Ed Lockwood - Senior Director of IR Rick Wallace - President and CEO Mark Dentinger - EVP and CFO

Jenny Yun - JPMorgan Jim Covello - Goldman Sachs Brett Hodess - Merrill Lynch CJ Muse - Barclays Capital Raj Seth - Cohen & Company Atif Malik - Morgan Stanley Satya Kumar - Credit Suisse Steven Pelayo - HSBC Omar Zallan - UBS Gary Hsueh - Oppenheimer& Company Mahesh Sanganeria - RBC Capital Markets Peter Kim - Deutsche Bank

At this time, I'd like to welcome everyone to the KLA-Tencor Corporation's Second Quarter Fiscal Earnings Call. (Operator Instructions). And now, I'll turn the call over to Mr. Ed Lockwood. Sir, you may begin your conference.

Thank you, operator. Good afternoon and welcome to KLA-Tencor's second quarter fiscal year 2009 earnings conference call. I'm Ed Lockwood with KLA-Tencor Investor Relations. Joining me on our call today are Rick Wallace, our President and Chief Executive Officer; and Mark Dentinger, our Chief Financial officer. We are here today to discuss second quarter results for the period ended December 31, 2008. 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 408-875-3600 to request a copy. Rick will lead off today's call with updates on the current market environment and the company's performance in the December quarter and provide guidance for the March quarter. Afterwards, Mark Dentinger will review the preliminary financial results for the quarter, and then we'll open the call for questions. A simulcast of this call will be accessible on-demand following its completion on the Investor section of our website. On the website, you will also find a calendar of future Investor events, presentations and Investor 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, 2008 and our subsequently filed 10-Q reports. In those filings, you will 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. 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. And although we make no obligation to update these forward-looking statements, you could be assured that any updates we do provide will be broadly disseminated and available over the web. With that, I'll turn the call over to Rick.

Thanks, Ed. Good afternoon, everyone. Our second quarter fiscal 2009 results reflected the compounding affect that the continued macroeconomic recession is having on an already weak industry environment for semiconductor equipment. In Q2, KLA-Tencor faced sharp reductions in capital spending ordered push-outs and factory shutdowns really across all our end markets and geographies. During the quarter, our customers accelerated plans to cut costs and conserve cash. They were dramatically scaling back their investment plans and reducing factory utilization throughout the period. This resulted in unprecedented low level of demand by the quarter end. As a result, we experienced sharper than anticipated declines in our orders, our revenue and our profitability in the period. Also, we see little sign of any meaningful recovery in the near term, and we're guarded against the possibility the business could actually decline from these already low levels. In light of this, we have an ongoing review of our short term outlook. We've already taken aggressive measures to reduce our operating expense and to drive structural efficiencies across our work, and now we're in the process of evaluating additional actions to adjust our cost structure in order to further reduce our breakeven revenue levels and to maximize our cash in this extremely challenging business condition. There is no doubt that we are experiencing extraordinary times. However, while we can't change the economic climate in which we are operating, we are well equipped because of our market leadership, the resources we have and our experience required to manage through this period and to continue to execute on our long-term strategy. So, not withstanding our increased emphasis on reducing costs, we do continue to invest in our business, our technology and our customers to strengthen our competitive position and lay the foundation for future growth. We're confident that we can manage through this downturn and emerge an even stronger company than we ever did. Let me talk a little bit about the December quarter end market environment. On January 12, we updated our guidance to reflect the steep decline in the industry activities that we were experiencing in the month of December. Our final results for the December quarter were in line with the revised outlook. New bookings were $243 million, down approximately 25% from September, and Q2 bookings reflected greater than expected drop in process control demand in the period, as our customers effectively halted technology development activity in the face of their extraordinary challenging market conditions. This is a unique condition and I think this reflects the depth and severity of this downturn. For years and throughout several cycles, customers have told us that even under the most severe end market conditions, they would continue to invest in technology development as a means of preserving near future competitive advantage. But in this period customer activity was an exception to that rule. In fact, excluding logic, which did continue to invest, foundry and memory were essentially idle during the quarter. As we manage the current downturn and position the company for the future, we will continue to maintain strict cost disciplines as we advance on our strategic objectives. We're going to focus on customers. We are going to driver a high level of investment in our market leadership and optimize the growth opportunities that have been availed to us in recent acquisitions. We believe this will play a critical role in our long-term success. I'll shift my focus to talk about the year ahead and discuss where we're placing our emphasis as we execute on our strategic objectives in this environment. First, our focus on our customer remains our top priority. We are maintaining a high level of investment in R&D as we're sure that's the critical success for K-T. Our goal is to maintain a leading position versus our nearest rival in every market that we serve, and today, we have a leading position in all but 2 of the 24 markets that we participate in. We're going to continue to maintain our leadership in the environment in spite of the fact that our customers are looking for ways to conserve their capital. In fact, we believe our competitive position will actually strengthen in this downturn as customers recognize that we're committed to maintaining a high level of investment in innovation throughout the cycle, while others are cutting back to preserve their viability. So, our continued emphasis on innovation and this high level of investment gives our customers assurance that they're going to get the most value from their investments today and in the future. Our second objective is growth. Here, our long-term strategy is to consistently grow faster than the industry. Obviously, industry growth was negative in 2008 and is forecasted to be negative again in 2009. So we've adjusted our focus to concentrate on cultivating and really strengthening our position in the new markets that we gain, both organically and through acquisitions. We're going to continue to innovate and drive differentiation and gain efficiencies in our new growth platforms. So we're in a position to grow in new segments as we come out of this downturn. In terms of our operational excellence, which is our third objective, our focus here is to drive structural improvements and achieve efficiencies across our businesses, with the particular emphasis in the short term of managing our cost structure to reduce our breakeven revenue level and to maximize cash. As we announced in November, we're executing plans to reduce out operating expenses over the next couple of quarters, in line with this objective. We're currently in the process of evaluating further steps to adapt to the declining macroeconomic conditions that we're seeing. So with the ongoing globalization efforts and our focus on streamlining our organization, we're positioning ourselves to be even stronger when business stabilizes and growth resumes. And our fourth objective is talent. Here, our focus is on developing and motivating the world class talent that's part of our company. Our focus in this current environment is to really optimize and engage and motivate those employees to help power us through these tough times. We've weathered many downturns before and we're prepared to navigate through this one. Clearly, the market is uncertain, but we're focused on the right markets with the leading edge technology. We will have unparalleled solutions and world-class talent who are executing on our strategy. From a position of strength, I think we can continue to build our company as we go through this period. And it does present actually unique opportunities to capitalize on our competitive advantage as we pull further away in terms of technology leadership, market leadership and leverage our financial strength to position us for the future. In terms of the March guidance, given the variability in our customers forecast today and the results of the implications for our financial results, we're adjusting our typical guidance practice to widen the range for our quarterly estimates. New orders in March are expected to be flat compared with December, plus or minus 20%. Revenues are expected to be between $280 million and $320 million, with a non-GAAP loss per share in the range of a loss of $0.20 to a loss of $0.35 per share. With that, I'll turn the call over to Mark.

Thanks, Rick. I'll remind everyone that we present our income statement in two formats, one under Generally Accepted Accounting Principles, or GAAP, and the other in a non-GAAP format, which excludes amortization and write-downs, goodwill and intangible assets associated with acquisitions, expenses associated with our stock options investigation and related litigation, and any other costs and expenses, which we do not expect to be recurring such as restructuring charges. Our balance sheet and cash flow statements are presented only in a GAAP format. Most of my prepared remarks will reference our non-GAAP income statements. For our reference to GAAP numbers, I'll make the distinction. A full reconciliation of our GAAP to non-GAAP income statement is attached to our press release and available at out our corporate website kla-tencor.com. Revenue for Q2 was $397 million, slightly below the guidance range we provided in October of $410 million to $430 million, and the GAAP loss per share was $2.57. Non-GAAP loss per share was $0.12, below the low end of our guidance at breakeven, plus or minus $0.02. Larger than anticipated non-GAAP loss is driven by the following factors; lower than anticipated total revenues, net of standard gross margin impact, about $0.05 per share after taxes. Lower than expected gross margins $0.07 a share after taxes. Lower than expected operating expenses, $0.02, a benefit after taxes, and higher than expected charges for other income and expense, or OIE, $0.02 a share after taxes. A summary of the differences between Q2 GAAP and non-GAAP numbers are; acquisition related charges of $457 million or $2.28 per share after taxes, which includes a $437 million impairment write-down as a carrying cost of our acquired intangibles and goodwill, stock option restatement related charges of $9 million, $0.05 per share after taxes, and restructuring and severance charges of $24 million or $0.12 per share after taxes. In summary, Q2 was a difficult quarter. Deterioration of business conditions that we experienced in September continued throughout Q2 and worsened late in December. In our October call, we indicated that we would be taking steps beginning in Q2 to reduce our operating expenses to the $165 million to $170 million per quarter level by June of this year. In addition to the reduction steps we began in the December quarter, based on current conditions it is apparent that we will need to further reduce costs, and we plan to take additional cost reduction actions later this quarter. Despite these difficult circumstances, our market leading position in most of our products was consistent with the last several quarters and we remain focused on developing our next-generation tool. New orders for Q2 were $243 million, below our guided range of plus or minus 10% from last quarter's new bookings of $325 million. In addition, approximately $28 million of customer initiated delays pushed out of the December quarter and resulted in net new orders of $215 million. We expect the pushed out orders to reenter our backlog when the industry begins to recover. We ended the quarter with $628 million in total systems backlog after adjusting for customer initiated delays and foreign exchange impact. The backlog at December 31, 2008 includes $177 million of revenue backlog for products that have shipped and been invoiced, but have not signed off by customers and $451 million in orders that have not yet shipped. We expect the majority of the unshipped backlog to ship over the next six to nine months. The approximate regional distribution of new systems orders and the quarter-to-quarter change in regional distribution was as follows; US with 64% of new orders in Q2, up from 45% in December quarter, Europe with 7%, up from 4% in Q1 of '09, Japan was 22%, up from 21% last quarter, Korea had no orders this quarter versus 13% last quarter, Taiwan was 3% versus 6% last quarter, and the rest of Asia was 4%, down from 11% in Q1. The approximate Q2 distribution of new systems and services orders by market as well as the quarter-to-quarter change in market distribution was as follows; wafer inspection was 22%, down from 30% last quarter, reticle inspection was 8%, down from 10% last quarter, metrology was 15% up from 14% in prior quarters, and solar, storage, high brightness LED and other non-semi was approximately 7%, down from 9% last quarter. Service was 48% of new orders in Q2, up from 37% last quarter. 45-nanometer and below development and pilot activity was roughly 70% of the semiconductor systems orders received in the quarter. This level was down from 85% in our September quarter. As we move forward, visibility into a meaningful turn into business is very low and we do not anticipate significant improvements in new orders in Q3. For planning purposes, we are assuming new orders in Q3 at flat plus or minus versus Q2. Shipments in Q2 were $327 million, down from $420 million in the September quarter. Looking at our income statement, revenue for the quarter was $397 million. It was down 24% from last quarter and down 38% from Q2 of last year. Our services business, which has been much steadier and more resilient than our systems business, also declined $4 million or 3% from the prior quarter, as several customers suspended service contracts and idle tools in response to the downturn. Our current expectations for total revenue in Q3 is a range of $280 million to $320 million. Non-GAAP gross margin was 46%, down 9% from the September quarter and 4 points below what we internally modeled at the beginning of Q2. Lower than expected gross margin was largely attributable to $20 million in net additional excess inventory reserves required as a result of lowering our calendar 2009 manufacturing plans. Operating expenses were $199 million, down $10 million from the September quarter. R&D was $89 million in Q2, down $15 million from the September quarter, and selling, general and administrative expenses, or SG&A, was $110 million, a $5 million increase from last quarter. Quarter-over-quarter, operating expense changes were due to lower average headcount in all areas of the company, including both R&D and SG&A. In Q2, we reduced our accruals for non-executive bonuses by $12 million, which reduced both categories of operating spending. The headcount and bonus reductions in the SG&A line were more than offset by a $24 million increase in our allowance for doubtful accounts during the quarter, reflecting collection concerns about certain customers who are experiencing financial difficulty. In Q3, assuming there are no significant additions required to our bad debt reserves, we anticipate that operating expenses will decrease by approximately $30 million as the full quarter effect from the Q2 cost cutting measures is realized. Other income and expense, or OIE, was a net $12 million expense in Q2, largely as a result of lower yields on our cash and marketable securities portfolio, and a $4 million write-down of investments in our venture portfolio. OIE was a $4 million gain in fiscal first quarter, in part due to a $9 million one-time recovery of bad debt. The non-GAAP tax rate benefit is 29% in Q2 versus 37% charged last quarter. Although, our Q2 rate of 29% is very close to our long-term modeling rate of 30%, the rate benefit in Q2 was comprised of our expected benefits of fiscal 2009 of about 40%, offset by quarter-specific charges of about $3 million. Our non-GAAP operating loss was $20 million or $0.12 per share in Q2. These numbers include stock-based compensation expenses of $22 million and the weighted share is used to compute the loss per share were $169 million. At the revenue range I had previously mentioned, we would expect a Q3 non-GAAP loss of $0.20 to $0.35 per share, assuming a tax benefit of 30% and further assuming that there are no meaningful charges required for additional customer collection problems or unanticipated charges for excess inventory. As I previously mentioned, we also took a $437 million GAAP impairment charge in Q2 to write down carrying value of the unamortized portion of acquired intangibles and goodwill. The goodwill component of this charge was $272 million and was attributable to acquisitions in the metrology space. The other intangibles impairment of $163 million was largely attributable to lower near term expectations for businesses we recently acquired. Turning to the balance sheet, cash and investments, including long-term marketable securities, ended the quarter at just over $1.2 billion, a decrease of $84 million quarter-to-quarter. Cash used in operations, which include the semiannual interest payment of $26 million was $36 million in Q2 versus $81 million in operating cash generated during Q1. We also used $49 million of cash to repurchase shares early in Q2, $25 million to pay our dividend and we generated $21 million from stock sales to our employees. Net accounts receivable ended the quarter at $332 million, down $38 million from the prior quarter end. DSOs were 75 days at December 31 versus 63 days at September 30. As previously noted, we increased our allowance for doubtful accounts by $24 million during Q2 to reflect collection concerns and the allowance at December 31, 2008 stands at $36 million. Inventory decreased by $31 million from last quarter and ended the quarter at $473 million. Large portion of the decrease in the balance resulted from a $20 million net charge for excess material, was also principally responsible for the lower than expected gross margins in Q2. Net capital expenditures were $7 million in Q2 versus $10 million in Q1. The weighted average shares in Q2 were 169 million versus 174 million shares in Q1. The declining weighted average share was largely the result of using the diluted method in Q1 when we had positive earnings versus the basic method in Q2 when we incurred a loss. For the March quarter, we are expecting another loss. So our weighted shares are expected to be about 171 million shares. No stock repurchases are anticipated in this quarter. Total headcount ended the quarter at 5,894, a decrease of 412 from September 30. The decrease in Q2 largely occurred following a reduction in force action we took in mid November, and we expect our headcount will continue to decline during Q3 as we adjust the company to reflect current business levels. Finally, our visibility into demand for semiconductor-based products continues to be limited. At this point, we do not expect any meaningful capacity related spending for at least the first half of calendar 2009. KLA-Tencor's long-term fundamentals are compelling and we are confident on our new product pipeline, but we are also aware of current business conditions. In our October call, we announced plans to reduce our quarterly operating expenses to $165 million to $170 million range by the end of June of '09, and doing so will allow us to breakeven between $350 million and $400 million in quarterly revenue. We took significant steps during Q2, but in light of the continuing weakness in the industry and uncertainties in the macro economy, we now expect to take additional actions in Q3 to Q4 to further reduce operating expenses to the $140 million to $145 million level by the second half of calendar 2009. These expense levels should allow us to breakeven at the operating cash flow line at total revenue levels of $300 million to $325 million per quarter, assuming there are no additional customer collectability issues and manufacturing plants stabilize. In summary, our guidance for Q3 is: new orders are expected to be flat, plus or minus 20% versus Q2. Total revenue between $280 million and $320 million, non-GAAP loss per share, which includes stock-based compensation, but excludes one-time charges in amortization, will be a loss of $0.20 to $0.35 per share assuming a tax benefit of 30% pre-tax loss. This concludes our prepared remarks on the quarter. I will now turn the call back over to Ed to begin the Q&A.

Okay. Thank you, Mark. At this point, we'd like to open the call for questions. And we once again request you limit yourself to one question given the limited time we have today. Feel free to re-queue for your follow-up question, and we'll do our best to get everyone in today's call. So operator we're ready for our first question.

Your first question comes from the line of Jay Deahna with JPMorgan. Jenny Yun - JPMorgan: Hi. This is [Jenny Yun] for Jay. LAM yesterday said they are in a midst of a Category 5 hurricane and it's going to last six to eight quarters and WFE will be down 50%. Do you feel the same with respect to your business, and if you can explain why, that would be great.

Hi, Jenny, this is Rick. I'm sorry, down 50%, was that the number? Jenny Yun - JPMorgan: Yeah, WFE will be down 50% in '09.

I think that as we look out on the year, we don't make a business of forecasting the business over the long-term. I think it's very difficult the do that. So instead we try to model what do we think reasonable scenarios are and how do we react. And we want to have some lead time in our models because the actions that we take, take a little while to implement. So I think right now there's no question as we've seen a pretty dramatic downdraft in the business, and really a lot of customers are just shutting off. So when we look at '08, '08 was a very difficult year. We did hold up better than the rest of our major peers. We think the same thing will happen in '09. But I do think it's reasonable to assume you can model anywhere between a down 35 to down 50 for CapEx in '09, but it's still early to tell what's going to actually happen in terms of later in the year. We have trouble predicting what March is going to look like. So we're trying to size the company appropriately and that's why we talked about the 300 to 325 run rate and go from there. But I think it's awful early to forecast that far out. Jenny Yun - JPMorgan: You performed better than your peers because you are in process control or because of market share gains or why would that be?

We look across a number of metrics, booking, shipping revenue, operating profit; I think it's a combination of factors, but stemming from the necessary investment our customers find in the segments that we serve, inspection and metrology. We also believe that our market position enables us to earn the significant investment it requires our customers to make to buy our tools, but they see value in that. So I think it's a function of the segments that we're in, and I think our business model also enables us to continue to perform even in very difficult periods like this relative basis better than the rest of our peers. Jenny Yun - JPMorgan: Okay. Thank you.

Okay

The next question comes from Jim Covello with Goldman Sachs. Your line is open. Jim Covello - Goldman Sachs: Great. Thank you very much. You guys have talked about some logic activity in terms of Q4 orders, but really foundries and memory being idle. Relative to the flat guidance in Q1, is that kind of what you expect from an order perspective in Q1, and then potentially looking a little bit further out, is that what you see for the foreseeable future? Thank you.

Sure, Jim. We expect a little bit of memory spending. I wouldn't say a lot. Nothing is a lot in these ranges, but certainly you heard Korea was zero for last quarter. So we see some in memory and a little bit in foundry, but still the dominant part of our business, the largest share would be in the logic. The way we're currently modeling, I have to put a caveat in that which is there's been a lot of variability, so it's very hard for us at this time to have much certainty around these forecasts. Jim Covello - Goldman Sachs: Thank you so much.

Thanks.

Your next question comes from the line of Timothy Arcuri with Citi. Your line is open.

Hi, this is [Junaid] calling in for Tim. Hi, Rick. Have you looked at maintenance CapEx for the industry? It would be interesting to see what your view on that is.

Sure. Yeah, I understand the model. I think it's an interesting thesis, and I agree that there is some level of investment our customers continue to make just to keep their relevancy of the investment fleet that they have. In our case, we do see products being upgraded. And so, I think the idea that we're close to maintenance is an interesting way to view it. However, it's not exactly the case for our kind of equipment. We do see investment going on and upgrading the existing fleet, but since we're not so closely tied to production, we're more tied to the development of new technologies and ramping. It doesn't apply as much for KLA-Tencor. But I think the notion that the CapEx is bottoming and we're in the down 35% to 50% range for the calendar year, if you attribute that to the maintenance concept, I think that's a reasonable thing to do.

Have you looked at a number which is down 50%?

As I said earlier, we're modeling a down 35% to down 50% because we have such little visibility into the later parts of this year. I think we have a reasonable understanding of what March could look like, but even then we've put pretty wide numbers around it. And then, we believe a slight improvement in the overall environment in the June quarter. So much of this depends on the macroeconomic factors as we know and also on the credit and the availability of some our customers to get access to funds, so I think that those are factors that make it very hard to call. That's why we have a fairly large range for internal modeling purposes.

Okay. Thank you.

Okay. Thank you.

Your next question comes from the line of Brett Hodess with Merrill Lynch. Your line is open. Brett Hodess - Merrill Lynch: Good afternoon. Rick, I'm wondering in this kind of environment when you're looking at your sales, technology buys mostly in the logic, what parts of your product portfolio are doing better? I mean, nothing is doing great, but what's doing better than others? Are you seeing a change in the competitive environment in this kind of weak environment or is there just not enough business to judge that? I think I missed it if you gave it, but usually you give the breakdown by product segment orders?

Sure. Yes, Brett. First of all, we give it. I think Mark could pull that up exactly.

Yes. Brett, let me give it to you real quickly, and also let me make one correction before I turn it back to Rick. In my prepared remarks, I think I said the revenue for Q2 was down 24%, and that was incorrect. It was actually down 26%. So, if you were listening, I apologize for that. Let me just say what we disclosed in my prepared remarks is that wafer inspection was 22% this quarter, which is down from 30% last quarter. Reticle inspection was 8% this quarter. That was down from 10% last quarter. Metrology was up a little bit, 15% this quarter versus 14% last quarter. The storage solar high brightness LED and the non-semi stuff was down approximately 7% this quarter. That was relative to 9% last quarter. And service was up considerably this quarter as a percentage of the whole, it's 48% in Q2 versus 37% in Q1. Brett Hodess - Merrill Lynch: Thanks.

Okay. Brett, on you other question, technology buys, unlike in the past where in this part of the cycle we would have seen people buying in anticipation of ramping our slow ramps, this is almost pure technology buy. So the products that tend to sale more in that kind of environment are the ones that are used for process characterization and development and almost nothing for pilot production monitoring. So that means the high-end brightfield wafer inspection tools would be an example of the kind of product we'd be selling in this environment. So, we don't see much in the way of overall business capacity, but certainly tends to be on the high end. In terms of the competitive front, there isn't a lot of data to see market share, but the indications are we've actually strengthened our position, and I believe that is because our competitors are dealing with viability issues and we're continuing to invest pretty heavily in the R&D. One of the upsides, maybe, is we've made remarkable progress in our product roadmaps. Unfortunately that's because we're not being bothered by field issues because where few customers are running at very high utilization. So it does give our engineering guys a chance to focus, but we've made really good progress on the product roadmap in the last quarter Brett Hodess - Merrill Lynch: Thank you. And then just one last quickie, we've heard from some companies that they are having to extend terms and things like that, are you seeing a big change in what you're needing to do to secure some of the orders?

Yeah, Brett. This is Mark. The answer is, yeah, that does come and entered into the discussion. We deal with it on a case-by-case basis. But yeah, the customer's financial issues are being passed along to us and it's a reality of doing business in this environment.

On top of that, we're being careful about how we do that. So, that's something that we do look at, as Mark said, case-by-case. Brett Hodess - Merrill Lynch: Okay. Thank you.

Thanks, Brett.

Your next question comes from the line of CJ Muse from Barclays Capital. Your line is open. CJ Muse - Barclays Capital: Good afternoon. Thank you for taking my question. I guess with Vistec coming in, I guess, starting in Q4, and ICOS really starting to ramp in Q3, how do you think about your non-semi equivalent business growth or lack of growth rate in 2009 calendar year relative to calendar '08? How should we think about that contribution?

It's a great question, CJ. I think right now there are different segments that we're seeing in that. The MIE for Vistec actually is pretty tied to the rest of our business. I would say that's not really a business that's outside our core there, the reticle business, and that business seems to be doing all right relatively speaking. The other one, ICOS, and we have seen pretty severe slowdown in the backend. We've also seen a recent slowdown in the solar business. So I would say that the expectation for the growth rate we have for those businesses, we're not seeing it right now and I don't see anything in the near term that leads us to believe that there will be significant growth on that side of the business. The one exception is the high brightness LED stuff seems to going along, and so there's some business there for us. Although it's not much of a factor, it looks pretty consistent with the rest of KT. CJ Muse - Barclays Capital: Okay. And then, in terms of the order guide that $100 million range, I know we're bouncing along the bottom here, but could you give a little specificity. Is there one or two orders, is that primarily Korea, how should we think about that?

It's such a big number as you gathered, and we debated on whether we should guide at all because it is such a big number. It's really a number of factors. Based on what we saw on the December quarter, I think our historical ability to predict who comes and who goes is just such that it's really hard to say because people that we counted on the past have always invested and were always there no matter what the environment was for the last 10 years. They backed out at the end of last quarter. Unfortunately, it's across the board because, remember, service is a good part of our business, so you're really talking very broad range on the systems business. CJ Muse - Barclays Capital: Okay. If I can just sneak one last one, the tax rate of 30% for fiscal '09 and fiscal '10?

Yes, good question. Actually, our fiscal '09 I think that the rate is likely to be a little bit higher than that, just because there is some unique things happening this year. In fact, if you broke down my comments on the Q2 tax rate, it was actually, spare one-time items, we probably would have had a tax benefit closer to 40%. So my suspicion is we're going to be a little bit better than 30% for the rest of fiscal '09. But I think when we turn the corner and go into fiscal '10, the best guess we have is our long-term modeling assumption, which we use for all of our internal planning of 30% is still where the rate will vacillate around. CJ Muse - Barclays Capital: Great. Thank you, guys.

Your next question comes from the line of Raj Seth with Cohen & Company. Raj Seth - Cohen & Company: Thanks. Rick, you may have touched on it before, but I missed it. Can you talk about how you expect service in this environment to trend across relative to the equipment forecast you gave?

Sure, Raj. I think what we're seeing is pressure in the service business for sure, and we did see service come down last quarter due to that pressure. What's interesting now though is when we talk to our customers, what we're finding is they're actually pretty heavily utilizing the tools that they have. So I think for the process equipment guys, there's a cost of consumables and it's directly tied to wafer processing. So they're going to, I think, suffer more greatly than we will on our service business. What we've seen is customers actually increase sampling rates and keep the tools utilized. I was talking to a team yesterday, they were talking to customer and they said, with your excess capacity, and the customer says, we don't have any excess capacity, we're using it all. So, as a result of that, I think our service business will hold up better than our peers, but there is pressure on it. And of course, our challenge is to make sure we continue to deliver value to our customers in that. So we're working very hard on it. But we don't have the consumables part of that, and I think that's part of what helps us in this. Raj Seth - Cohen & Company: Sure. So wafer starts, let's say, are down, I don't know, 35% and other service businesses are down proportional to that, is half of that rate realistic for you?

I think it is and maybe even better. I think the reason better is because a lot of the equipment that we have under contract is being used for some of the development work. So I think that could help us, but there is definitely pressure on it for sure and customers are looking to cut their operating expense as well. Raj Seth - Cohen & Company: Great. Thanks.

Thanks, Raj.

Your next question comes from the line of Atif Malik with Morgan Stanley. Your line is open. Atif Malik - Morgan Stanley: Hi. Thanks for taking my question. Rick, you mentioned clearly you're going to come out stronger competitively through this downturn. If I look at the PDC market, let's say, you have 60% market share, 10% of Applied and 10% of Hitachi and the remaining 20% is quite fragmented. Assuming all those guys go out of business in this downturn, then what percentage of the 20% can you capture given your products and positioning?

Yeah, that's a great question, Atif. I think it's two things. One, by stronger I mean better products. We keep investing. We've got some very exciting products in the pipeline. So I think it could be two things. One, we could create more value, which means not necessarily share gain per se, but more pricing power. I think that's an important attribute. And the other thing is I do think some of the smaller guys are not going to make it through this cycle. So, from that standpoint, there could be some share gain involved in that. We're not modeling any. I think that our general belief is we focus on maintaining our share. We kind of like our share where it is, but we think that we can continue to create more value and that will help protect and build on gross margins in the recovery. Atif Malik - Morgan Stanley: Right. But have you actually had discussions with customers or have they come to you with the concerns that the smaller guys won't be able to and that they don't want to rely on the smaller guys this cycle?

Yes. Actually we have seen some of that. I think that there is some concern from our customers about the ability of some of the smaller players to continue to invest. On the other hand, our customers still have dual supplier policies and I don't see them changing that behavior. So I think it's a combination there. For us, the best thing we can do is keep creating products that our customers need, and I think we'll be able to do that by virtue of our balance sheet and our business position. Atif Malik - Morgan Stanley: Okay. And one quick one, shipment guidance for the March quarter, what was the number?

Yeah. We actually have suspended giving shipment guidance on a quarterly basis. We did that last quarter. So we are disclosing shipments, but not shipment guidance. Atif Malik - Morgan Stanley: Okay. Thanks.

Your next question comes from Satya Kumar with Credit Suisse. Satya Kumar - Credit Suisse: Thanks for taking my question. I jumped on the call a little bit later, Rick. I was just wondering if you had any comments on the variability of the bookings guidance for March. Is there any large projects at all that might be swinging things around or is there a bunch of little orders that could move the numbers from the low end to the high end. What would cause that?

The variability in the guidance is we're at such low numbers that if you talk about one of our larger tools, it can swing a very large percentage. And so, it's not so much that there are large orders. For us, many single sales constitute a larger percentage than ever before at these levels. What I said earlier is we debated whether or not to even give the guidance at all, but figured that with a larger range we could kind of talk about the midpoint of where we are pointing. But we saw so much strange behavior last quarter in terms of our customers that we felt that it was necessary to widen the range. Satya Kumar - Credit Suisse: Understood. If I look at deferred revenue balance, I missed that number, what was it at the end of December and what do you expect the drawdown will be in March?

Let me look it up for you real quick. There are two components. The deferred revenue number at the end of December was about $71 million and the deferred systems profit number was $83 million and how you look at it. The deferred revenue number from the September quarter was up a little bit, about $10 million, and the deferred profit number was essentially flat. Satya Kumar - Credit Suisse: Sorry, did you say $177 million or $77 million?

$77 million. Satya Kumar - Credit Suisse: Okay. And what do you expect the drawdown on that will be in March?

We're not forecasting what the specific drawdown would be on the deferred revenue in March. Satya Kumar - Credit Suisse: Would there be a drawdown at all? Satya Kumar - Credit Suisse: I suppose it could go either way. Satya Kumar - Credit Suisse: Understood. On cost reductions you mentioned that you are going to take more expense reductions. How should we think about the magnitude of that as we look into the second half?

Actually the cost reduction actions that we're looking at that we would start action on this quarter are designed to drive us into an operating cost structure of $140 million to $145 million a quarter, probably realizable in the second half of this year at some point. Satya Kumar - Credit Suisse: Got it. Thank you.

Your next question comes from the line of Steven Pelayo with HSBC. Steven Pelayo - HSBC: Great. First, a clarification your guidance for bookings is flattish. Is that against the 243 gross or the 250 net in the December quarter? And the second question is, your revenue guidance is relatively in line with consensus, but EPS range is quite a bit weaker there. The two areas that we haven't talked about is really the gross margin line or the other income line. Are there anything special going on there that we should be thinking about in the March quarter?

Yeah. On the other income line that should stabilize, again, assuming that we don't have any additional write-downs required in the venture portfolio and interest rates are reasonably stable as we move through the quarter. They are so low right now, the passive yield on our investment portfolio is so low right now, it's hard to imagine they're going much further. On the venture portfolio, there's always some risk it could go down, but those are the two things that drove it a little bit lower. On the operating side, it's strictly a question of how soon we can action some of the decisions we need to make about the further cost reduction actions on operating expenses. But as I indicated, we're going to start them this quarter and try to drive forward. The gross margin line is the tricky one. With the guidance as wide as it is and we've contemplated and taken in all the considerations that Rick previously mentioned in establishing the guidance, the real question boils down to product mix versus service mix and whether or not we're required to drawdown build plans any further than what we have already drawn them down for the rest of calendar '09. We are being cautious about the gross margin percentage that we're implicitly guiding to, but it's a wide range of variability and that does account for some of the reason why you would see not as robust a profit as you might expect at those revenue levels. Steven Pelayo - HSBC: Once again, the bookings guidance, is that against gross number comparison?

Yes. Steven Pelayo - HSBC: I'm sorry, yes.

Yes, it is against gross. Steven Pelayo - HSBC: And then, final question for me is, I think at the end of each calendar year you tend to get some service contract renewals. So is your expectation that service bookings are down in March and effectively system bookings are up?

Not necessarily. We are keeping a tight eye. We did get a drop off in, if you will, contract renewals or contract suspensions as we ended the December quarter. But it is possible as we move forward into the third quarter and the fourth quarter that we can make some of that backup with what we call the billable work, where people call up and we get an increased chargeability. So we're not necessarily signaling one way or another, what that might have to do or how that may respond in the revenue line. Steven Pelayo - HSBC: Thank you.

Your next line is from Steven Chen with UBS. Omar Zallan - UBS: Hello. This is [Omar Zallan] calling in for Steven Chen. My question is, your services sales have been relatively stable, do you expect them to continue with that relative strength going forward? And then I have a follow-up.

It's not clear. We would expect it to be stabler, as Rick indicated, than some industry, than some other companies in our peer compares, just by virtue of the nature of the business. But it's not clear whether or not it will strengthen or weaken in this environment. We're sort of prepared for a flattish type of outcome as we are looking at it right now, and clearly, hoping for better than that. But as it is right now, it's a little difficult to tell. It was fairly strong into early Q2, but it did drop off late in Q2. So as it is right now, it's not clear exactly where it's going and it was down slightly for the whole quarter. Again, we are thinking about that as flattish right now and looking for further signals. It's not likely to rapidly drop off the face of the earth and it's also not likely to skyrocket in the current environment. Omar Zallan - UBS: Okay. Thanks for that. And just as a quick follow-up, since sales to Korea were zero, do you get the sense that your Korean customers are waiting for a decision on the Taiwanese government bailout before signing orders, creating some pent-up demand?

I hadn't thought that aspect through. I think what we saw there was just reluctance to spend capital in an environment with pretty severe changes to their end market. So I think a lot of our customers are just trying to get their footing right now and figure out what does the world look like before they spend. We had one major customer in Korea obviously go through reorganization and that probably contributed to a slowing decision making process. So we will see. Omar Zallan - UBS: All right. Thank you.

Your next question comes from the line of Gary Hsueh with Oppenheimer & Company. Gary Hsueh - Oppenheimer& Company: Thank you for taking my question. I might have missed this, but could you give the order breakout by memory, foundry and logic?

Sure. Mark, you got that?

Yes. What we did was we broke it down and actually didn't disclose that. We may have the data compiled somewhere. Let me see if I can look it up for you. Gary Hsueh - Oppenheimer& Company: Okay. Let me move on. I am just trying to parse the difference in your guidance with the difference perhaps on Lam or Varian. You guys are guiding to a much more modest decline in revenue. Certainly, the order outlook looks like it's a lot more benign than what the industry feels like. Do you feel that has more to do with your inspection metrology market or do you think it has more to do with your specific customer exposure, primarily to one single logic iDM customer here near term in December and March?

All right, Gary. I'll take the first part of your question also. Memory was about 3% last quarter in December, logic was 90% and foundry was about 5%, and didn't quite average to 100, 92, 3 and 5, but about 25% of our business was non-semi and the service business is holding up better than our peers. So I think back to your question of why we think things are, why we're projecting that will hold up better, I think it's a combination of a couple of factors. One, we still do see technology buys happening although at a low level for technology development, and I think the people that are doing pilot production or coming on production aren't going to see any of that business and that tends to be pretty heavily inspection metrology related. I'd also say that the service business holds up better for us in this kind of environment because of the nature of the business. We are not selling consumables. We are not as tied directly to manufacturing volumes. And I think the third thing is we do have some business outside of semi, which are doing okay right now. I wouldn't say that they are doing great, but we said the non-semi was going to be a reasonable part of our business and that continues to go. Those are the factors that allow us to view the world that way, but our pure-semi systems business we do see that would be more pronounced down, but we have other businesses to support us. Gary Hsueh - Oppenheimer& Company: Okay. And I guess my last question is just to kind of test how conservative your guidance is. Are you kind of automatically assuming here a certain percentage push out in terms of shipments and revenue out of your currently existing forecast for the March quarter? Is there a sufficient amount of conservatism now build into your March quarter guidance that pretty much preclude a negative pre-announcement here at the end of Q1?

Obviously, that's why we would pre-announce. We gave a range. We widened it because of the volatility and the lack of visibility in the industry. And so, this we thought was a reasonable look given all the variations. But I would say in this market almost anything goes, and if you saw what happened at the end of December, I think it surprised a lot of people. And so, obviously, there are other things that could happen but we scrub it weekly, we look at it closely and right now we think it's a reasonable estimate for March. With regards to push outs, we have modeled that I think reasonably well, and I think it's a pretty reasonable estimate at this point. Gary Hsueh - Oppenheimer& Company: Okay. Fair enough. Thank you.

Thanks.

Your next question comes from the line of Mahesh Sanganeria. Your line is open. Mahesh Sanganeria - RBC Capital Markets: Thank you very much. Just the breakout you gave for the systems orders, just want to make sure that logic 90%, foundry 5% and memory 3%.

Yeah, logic 92 is the actual. Mahesh Sanganeria - RBC Capital Markets: Okay. So if I look at your system order close to 100 million to 120 million, logic looks like probably from one customer, how does that logic order trend in next couple of quarters?

Yeah. I wouldn't assume one customer. The other thing on this is, I would say that doesn't count non-semi, which was about 25%, nor does it count service. We expect the March quarter logic to not be as strong as either a percent of our total, and since we're guiding flat, it also means it would be down in absolute terms. Mahesh Sanganeria - RBC Capital Markets: So logic is going to be down and you expect foundry or memory --

We're talking small numbers. So let me just be clear because if somebody says you're talking about memory going up by a factor of five, I'll say we're talking about a small number of orders of things that we have pretty clear visibility into memory, so some small percentage of memory and a slight uptick in the foundry business. Mahesh Sanganeria - RBC Capital Markets: So overall can you give us an idea of how the non-semi business is going to do in 2010 versus 2009?

Seriously? Mahesh Sanganeria - RBC Capital Markets: Sorry, 2009 versus 2008.

Okay. That's still hard, by the way. I think that 2009, it's in everything that we can see, the end of the calendar year of '08. For example, our solar business was chug along and growing, and we saw the brakes just get hit late in the calendar year. So I think solar has cooled off quite a bit, and I think it's a multitude of reasons for that. So we'll see some business there. The high brightness LED, even those guys I think have stopped growing. I don't know if they're slinking yet, but they've stopped growing. So I think there's some business there and some opportunity. Backend tests right now is virtually turned off. So I think there are a number of segments there that are going be down just like the rest of the market, and it's hard to see any short term catalyst for really anything. That's why we're so guarded on our visibility. So we model '08 overall, '08 to '09, and it looks like overall trends continue to be downward pressing. Mahesh Sanganeria - RBC Capital Markets: Okay. Thank you very much.

Thank you.

Your next question comes from the line of Peter Kim with Deutsche Bank. Peter Kim - Deutsche Bank: Hi. Thanks for taking my questions. I was wondering, given the sharp cuts to OpEx and R&D, I'm sure it's included in there, do you expect to exit or shed any market segments?

We have ongoing review of our portfolio, Peter, and I think that the decisions that we've made in the last few years still were the right ones in terms of the markets that we chose to exit. Right now, everything is under review, but we actually like the position that we have in all the market segments. And I think the challenge for us is to maintain those options for growth platforms as we go forward. Part of our belief in this downturn is that others will have to do that, because they're not as financially viable as we are, and then we'll be in a position to grow share as we come out. So there's none that we are currently looking at exiting at this point. Peter Kim - Deutsche Bank: Okay. And you characterize the backend and some of the sub segments of the front-end, I was wondering if you could characterize the bare wafer market, how that's doing relative to the other segments.

Sure. Bare wafer is off. I mean, there's almost no advancement going on bare wafer and I think that the bare wafer manufacturers have seen the advance for their products reducing. Whether or not that picks up in later in the calendar year is a pretty hard one to judge right now. But there may be some technology things that happen there, but for capacity I think they've got enough. Peter Kim - Deutsche Bank: Okay. Thank you.

Your next question comes from the line of Patrick Ho with Stifel Nicolaus. Your line is open.

Hi. Thank you for taking the question. My name is Marian in for Patrick Ho. What is your take or position in terms of the potential consolidation in the DRAM market and do you think this could hurt or help KLA-Tencor when all is said and done.

I think, overall, it's probably healthy for the market to get to a more rational number of players. And so, I think that if there is consolidation that comes through this cycle, in the longer run that will probably make a healthier industry and that's good for us. I think it favors larger players. So, from that standpoint, I think it's good for us. I do think for the short-term, no. It means there is churn, there is less decision making and that's part of the turmoil we're seeing in the market right now. So I don't think for the short term it's good for anybody, but longer term probably good.

Okay. My last question is, what is your view on cash and what do you expect to burn in the near term?

Obviously, cash is critical in this environment and I think that's pretty clear for all the major players. So our philosophy has been to do everything we can to reduce our burn rate, but at the same time recognizing that we do have a very strong balance sheet and we have the means to be able to tradeoff some cash usage for continued R&D investment. Mark, add any color to that?

Yeah. When we talked about the model going forward by the end of calendar 2009, basically, breakeven if the operating cash line is at $300 million to $325 million, that gives you a sense of the fact that if we can stabilize that line, we think our cash balances and our other resources will allow us to continue for quite a while at those level.

Okay. Thank you.

That concludes today's questions. Do you have any closing remarks?

No. Thank you very much operator. Thank you everyone for joining us on our call today. We look forward to seeing you all on our next earnings call scheduled in April.

This concludes today's conference call. You may all now disconnect.