Q2 2020 Earnings Call

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Ladies and gentlemen, thank you please standby and welcome to the Kaylee Corporation fourth quarter in calendar you teach out from 19 earnings conference call. At this time all participants are in the city elegant after the speakers presentation. There will be question answer session do ask the question during the session you will need.

Each press the star one than your telephone keypad, if you acquire any fergie assistance. Please press the star <unk>. Please be advised that today's call is being recorded Oh, no like kind of conference over to Mr., Kevin Castle, Vice President Investor Relations for Kaylee Corporation. Please go ahead Sir.

Thank you Charlie and welcome to care ways earnings conference call to discuss the results of the December 2019 corridor and the outlook for the March 2024.

Joining me today as well as our Chief Executive Officer in Bren Higgins, our Chief Financial Officer.

During today's conference call, we will discuss quarterly results for the period ended December 31st of 2019 that we released today after the merger closed.

And is currently posted on the Investor Relations section of our website at <unk> Dot Kelly Dot com.

Today's discussion of our financial results and outlook is presented on a non-GAAP financial basis, unless otherwise specified a.

A detailed reconciliation of GAAP to non-GAAP results in todays earnings press release, and the earnings Slide presentation posted on the Kelway Investor Relations website.

Our IR website also contains a calendar future investor events and presentations, including those from our September 2019 Investor Day.

And corporate governance information, including are quite very policy as well as makes takeaways FCC filings, including our most recent annual report quarterly reports on forms 10-K and 10-Q.

Our comments today are subject to risks and uncertainties reflected in the risk factors disclosure in RCC filings any forward looking statements, including those that we make on the call today are subject to those risks and Carol I cannot guarantee those forward looking statements will come true.

Our actual results may differ significantly from those projected in our forward looking statements.

I'd like to now turn the call over to our President and Chief Executive Officer, Rick Wallace, Rick. Thank you, Kevin and thank you all for joining us today.

I'm going to begin with a high level strategic overview aimed at what drives kaylee as long term business success and differentiation before I cover the near term December quarter business highlights. Please turn to slide four.

Yeah like continues to benefit from multiple secular growth drivers we discussed in depth at our September 2019 Investor day.

Our performance this quarter and our strategy is for diversified growth.

Technology leadership and operational excellence are playing out according to our plans by numerous measures. The December 2019 quarter was strong for Kelly.

Revenue in both GAAP and non-GAAP bps finished at the upper end of the range of guidance result of strong demand and exceptional execution. This performance was particularly satisfying giving up a set against the backdrop, that's still lack luster memory demand.

The global leader in process control and supplier of critical process, enabling solutions for the data era Kaylee remains at the forefront the most important industry trends and technology inflections in the electronics industry.

Our deep collaborative customer relationships brought IP portfolio and differentiated solutions that address our customers. Most complex challenges are the essential ingredients and the recipe that sustains our market leadership.

Our business also continues to benefit from increasing complexity and advanced semiconductor device design and manufacturing processes as well as mega trends driving demand across multiple product generations.

And in numerous key industries.

Please turn to slide five.

Underpinning our success and consistent outperformance is the Kaylee operating model.

Many of you are becoming more familiar with this model given that we spent a fair amount of time at our Investor day discussing it and while it's not new to kill a we understand talking about it may be which is why we decided to codified the way that we did.

We expect to continue to hear us refer to it as it does the best job of simplifying how we run the company.

It also helps reinforce the critical core competencies that we believe could enhance the long term performance and profitability of acquired businesses such as Orbotech.

Most importantly, the Kelly operating model is critical to align the company on a consistent strategy and execution heightened accountability.

And facilitate continuous improvement, while ensuring we always operate with strong financial discipline and rigor.

Please turn to slide six.

Strategically we have four objectives that serve as our guide and drive our sustainable high performance culture I find this always worth reinforcing objectives, when speaking with investors and analysts says they provide a helpful window into our strategy going forward.

These four objectives, our market leadership product differentiation operational excellence and attracting and developing talent.

We run all our businesses and integrate newly acquired companies with a focus on these four key objectives. Today's result point to our alignment and achievement of all four of these.

Please turn to slide seven for the December quarter business highlights.

Before I cover the business highlights for the quarter I'd like to provide some high level perspective on the current industry environment.

I'll begin by addressing the Corona virus situation first and foremost our primary concern is what the health and wellbeing of all affected by the situation. We're taking the recommended precautions and have implemented appropriate measures within our global business operations, including including widening the range of.

Haydn's for the March 2020 quarter to reflect the uncertainty we see in the marketplace.

Brand will provide further color on this.

We are closely monitoring the situation and we'll update investors as material new developments arise.

Notwithstanding this hopefully short term issue the long term growth opportunity for the semiconductor market remains very compelling driven by the proliferation of electronics across more diversified end markets. The introduction of new advanced technologies supporting the development and rollout of Fiveg.

Growing semiconductor investment in China, and continue device and performance innovation to develop superior performance and return on investment.

Kelly strong results are primarily driven by our industry, leading positions across various markets and the demand momentum that has continued for both technology development and capacity growth in advanced logic nodes.

The demands a sport advanced logic nodes is expected to remain healthy through 2020, and 2021, driven by accelerating investment in UBI competitive dynamics and new capacity additions.

2020 is setting up to be our fifth consecutive year of year over year growth for K.L.A. with topline growth currently expected to be in the high single to low double digit range tracking ahead of our long term revenue growth of 7% to 9% that underpins our 2023 target model.

In terms of our outlook for the Wi Fi wafer demand environment in 2020, given the recent news of increased Capex investment from leading foundry and logic customers and the improving business conditions in memory, we're aligned with the consensus expectations for 2020 to be a growth year for Wi Fi coming off a stronger than.

They did finish to 2019.

Now let me cover some of the product highlights from the quarter Kelly's market leadership as the product of successful execution of our portfolio strategy focused on differentiation to address our customers most critical challenges.

We're confident in our product positioning in the validation from strong customer acceptance across our portfolio.

We continue to see accelerated growth of our flagship Gen. Five optical inspection platform deployed for both technology development and production monitoring at the advance nodes. Our customers are now using the genfive platform to identify and solve yield remedy issues at the seven nanometer node and beyond we're also encouraged by the growing adoption.

Of patterned wafer print check applications to qualify radicals pretty you V.

Genfive offers the best solution to make sure easy mask or defect free and optimized to achieve process window requirements.

Boosted in part by this expanded use case genfive shipments nearly tripled in 2019 and adoption is expected to grow in 2020.

Also at our recent Investor Day, we announced our first new E beam inspection platform in multiple years, and we continued or see very positive feedback from initial customer evaluations and we're starting to receive purchase orders.

Okay lazy beam inspection platform work seamlessly with our Gen. Five optical inspection platform through built in connectivity offering customers. The best inspection performance combination at the lowest overall cost of ownership.

This combination is a unique differentiator in the marketplace today, we can identify and ditech critical yield limiting defects at the most advanced nodes.

After proving the value of the technology and initial customer valuations, we delivered the industry's first production ready version of the X Ray metrology platform to customers in the December quarter.

Introduced initially at our September Investor day, they actually on platform is a small angle X ray scattering technology for inline metrology applications to monitor the high aspect ratio features and advanced Threed NAND DRAM device architectures.

This platform provides a lower cost of ownership and improved cycle times, when compared with existing destructive metrology techniques. We're now focused on establishing new use cases with all leading memory customers.

Last but certainly not least kelway service business continues to deliver excellent revenue growth performance, while simultaneously generating strong free cash flow.

Semi process control service revenue reached $1.1 billion in 2019 with 70% of this revenue generated from subscription like service contracts. This performance continues to give us high levels of confidence that Kelly services.

Deliver long term revenue growth rates in the range of 9% to 11% several factors drive growth in our services business, including increased complexity of our systems expansion of the installed base and expanded demand at the trailing edge notes with high fab utilization and foundry and logic and signs of improvement in memory.

Our customers are also looking for opportunities to enhance productivity and extend the life of their installed base. As a result, we see robust service contract penetration in our service business is providing a steady recurring revenue stream for all our businesses.

Please turn to slide eight in summary, the Kaylee operating model drives our investment thesis. This was accomplished by driving sustained technology leadership was a strong competitive mode.

Supported by a track record of strong free cash flow generation and capital returns.

When we began the new year with the expectation that the industry will see a redemption resumption of growth in 2020.

We're energized by the prospects that lie ahead, kaylee continues to execute exceptionally well and deliver healthy relative revenue and earnings growth.

Our focus on driving innovation and providing a steady stream of differentiated products and solutions positioning kaylee to achieve the long term growth targets, we established at our 2019 Investor day.

Despite industry headwinds 29 team was a historic year for Kaylee showcasing the enduro enduring value created by the successful execution of our strategic objectives. As we look ahead, we're confident that we're investing in our future and are well positioned for growth in market leadership building on the momentum we have established in our.

Process control markets and capitalizing on the market expansion opportunities from the Orbotech acquisition.

Our orbotech integration and products synergy programs are firmly on firmly on track and progressing well.

I'd like to now turn the call over to Brown for his commentary on the December quarter financial results in our March quarter outlook Bren.

Thank you Rick Please turn to slide 10 for December quarter, 2019 financial highlights.

This was a strong quarter for Kelly with revenue and EPS each coming in at the high end of our guidance ranges.

Total revenue for the December quarter was 1.5 over 9 billion.

Which wasn't the upper end of the range guidance of 1.435 to 1.515 billion.

Gross margin for the quarter was 60.8% in the upper end to the guided range for the quarter of 60% to 61% driven by incremental revenue growth and product mix operating margins were.

Sept, 34.8%.

GAAP EPS was $2.40 non-GAAP EPS was $2.66.

Both of which were also at the upper end of the range of guidance at $2 in 13 cents to $2.43.

$2.39 to $2.69 respectively.

Cash from operations and free cash flow were both strong and above our internal targets coming in at 388 million and 353 million respectively.

Our financial results. This quarter were exceptionally strong all around and we remain laser focused on our overall execution as well as our integration and synergy plans for Orbotech.

During the quarter, we remain consistent and effective in our capital return framework by returning 119% of quarterly free cash flow to investors.

Our capital return was accomplished by repurchasing $285 million of common stock and also distributing a $135 million in quarterly dividends.

We currently have $1.3 billion remaining under our share repurchase authorization and plan to continue to execute our repurchases consistently going forward.

A key pillar of our investment thesis is kaylee longstanding commitment to returning cash to shareholders for calendar 19, Kaylee returned approximately $1.5 billion or 127% of our free cash flow to shareholders through our dividend and share repurchase programs.

Our capital return included more than $1 billion and stock buybacks.

Please turn to slide 11 for revenue breakdown by reportable segments and end markets.

Revenue for the semi process control segment, which includes the associated service business was healthy at 1.248 billion in the quarter up seven presents a 7% sequentially on the back of continued strength in foundry and logic.

As Rick mentioned, our initial view of the WP demand environment for 2020 is for solid growth off of a better than expected finished at 2019, driven by continued strong investment for multiple foundry and logic customers investment in easy and expanded memory investment in the year.

In addition continued high levels of demand from native China is expected to contribute to overall industry growth in 2020.

As I mentioned foundry was very strong in Q4 at approximately 52% of semi process control revenue up from 44% last quarter.

Memory was 40% in December down from 43% last quarter.

Logic was 8% versus 13% last quarter and inline with our expectations.

I will turn now to the specialty semiconductor process segment.

As a reminder, SPT EPS was formerly part of Orbotech and is a leader in PVD in etch process solutions and fast growing specialty semiconductor applications like Mems sensors power and RF devices as well as an advanced packaging market.

Revenue for SDTS was 75 million up 9% sequentially.

Well, that's bts revenue for 2019 was impacted by global trade issues, we expect 2020 to be a strong year.

To be year strong growth driven by expanding RF demand to support Fiveg investment and a potential recovery in the automotive electronics market in the second half of the calendar year.

On a very encouraging SPT had ended the December 19 corner with record backlog in quarterly bookings.

Revenue for the PCB display and component infection segment was 186 million, a 4% sequentially and inline with expectations.

This segment includes the former PCB and display businesses of Orbotech and Calix component inspection business.

After a cyclical low we expect 2020 to be a modest year growth for PCB driven by the transition to Fiveg smartphones.

Please turn to slide 12 for breakdown of revenue by major products in region.

The distribution of revenue by major product category in the December quarter was as follows wafer inspection was 40%.

Patterning, which includes radical inspection was 19%.

Wafer inspection and patterning are part of our semiconductor process controls segment.

Specialty semiconductor process was 4%.

PCB displaying component inspection revenue was 9%.

Service was 24% of revenue in the quarter.

Other was 4%.

In terms of regional split Taiwan was 30%.

China was 25%.

Japan was 13% Korea was 12% the U.S. was 11% Europe was 6% and the rest of Asia was 3%.

Please turn to slide 13 for other income statement highlights.

Total operating expenses were $391 million in the quarter, including $220 million of R&D expense.

Operating expenses were slightly higher than expected in the quarter due to non had cat not head count related engineering development expenses and modest variable compensation adjustments operating margin was 60 basis points higher than modeled at 34.8%.

Other income and expense in the December quarter was 38 million the effective tax rate was 13.5% inline with our long term tax planning rate a 14%.

Going forward based on our expectations for the geographic distribution of profit you should now used 13% as long term tax planning rate.

Net income was 422 million and we had just under 159 million diluted weighted average shares outstanding.

Please turn to slide 14 for look at our balance sheet highlights in debt maturities profile.

We ended the quarter with $1.7 billion and cash total debt of 3.4 billion and a flexible and attractive debt maturity profile supported by investment grade ratings from all three agencies.

In October we retired or 250 min, 3.375% senior notes due November 2019.

We intend to refinance our $500 million senior notes due November 2021 during the March quarter.

Please turn to slide 15 for review of free cash flow.

Kaylee as a history of consistent free cash flow generation and high free cash flow conversion.

Over the past five years, we have averaged 99% free cash flow conversion and in calendar 2018, it was nearly 90%.

Our innovation and differentiation in the marketplace, our what drives our industry, leading gross and operating margins and ultimately our free cash flow conversion.

Please turn to slide 16 for review of our capital return to investors.

Haley continues to execute on its commitment to return capital to shareholders in the form of both dividends and share repurchases.

The dividend payout has increased at a CAGR of 15% since inception 13 years ago.

Share repurchases of also increased over the years, where the average price paid for repurchase shares being slightly under $70 and with approximately $3.8 billion deployed for repurchases since 2010.

The only exception to the company systematic repurchasing activity was during the periods when it was blacked out due to acquisition proceedings.

Please turn to slide 17 for March quarter 2020 guidance.

The fluid situation accompanying the corona virus responses, adding complexity to our forecasting process.

As seen with others, we're operating with key assumptions regarding the resumption of business activities in China, both in who Bay Province. In addition to the rest of the country.

To date, we do not expect a protracted disruption of our business for calendar year 2020.

Policy changes regarding the response could affect our ability to ship and support shipments into China as well as to access key components from our China based supply chain necessary to meet system shipment commitments to our worldwide customer base.

In short this is a situation with limited visibility that could impact our near term results and we will be prudent in providing you with the best information we have as we proceed through the quarter.

As Rick mentioned in the range of guidance has been widened to reflect this quarter's uncertainty in our current estimate of potential disruption.

We expect total revenue to be in the range of 1.3 to 5 billion to 1.5 to 5 billion in the March quarter.

This revenue guidance would have approximately been 3% to 5% higher at the midpoint without the adjustments for the current of Iris impact.

Foundry is forecasted to be about 60% of semi process control system revenue in the March quarter depicting the strength, we continue to see amongst our foundry customer base.

We expect memory to be approximately 28% of system revenue, reflecting continued headwinds we see into memory market.

Logic is expected to be about 12% of semi process control system revenue next quarter.

Based on products and product mix expectations for the March quarter, we forecast gross margin to be in the range of 59.5% to 61.5%.

Operating expenses will be in the range of 380 to 385 million down sequentially from December as prototype material expenses normalized run rate.

Given expected revenue levels for 2020, new product development investments of multiple product technologies to support the industry's transition to high volume production of easy lithography and initiatives to reduce our long term structural cost position, we expect quarterly operating expenses to remain in this range for the remainder of the calendar year.

For 2020 operating margin, we're running the company underperform inline with the 5.5 to 6 billion dollar revenue interval of our business model presented at Investor Day back in September.

We expect other interest expense to be approximately $39 million in the quarter and the effective tax rate to be 13%.

For earnings we expect GAAP diluted EPS of $1.79 to $2.57 per share and non-GAAP diluted EPS at $2.04 to $2.82 per share.

Our EPS guidance is based on a fully diluted share count of approximately 158 million shares.

In conclusion, the December quarter results demonstrated strong.

Performance and relative strength for kaylee across many areas of our business.

With our diversified end markets continue technology leadership across a broadening product portfolio and operational discipline Kaylee is delivering on our mission strategy and objectives.

As we begin the new year calendar 2020 shaping up for another year growth in line with or slightly better than our long term revenue growth rate target of 7% to 9% earnings per share growth of 1.5 times, the revenue growth rate and demonstrating progress towards our 2023 revenue and non-GAAP EPS target of $7 billion to $7.5 billion.

And 14 50 to 15 50 per share.

With that I'll now turn the call back over to Kevin to begin with the QNX.

Thank you Brian as we begin the Q and a we request you limit yourself to one question and one follow up question to ensure we get is through as many questions as possible.

With that Charlie we are ready for the first question.

Okay.

Ladies and gentlemen, if you would like to asked a question. Please press star one from the telephone keypad and deeply into Daniel.

First question comes from the line CJ Muse from Evercore. Your line is Nelson.

Good afternoon. Thank you for taking the question I guess first question you talked about 2020 year over year growth of high single to low double digit and based on the other segments. It looks like that implies your semi business growing.

Roughly 911%. So curious is that the right mass and then as part of that what are the puts and takes in terms of process control intensity in twentytwenty, presumably a a year with with more memory.

Which which is an obvious negative. However, you have your new X ray tooling and growing share it adds to the end.

As well as.

Gen five and exposure to either be so can you kind of walk us through.

The puts and takes around your exposures and TWC, both good and bad in 2020.

Yeah sure CJ, it's Brian and I'll go first here just in terms of just context on the numbers I mean, certainly 2019 finished a finished much more a much stronger than than what we expected which was good to see and as we look at 2020. If you go back to last earnings versus where we are today given what we've seen in the.

Foundry logic space, we do expect to see more growth in the space this year than than than what we thought before and I don't think that our views on the memory environment had changed all that much that we'll see.

Flash memory recover we would expect to see that through the year.

And we're not relying much on DRAM in our overall forecast in terms of.

Of the incremental WFP investment so.

When you take all those puts and takes and say, okay, where is the growth coming from so certainly are logic foundry process control intensity is.

As good some of the growth coming from memory is lower process control intensity, but to your point, we do have new product introductions that we believe will will help drive some of that so our assumptions is that we think from a a process control intensity perspective, it stays relatively flat year over year and with new product introduction.

We'd expect to see some some modest share improvement as well so that's pretty much how we see things at this point.

Very helpful.

My follow up how should we think about seasonal trends for for your PCB business.

I imagine that that's much more of a second half Apple weighted kind of ramp so is there any sort of.

Yeah, you know kind of range first half second half kind of mix there.

I would expect PCB to be stronger in the second half it tends to be more mobile centric. So so to your point, we would expect to see a see stronger.

Revenue profile in the second half for PCB, what expect this year to be as Rick indicated a year of modest growth in the space and.

And keep in mind in that part of the business. We also have big chunk of it is also service where it's over 90% of its contract base. So it didnt. There's a there's a high service utilization on those tools and stickiness to the investment as well.

Thank you very much.

Thanks Jay.

Your next question comes from the line, that's probably going forward. The JP Morgan. Your line is now open.

Good afternoon, guys good job on the clearly execution and strong start to 2020.

Great service is showing on process control in calendar year 19, a according to my calculations your services business.

Was up about 11% in up the upper end of your long term target of 90, 11%.

On your full year view of 10% revenue growth for the business here in calendar 20 based on your installed base growth in 2019, how do you see your process control services business growing in calendar 2000.

So I think when you look at the comparison to the year me certainly we've got some incremental growth from the inclusion of the Orbotech business in India.

In 19 that drove the growth rate to the.

To the upper end of the range. So on the process control side, given the weakness in memory, particularly in the first half of the year. It did pushes down towards a slightly below the 9% to 11% range in terms of year over year growth for the process control part of the business as we look at 20, though as we've seen utilizations tightened pretty significantly.

Both in memory, but also in the logic space over the course of the year, we would expect to service business to perform in line with its long term growth rate.

Expectation, which is the 9% to 11% so.

We feel pretty good about what's going on there certainly the contract penetration is as high as Rick indicated I think with rising utilization with new products.

Given demand for customer from customers as they ramp new facilities, we tend to see.

See strong service performance, there and I would expect to see that play out in 2020, So I'd expect more growth next year or in 2020 versus 19.

Yes, I appreciate the insights there and you know a big part of the growth for the team has been draw that the the team has been driving is really due to new product cycles right. Gen. Five turnaround for easy as an example to that end can you guys just give us an update on some of your next generation programs like.

X Ray for stock profiling he'd been both for wafer and medical maybe some.

Rough guidelines on product launch timing and contribution to revenues.

Yeah, I'll take part of that and then Brian can talk about contribution as we talked about it at the analyst day and also in our last earnings call. We have seen progress in some of the new products. We introduced the actually on and I mentioned that in the prepared remarks, we're seeing peos now for some of the E beam inspection.

Tools that before were under evaluation. So we're pretty much on target in terms of the growth potential that we envisioned when we laid out the 2023 plant.

And that starts to become more material in the second half of this calendar year, we're very excited about what we've seen with the CD product because we're.

The actually product, we're seeing more used cases were getting customers to give us really positive feedback and we see continued acceleration that I'd also say that the E beam inspection combined with the optical tool has been performing as we expected and we're seeing momentum grows there. So we're on target we continue to be on the.

A strategic objectives that we laid out for those products to get us to where we believe we need to be to support our 2023 plan in terms of impact for this year, it's more second half loaded and so brand can talk a.

Little bit of sizing it yes directs point I mean is an important part of our strategy here to see the market with these products into started to develop use case and to drive value with these offerings with customers and so initial results are pretty promising and it's one of the they're really one of the.

Factors as we look at those products, whether it's incremental gen. Five print check applications, which is how customers will qualify radicals in the fab.

In E or whether its evening to Rick's point or actually metrology, we're really excited about the contributions from those products as we.

As we move forward here so.

The contribution in 20 will be less than what I would consider sort of a steady state expectation for those business because we're starting to the seem to market with those products, but we will see see revenue and I I would think that is one of those factors that I believe keeps process control intensity a flat. Despite the memory growth that we would expect to see in in 20.

The one other area you didn't ask about heartland, but but all.

Just for more perspective, the Gen five adoption this accelerated throughout the.

2019, and now in 2020 were seeing additional growth and we're seeing it really being a major product for multiple customers on both advanced but some notes that we would have thought maybe it was late for insertion, but we're finding some applications and where it's really gaining some traction is with either.

The qualification and I mentioned that in the prepared remarks, but I think it's really important as easy fans out. We think is a great opportunity for gen five to exceed even some of the potential that we had originally envisioned because it's really the best way to verify the quality of the masks and especially as customers are ramping the number.

Devices running on a UBI, we're seeing a lot of support and interest from our customers for that so we feel really good about where gen. Five is right now.

Great great job on the execution. Thank you.

Thank you.

Your next question comes from Unblinded, David Wong from Instinet Your line is Nielsen.

Thanks, very much could you give us some idea as to what percent of semi equipment sales out to domestic Chinese chip makers.

I would say.

Probably between 25 and 30% generally.

So to think about the systems fees in 2019, it was about 665 million.

On our.

What was about.

$3.2 billion of semiconductor shipments are semiconductor revenue.

Okay, Great and did the other question I had is.

When we tried to calculate year over year for the March quarter. Its of course confused by the closing a little bit take a year ago. So can you give us some idea of what the midpoint of your guidance implies in terms of organic year over year growth full traditional kayla excluding okay.

Yes, so we would expect and again with some range to this but at the midpoint of on the semiconductor side would be approximately.

1.2.

About 12, 15 to let's say 12, 30 35 in that ballpark.

Okay, great. Thanks.

Your next question comes from the line Committee on QVC do this your line is now.

Thanks, a lot.

So Brian I I'm, just looking at the second half of 2019, I'm I'm just I'm looking at your process can troll system shipments and you did 831 in September and you just at age 75 and last September you did 830, and then you did 850 last.

Last calendar Q4, so that's up like small single digits year over year.

But if I add together Intel and you know TSMC capex, it's up like more than 30%. So it's so it seems like the number ought to be a little higher I'm. Just wondering if maybe there's some timing effect there or how you sort of I sort of reconcile those numbers. Thanks.

So Tim I think when I look at the data on the semiconductor process control part of the business.

It looks like revenue was up about 24% half over half and in the second half versus the first half.

Of 19, Yep Yep, Brent I guess I was talking second half of 19 versus second half of 18.

Second half of 19 versus second half of 18.

Basically barely barely up.

Yes, it looks like it's up.

Yeah.

Few hundred million.

And I guess the question is you know you guys are pretty will expose to foundry and logic. So.

Why would it be up so little when those guys Capex is up massively I mean, it's up 30 plus percent.

Well you got to remember that even the activities that we saw at the end of calendar year, that's revenue that didnt come in at the end of the calendar and the other part of that was the change in memory during that same time period.

Got it okay. Okay. So it's a timing issue okay, yes, Tim I think it's timing I mean look we it's not a way I really thought about it so.

We can we can follow up on it I need to think about.

About those dynamics I mean, you get different customers different customer mix you had the China dynamics. So there were a number of of moving parts here that influenced the numbers I mean, if you look at our year over year performance.

You know in it in a down here for the industry it down what looks like about 10%, we're going to be up modestly maybe I think it looks like we were up about 1% or so so.

So the second half strength driven by.

Strong investment really from from the foundry leader I would say logic. If you look back at the detailed logic was was was not all that strong for us over that really over the course of most of 19. So.

I think the relative performance is pretty good.

In 19 versus making yeah, and one last point, Tim as there was a change in bear wafer and we talked about the out that 19 was softer than 18 and so some of the business you would've seen an 18 would have been.

The wafer so it was both a mix and timing issue.

Got it yes, airwave or was down bare wafer was down about 10%.

Year to year, so that was another factor as well.

Okay. Okay Awesome got it and then Rick I think you said in the prepared remarks that obviously youve widened the range, but I think you also said something about potential policy changes.

What did you were you referring to export control that could come about or were you, referring specifically to just the virus and something that might happen around that thanks.

No just nothing about anything other than were complying with all the.

And as you know rather fluid changes in policy of support of where overall, China, but also one particular and following that and monitoring that very closely as.

As everyone is right now.

Okay. Thanks much.

Thank you.

Your next question comes from the line Krish Shankar with Cowen and company. Your line is now open.

Hi, Thanks for taking my question to one first simply the rig or Brian If I look we're doing much better guidance looks like sequentially foundries up when memory is down.

Going to Q is how wise memory down so much if non does when it comes back and secondly in a in moments where people thing.

Foundry logic Capex is front half loaded is should we assume that FFO yield revenues have to trend or is it tough to say at this point that a follow up.

Well, Chris on the on the memory recovery is more of a second half driven dynamic I mean, the activity out there is pretty limited right now to to one customer.

So not a lot of investment and so I wouldn't expect to see.

Foundry recovery or I'm, sorry memory until we move into the.

The second half a year.

Got it got it and then this is a follow up if the memory recoveries won't be back half loaded and foundry logic of front half loaded how does it impact to gross margin profile.

There are no changes in gross margin our gross margin across.

All our customer segments is generally the same not varies across different product types, but customer segments don't don't drive influence our gross margin unless the product mix dramatically changes, but product. The product is the same margin generally customers across all segments.

That's it thanks Ren thanks.

Your next question comes from Blind, John It's here with Craig Credit Suisse online channels.

Yeah. Good afternoon, guys. Thanks, Let me ask the question blend in your prepared comments, you said that the midpoint of the March quarter Rev guidance would have been 3% to 5% higher if not for the question you guys you're baking in for the uncertainty around the corner virus I'm just kind of curious is that true EPS as well or are you not curtailing spending.

So you sort of that lower number and so EPS would actually be up more than I had a higher revenue midpoint.

Yes. The assumption is really about revenue is not about spending our spending plans are based on product development requirements and infrastructure requirements across the company over over a broader view of the future. So in any given quarter and situation like this we would continue to spend according to our plan I also said the.

Expectations that I don't think it affects our overall plan for 2020, so I would think that that business just shifts into the first part of art for later on in the next quarter or too.

As we progressed through the year. Obviously this is a fluid situation and things can change, but based on how we see it today.

That's how we're thinking about it so so the the 3% to 5% is basically just comes off the top of the same expectations for spending and of course, there is a gross margin impact to that which is reflected in the guidance. So we widened the range because there is some fluidity around not just what happens in Hebei province, but even broader.

China, and how that restarts not just with customers, but suppliers. So we tried to bake in the broader range to to accommodate that potential risk, but thats how were thinking about a right now.

That's helpful and then as my follow on risk. It's always helpful. When you get kind of your perspective at the industry I'm going to put you on the spot a little bit your pure last week was a little bit more explicit on a WSE forecast for calendar year 20 wondering if you you endorse that forecasts and if you don't want to get to specific numbers I'm just kind of curious how you think about the profile.

Ill up WSP that there's a lot of concern that maybe it's front half weighted versus second half weighted how do you kind of see the half on half both for WSE in your business this year.

Yeah, Thanks, a lot John.

I think that.

You know what I can say is the end of calendar year. There was more momentum maybe than we would have anticipated from a lot of the activity with our logic and foundry in fact.

As you know is very strong and very encouraging the number of design starts and so foundry really shapes up to be quite strong and it's more than just one customer advanced nodes. So we feel really good about foundry logic and we're getting the right signals from our customers about the strength there memory did strengthen in terms of our view.

And as Brent just indicated its earlier for us to size, what second half and as you know, we don't give annual guidance, but I wouldn't say there is certainly momentum.

For.

The memory investment and even if you look at the way 19 ended and you've talked about this in the past. If this is downturn is pretty good downturn, because 19 ended pretty strong in the momentum feels pretty good. So if you take out any exaggerated as factors like.

Yes, some of the things we're dealing with in terms of the krona virus things look pretty good for Twentytwenty and we're pretty excited it's really hard for us to size it and for us.

We definitely feel momentum and we're building our capacity to be able to support the increased demands and we have some product areas, where we're out of supply for what customers want so we're having to add capability to support that so I don't want to give a number but we definitely feel more Pos.

Positive about 20 than we did probably four or five months ago, especially in light of how strong 19 ended.

Yeah, John in the only other things I'll add to that is to Rick's point, I mean look strength and timing of memory recoveries, probably the biggest wildcard in so certainly people have different views on that and depending on which.

Which markets that you tend to do better in you may have a different view of that so I think that's one of the wild cards. The second one is how how much growth that we see in China. How robust is the growth we do expect China to grow year over year in terms of Wi Fi investment I think the question right now there may be.

One of the Wild cards. If you will is how much of that as memory in terms of the next phase of investment on the memory side. So certainly there are number of projects on the foundry logic side, they're investing and overall, but it's more foundry foundry logic heavy so I think the memory sort of question in China's probably another factor that influences that that forecast, but I'd.

I do think that where we lineup is probably in this.

Low high single low double digit kind of range, plus or minus and we'll see how plays through as we move through the year.

Given the flexibility we've laid out in the factory if it turns out that is stronger than that we should be able to support.

That demand so.

Well, we'll be we are well positioned for that if that that materializes that way.

Very helpful. Thanks, guys.

Your next question comes from the line of feedback volume from Bank of America excuse me your life now.

Thanks for taking my questions.

I get that you're taking a conservative view into Q1, but I look at your peers and others in the semiconductor industry.

We have chosen not to.

Adopt that conservatism on assume that even if that is a pause in China.

That that is sufficient time to recover from it. So let's assume Q1 plays out for you. The way you are guiding right. Now do you think that is a above seasonal catch up in the following.

Corridor or it's too early to to make that determination. Mike has made a demand destruction. There what do you think that benefit time sort of catch up here.

You have a decade, so so when I look at it I think that business just shifts and part of it is process control part of it as a it's really across our broader business, there's an impact to the specialty semiconductor business and walk away or in.

And we will on in who Bay Province, there an impact is a flat panel business and to process control. So what we're assuming is that area given its the epicenter of the Corona virus. So far that it takes a little bit longer for that to recover and so we're we're adjusting our our outlook to accommodate that perhaps were little bit less.

Theres any others and so you know where adoption of the slightly more conservative view and but but my view is that the 2020 outlook is no different and so I would expect that business too as we start to be able to engage their and be able to support those customers that.

We'll ship that capability in the June quarter.

In that timeframe, yeah, and if you want perspective use look back at other disruptions and supply in our industry's history, just recently and what comes to mind Amir floods that we had in southeast Asia. We had we had the tsunami and the effect of that and we've had fires in fabs in every case it bounced back so.

So I don't think there I think it's if it's a temporary disruption it comes back.

And Thats what were as were viewing it right now.

Very helpful and for my follow up.

Do you see higher process control intensity in memory in this cycle than it has been.

In the past and been in that is that a difference between NAND and DRAM process control intensity.

There is higher I think what's interesting is this is a case of having the capability as opposed to the desire our customers in especially in NAND. How do you just desire for more process control capability. We just didnt necessarily have the solution. So that was why the intensity was lower there was plenty of desire.

Well, we have now our products that we've been working on for years targeting at supporting some of the challenges in the advanced NAND technology nodes and we're seeing adoption as a result of those new products. So thats driving that process control intensity drams benefiting from the fact, they are still shrinking and so you're seeing some use for some of the advice.

I asked wafer.

Inspection capabilities to be able to deal with the increase deep activity requirements. So both of those are our cases, where we're seeing higher intensity and it's brought on mainly by solutions not so much by need.

Hi, Thank you.

Your next question comes from blinded to Shia Harry with Goldman Sachs. Your line now.

Hi, guys. Thanks for taking the question and congrats on a strong year.

Just a quick follow up on the Corona virus impacts have you already identified disruptions to supply chain or have you have you received changes to in terms of demand signals from customers or is if you guys being proactive and prudent and conservative.

Yeah, we're not seeing any change in the customer needs and in fact, if anything we're having more conversations with customers to ensure that we can continue to support them.

We are modeling supply chain questions and I think that that is something that we continue to to model and that's what accounts for the range that we provided in the the size of the range. So it's much more about sorting it out and Theres new information everyday I'd say in last couple of days, it's actually been slightly up.

I live in terms of the ability to navigate and so we're still working through a lot of those details, but we do have suppliers that haven't been able to get back end in other parts of China, whether it's in Shanghai iron to Joe that to deliver capability that gets integrated into systems and its its supply chain it could be dual sourced.

But not in in a short run it would take a couple of months to qualify a second supplier. So right now when those suppliers are able to come back online.

There are people can actually get back into the factory. We would expect to have had very little if any disruption based on the current plan now if it extends out and people can get back in and these facilities stay close that would have a broader impact and again another reason for them the wider range and so and maybe the last point you. All know this is.

The extension of the Chinese new year means that there is still we're still sorting through what that means because people have been off and so as they go back we're trying to determine exactly how that plays out.

Got it does very helpful. And then a quick follow up on SPT US Brian you talked about exiting the year with record backlog. It looks like you guys are expecting you're pretty strong year. This year.

In addition to RF I think you talked about a recovery in auto into second half, but if you can kind of speak to the relative contributions from those two dynamics in the year there would be helpful. Thank you.

Yeah, I mean, certainly fiveg and the are increasing RF requirements are going to be a big driver for Sps both in in the infrastructure for Fiveg, but also in the mobility cycle as that starts to play through.

Automotive is there is increasing semiconductor content automotive and automotive have difficult year 19, so even some of the stronger customers for SPT has bought very little in 19. So we're we're comfortable or an optimistic about seeing that part of the business recover and I would expect SPT asked if you had two too.

Gather both in terms of with Fiveg is driving and automotive you end up with a a 10% to 15% kind of growth year for.

For that business. So we're excited about those opportunities packaging might might provide another tailwind and.

I think there very well positioned in those markets.

Thanks, so much.

Your next question comes from blinded Joe could keep leads boasts well give you any signs now.

Yeah. Thanks for taking the question in the past you talked about the memory adoption on Gen five being stronger than expected I'm. So maybe you could talk about just your confidence going into what looks to be Ana and memory cycle and the potential incremental growth drivers there versus prior cycles. And then you know are those net new opportunities or they can.

Additive to put displacements.

Hi, Joe Hi, This is Rick I'll take the first Spartan brand finished the with the hard stuff. So so my view is the.

We are seeing the adoption, we talked about earlier over process control adoption stages backup and say process control intensity in 20 being nominally flat tonineteen, that's really a function of memory adoption being higher than it's been historically and that's a function of the new products that we have as well as increased adopt.

Option and wafer inspection, we have seen new use cases in terms of what we're seeing for example for Gen. Five as we expand that capability out one thing. We don't know is when or if you vs really going to be implemented many big way in memory, but that creates some some upside but the other thing is the metrology opportunities.

That we see based on the new products that we've introduced drive that intensity up. So there is some displacement in terms of our new tools displays are our prior generation, but the net of at all this process control intensity, improving as we see it in the memory specifically in and the NAND.

Yes, I think to Rick's point, I mean, one of the big things that we saw change in NAND intensity as we went to three D was a driver of our unparalleled inspection business to keep tools cleaner and because of defectivity challenges as they start to process. The stacks you have increasing flatness requirements and so as the stacks are rising.

Flatness becomes more and more important wafer stress is more important and so we're we're we have capabilities for that and then certainly the metrology requirements as as as you've gotten into threed structures have intensified in.

In a meaningful way for US then you add in new products.

And we feel pretty good about that both with new products from metrology, but also in terms of some of the E beam capability that we're bringing to market to raise point DRAM.

With the introduction of E V into DRAM, even at a single layer or two that should drive scaling again and ultimately will.

Enables smaller defects, which tends to drive our inspection business and with the broader portfolio. We feel like we're very well positioned there. So we think there's opportunities for we have to execute but we think theres opportunities for us to continue to drive.

Some improvement in process control intensity in memory, it'll never looked like foundry logic, but at the same time I think theres incremental opportunity there if we can execute.

Thanks, That's helpful. And then there was a quick follow up your expectations for domestic China revenue for 2020, I apologize I missed it is that still flat year over year.

No. It's one of the drivers it's changed since last earnings is I would expect to see some growth there. It's more logic foundry heavy I think the amount of memory investment in China next year is probably one of these wild cards that will influence the Wi Fi for level overall for next year, but I would expect to see a grow and I think it's double digit growth.

The year to year.

Thank you.

Thank you.

Your next question comes from line Sidney Ho from Deutsche Bank. Your line is now.

Thanks for taking my question just following up to previous questions on the implied in EMEA revenue guide for the March quarter I understand then we capex recoveries more second half, but it doesn't play a sharp decline quarter over quarter after three straight quarters of.

Revenue being at high level, so what's driving that dynamics in the previous three quarter. Instead, we will be Aston until the second half of this year.

Well you had multiple customers investing in and right now when you look at the March quarter.

There just isn't a lot of activity on the memory for you still see customers investing in technology progression.

But but very little new capacity, particularly in the in the flash space right now in the March quarter for US now we shipped into that business more in the December quarter. So it could be a timing issue between what we see it versus where capacity centric player might see it but.

Memory in the March quarter is kind of weak and I would expect to see it strengthened as we move through the year.

Okay. That's helpful.

I mean, if all of its Oh, sorry. If this has been asked earlier, but last quarter, you had expected revenues to come down 5% half over half in first half calendar 20, and given a calendar Q4 was much stronger does that change the slope of that and assuming that the corona virus impact tend to offset itself in the first half the year in house.

Should we think about source halfway second half floor for.

So this year I.

I think it's a relatively flat outlook half to half in the first half of 20, given the assumptions that that we have on the Cronto virus and we start to see this work itself and clear itself as we move into the June quarter. So.

Relatively flat.

For the overall business.

Okay, great. Thanks.

We have no for your question at this time I will now turn the call but back to the percentage.

Thank you and thank you everyone for your time and interest in kill it today.

Charlie can you please conclude the call.

Thank you, Sir ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect.

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