KLA-Tencor (KLAC)

Q3 2011 Earnings Call

April 28, 2011 5:00 pm ET

Executives

Richard Wallace - Chief Executive Officer, President and Executive Director

Mark Dentinger - Chief Financial Officer and Executive Vice President

Ed Lockwood - Senior Director of IR

Analysts

James Covello - Goldman Sachs Group Inc.

Stephen Chin - UBS Investment Bank

Christopher Muse - Barclays Capital

Krish Sankar - BofA Merrill Lynch

Timothy Arcuri - Citigroup Inc

Satya Kumar - Crédit Suisse AG

Mahesh Sanganeria - RBC Capital Markets, LLC

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Presentation

Operator

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Hello, my name is Sean, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA-Tencor Third Quarter Fiscal Year 2011 Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Ed Lockwood, Senior Director, Investor Relations. Please go ahead, sir.

Ed Lockwood

Thank you, Sean. Good afternoon, everyone, and welcome to KLA-Tencor's Third Quarter Fiscal Year 2011 Earnings Conference Call. Joining me on our call today are Rick Wallace, our President and Chief Executive Officer; and Mark Dentinger, our Chief Financial Officer. We're here today to discuss third quarter results for the period ended March 31, 2011. 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.kla-tencor.com or call (408) 875-3600 to request a copy. A simulcast of this call will be accessible on demand following its completion on the Investors section of our website. There, you'll also find a calendar of future investor events, presentations and conferences, as well as links to KLA-Tencor's SEC filings, including our Annual Report on Form 10-K for the year ended June 30, 2010, 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 results. More information regarding factors that could cause these differences is contained in our filings we make with the SEC from time to time, including our fiscal year 2010 Form 10-K and current reports on Form 8-K. We assume no obligation and do not intend to update these forward-looking statements. However, you can be reassured that any updates we do provide will be broadly disseminated and available over the Web. And with that, I'll turn the call over to Rick.

Richard Wallace

Thanks, Ed. Thank you all for joining us on our call today. I'll focus my commentary on summary highlights of our March quarter results and provide guidance for June. Then I'll turn it over to Mark for a more detailed review of the financials, and we'll conclude with Q&A.

KLA-Tencor's March results features another quarter of high levels of demand, record quarterly revenue and earnings and strong cash flows. These results showcase KLA-Tencor's market and technology leadership and the dedication of our global workforce, driven by our culture of innovation and focus on the customer. They also demonstrate the strength of our business model and its profit and cash generation ability, as well as our continued commitment to delivering industry-leading financial performance. That performance enables us to return value to shareholders in the form of dividends and share repurchases at a level that sets the company apart from our technology peers.

Here are some highlights of the Q3 results. New bookings grew 18% sequentially to finish at $853 million, representing the second-highest quarterly bookings level in company history. On our January earnings call, we gave an initial range of bookings guidance for the March quarter to be flat to up 20%. Then in February, we updated that view by observing the bookings we're trending to the top of the range or above. The final bookings results came in just below our updated outlook due in part to order timing issues that emerged late in the quarter.

Third quarter revenue grew 9% compared with December, ending above the guidance range at a record $834 million. And we ended Q3 with over $1.4 billion in total backlog, positioning the company to continue to deliver revenue and profitability at historically high levels as we move ahead.

We also achieved a new high in quarterly non-GAAP net income of $225 million or $1.31 per diluted share in Q3. Underlying these record earnings were gross margins of 61.3% and record operating margins of 38.6%. Clearly, the value we are creating for our customers and in helping them solve their most complex yield challenges is being reflected in the strong adoption and record financial performance we're reporting today.

Cash flow from operations was at the healthy $244 million in Q3, and our balance sheet is strong ending the quarter with $1.8 billion in cash and investments. And consistent with our continued commitment to return value to shareholders, we repurchased approximately $58 million of our stock in Q3 in addition to paying our regularly quarterly dividend of $0.25 per share.

Turning now to some specifics on the current demand picture. Orders in March quarter demonstrated the continuing trend of high demand we're experiencing in the cycle. In fact, in the past 4 quarters, KLA-Tencor has booked over $3.3 billion of new orders for an average of about $830 million per quarter. This amounts to 14% growth over the previous 4-quarter company high for new orders set in the 2006 to 2007 timeframe. This growth is a result of our market leadership, strong adoption in the quarter, growth in services and the addition of new markets. The order book for March is another strong quarter from the foundries, with foundry bookings at 58% of total new orders. Foundry demand remained at a high level as increased technical complexity at the leading edge, intense competitive dynamics and rapid growth of new fabless designs are all driving very strong adoption of process control. Bookings from memory customers grew to 27% of the total in the March quarter demand accounting for 73% of memory orders in the quarter. And logic was 15% of bookings in March driven by requirements to support 22-nanometer production ramps this year and in 2012.

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