five customers accounting for approximately 75% of demand today and often with 1 or 2 customers accounting for a significant portion of order and shipment volume in a given quarter. With each customer having their own unique timeline for executing their technology investment and capacity expansion plans and with shorter product delivery lead times becoming normal in our industry, forecasting accuracy of bookings within a 12 week window has clearly become even more of a challenge. With that, though December orders and shipments were strong, the near term shift in customer demand requirements that Rick mentioned have resulted in certain shipments, which were originally slated for the March in June quarters moving into the second half of calendar twenty 15.
We see this as largely a timing issue and our optimism for calendar 2015 to be a growth year for KALI-ten core is high. Our internal shipments forecast for calendar 2015 is consistent with business levels that would support revenue growth for KLA 10 Core in line with the overall industry growth rates and what is expected to be another year of strong CapEx investment, with shipment volumes roughly balanced across the first and second half of the year. Regarding customer segment commentary for the Q2, combined foundry and logic customer demand was 56% of new orders in Q2 and slightly below our expectations for the quarter due to some marginal weakness at the leading edge. As I mentioned, we believe the near term volatility in Foundry and Logic is largely a timing issue and a function of a variety of factors, including customer concentration and yield issues, as well as shifting capacity requirements at the leading edge for 14 and 16 nanometer and the timing of early development activity for 10 nanometer. Memory bookings were a record in Q2 finishing at 44% of new system orders in the period with upside from DRAM.
We expect memory demand as a percent of total system orders in calendar year 2015 to be on par with our calendar 2014 result, with investment focused on technology upgrades in DRAM and on capacity additions of planar device architectures in NAND and 3 d NAND. Investment by our customers at 20 nanometer and below product group. Wafer inspection was approximately 47 percent. Reticle inspection was 11%. Metrology was approximately 20%.
Service was 20 Storage, high brightness LED and other non semi was approximately 2%. Total shipments in Q2 were 7 $66,000,000 up 40% sequentially from September. We expect shipment growth again in Q3 to a midpoint of approximately $785,000,000 in the quarter. Given current shipment backlog, we expect shipment levels to remain at a high level with 1st year calendar 2015 shipments expected to grow compared with the second half of twenty 14. In total, we ended the year with just over $1,300,000,000 of total backlog comprised of $1,100,000,000 of shipment backlog or orders that have not yet shipped to customers and expect to ship over the next 6 to 9 months.
Total backlog includes $262,000,000 of revenue backlog or products that have been shipped and invoiced, but have not yet been accepted by customers. Turning to the income statement. Revenue for the quarter was $676,000,000 above the midpoint of the guided range and up 5% compared to Q1. Gross margin was 58.5%, an increase of nearly 3% from September and significantly above the guided range for the quarter. Our gross margin significantly exceeded guidance for the quarter due to a favorable mix of products and services and better than expected manufacturing efficiencies due to output levels and favorable foreign exchange impact in our offshore factories.
We expect gross margin to be in a range of 56.5% to 57.5% in the March quarter as the benefit of higher revenue volume is offset by a less favorable product mix compared to the December quarter. The shipment dynamics related to today's operating environment have also added additional volatility to our gross margins. Over time, our gross margin performance should continue to reflect our differentiated business model, which is fueled by 60% to 70% incremental gross margins. Operating expenses were $231,000,000 down from $240,000,000 in Q1 and below the guided range of $236,000,000 to $238,000,000 for the quarter as we saw the benefit of a heightened focus on cost management. Over the past few years, we have made critical investments in R and D and customer application support, advancing the product roadmap for flagship products such as broadband plasma and laser scattering wafer inspection technologies and the Archer platform and overlay metrology.
We've also made investments in new opportunities for growth such as the 5 d patterning control solution. We believe there are additional opportunities to continue to meet customer requirements and sustain our market leadership while driving better cost efficiencies throughout our organization. Looking ahead, we are modeling operating expenses of approximately $227,000,000 to $229,000,000 in the March quarter and expect operating expense levels to decline over the course of the calendar year to about $220,000,000 per quarter. Other income and expense for the quarter was a net expense of $29,000,000 reflecting the impact of the new debt on the balance sheet resulting from our leveraged recapitalization. We expect OIE to be a net expense in March of approximately $30,000,000 The tax rate was 16.4% in Q2, lower than the 23% revised guidance rate for the December quarter, principally driven by the reinstatement of the R and D tax credit in the U.
S. Going forward, you should continue to use a long term planning rate of 22% for modeling purposes. At the 22% guided tax rate, earnings per share would have been $0.64 in Q2. Net income was $113,000,000 or $0.68 per fully diluted share. Turning to the balance sheet.
Cash and investments ended the quarter at $2,400,000,000 a decrease of $576,000,000 compared with September. This reflects the impact of the leverage recapitalization transaction we completed in the December quarter. In conjunction with this transaction, we issued an aggregate amount of $2,500,000,000 of senior notes with various maturities with a blended interest rate of 4.28 percent. We also entered into a $1,250,000,000 5 year senior unsecured revolving credit and term loan facility. This credit facility consists of $750,000,000 of amortizing term loans and commitments for an unfunded revolving credit facility of 500,000,000 dollars The interest rate on the $750,000,000 credit facility is 1.49% based on current rates.
With proceeds from this leverage recapitalization, we paid a special cash dividend of $16.50 per share for a total amount of $2,760,000,000 Concurrent with our leverage recapitalization, we also announced that the Board of Directors has authorized an expansion of our existing $1,000,000,000 share repurchase authorization announced in July by an additional $250,000,000 In the quarter, we repurchased 2,100,000 shares of stock at an average price of $69,94 As of December 31, we had approximately 14,800,000 shares available for repurchase under our current authorization. We plan to execute these share repurchases over the next 12 to 18 months. In addition to the $16.50 special cash dividend in December, we paid a regular dividend of $82,000,000 or $0.50 per share in the quarter. Cash from operations was $11,000,000 in the quarter, down $24,000,000 sequentially, largely due to the higher accounts receivable associated with the ramp in shipments in the quarter and monthly shipment linearity. And lastly, fully diluted shares ended the quarter at 165,000,000.
In conclusion, to reiterate, our guidance for the March quarter is new orders are expected to be in the range of $500,000,000 to $700,000,000 revenue is expected in the range of $685,000,000 to 765,000,000 dollars with non GAAP earnings per share in the range of $0.63 to 0 point 8 I'll 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 to questions. 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. Please feel free to re queue for your follow-up questions and we'll do our best to give everyone a chance for further questions as time permits.
Candace?
Your first question comes from Timothy Arcuri with Cowen and Company. Your line is now open.
Thank you so much. Bren, your commentary on the first calendar half of the year, did I hear that right and that it suggests that the June orders are going to be up like 35%, 40% sequentially? And I guess does that assume that the push outs on FinFET that they come in June or that they're more additive to that during the back half of the year? Then I had a follow-up. Thanks.
So Tim, it's a good question. So when we looked at it, we saw a similar profile to the second half of calendar 'fourteen with the weaker first quarter with some bounce back into the June quarter. So it looks as we size the 6 month period, it looks pretty similar to us. And as I said in the prepared remarks, I think the 12 week window dynamic is becoming a more challenging dynamic for us to forecast with the customer concentration we have, size of orders and so on. So, we look at the 6 month window, it looks like it's roughly the same size.
Okay. Thanks. And then just on margins, Bren. What I mean, at this revenue level, margins are they're a good 150 basis points below. I'm just looking at March, the guidance.
They're a good 150 basis points below where if you kind of average out where they've been the last couple of years at that particular revenue level, it seems like you're giving up about 150 basis points on margins. What exactly is happening there with the mix? And will you get that back in June? Thanks.
Well, I mean the mix factors are for the same reasons we talked about with the shipment plans as you ship tools to customers and you're shipping more to individual customers you're revenueing tools faster. So in some ways, your margin is impacted by the mix of products you're shipping to a greater degree than what we've seen in the past. Clearly, margins were extremely strong in Q2 for the reasons we talked about. And there is some correction of that in the gross margin somewhere between 57% 58%. There are obviously the mix dynamics that will play out in any given quarter, but that's how we're modeling it today.
And I think the other thing to keep in mind is the growth of our Tim, I think one other thing to keep in mind is the growth of our service business, while accretive at the operating margin level, is dilutive to our gross margins. There are no we don't the way we do our accounting, there's no operating expenses there. So we believe it's there's an impact a dilutive impact to gross margins from that dynamic and services in the low 20th percentile of our revenue mix. Okay, Brad. Thank you.
Thank you.
And your next question comes from Farhan Ahmed with Credit Suisse. Your line is now open.
Thanks for taking my question. Can you briefly talk about like the push outs that you saw? Are they coming more from the leading edge 28 nanometer sorry, sub-twenty nanometer production as you mentioned? Is it coming from primarily in U. S.
Region or is it coming from overseas some foundries? Can you just briefly describe which region did you see the push outs from?
Well, so I mean, we came in obviously stronger at the versus the midpoint in Q2. So certainly that impacted our views on Q3 with some pull ins into Q2. But in terms of Q3 versus what we thought, it's really a mixed bag across foundry and logic. So, at leading edge, but also some of the trailing edge business that we've been forecasting for some time and has been a bit elusive. And I think that's dependent ultimately on some competitive dynamics in terms of second source strategies and so on.
So, I would say it's across the board in terms of what we saw in Q3. And as I said earlier, some of it, we think, comes back in Q4.
Thank you. And then second question I have is just talking about your next 6 month forecast, you're talking of revenues being flattish half and half. If I look at the EBITDA level that you had in second half of calendar year, it's about $313,000,000 Assuming that your profitability and revenues are similar, you're looking at like debt EBITDA levels of about $620,000,000 $630,000,000 Do you think that there is some risk to the debt to EBITDA covenants as we look out for a year or 2? I mean, your EBITDA profile seems pretty low compared to what it was a year ago in terms of like if I look at the 6 months period from now and the past 6 months and compared that to the previous one year, it's down quite a bit.
So our commentary on the first half was bookings related, not revenue. So I expect the revenue to be higher than bookings. I don't want to guide June, obviously, but I do think we'll see sequential growth into the June quarter. So I don't have the math in front of me on EBITDA, but as I've looked at it relative to the covenants I have with my bank debt, we feel pretty comfortable with the level we have relative to what our expectations are for the business going forward. So I don't have any concerns based on what we see today.
Obviously, with the backlog position we have and our expectations for shipments into this quarter, June should set up for a sequential increase in improving operating profitability.
Thank you. That's all I have.
And your next question comes from Krish Sankar with Bank of America Merrill Lynch. Your line is now open.
Hi. Thanks for taking
my question. 2 of them. First one Rick or Bren, it looks like you're running at a $600,000,000 run rate for bookings in March and $800,000,000 or so in June. What does the composition of those orders look like in March June in terms of memory and foundry? And I had a follow-up.
Yes. So, well, we're not guiding the June quarter, but for March, March looks to be pretty foundry centric, so 70% foundry and memory is 19%, logic 11%. And NAND as a percent of the total memory mix is about 31%.
Okay. That's helpful. And then second question is one of the things I noticed both December March and your guidance on OpEx is that the OpEx seems to be coming up pretty strongly. Seems like just trying to find out is this a function of you guys responding much faster, more aggressive on the OpEx side given gross margin or pricing might be under pressure? Or is it a function of the fact that there are some projects that don't need to be executed anymore like $450,000,000 or something else like that?
Chris, you said coming up. Did you mean OpEx coming down? OpEx coming down, yes. Yes. Okay.
So, Krish, I think that's right. I mean, if you look at the last couple of years, we've had sustained investment in a number of key platforms in the program. Obviously, we're investing in 450, investing at a slight level, but investing in EUV in addition to some growth opportunities like our 5 d solution. Customer support, another area. And so we've invested according to the roadmap.
We think we're in a position now relative to our road maps and our competitive position that we think that there are opportunities for us to start to scale this down somewhat. And so we saw that momentum play out in the December quarter. We think it continues in March and progresses through the year. So, we're also doing some things underneath the surface in terms of how we think about our sustaining engineering, how do we use offshore engineering resources more efficiently and so on that we think we can drive the operating run rate down into 2 20 range as we move through the calendar year.
Got it. Thanks guys. Very helpful.
And your next question comes from C. J. Muse with Evercore ISI. Your line is now open.
Good afternoon. Thank you for taking my question. I was hoping to go back to your comments on customer concentration, because if we go back in time, you guys had great ability to manage through a 6 month backlog give or take. And clearly, there was customer concentration issues then as well. And so just curious, is it movement of market share from one player to another?
Is it enhanced customer concentration? What's driving the change in your business model?
Well, I think it's really our customers. I mean, given the lead times that they have in the markets that they're supporting, I think their lead times have come in and I think we've seen that same pressure pushed back on us. So we have had to change our business somewhat in terms of our ability to be flexible and respond. But in a lot of these cases, we'll have these conversations where we'll ask for more lead time and our customers will push back given the dynamics that they're facing. So, there is less predictability.
We've seen it for a while.
And I just
I think it's just it's a change versus where we were in the past. I think it's more the end markets. And I think the concentration we have very orders, sizable shipments that are going to ship out. And as the customer changes the plan, it has a dramatic impact obviously on a given quarter's shipment. So our shipments tend to be pretty close to the ranges that we're guiding, but it's more of a challenge today and certainly impacts not just the overall shipment level, which has an impact on revenue, but also the gross margin given the mix of products that you're shipping.
I also think if you think about consolidation, one way I think about it is, I look at consolidation of our customer's customer in terms of their influence on the spend. So especially in the foundry space, their actions actually are often not really clear until very late to our foundry customers and that's part of the dynamic of the movement. That's why we don't get more visibility I think from our foundry customers.
That's helpful. And I guess as a follow-up, I could sneak in 2. One was, as we think about the uplift in your account receivables? And then the second one is you've shown really good growth on the service side. Will that continue?
And how should we think about, I guess, service spares as well as upgrades as part of that mix?
Yes. I'll take the service side. I do think we'll continue to see growth out of service. One of the things service is benefiting from on the one way I think about it, the Internet of Things isn't really driving a lot of front end WFE spend, but it is driving the longevity of a lot of these fabs, which is good for our service business. And so I think part of what's happening is as some of these fabs run longer and get more devices, we're receiving the extension of the life of the tools that are being serviced and that's part of the underlying driver for our service business, which is great.
And I'll let Bren handle the accounting part.
So on the day sales outstanding was on revenue about 85 days, a significant uptick there. And that was really a function of the monthly shipment linearity. We shipped a number of tools in December and in the last part of December. So the cash collection will happen in the Q1 on those shipments. And so I'm expecting reversion back to normal 70 ish or so DSO levels, plus or minus a few days, and it will drive operating cash flow probably up in the $250,000,000 to $300,000,000 range as we move into March based on what we're expecting to ship today and the timing of those shipments.
Very helpful. Thank you.
And your next question comes from Harlan Sur with JPMorgan. Your line is now open.
Yes. Hi, good afternoon. This is Bill Peterson calling for Harlan. I was hoping you can, I guess, share a little more color on this push out? Is it basically just one customer or is it broader participation?
And I guess what gives you the confidence that these will materialize for the second half of the calendar year? What do you base the confidence on?
Well, if you look back even some of the stuff that we pushed out even was in December and we were having very high level conversations with customers that felt like they had pretty strong commitments from their customers to move forward and they were in the process of allocating space and slots to support their ramp. And then very late in the day that got pushed. And so those some of those things even pushed outside of the March and into the second half. So when we look at the overall dynamics, you say that we're in great shape share wise. The And we And we see it both as Bren mentioned to a prior question both at the leading edge and as we're seeing some of that in logic, but also some of the not leading edge in the foundry space we're seeing movement.
So you just go back to what are your assumptions about WFE for the year and what do you really think of the foundry spend. And our view is, if in fact the WFE numbers work out then we'll see them in the second half. But until as you know until the orders are placed, it's very hard to know if they will. But if you go back to our underwriting assumption is WFE up 5% to 10% this year and the mix largely intact with what it was last year, we feel pretty good about how the year is going to play out. It's just the uncertainty has increased as the volatility due to concentration.
Okay. That's helpful. Thanks.
Your next question comes from Jim Catella with Goldman Sachs. Your line is now open.
Hi. This is Chelsea German on behalf of Jim. Thanks for taking the question. Can you talk about your plans for paying down or refinancing the new thinking about? Thanks.
So we just borrowed the money. So we're not planning to refinance. We're pretty happy with the structure of the debt that I laid out in the prepared remarks. Our goal, our long term target is 2 to 2.5 times. We think that makes sense for a business with our characteristics.
We went above that in this case, as I talked about in the last call, given the attractive lending environment, but also the what we expect to be a healthy CapEx environment over the next couple of years. We structured the debt in a way that we can pay it down and we'll pay it down with the term loan piece, which is pre payable with a lot of flexibility in how we do that. And so we'll do that over the next couple of years working down to our long term target. So that's how we're thinking about it.
Great. Thanks. And as a follow-up, you mentioned on the last call that you're expecting multiple players to be on FinFET by the end of 2015. Have you are you still expecting multiple players? Or is that more of a one player?
In the foundry?
Yes, in foundry.
So I think you'll see multiple players. I think that's still our expectation. But to the points earlier, we're seeing a much more measured ramp of capacity for FinFET. I think the leader is comfortable with their position and the other players are working quickly to try to catch up. And I think the competitive dynamics on that front will ultimately drive how much capacity gets added over the course of the year.
We think that is what's driving some of it into the second half. And but ultimately, I think you end up with multiple players with the capability.
Great. Thanks.
And your next question comes from Edwin Mok with Needham and Company. Your line is now open.
Hi. Thanks for taking my questions.
First one, did I hear
correctly that you said you expect a shipment in the memory space to be roughly the same this year or flat to last calendar year? And if that's the case that would imply a very strong growth in foundry potentially in the second half. Is that how we should think about kind of the shipment trajectory for your business?
Well, we said orders. The order mix is a percent of the total we expected to be roughly similar in the low of 30th percentile that was memory in calendar 2015 versus calendar 2014. There could be some timing issues, generally that should translate mostly to shipments in a similar mix. But obviously, the timing issues and lead time can have an effect on that. For us, from a pricing perspective, product mix perspective and so on, there's not a lot of difference in terms of what we ship in memory and foundry.
So it doesn't really have an impact necessarily on the revenue levels or the margin profile of the various segments. So it's all pretty consistent across the segments for us.
Okay. That's very helpful. And then on this foundry push out maybe just some clarification there. So you mentioned there's some push out not just in lean and ash but also in orders, right? And but then you also mentioned that your quarter came in a little stronger than expected and there was some pull in non order.
I'm just trying to understand the dynamics. Are these pushed out? Are you expecting a lot of these pushed out to be captured in the June quarter or which is what you guide for higher order in June quarter, but some of that expect to the second half. In terms of shipment of these orders given the push out, should we expect the shipment to come back in the second half or is it more prudentially delayed to 2016?
Well, we had a nice bounce back in foundry from Taiwan specifically in the December quarter. So that was encouraging to see, but foundry was weaker than we expected going into the quarter. Most of the strength came from a much stronger memory mix of business than we were modeling. As we look at the next quarter or so a couple of quarters, as we said earlier, it's a mixed bag. It's 20 nanometer and below.
It's also some 28 nanometer business. And obviously, there's also some 10 nanometer early activity that's part of that as well. So, it's a collection of customers and not huge amounts of dollars, but in the aggregate obviously had an impact on what we were planning for in the first half of the year.
Okay, thanks.
Your next question comes from Patrick Ho with Stifel Nicolaus. Your line is now open.
Thank you very much. Maybe a big picture question for Rick in terms of memory, process control intensity. If I recall at your Analyst Day last July, you mentioned that you expect to see process control intensity rise for the memory space. Looking at the DRAM spending that we're seeing today in the conversion to 20 nanometers, 1, are you seeing this? And secondly, is there a bias towards inspection or metrology, particularly as you see more multiple patterning steps at 20 nanometers?
Yes, great question. Pretty much tracking the way we laid it out at semicon in terms of memory. The one caveat I would say is for DRAM it is and back to the mix it looks like historical mix. You do get overlay to your point, you get some strength there, but you also have advanced defect inspection to find some of these smaller nodes as you're pushing DRAM technology. So DRAM looks very much like we said.
As we said then and even said in the last call, it's too early to tell on 3 d flash because there just hasn't been enough of it and it's still early days on that. So whether or not that plays out to be at the intensity that we laid out, time will tell. And given the latest, the view that there's going to be more push out of 3 d from what was expected even at semicon, I think that it will be the rest of the calendar year for we'll have validated that model. But I think for DRAM, it has been tracking the way we assumed and the historical mix looks pretty similar between metrology and inspection.
Great. And as my follow-up question maybe also for you Rick, in terms of the foundry process control intensity, you guys saw a big pickup when 28 nanometers was rolling out given the yield challenges. I guess the 2 part question there is 1, how come you haven't seen it yet with the 2016 and 14 given the challenges there? And secondly, do you think you'll get that kind of incremental step up that you saw at 28?
Yes, it's a great question. I think that the challenges associated with the yield right now, what we're seeing at sub-twenty are not necessarily things that inspection and measurement can address. I think it's more a function of some of the just process integration. And while we can be helpful in diagnosing that, that's very different than addressing the manufacturing ramp. So we're still early days on that.
Will we see it? Again, we're too early to say whether that will be validated in the rollout, because people aren't really far enough along in that development to know. But our expectation there that the signs are good. There are also some questions about utilization of existing facilities. For example, will customers roll what is 20 nanometer capability to 16 and then what happens to the intensity in that scenario.
And again, it's too early to know that.
Great. Thank you.
Your next question comes from Mehdi Hosseini with Susquehanna. Your line is now open.
Thank you. Thanks for letting me ask a question. Rick, it seems like you have a pretty good confidence with opportunities this year. It's just that the quarterly booking and shipments are lumpy something that we went through last year. So given your confidence and also the lumpiness, why not provide us with kind of a year end guide so that we could avoid debating whether June will be up time the specific orders that have such a big variance given the customer concentration?
Thank you.
So Mehdi, I'll go ahead and start. So we tried to provide a little bit more color in broader windows, 6 month windows about what we're seeing in the business over the last few quarters. And I think that's important. We've also tried to give you some insight into where we're based on where the industry is projecting to be where we think we'll end up relative to that. So for example, when we talked about calendar 2015, I think in Rick's prepared remarks, we thought given the dynamics of the mix of business across foundry logic versus memory, that we would expect if the industry was up 5% to 10%, we ought to perform somewhere in line with the market.
We think that, obviously, the process control intensities of the 2 segments or three segments are different. And with memory as a higher percentage, that does impact our ability to outperform the industry. So as we look at it this year with roughly the same mix of business, we see a market perform here and I think that translates from a 12 month 33 $33,000,000,000 to $34,000,000,000 WFE level, which is that plus 5 to plus 10 range. So we're trying to do it all, but at the same time, we feel like we don't want to be less transparent in the process. We think the quarterly bookings are less relevant to our business today, given concentration and given that the industry is not as cyclical as it was in the past.
But it is something that we've always provided and we'll continue to provide it. We put a broader range on it and we'll do the best we can and then try to bridge it back to what happened versus what we thought would happen.
And Mehdi, to your point, I know you've made this point before. I don't disagree with the thought process in terms of the lumpiness and how much help is it really. But on the other hand, as Bren said, we're reluctant to remove something given the general view of the desire to have transparency. But it is something we debate from time to time. I could tell you it's not exactly how we run the business though.
When we go back and think about how do we run the business, how do we size the business and how do we make investments, it's not based on the quarterly numbers. It's based on what we view as trends. And even then it's not even annualized. It's on a longer term basis than that. But your point is once again made.
That's fair. And then my follow-up has to do with EUV. When you presented the competitor conference in December, you highlighted some of the intimate conversation you're having with some of your customer. The big foundry in Taiwan is proceeding forward. What is it going to come down to?
It seems like you're waiting for investment. The largest customer is proceeding forward. Is there a time line here? Or are you just not going to proceed forward even if your largest customer wants to move forward?
Well, I think that the way it stands today that any production done with EUV before 2020 is going to be done without actinic wafer or reticle inspection. We are now too late to make any insertion point. And that's based on the fact that there is still a lot of debate by our customers about the relative trade off between the cost of us developing that technology and their confidence of its need in production. So I'm not saying EUV won't go into production before 2020, because we don't know that. But I can tell you it won't go in production before 2020 with actinic reticle inspection.
So either it won't go in production or they'll have to figure out how to do it without it.
Got it. That's helpful. Thank you.
Your next question comes from Mahesh Sankanariya with RBC Capital Markets. Your line is now open.
Thank you. I just want to get one more clarification on the foundry push out. ASML reported a pretty good booking and I think that primarily came from Taiwan. And I think you commented that your booking had a pretty good Taiwan component. So my guess is that the push out you are seeing is not from Taiwan and other places?
Well, as I said earlier, I think it's a mixed group and it comes from a number of regions and in a number of nodes. So I think that given lead time, I think certainly customers tend to get into queue with litho sooner. I don't know exactly what ASML said or how they positioned it. But as we look at it today and to Rick's point earlier, there is some fluidity to these orders certainly at 28 nanometer and so they're moving around a little bit and so the timing is uncertain and we'll just have to see how it plays
out. And so can you comment on what is the what could be the I mean, we know that for 2016, the driver is that yield issues and customer giving allocation to different foundries that's a big driver for 16, 20 nanometer fluidity. What in your opinion is driving the changes at Mature Technologies?
I think that's a similar dynamic. It's just not happening so much with the leading edge foundries. I think there is significant competition for 28 nanometer foundry capacity and we are seeing movement among those players as they try to win that business. So similar thing, but just not with the exact same players.
Okay. That's very helpful. Thank you very much.
And your next question comes from Weston Twigg of Pacific Crest Securities. Your line is now open. Hi.
Just wondering real quick on the reticle inspection business, which I know is a good high margin business, but that you've mentioned it's somewhat saturated. I was wondering if there's
It
It's a great question, Weston. I think that the we don't know the answer yet. I think that it's not as much about multi patterning per se as it is sub-twenty nanometer technology. So the multi patterning above 20, I think is pretty well positioned. The question will be sub-twenty, are there new kind of inspection modes required, new algorithms, new developments as people try to figure out exactly how to tune those reticles to support sub-twenty.
And there are some indications that that will create some boost in demand. But again, it's relatively early in that and we don't really see it. So what mostly is happening now, we did have some good reticle business last quarter, but mostly what's happening is in the fab and that's those tools are not fully as those are not as complete tools. So you have a tool that's targeted at that line that's a different kind of tool than what we sell to the mass shop. But we'll wait and see on that.
I think that there's a good possibility that we'll see some increase in demand. I wouldn't forecast that in the very near term though. I think that's a longer term thing.
Okay. That's helpful. And then just real quickly wondering with the new cash balance, can you give us just an update on what's offshore versus
onshore? It's about $1,000,000,000 of it's onshore, dollars 2,400,000,000 onshore.
Perfect. Thank you very much.
Your next question comes from Rameet Shah with Nomura. Your line is now open.
Thank you. And I apologize I'm jumping on
a little bit late here. Rick, ASML said the other day that every single memory maker is increasing capacity. And I know you indicated that visibility in 3 d NAND is a bit limited today, but
I was
wondering on DRAM, how do you see capacity playing out here in the first half? Is it increasing? And how would you describe the pace?
Yes. I think memory setting up to have a good year again in 2015. We have seen strength in our memory business as we commented on the call. The December quarter was our best memory quarter and we see that continuing and it is mostly in DRAM. And we think for the year, it looks that way with the 3 d NAND being later in the year.
So I think it's true and I think our adoption has improved. But again, it's at a lower level than foundry. So from our standpoint, a mix shift toward memory doesn't increase our available market.
Okay. Thanks for that. And Bren, just on the special dividend, I think it was a little controversial at the time, but in retrospect, it looks like it was a very good decision. And I'm curious how you're thinking about this going forward. Have you considered at all the idea of doing a smaller but perhaps more frequent special dividend based on the performance of the business?
Well, so just to back up and our process is that as we evaluate the company's strategic plan and we look at not only our cash reserves, but the debt capacity that we have. We go through that process and we think about the alternatives of how we invest operationally, M and A considerations or shareholder return considerations. So that's a regular process for us. Clearly, the shareholder return options are viable options. And I think in terms of value creation, the other options are juxtaposed against that.
So clearly, we have a long term target. And in terms of leverage levels, we think that makes sense. And as we delever the debt and we see the growth in EBITDA in our business, we'll to the extent that that affords a position for us to run through that process and consider it again, it's a possibility. But we'll run through the process and make the right call based on what we think is in the best interest of the shareholders long term.
All right. Thanks, Brad.
Your next question comes from Sandeep Bajikar with Jefferies. Your line is now open.
Hi, guys. Thanks for taking my question. Two questions on foundry. First, what level of sub-twenty nanometer foundry capacity do you currently expect to see get built or converted overall? And how much of this did you actually see get built in the December quarter, if at all?
Well, so we just I mean, I think some of the 20 nanometer conversion will be largely determined by what happens with the end markets and whether as the major customer there as they migrate away from 2020, does that capacity get consumed by other fabless customers? So I think that's the wildcard. I think that the 14, 16 capacity is really just starting to get added. And so we'll see that capacity get added over the next few quarters or so through this calendar year with FinFET designs coming out of the foundries probably sometime in the Q4 of the calendar year at least that's our best estimate at this point.
Okay. And just as a follow-up, what's typically the lead time in foundry? I know you said you don't have a lot of visibility. But if you can provide a perspective on how much the lead time might have shrunk, I think that would be helpful.
It varies by customer across products. But I think we're generally if you look at our backlog with most customers, we're usually it's about 4 months from the time that we get orders to the time we ship the tools. So it varies, but I think that's a reasonable way to think about it. Okay, great. Thank you.
And your next question comes from Sidney Ho with Deutsche Bank. Your line is now open.
Yes. Thanks for taking my question. I just want to make sure that I hear that in prepared remarks you mentioned the WFE markets will grow 5% to 10%, but you expect your mix to be similar to 2014. I don't know if it's orders or revenue. But at the same time, you also expect to grow in line with the WFE market.
If I look back at 2014, I think the mix was if the mix is the same, but you actually undergrow the market in 2014 as well as sort of 2013. And I believe that one of the major reasons because of mix. Can you help me reconcile how you're going to be able to grow in line with the WFE market? Is there some customer specific? Is there some intensity increase that kind of thing?
Thanks.
Well, think of it this way. If the mix stays the same year on year, then we shouldn't see under the market gross less than the overall market, right? What happened in 2014 is the mix swung to memory. Does that make sense?
Yes.
So therefore, it drove down the overall potential market for process control because memory intensity is lower. If year on year the mix is the same as last year than our compare is last year and then we ought to be able to grow with the market for the space. Does that make sense?
Yes. I guess the point is the mix didn't turn more unfavorable.
Well, it stays where it was. So as opposed to shifting. What happened in 2014 versus 2013 is it increased for memory and that drove down available market for process control, right? If 2015 ends up looking like 2014 then that's your compare. And of course, we hope to outgrow it, but when we're looking across the board.
Now if memory is actually a larger percent, if that mix increase then we'll be up against that headwind and we'll have to grow either through market share or driving additional adoption.
That makes sense. My follow-up question is on foundry. I think there are many questions on foundries, but seems like there should be a big push for foundries in the first half and I know you talk about some push outs and whatnot. Is there enough visibility right now to look at what you think your first half versus second half is?
Well, I think that overall we can do the whole year and we look out and that goes back to WFE for the year. And as things flash around in there, to Bren's point, it can impact if it goes late enough in the year, our ability to revenue it because of the shipments in revenue. But the dynamic right now is shaping up. We still think the year looks consistent with the 5 up 5 to 10, but with some moving parts and we're not certain how they're going to play out. But we don't give guidance beyond the next quarter other than commentary on our perspective on the year.
Okay, great.