KLA Corp (KLAC) — Q3 2015 Earnings Call Transcript

Thank you, Stephanie. 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 third quarter results for the period ended March 31, 2015. We released these results this afternoon at 1:15 PM Pacific Time. If you haven't seen the release, you can find it on our website at www.kla-tencor.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-Tencor's Investor Relations website. There, you’ll also find a calendar of future investor events, presentations and conferences, as well as links to KLA-Tencor’s SEC filings, including our annual report on Form 10-K for the period 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 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 these differences is contained in the filings we make with the SEC from time-to-time, including our fiscal year 2014 Form 10-K and our subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K. We assume no obligation and do not intend to update these 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 delivered another quarter of solid financial performance in Q3 driven by our market leadership, our innovative portfolio of process control solutions and strong operational execution. Financial results for Q3 were inline with our expectations, revenue in the quarter grew 9% sequentially finishing above the midpoint of our guidance at $738 million. And non-GAAP earnings per share came in at the upper end of the range at $0.84 per share driven by lower operating expenses in the period. New orders also finished in the upper end of the range of guidance in Q3 at $692 million. These results are a good start for KLA-Tencor in calendar 2015 reflecting continued solid execution against our strategic objectives and the benefits of our ongoing focus on innovation and market leadership. In fact, our latest industry market share data shows KLA-Tencor delivered another year of strong market leadership in the most critical areas of process control in calendar 2014 demonstrating success in our customer focus initiatives and the value of our portfolio of process control solutions. As the market leader in process control, KLA-Tencor is addressing our customers' most critical yield challenges and the various technology transitions underway in the marketplace today including multi-patterning, new device architecture such as FinFET and 3D NAND. Turning now to our perspective on the current market environment and thoughts on the industry landscape for the remainder of calendar 2015, first I think it's important to remind everyone that setting aside the seemingly never-ending stream of conflicting signals and uncertainty as to the magnitude and timing of near-term investment in the leading edge, equipment demand is generally healthy and our customers continue to drive their long-term strategies for growth led by major technology inflections at the leading edge. But over the consolidated customer base, demand for leading edge logic and foundry is limited to one or two large customers in the initial phases of a new node, the continued high pace of next-generation node transitions has led us to accept a higher degree of volatility in quarterly demand, shorter leading times and the result of low visibility in the demand environment as just being part of our industry today. Even with these factors and with caveats related to the timing of investments in the year, we still expect 2015 to present solid demand for the equipment industry. With investment levels forecasted to be on par with what we saw in 2014 and with the potential for modest industry growth depending on the timing of some of the larger capacity ramps that are expected in the second half of the year. In terms of our view of the end markets, we see memory investment initially focused on 20-nanometer conversions in DRAM followed by increasing 3D NAND investment in the second half of calendar 2015. The primary focus of investment for foundry in 2015 continues to be FinFET development and capacity ramp for a number of customers in addition to filling capacity demand for 28-nanometer. We also expect our R&D and pilot investment for the 10-nanometer design node to begin picking up in the second half of the calendar year. In this environment, process control plays a critical role in enabling the successful execution of our customers' growth strategies creating opportunities for KLA-Tencor and fueling our long-term growth. As the market leader in process control, we expect revenue growth at least in line with the industry in the year. KLA-Tencor has an ongoing process for evaluating the company's progress in our long-term strategic objectives of customer focus growth, operational excellence and talent development. Our goal in successfully executing these strategies is to deliver consistent growth, strong cash flows and profitability and sustain market leadership over the long-term with superior returns to our stockholders. We believe our ability to proactively get ahead of shifting customer and market dynamics is one of KLA-Tencor’s competitive strengths and a key differentiator for the company. Consistent with this ongoing process, today we announced a plan to reduce our global employee workforce by up to 10%. This action and previous organizational alignment actions are aimed at streamlining our organization and business processes in response to the changing customer requirements in our industry. Our efforts are directed at improving efficiency and removing complexity throughout our organization, streamlining our customer focus strategies and better integrating our R&D and product introduction processes. The goal of these efforts is to deliver an increased capacity for investment in innovation and market leadership and direct our resources toward our best opportunities while enabling improved earnings power over time. Examples of areas we have identified for future realignment of investment priorities include scaling back our investment in EUV, as well as consolidating our customer-facing organizations and our go-to-market strategies to better match the consolidated customer base. We will continue to make the strategic investments necessary to fuel our long-term growth strategies and we will also continue to proactively evaluate and adjust our plans as appropriate. Regarding the headcount reductions we are announcing today, we are currently finalizing the details and specifics of these actions and we will have more information in the weeks to come. In closing, long-term growth for KLA-Tencor 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 the leading-edge manufacturing environment. As the market leader in process control, KLA-Tencor continues to benefit from these increasingly complex and costly yield challenges. As we look ahead, we are energized by the opportunities that lie ahead and optimistic that 2015 promises to be an exciting year for KLA-Tencor. We are well-positioned in key markets with innovative products to execute our strategies for growth in market leadership and to deliver strong returns to our stockholders. Turning now to guidance for the fourth quarter of fiscal 2015. New orders in June are expected to be in the range of $550 million to $750 million. Revenue guidance for Q4 is in the range of $710 million to $790 million and non-GAAP earnings per share in the range of $0.78 to $1.02 per share for the quarter. Before I conclude, I would like to thank the entire KLA-Tencor team for their continued hard work and dedication. As always, our driving focus remains on innovation and execution enabling us to meet complex customer requirements and deliver consistent solid financial results. As we move forward we will continue to support high levels of investment and innovation to drive our market leadership, generate improved operating leverage in our business, and deliver strong returns to our stockholders. With that, I will turn the call over to Bren for his commentary on the quarter before returning for Q&A.

Thanks, Rick, and good afternoon. Revenue for Q3 was above the midpoint of guidance at $738 million and non-GAAP earnings per share finished at the upper end of the guided range for the quarter at $0.84 driven by higher revenue and lower than modeled operating expenses in the period. Fully diluted GAAP earnings per share in Q3 was $0.81. The GAAP earnings per share in Q3 included $0.03 of acquisition, restructuring, severance and other 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. Looking at the overall business environment, the landscape is similar to what we described back in January with shipments and revenue levels for KLA-Tencor expected to be generally balanced half over half in 2015, what is now planned to be a year of modest growth for WFE. There are assumptions in the forecast that could impact the timing of results but the overall view that calendar 2015 will be a solid but not spectacular year for KLA-Tencor and the industry remains the same today. New orders in Q3 were $692 million at the upper end of the range of guidance of $500 million to $700 million for the quarter. Foundry was 76% of new orders in Q3 and logic was 7%, memory bookings finished at 17% of new system orders in the period. Turning now to the distribution of orders by product group, wafer inspection was approximately 39%, reticle inspection was 11%, metrology was approximately 22%, service was 26%, storage, high brightness LED and other non-semi was approximately 2%. Total shipments in Q3 were $715 million. Given current shipment backlog we expect shipment levels in the second half of calendar 2015 to be roughly equal to the levels in the first half. In total, we ended the quarter with just over $1.3 billion of total backlog comprised of $1.1 billion of shipment backlog or orders that have not shipped to customers and expect to ship over the next six to nine months. Total backlog also includes $239 million 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 $738 million up 9% compared with Q2. Gross margin was 57% and in line with the guided range. We expect gross margin to be in the range of 57% to 58% in June driven by a more favorable mix of high-end wafer inspection tools in the quarter. Looking ahead, 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 $218 million, down from $231 million in Q2 and below the guided range of $227 million to $229 million, a result of favorable variance and some discretionary budget in the quarter and from our continuing focus on cost controls. The global employee workforce reduction plan announced today and previous organizational alignment action are intended to optimize our global business operations to maintain our leading market position, free up resources to direct investment on our most important customer and product development initiatives, and appropriately align our organization and business processes to fit in evolving industry and customer landscape. We are currently modeling operating expenses for June quarter to be flat compared with March. At this time, we're unable to make a good faith determination of the cost estimates associated with the global employee workforce reduction plan and our June quarter GAAP EPS guidance does not consider the impact of these costs. We plan to update GAAP guidance once we have determined the earnings impact of the proposed plan. Other income and expense was a net expense of $29 million in March, and we expect OAE to be a net expense in the June quarter of approximately $28 million. The tax rate was 21.1% in Q3 and in line with the long term planning rate of 22%. Net income was $137 million or $0.84 per fully diluted share on a non-GAAP basis. Turning to the balance sheet, cash and investments ended Q3 at $2.3 billion, we repurchased 2.6 million shares of stock and paid a dividend of $82 million in the period, and cash from operations was strong at $242 million in the quarter. Lastly, we ended Q3 with approximately $163 million fully diluted shares outstanding. I expect Q4 to end at approximately $160 million. In conclusion, to reiterate our guidance for the June quarter is new orders are expected to be in the range of $550 million to $750 million. Revenues expected in the range of $710 million to $790 million with non-GAAP earnings per share in the range of $0.78 to $1.02 per share. This concludes our prepared remarks for today. I will now turn the call back over to Ed to begin the Q&A.

Okay. Thank you, Bren. At this point, we'd like to open the call to questions. We request that you limit yourself to one question and one follow-up given the limited time we have for today’s call. Feel free to re-queue for your follow-up questions and we’ll do our best to give everyone a chance for further questions as time permits. Stephanie, we're ready for your question.

Hi, thanks for taking my question. The first question I had was quickly, Bren, you mentioned that the second-half shipment should be similar to the kind of first half. What is your shipment guidance for June quarter? And I also had a follow-up after that.

Sure, Krish, the guidance for the June quarter, at the midpoint is up 12% to $800 million, so the guidance range is $760 million to $814 per shipment.

Got it, that is very helpful. And then a question for Rick as a follow-up. I am curious to know the thought process behind the 10% workforce reduction, because it looks like the industry spending is robust and you guys also said that you need to grow in debt like six months ago. So why the reason for the cuts now that you are confident and seem to be doing it? Is this more a reaction to any kind of competitive situation, market share loss, or is it more looking at KLA specifically over the next 12 to 24 months?

Well it's actually looking at the industry over the next five years and thinking about how we should be structured and to provide answers to customers' challenges. So two things: one, as we know that the industry has gotten a lot simpler in terms of customer consolidation and we have the luxury of being able to afford a relatively expensive go-to-market strategy which we are streamlining in this. The second is our product divisions, we had a number of product divisions and for a while that made a lot of sense for most of the company's history, but we think now that in – as what we're seeing now from our customers is really a request for a solution across products and our ability to do that means we streamline those product divisions, let's say, you end up with a fair amount of excess capacity in terms of management to support that. So we end up being streamlined in terms of our go-to-market but also our product development. So it's really a reflection of what's going on in the industry and the result is we end up being in a position where we're going to have the reduction of some of the talent that’s been in the company.

Thanks Rick.

Thanks a lot. A couple of things. Rick, I guess - this is just a big picture question, but I'm just looking at your WFE share. And in 2014 you lost about 50 basis points of WFE share. And if the back half, revenue wise, is pretty similar to the front half of this year, you're going to lose another 50 basis points roughly. And it seems like there is - that your lack of exposure to memory is becoming a real problem as a lot of the secular spending vectors are in memory. So I guess I wanted your opinion on is this finally the straw that sort of breaks the camel's back that forces you to get into the process business to gain some exposure to memory? And then I had a follow-up. Thanks, Rick.

Sure, Tim. So, let me start with no, this is not something that forces us into process. I think what it does is - we have opportunities to create more value in memory and to increase the capital intensity, but we don't necessarily - we haven't delivered those solutions yet to the market. And some of those memory processes are inherently less process control intensive and we know that. So there is some opportunity for growth there. And we also as we model it out, we do think we are in a secular part of the industry where memory is going to be higher but not forever. And so when we model this, we'd say, yes 2015 continues to be probably more memory heavy than if you go back three or four years, but we think that trend will swing particularly when we start seeing investment in next-generation technologies as in the 10-nanometer node for logic and for process which have been delayed. Then we'll expect to see foundry come into balance and we'll see opportunities to grow relative to the market. We think we hold to the market overall this year but we have chances for growth as we go forward. Bren, you want to add any color to that?

No, I think, Tim, within the segment itself, our market share position is very strong. And so we're comfortable with our positioning but obviously as you know memory isn't our strongest hand, so every WFE dollar is not created equal in terms of the impact on our business. So while we're - I think we're encouraged by what we're seeing on the share front memory and some of the opportunities to increase adoption, the adoption is not going to ever get to where foundry and logic is. So we think that once foundry and logic begins to invest in earnest and some of the technology transitions that Rick mentioned, we feel pretty good about our relative performance at that point.

Okay, great. And then, just a quick follow-up to that, Bren you had guided, I have my notes, last call you said that you saw orders in the first calendar half of this year would be about flat with the calendar second half of the last year, which is implying that orders in June would be like $825, something like that now even if I adjust for March being a bit better, being above the range, it seems like roughly $100 million pushed out of the first half of this year from the order perspective, can you talk about what that was?

So, once again the specific customer situations but I was expecting more for at least from an order perspective, more 10-nanometer activity to start to show itself from the June quarter and that looks like that's delaying now to the second half of the year. I'd see principally that's the biggest piece of the change.

Good afternoon this is Bill Peterson for Harlan. Thanks for letting me ask a question. Piggybacking on the move towards 10-nanometer, as you talked about, it's really limited to a few players at the moment, but as we look ahead, what is your view on capital intensity uplift for process control as we compare to, say, 14, 16, or 20, the combined node? And related, how should we think about the reuse of equipment when transitioning between these advanced nodes? Thanks for your insight on that.

Sure. The 10-nanometer process intensity we have some models for it but until it really happens, it’s going to be hard to validate those models because we're still early in terms of people's development for it. But we did have models that we laid out and we can talk to the specifics of that in a minute. In terms of the transition and the reuse issue, I think that it's pretty clear in cases like the 20 to 16-nanometer transition you do see the opportunity for customers to have a fair amount of reuse depending on the back end of the process and how much change there. So far that's part of it, but the other do they maintain the 20-nanometer line going and so reuse gets, I think you see more pronounced if the volume on the 20-nanometer decreases when they go to 16, does that make any sense? So 10 we think is entirely a different case more like the transition from 28 to 20 than it from 20 to 16 and so we expect more intensity as a result of that we're looking for some of that data and the specifics here inside. Yes, so the way we laid it out, I don't think we feel, we feel very comfortable with the data at least on the foundry logic side that what we consider one exit in below which included 20-nanometer was in excess of 18% on logic foundry. So to Rick's point, I think the biggest issue is very similar toolsets from 20 to 16, 14 with the same lithography, the biggest question was going to be the size of the node and the number of designs and therefore the ability to migrate capacity. So to the point earlier with very little activity, 20-nanometer beyond couple of customers, customers were able to migrate capacity down to 16 and so, so I think that's the dynamic that we're seeing. But we're comfortable with the 18% as Rick said early on 10 and so I think we'll save that for another day and depending on how you to that earlier question, depending on how you one day gets to this total, but with memory blended at 40% to 45% which is probably where it is this year. You're probably sub 14% -14.5% or so on that range between 14% and 15%, but we will see how it plays out through the year.

Thanks for that color. My follow-up, and switching gears to memory, we are getting closer to 3D NAND adoption as we witnessed from a lot of the press releases out there. We would expect, of course, more capital depth intensity with reuse of a lithography. But can you give us an updated view on what your customers are standing to require from a process control perspective and how it compares to 15-, 16-nanometer Planar? I guess presumably areas like overlay, OCD, stress become more intensive but what about some other areas, inspection overlay and things like that? Thanks for the insight.

Sure. I would say it is more intensive in metrology than it is inspection when you look at the transition of 3D. There are a couple of areas of opportunity and inspection, there’s definitely opportunity when it comes to measuring, inspecting films and especially buying films and there’s a big desire to keep those processes as clean given the process. So you do have opportunities there because angles are relaxed, you have less intensity associated with advanced wafer inspection expect for in the development phase, so you do see it there but not as much in production. Metrology is kind of where the action is though, because there is so much in terms of number of players’ requirements, round overlay and film measurement, so we do see big opportunity in terms of what's going on in the metrology. And so, in aggregate you do get an increase and the intensity, but it still is significantly what we see in the logic foundry. But the rate of increase is similar to what we see in the rate increase in logic foundry, but the intensity is probably modeled, it was about half of that what you see in large foundry. So, we’re matching subject to the shift for memory to logic or logic memory than we are necessarily node to node, where we do see increased adoption associated with the advance node.

Hi, thanks for taking my question. First just wanted to ask if you had a new investment program from your customers to move forward with actinic UV mass inspection, how quickly could you ramp that program up and does that potentially impact your workforce layoff plan?

I guess, we are having a lot of conversations with customers about that and nothing has really changed in terms of customer sentiment around the need and timing of actinic inspection. So as soon as I think we see any capacity being available, should it get funded is 2019 and at this point we don't see a lot of appetite for that given the relative low adoption in terms of EUV and the production. So what we do see here, we have some recent examples of some plans as you know to do, cut mask, but the 6XX product line that we have there can service that and service those needs and it is going to be utilized to do that. So the answer remains the same, it's probably four to five years if we were to get funding we don't anticipate that happening any time soon and the talent that one would need to do that is not necessarily the talent that we’re viewing as part of a transition to this leaner structure as we go forward. And so from that standpoint it really has no bearing on actions that we are taking now.

Not given the specific customers in terms of how that's moving, but I think if you look at the reduction in CapEx there and the reduction in CapEx from TSMC, we had about $2 billion of CapEx come out of the market. So about $1 billion of that was WFE and at the intensity levels we described earlier represents probably somewhere around - somewhere between $100 million and $150 million of KLA-Tencor opportunity given our share in the intensities I mentioned. So, clearly those push-outs had an effect on our business as we look at the year. There is probably some opportunities for some upside out there, I think that's happened around 10-nanometer or strengthening in some of the memory markets but in recent terms however we see it today its hard to ignore that impact in terms of the - the impact on CapEx and the customer behavior we're seeing as a result of that.

Very helpful. Thank you.

Hi, this is Chelsea Jurman on behalf of Jim. Thanks for taking the question. It sounds like you are now expecting WFE to be flat or up slightly and that this is going to be determined by the second half. Relative to where you provided your initial guidance for 2015, where are you seeing the most upside, and where is there the biggest risk to the downside?

That's the way we are seeing it right now and as I said I think upside is related to foundry logic 10-nanometer and Volume-NAND. I think that on downside there, I think is all publicly related to how much end market demand we actually see start to come into play around 16 to 14 and what does that do to drive more capacity I would say - absent the broader sort of macro issues that are out there that's how we would see it.

Got it. And then in terms of growing in line with the market in 2015 or in line with the industry, would you say that your forecast for industry growth has come down since the beginning of the year? And how is your growth impacted by the changing CapEx cuts at not only Intel but other big customers?

Yes, I think we are in line with the rest of our peers around the views of the year and I think with the public announcements from two significant customers in our strongest space, or strongest segment that is certainly led us to moderate that view for the year.

Thank you very much. Maybe as a follow-up to Wes' question for you, Rick, in terms of the mask inspection for EUV, how do you look at it from a KLA perspective in terms of the risk/reward, the investments? Will you only do it if you're going to get some outside funding or is there something you can do if the customer demand is there to take on that project?

No, this is one where we need to work closely with the customers to make sure that A, the demand is there and the commitment is there because right now the uncertainty around the timing of high volume EUV makes this a very different kind of question in terms of the investment profile. Remember we build that tool and there is not a market for it, there is no other application for it. It can only be used for one thing which is to inspect EUV masks. And if you build advanced wafer inspection tool, it really only matters the people are making wafers and doesn’t really matter the technology they are making it with. So, for that reason we're coupled to our customers on this and talking closely with them about their needs and we'll develop in conjunction with them as we go forward. But to-date we have not seen compelling interest on their part to want to make that commitment.

Hi. Thanks for taking my question. Rick, similar to Tim's question, if I look at your PDC market share, it has been pretty stable and actually going up, but the PDC share as a percent of equipment spending WFE has been coming down from 8% to 9% to 7%. Can you talk about your opportunities in the non-semi-markets, the storage packing? Is there anything you can do, either organically or inorganically to grow there?

Sure. We certainly have, we participate in what’s going on in some of the back end and packaging and so on. And we have opportunities for growth there but let me just caveat it by saying the size of that opportunity relative to the rest of the company doesn’t provide a meaningful uplift to our overall. But we think it’s more important is associated with the intensity of process control and foundry and memory and a big part of that transition as we know is the increased memory spend. We think that that comes back into balance, in the future, we’re not exactly sure when and we think that once again provides our opportunity to go faster in the industry. We do see increased intensity as we go node to node, some of that is opportunity that will capture with our existing products and some of it is opportunity that we’re going to need new capability to capture and worth looking into. So we’re not really looking outside of our core to grow faster than the industry. We think we’ve got what we need inside, we just need to execute.

Yes, I mean I think the extra element in that is how we think about de-levering the - some of the debt that we brought on and we structured a component that debt with a term loan bank component that we have prepay ability to. So using 100% of the cash flow obviously we’ve got the ongoing dividend and that’s a different exercise in terms of how we think about the growth rate in that ongoing dividend relative to the growth rate in free cash flow of the company. And then the difference between the U.S. cash which is about 60% to 70% of the total less the ongoing dividend goes towards share repurchase and de-levering. So we’re committed to executing the share repurchase component of the recap announcement we made last fall and then beyond there I think my focus probably shifts more towards this beyond dilution more towards de-levering to my long-term leverage target at 2 to 2.5 times EBITDA.

Thank you very much. Just want to follow up on a comment you guys made earlier that 20, 16, 14 node is not ramping as fast as you would have thought. And 20, it was supposed to be slow and I remember 28, when you ramped first, it was a huge year for you. You outperformed by 20% in that year, and we haven't seen that at 20, 16 and 14. So do you have some thoughts on what is happening in the marketplace with this particular node? If you consider this as a one-node, 20, 16, 14, and compare it to 28, why so much difference in these two nodes?

Well I think you mean the end market demand at 20-nanometer wasn’t particularly strong beyond in couple of quarters and so customers have the ability to migrate some of that capacity, we’ve seen that in the few areas to 14 16 given the similarities with part of the process. So I think having lumped them together is how we think about them and I think it’s probably a combination of factors and market demand, competitive dynamics and so on that we’re different and stronger perhaps 28-nanometer than what we’ve seen so far at 20 and below. That can change and change quickly but at least so far that’s the pattern we’ve seen and it’s the pattern we’ve seen over the last three quarters. So it’s not necessarily something different in terms of couple of quarters. We think that a lot of that capacity begins to ship and then we will start to see how the rest play of it plays out here as we move through June and into the second half of the year.

And one more question on your commentary on first half similar to second half, can you talk a little bit about what do you see in terms of the distribution of spending in shipment terms between logic and memory in the first half over second half?

I don't know if I have that level of granularity, I know that that there just qualitatively fair amount of memory activity here in the June quarter that look at the data and then also some foundry shipments very strong quarter from Taiwan, you will see in some of the data in terms of bookings and I think that will turn quickly. So foundry pretty strong as well through June. I think for the year as I said earlier, I think if you look at total order mix and modeling that memory is probably in the low 40 percentile of the total. And I think our shipment profile would reflect that.

Thanks. Hi, Rick and Bren. Just another follow-up question on the gross margin. Does any of this foundry 28-nanometer fill-in spend that you talked about have a negative mix impact on KLA's gross margin now and maybe that reverses itself the second half of the year or is this 28-nanometer fill-in expense just not that meaningful?

Our margins across all of our segments are generally very consistent and segments and customers. So there isn’t really an impact if have one customer having versus another in the given quarter. Most of it’s driven - most of the variations frankly are in gross margins driven more around product mix than anything else right high end wafer inspection versus lower radical for example mash up versus fab, those dynamics tend to influence our gross margin much more so than anything related to customer mix or segment.

Hi, thanks for taking the question. My first question would be are you planning to invest more into e-Beam inspection and into packaging related to tools?

I’m sorry E-beam and packaging that was the question? Yes E-beam inspection and packaging. Okay. So separate, yes. What we have - we certainly we have interest in trying to provide a complete defect inspection solution and so there are certainly there are niches of that which are best served by E-beam and we participate in certainly E-beam review we have a product, we are proud of there, we have not been in the inspection market but we are certainly evaluating ways down there. But we also believe that customers very much want high productivity solutions and the capability which are part of what our Fusion offering is aimed at as providing the capability of linking both optical inspection with the ability to quickly review those defects. So we’re participating, we don’t have I don’t see a huge increase in our E-beam inspection investment overall, we are investing pretty heavily in E-beam in general and we might move between some of the segments there. As far as packaging, we do have some ongoing opportunity, we frankly don’t see that big of a market for process control and packaging, we do participate in that but I would not anticipate increasing our investment toward packaging. I think the front end is much more interesting for us in terms of the opportunities that are out there.

Okay. Thank you, Bren. That concludes our call for today. Thank you for all joining and we look forward to seeing you later on in the quarter.