Q4 2020 KLA Corp Earnings Call

[music].

Then ultimately after the speaker's remarks, there will be question answer session to ask the question give me. The session you will need press star one on Nicolas and keep it if you acquire and forget assistance. Please press star is given I would now like kind of conference as it comes to Kevin Kessel Vice President Dick This is the lease.

Please go ahead.

Thank you and welcome to kill its fiscal Q4 2020 quarterly earnings call to discuss the results of our June quarter outlook for the September quarter.

Joining me today as recalls or Chief Executive Officer, and Bren Higgins, our Chief Financial Officer. During today's call. We will discuss quarterly results for the period ended June Thirtyth 2020, and we released today after the market close in the form of a press release.

Shareholder letter and slide deck.

These documents can be found on the IR section her website.

Today's discussion of our financial results and outlook is presented on a non-GAAP financial basis, unless otherwise specified a detailed reconciliation of GAAP to non-GAAP result is in today's earnings materials posted on the Kaylee IR website.

Our IR website also contains a calendar of future virtual investor events, as well as presentations corporate governance information, including our quite accurate policy and links to Kaylee SEC filings, including the most recent annual report and quarterly reports on forms 10-K and 10-Q.

Our comments today are subject to risks and uncertainties reflected in the risk factors disclosed.

Our SEC filings any forward looking statements, including those we make on the call. Today are also subject to those risks and Kaylee cannot guarantee those forward looking statements will come true.

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

As we mentioned last quarter, we're changing the format of these calls to provide deeper insights into Kayla and our business performance.

And also a lot more tibor QNX beginning this quarter, we will provide some highlights from our full prepared remarks, which can be found in the shareholders letter before beginning our Q any session.

I encourage you all to read the letter it can be accessed on our Kaylee IR website.

And with that I'd like to turn the call over to our President and Chief Executive Officer, Rick Wallace.

Thanks, Kevin and thank you all for joining us today.

On behalf of all of US the Kayla, We hope you and your families are safe and in good health.

And we thank you for your continued interest and support of our company.

In many ways our performance in the June quarter. Once again highlights how the Kaylee operating model in long term strategic objectives provide a dependable framework to guide our execution and help us consistently deliver on our commitments.

Thanks to the dedication engagement and perseverance of our global workforce in the face of the challenges posed by the coated 19 pandemic.

Haley delivered strong results in the June 2020 quarter.

Revenue and non-GAAP EPS each finished above the midpoint of our guidance ranges.

Demonstrating strong consistent demand from our customers exceptional execution by our teams and the enduring strength and resiliency of the Haley operating model under today's extraordinary circumstances.

For my opening remarks today, the plan to touch on some of the key messages from our letter to shareholders I'll start with an update on our priorities related to covert 19 touch on the industry demand environment, then cover five highlights from the quarter before passing it the brand who will review our financial highlights and our outlook.

In terms of Kogan 19, we continue to take proactive measures to ensure the health and safety of our employees their families and our partners or action to date have been successful and effective as reflected in our strong financial results in the first half the pound or 2020.

But more importantly in our safety record to this point in this pinned down it.

It's also important is that our worldwide teams have never lost sight of what our customers need.

Our teams have been exceptionally resourceful and committed to executing for our customers most pressing needs and challenges.

Customer feedback has been outstanding.

Haley is consistently delivering on our customer commitments.

And that's been in long term remains an important priority for us during this time.

Confident that our R&D investments will help ensure a bright future.

Now turning to the industry demand environment customer demand is strong we ended the quarter with our second highest level of quarterly backlog ever in the June quarter, we saw broad diversified strength across each of our segments semiconductor process control was above plan multiple LC business has set records and our services businesses.

Record installations.

Today's environment continues to accelerate many of the secular industry growth drivers that we outlined in our 2019 Investor day.

Datacenter demand fiveg infrastructure, the revival of PC demand to support work from home virtual collaboration remote learning and entertainment and gaming are driving an acceleration of the data era that translates across end markets and industries.

We're also seeing this acceleration in our own business adopting new digital productivity tools to improve collaboration with teams and customers. We've also increased investment to accelerate digitalization of our global Enterprises for example, and our services business, we're working closely with our customers to expand remote service technologies.

Men are in country service and installations engineers.

Here are five highlights that stood out the most during the past quarter.

First we saw continued strength in foundry and logic in the June quarter, and our revenue forecast for the remainder of 2020 shows relative balance between businesses from these customers.

Business from memory customers is improving somewhat in the second half of 2020 versus the first half with higher business levels and more customer breadth expected in the December quarter would that momentum continuing into 2021.

Second Kayla ended the June quarter with near record total company backlog.

Demonstrating momentum in the marketplace across our portfolio newly launched products such as the well received DSL 10 E beam inspection platform helped drive our market leadership.

Third our services business continues to perform well and remains on track for growth and healthy free cash flow generation. Once again this calendar year.

The services business set a record for system installations in the quarter, we see robust service contract penetration, which has risen steadily from the 70% plus contract penetration to 75% plus over the past several quarters and delivering a strong recurring revenue stream.

We're forecasting service revenue growth in 2020 inline with our long term annual 9% to 11% target.

Fourth the newly formed electronics packaging and components are CPC group delivered record results in the June quarter and finished above our internal forecast.

Within APC, we achieved a key milestone with the SPT us delivering record the quarterly revenue of $100 million in the June quarter, We expect 2020 to be a year of double digit growth for Sps.

I'd also had a record quarter driven by improved market positioning supporting fiveg infrastructure in handsets.

The strong results for CPC are coming about 18 months post the acquisition of Orbotech. We're very pleased to see the successful demonstration of our strategic growth strategy is bearing fruit.

Also on pace to achieve cost synergies from the Orbotech acquisition above the original targets.

Finally in keeping with our commitment to deliver strong and predictable capital returns to our shareholders. Today, We announced our board of directors has approved the 11th consecutive annual dividend increase the increase raises our quarterly dividend by five cents to 90 cents per share for an annual run rate dividend of $3.60 per share.

Hey, let's dividend payout has grown at a CAGR of approximately 15% since inception.

Before I hand, it over to brand, let me summarize by saying tailings focus on innovation and execution combined with market leadership and robust free cash flow and helped us successfully navigate through these challenging times.

We believe the secular factors driving industry demand in our 2023 targets remain firmly intact.

I have diversified growth the strong long term operating leverage that positions our business to be even stronger and more resilient in the future with that I'll turn it over to Brian.

Thanks, Rick Kelly's June quarter results highlight both the soundness and strength of our ongoing strategy, we are demonstrating our ability to meet customer needs and expand our market leadership, all growing operating profit generating strong free cash flow, maintaining our robust capital return strategies.

Total revenue was 1.46 billion non-GAAP gross margin was 60.3% slightly above the midpoint of guided range the quarter of 59% 61%.

Non-GAAP EPS was $2, a 73 cents towards the high end of the guidance ranges dollar eating one to $2 in 80 cents.

GAAP EPS was $2 and 63.

Revenue for the semiconductor process control segment was modestly above expectations for the quarter.

Foundry was once again strong at approximately 50% of semiconductor process control systems revenue.

Logic was about 10% of semiconductor systems revenue and memory customers were roughly flat at 40% in the June quarter within memory. The business was evenly split about 50 50 between DRAM and NAND.

Revenue for the specialty semiconductor process segment was a record 100 million up 18% sequentially and 50% year over year is on track for double digit growth in calendar 20.

PCB display opponent inspection revenue was also a record at 202 million up 26% sequentially and 10% year over year and above internal plans.

In terms of balance sheet highlights.

We ended the quarter with $2 billion in cash total debt of 3.5 billion.

Flexible and attracted bond maturity profile supported by an investment grade ratings from all three areas.

From a cash flow on capital returns perspective free cash flow was $411 million in the June quarter free cash flow conversion was 96.5% and free cash flow margin was 28.2%.

For capital returns over the past 12 months, we've returned 1.35 billion to shareholders or 83% of free cash flow, including 522 million in dividends paid and 829 million in share repurchases.

We believe our track record of delivering strong capital returns is a key component of the Kayla investment thesis and offers predictable and compelling value creation for our shareholders.

As Rick mentioned, a moment ago, our board approved our 11th consecutive annual dividend increase resulted in annual run rate dividend $3.60 per share.

As it relates to guidance for the September quarter, we'd like to start out by saying that our operations teams have done a great job mitigating the supply chain challenges in disruptions related to code 90, although we are carrying more inventory to mitigate unanticipated disruptions should they occur.

The extra measures, we have taken to maintain flexibility in continuity of supply for critical components in our supply chain has definitely been affected as demonstrated by Kaylee strong results for both our March and June quarters, either met or exceeded the midpoint of guidance ranges.

With that said, we are narrowing our guidance range as we generally see consistency in the current operating environment.

The demand profile today for the second half of the years firming and we now anticipate that the second half will grow versus the first half of 2020.

For the calendar year, we expect a faster than market growth year for semiconductor process control business and growth for the total company in line with or above our long term revenue growth target range.

With that guidance for the September quarter is as follows.

Total revenue is expected to be 1.48 billion, plus or minus 75 million.

We forecast non-GAAP gross margin to be in a range of 60.5% to 62.5% as product mix is more favorable versus the June quarter.

The market reception to new product offerings in our semiconductor process control business has been strong and as outlined at our Investor day back in September. The company has made solid progress on our plans of driving cost inefficiencies on new product platforms and leveraging scale derived by our worldwide service infrastructure.

Finally, GAAP diluted EPS is expected to be in a range of 2018 cents to $2.82 and non-GAAP diluted EPS range in 2042 cents to $3.06.

In closing, we have adapted to a challenging environment.

We are executing well and had even more confident that we're on track to meet our 2023 target model both in terms of topline growth and profitability.

We are encouraged by the strength the resiliency of the Kaylee operating model, which guide their strategic objectives.

These objectives fuel our growth operational excellence and differentiation across an increasingly more diverse product and service offering.

They also underpin our sustained technology leadership.

Competitive mode, and strong track record of free cash flow generation and capital returns to shareholders.

With that I'll now turn the call over to Kevin to beginning today.

I'm Charlie plan.

Provide instructions for the queuing and making money.

Curiously, ladies and gentlemen, if you would like to that question. Please press star one on your telephone keypad and wait for you need to be in now if you wish to canceling Chris print town key please limit your question to one question and one follow up.

Your first question comes from the line the Portland food with JP Morgan Your line.

Good afternoon, so I'll jump on the quarterly execution, no two months ago, the industry supply chain as well as demand trends looked pretty uncertain you fast forward to today supply chain has come back semiconductor fundamentals, while we can June or is fully showing signs of improvement entering the second half of the year. If I look at your was.

Well, it's in died and make some assumptions on December and it's like you'll be towards the upper end of your pre cope with 19 revenue outlook or sort of in that low double digits percentage revenue growth for this calendar year first is that a fair assumption and maybe some commentary on your WSE spending outlook today versus pre.

Global 19 earlier this year.

Yeah Arlon, it's Brendan I'll go first here. So I think your your conclusions are generally corrected we said in the prepared remarks.

We see our view on the year to be generally.

Within our long term target growth range of 79% or above.

And so as we look at the year overall I don't think things have changed all that much I mean, you're right. There was a lot that had to be done back in March and June in terms of managing supply chain and supporting customers, but we worked through all that and we've got some consistency now in our overall view so in general I would say that our views overall or are virtually unchanged.

Do you at the everybody counted up a little bit differently, but I would so I don't want to put a point number out there, but I would say that somewhere in the mid to high single digit type growth 55 to our mid Fiftys to high Fiftys, probably the right way to think about it.

Great. Thanks for that and you entered the June quarter I remember, what do you have strong specialty semiconductor trends, but maybe more muted trends within some of your other EGPC segments like PCB in display as these are more consumer and sort of autofocus automotive.

This segments for you guys and probably more impacted by pulls it 19, but you've got to delivered strong double digit sequential and year over year growth in you know the the PCB display in components inspection business. The what drove the solid trends and how you're thinking about this particular segment as you move through the second outflow.

This year.

Yes, Thanks, Harlan I'm really pleased with our performance in HPC and I think you have to when you think about the different divisions.

We saw strong continued momentum in packaging and that's really the Ecost business. We're also seeing S.P.T. us, especially semi business had a very strong showing and we mentioned that set a record there up revenue PCB was earlier in the year looked like it was going to soften in it strengthened and driven a lot.

By Fiveg infrastructure build out and we feel really good about the execution that team display is still in a tough spot and thats not one that really.

We saw a lot of strength and we're following through on the conversations we've had on display where were working on the cost structure and being positioned for for when the recovery happens there, but but I think the other businesses. The other thing is really notable as Sps had a very strong quarter in spite of no automotive business. So that's really upside as we go forward I think it's.

Pretty fair to say automotive semiconductors, a bottoms and so we feel pretty good about it's pretty much all upside from here as the spending has probably been curtailed, but it shows signs toward the end of next year over the it this year and then into 2021, we'll see some resumption of investment.

As a electrification projects continue so yeah, we feel good about where we are with that and we are definitely getting traction having those under one organization and engaging with customers at a high level.

Alan its brand the only other thing I'll add to that as we go back to two April when we're thinking about the quarter was unclear what the what the handset environment would look like in the second happen here and so I think one of the encouraging signs that we did see to Rick's point was it the PCB business was really driven by site by GE and the preparation for.

A handset introductions that are dicom, so that was a bit of a surprise for us or or perhaps had some unknown built into it just related to overall coven. So drove the SPT, yes business as Rick said, but also.

Drove incremental upside in PCB.

Your next question comes from the line up John did serve with credit Suisse. Your line is now.

Yeah. Good afternoon, guys congratulation to saw results. Thanks, but let me ask the question really just on the gross margin guide into September and pretty good sequential growth wondering if you just unpack that a little bit is this a larger percent coming from the semi process control or is it mix within S.P.C. and I guess importantly.

Do you think that that you know the June quarter now growth into the September is a trend that you can sustain going forward or is this kind of an anomaly quarter relative to mix.

Yeah, Hey, John So I did say that yes, I mean quarter to quarter, we're seeing sequential growth in semi Tc and so that's having a positive effect on on gross margins and so so I think that what we're seeing there I am encouraged as I said in the in the shareholder letter we.

Talked a lot about driving cost and efficiency improvements in new platforms customer reception has been strong. So we feel pretty good about the product portfolio, we have and the the margin position. So let me just say that I.

Have more confidence around our margin trajectory moving forward, although quarter to quarter that the mix dynamic tends to be the biggest factor that drives our margin around this.

This range, but but certainly as we look forward, we feel pretty confident that.

We should be able to to maintain this sort of 61% and above type trajectory that.

Right now.

Helpful. Then as my follow up Rick you talked about second half of the calendar year growing over the first half of that kind of curious if you could break that down between sort of memory and logic foundry and how might that have changed over the last 90 days I mean, I don't want to put words in your mouth, but it sounds like maybe you're less optimistic about a memory uptick in the back half.

For the year, perhaps more optimistic about lot logic foundry sustaining and if that's the case in any read as we go into calendar year 21.

Yeah, we do see.

We think theres.

A lot of evidence that the foundry logic has got a whole through the second half and I think that also now we're getting indications of strength going into 21.

Part of the uncertainty I think around the year that everybody has is the memory recovery probably towards the end of the calendar year, and that's really where we would expected in Q4 to strengthen there. So that's that's a I think maybe the less certain part of that but the set up for logic looks really good I think the progress that.

Customers and designs and the ongoing investment by our customers and in multiple design wins in multiple.

Proliferation of devices and multiple players. So we're also getting breadth and our products are doing really well. So we feel pretty strong about how the the logic foundry is going to hold up.

Your next question comes from the line net Krish Sankar blade, killing and company your line Standalone thing.

Yes, hi, Thanks for taking my question I have two of them close we need a week or brand you know clearly like dual fuel larger logic and foundry customers have spoken about push out of either the seven nanometer opportunity given the two nanometer upon lease I missed the backdrop, how do you think of kidneys process control revenue opportunity over the next deal to to give.

And with some of the meeting as you noted that getting pushed out and then I had a follow up.

Yes, there's.

There's really nothing that's been discussed publicly that hadnt been the way we had been factoring in forecasting our business, it's pretty much consistent with what we've seen I think some of the public announcements are catching up with some of what what's going on.

You have to look at why there are delays when there are delays in the delay as tend to come from.

It's much more an inability to execute than it is a demand there's plenty of demand at the leading edge, it's the challenges associated with.

Yield management with process control with the overall process integration and those are factors that we're heavily involved in so when we think that there's a lot of continued momentum for us and process control, both metrology and inspection on the leading nodes and so we that's part of why earlier comments in the last.

Just a given a question were about the strength that we see through the calendar year and then into 21. So we feel pretty good about how that's going and I think are in partnership with our customers. We're helping them work through some of the most challenging metrology and deep activity issues, some of which frankly, they did not anticipate but we did and we've been showing savannah.

Oh, you and getting a adoption as a result that makes us.

Yes, if that does spends a lot.

Then just.

Just to follow up on the product side, you guys introduced a.

That doesn't mean for E beam inspection tool at Semicon, I'm, just trying to figure it out.

Good evening tools still focused on depicted the considerably from looking at bats, and because of the deal voltage worked its going to and you won't company those are going to like.

Multi being too.

You guys, it's still a single beams I just wonder if we go the E beam roadmap. Thank you.

Yes so.

What we wanted to make sure is that we can provide differentiated performance for to address the market gaps that existed and that we can provide customers a complimentary solution along with her optical tools, because what they're really trying to balance is how do they get all the characterization understanding.

And product development that are looking for out of portfolio. So we have some unique capabilities in our E beam inspection tool, we think that the coverage it provides in the uniqueness.

In addition to the fact that its closely coupled with our optical tools gives a very strong advantage to our customers by using them in parallel and that's what we're seeing a we have mapped out and we.

I have a lot of confidence that we understand what the roadmaps looked like in terms of the different E beam architectures, and we feel very confident about our ability to be competitive any being we wouldn't have reentered the market. If we didnt feel like we had a differentiated solution and so thats the ability both to find the defects of interest and define them as throughput.

What's that are compelling for our customers and we as we map out the future we don't see any gap between us and competitors. In fact, we see that we have the ability to continue to differentiate our solution.

Your next question comes from the line its CJ Muse with Evercore ISI. Your line is now.

Yes. Good afternoon. Thank you for taking my question I guess first question was hoping you could provide a little more color on your prepared comments regarding memory in greater breadth of spending into Q4, the beyond into 2021 would love to hear kind of what you're hearing in dialogue with customers there.

Yes, you Jay its brand so I mean judging by our.

<unk> percent a business for for the September four that's memory, it's it's a lighter than.

Then in June so most of what we see in the second half and this was one area where it wasn't all that clear be backup three months ago and say, okay. We thought we'd see some memory recovery into second half of the year I wasn't exactly sure when we'd see it but as weve. So it looks like it's more December December focused and it a I would say it is probably.

The heavier on the flash side, although there is fluidity in terms of how customers are thinking about those investment plans, but I think you can look at all the players that are out there.

That we would expect to see business start to improve in that timeframe and then I think are solid momentum as we move into into next year I don't want to provide color on on 21, but I think as we take a step back and look at it.

We're memory has been I mean, starting in the middle of 20 team, we've seen a pullback and very disciplined management of memory capacity and most of the investment focused on.

Technology transition so as that market.

Continues to recover I think that the markets in a pretty healthy place overall is as we move into 21.

That's helpful. As my follow up for for the PCB display and component business.

Including service how are you thinking about second half calendar year versus the first half.

And then as part of that how should we be thinking about the seasonality.

In terms of peak quarter Q3 versus Q4 given.

How a dominant PCB is within within the construct here. Thank you.

Yes, SB Ts I would expect it potentially could be flattish half to half wants to see how it how it plays out I think PCB second half will be slightly.

We'll probably be lower in the second half given what's driven that the strength. We saw in the June quarter would expect a lot of focus on execution as we move into the second half there on the flat panel business I wouldn't expect a much to change on that front. It is 100% consumer focused there's virtually no LCD investment out there and so there is.

A fair amount of digestion of that capacity that are still being worked through so I don't expect.

Any growth in fact, maybe second half might be flat to modestly down in that business.

Your next question.

Punch.

Your next question comes from the line that Patrick Cope with Stifel. Your line is now.

Oh, Thank you very much and congrats on the nice quarter, just maybe following up Oh CGS question about the memory spend and timing typically memories.

It'll get more metrology biased.

Versus say logic and foundry being a little more inspection bias is there any difference on the timing of your tool deliveries because what I'm trying to get out is it, especially tightened tends to lead some of the process tools, but metrology may come in conjunction with process tools. So am I looking at that correctly.

Or are there still hold we times in terms of metrology shipments relative to process tools.

It's a good question certainly metrology certain parts of metrology like in film measurement and overlay tends to scale with.

When capacity, but you also have on pattern inspection that scales also with capacity.

On the on the pattern inspection side, it tends to be a little bit more front end.

In terms of just the development process itself. So.

Now I think from a a lead time point of view I don't think the lead times on the products are all that much different a few months or so but generally that's a that's how it plays out.

Great that's helpful and maybe brand as a follow up in terms of the Opex management, you probably have gotten some savings over the last several months due to cope with 19, and the diminishing of travel and things of that nature.

As we get back to a more quote normalized environment, how do you balance some of the increases that will come from that versus you know these attractive opex levels that you're you're achieving today.

Yes, that's a good question and more probably operating right now $10 million to $15 million below what I consider to be normalized run rates.

We certainly wish we could add people faster both in terms of new heads, but also a replacement head count and so this process. This situation has slowed us down from that perspective. So I think if you just look at overall spending levels today relative to revenue we're sizing the company in that 380 that $385 million range in all.

Ultimately the way, we're going to run the company over the long term is to drive a one and a half X drop through wouldn't have extra revenue growth rate drop through to the earnings and so that implies 40% to 50% incremental operating margins. So for every incremental dollar revenue were probably.

The increase costs tend to 10 to 15 cents or so so that's a the way to keep our incremental gross margins are above 60%. So it's a way to think about it so.

So we're going to look at the opportunities to invest we always invest in our in our portfolio. That's why our market shares almost fivex or nearest competitors why we introduced products faster than our competitors is is that we want to make sure. We got the best products out there and we continue to innovate and so we're going to look at the opportunities first and foremost and then size overtime consistent with our long.

Our model.

Your next question comes from the line yet any T.K., we would you be F secure line Standalone.

Thanks, a lot so Brian I guess the my first question is on the process control revenue so.

[noise] down in June and I know that you know there was maybe some difficult comps because of the Q4 last year, but wfb in the first definition is definitely up in your process control shipments have been down in March in June.

And but it sounds like you think that you're going to at least keep up with the WP for the year, So that would imply a pretty big back half of the year given what's happened here in the first thing.

Can you maybe hold our hand, a little bit and you know tell us why you seem to a loss like a little bit of share in the first and maybe why.

You know.

No process control will be up so much and maybe help us gauge how much will be up in September are you talking 10% to 15% Q on Q, thanks, I'm going to follow.

So Tim we don't really look at done if he spent half to half here as I just look at overall expectations and the way we laid out the year at the beginning the year and we're we're mostly in line with a with the plan that we had and against the backdrop of let's say WSE levels that are mid single digit growth for the year I would expect across.

Yes control business to the outperformed the market so as I said earlier around.

Since it's such a big part of our business that we had expected to be within our target revenue range for the year slightly above process control that's that statements consistent for process control.

And as well.

But I guess.

I would expect it to be up I would've expected to be up half to half.

And then.

I guess just on that point can you give us a sense for where you think it'll be in September and then I guess my follow up was you didn't repurchase any shares in the quarter, which is kind of interesting watt why why not thanks.

So Tim we guide the overall company and we manage and deploy resources across all of our businesses too.

To meet our expectations and so.

I don't want to guide the semi PC business, but in terms of just overall expectations I'd expect that business to grow mid single digits versus the June quarter, but that being said if I've got strength in other parts of the company and I may.

Deploy resources in a different way that that helps us sort of managed to our overall numbers, but but at the end of the day, what we're really trying to do is is drive to our expectations and.

And to continue to ship it support customer support and their timing, but I would expect that mid single digit sort of quarter to quarter growth in that and that segment.

Your next question comes from the lined out and get back on the bankruptcy I never discoveries Caroline Stewart.

Thank you for taking my question I think Brinker brand you mentioned some signs a foundry demand perhaps sustaining into next year I was hoping if you could give us some more color because I think consensus seems to be that founder demand could activity.

Possibly decline next yet and I realize it's early but.

From what you see today is it possible that foundry demand could actually be positive.

Next year.

Oh, Yeah, it's really early for next year, but what we do see is a multiple customers, making investments in foundry and so far this year, it's been largely a smaller group. So one and so the expansion of that is really and the conversations we've been having into commitment to that is what gives us the.

The confidence for the second half of the year and then the follow on projects that are coming after that or why we think it's a good set up for 2021, but obviously there there's a long time between now and then but I think the notion that there is success of the advanced nodes that you have the fiveg infrastructure building out.

You have a lot going on in the advanced computing and high performance computing along with the work toward AI is all very positive for what we're seeing in terms of the continued investment in foundry and logic and a lot of that is driven by the additional capability people are getting from the advanced nodes. So.

So that's what gives us confidence that plus the conversations we're having and the the our challenge and meeting some of the slot demands through the rest of the year just to keep up with what customers are are talking about needing and we have pretty good ways of judging their actual intent. There also a number of projects in China that are Iowa.

He RF sensor focused and so.

It's made foundry a higher percentage of the mix overall this year and we would expect some sustainability in that as we move into.

Into next year, so to Rick's point, there's a fair amount of diversification really across.

All end markets, we would expect.

On a modem in industrial in those areas sort of fits back with the China statement or more trailing edge.

To be better next year and theres enough in market demand at the leading edge, that's driving a driving incremental customer investment in mitigating reuse and so on so I think the setup as we continue this year at the rest of the year, but also as we move into next year looks.

Looks pretty good Hey, there was a question earlier Tim's question on share repurchase I just want to spend a second on it. So so we as we started the quarter. We are focused on on overall liquidity and wanted to see how the market shaked out given all the unknowns uncoated. So as we progressed in the quarter, we did pause our share repurchase plan we did.

Buyback a fair amount of shares in the March quarter and would expect it will start our our capital allocation program will will begin at this quarter again, it at least around share repurchases and should finish the year inline with our objective of returning at least 70% of the cash flow, we generate to shareholders I would expect this year to be.

Above that above that baseline.

Okay, and if I could ask a quick follow up.

There are two big trends going on so DSMC appears to be getting stronger I'm. So there are fewer perhaps the high end.

Leading has customers to go after and then that has also this trend of more sovereign and manufacturing, which I understand is probably the same demand but may be scattered across.

More places that could cause some cyclicality and I don't know how how do you think Kelly's position when there are fewer leading edge foundry customers and then if that is more sovereign manufacturing does it shift more of the spending towards your competitors, what expose more to capacity rather than do technology.

Ships or use improvement just how do these two big trends play out for Kelly or what the next few years. Thank you.

I wouldn't say their viewer.

So I think if you look at leading edge or investment and certainly our expectation for what we've seen in this business. When we expect going forward is to Rick's earlier point.

Yeah, no correlation between any of the announcements or or conjecture, that's in the marketplace versus a versus what we're doing internally. So we feel very good about the leading edge adoption that's out there and I think that as you see the end markets adopt I think that that deploys more.

Capacity.

And with boundaries of franchisees are providing more of a more of that capacity then that tends to be higher process control intensity and as those customers have to deliver a lot of yielded product the tight market window. So we feel pretty good about that there's a lot of end demand in this specific designs for those four that demand and so I think on the.

Trailing edge side.

There is some startup cost for new projects or maybe inefficiency in the market, but overtime there they're building to specific markets and you might see some training capacity, there, but but overall I think we feel pretty good about the leading edge environment, particularly end demand, but also the technology scaling thats now happening with TV.

Your next question comes from the line to kill Quickselect cheap with Wells Fargo guidelines.

Yeah. Thanks for taking the question in the past you've talked about opportunities for higher metrology intensity. It in NAND flash at higher layer counts. So I'm. Just curious you know as we go into this next memory spending cycle relative to the Pratt has cycle how do we show how should we think about just your opportunity there for.

Kind of peak cycle revenues relative to the last cycle.

Yeah I'll take the first part and then brand can fill in the number thinking that industry, Joe I mean, what we've seen in two things one as the design rules have ER or the design complexity has pushed both in flash and of course in DRAM that does create more opportunity in some cases the opportunity was already there.

What was missing from us was necessarily a solution. So part of it was having the capability and tools to support the advanced node and the needs and that's something that we're pretty happy with in terms of as we laid out in the past our ability to drive up process control intensity in memory and we've already seen the first part of that.

So we feel validated and not approach are the only thing it's interesting and we didnt necessarily know is going to happen, but on DRAM. The and the introduction of you V for DRAM driving more deep activity needs and capability and the usage of that so.

There are some really positive trends in terms of driving process control intensity well above what it was in the past for memory, we really went backwards when the first moved to NAND.

What was first introduced because they went back a couple of design rules and now they're back moving forward. We have some product capability, we've learned how to solve some of these problems and we are engaged closely with customers. So we feel good about the progression of process control intensity as the design rules continue to to me.

Before the technology nodes continued its not just design rules as you know, but the the challenges in the increased number of layers. So brand from a from a standpoint of the numbers. Yeah. I think we've seen process control share the increased two to three points from the transition from planar NAND.

Vertical NAND.

To Rick's point, we do have some new products in the pipeline that that if.

These products are effective and can be deployed in multiple units across fabs give us an opportunity to left to improve that intensity, even higher both in terms of metrology.

With some extra capability that that we're working on but also.

If we can help solve the the deep activity challenge and defects within the stack and locating impacts, but then the depth dimension of the stack. So so there are no shortage of opportunities and I think we've seen it improves so far and and we look to see a little bit of improvement moving forward on the DRAM side with the introduction of either is infrastructure for you'd be whether its.

One layer or more you still have to have it.

Reticle Inspector.

To be able to to qualify radicals you have to qualify blanks and then of course, you have to do print check to validate reticle fidelity.

In the fat itself. So there is also infrastructure investment that needs to happen.

Support.

I'm sorry.

Thanks for that and then as a follow up I just wanted to clarify in your prepared remarks, you talked about the new a U.S. restrictions.

Is there a change in that at all relative to what you talked about last quarter in terms of yeah. I think an their prepared remarks, you talked about its difficult to predict the near term dynamics related to those.

Well and it was and we had to go through the exercising the exercise as did our peer companies.

The determining whether or not we were how to be compliant with the regulations and I think all the peer companies have gone through that exercise them weve.

Been able to navigate that as we said we're gonna obviously, if all the law I was just there were some uncertainty as to what exactly how to interpret it. So we've had the benefit of working through those details and.

Feel like we've we've moved on from that.

Your next question comes from the line it Joe Moore with Morgan Stanley. Your line is now.

Great. Thank you.

I Wonder if you could talk a little bit about your business in China, it's been pretty stable as a percentage of revenues how is that mix shifting between multinationals and China sovereign kind of customers and what are you seeing specifically from trying to sovereign customers.

We're seeing that we're seeing growth this year.

You know and so so you've got the pieces that are part of PCB and display. So micro statement is is more.

WSP centric, but I would expect it to be up 20% or more so I think WSE levels in China or.

For the native China customers are probably somewhere in that.

$9 billion to $10 billion range. So.

It certainly is growth this year, and it's more foundry and I would call it infrastructure centric.

Okay, great. Thank you very much.

Your next question comes from the line.

On a linked with Citi. Your line is now.

Hi, Thanks for taking my questions and dumping results and guide.

Good to see you see delivering record the June quarter that I've a question on Fiveg. Your fights you smartphone exposure on the PCB side gives you an edge or will you appear to have based on our work in perhaps the higher stock multiple how much of the PCB at system and services revenues are five de exposed on an annual.

With that.

So when we're looking at a right now, it's about 50% and and it feels like the success that we've had there as you pointed out we've got good exposure. We've got good products to serve those customers and we feel like that's this is early days for the Fiveg build out. So we think there's a there's continued opportunity there as we go forward.

[music].

Great and then it given the question earlier on delivery at the U.S. logic make or longer term I see you have better exposure to foundry versus that logic maker based on your 10-K is that shipped up capacity from the U.S. logic maker two to five on foundry potentially newco will your logic.

Opportunity on a modest positive.

You know, it's it's really hard to say I mean, I think part of what we've experienced over time is that there are customers that historically, we've seen a high correlation between their ability to stay on leading edge and their engagement and investment.

And Calite process control equipment. So what we're seeing now is people that feel like they're needing to catch up our investing more to do that but but I think it's pretty clear if you want to stay on the leading edge applauded logic and foundry and you don't have the ability to fully understand and the learning cycles in the fab you're going to.

You're going to struggle so anybody that's trying to get into a lead or maintain a lead ends up changing their investment profile. That's why what's really good for us as people that want to do advanced node technology, because they need to invest and so I would say that if it moves that because then that they've struggled and if they want to be so.

Accessible then they end up investing more so I think that what's really good for Kayla as advanced nodes and the desire people have to support them I.

I think and as you know in a in a foundry, especially a multiproduct boundary.

The other challenge they have as there are multiple process flows. So it also is a challenge for inspection and metrology to be able to support. So many flows because all the designs are all going through the same process flow. So we generally feel really excited when we see the large number of increasing designs.

Advance nodes, that's what's really been encouraging.

The other thing on the sustainability of it just does the one thing we would have wondered earlier. This year was if we were to see utilization in the fabs of logic and foundry go down and we haven't so we feel pretty good about the sustainability of of the investments across the board.

Your next question comes from the line at Blayne Curtis that workplaces for wind Standalone.

Hey, guys. Thanks, there a question that result, just curious on the service side and you had delays getting in and actually doing service you talked about record number I'm just kind of curious.

You mentioned earlier, whether you actually are caught up or plan to catch up as you're looking at September.

Well, we installed a record number of tools in the June quarter, and so we feel very good about that on the circumstances and being able to transition to much more localized teams to to handle the.

The installation requirements for four tools and of course, our guidance for the September quarter contemplates. Those those plans overall service has been as has done extremely well Rick talked about utilization rates. It foundry and logic. We've also seen very strong utilization rates, a memory, which is another indicator.

Health of the market so we.

We feel pretty good about all of that we think we're gonna grow our long term growth rate expectation and annual growth rate expectation for services, 9% to 11% and we think we'll be in our target range and because of the scale that we're now able to drive and some of the investments we made over the years in China in particular, but.

Also in Taiwan, and Korea, so as we're able to drive a.

More economies of scale in our and our profit structure as well so that's.

It's it's a pretty good situation right now for service and I think we've adapted pretty well and we're trying to leverage.

Some of that promote capability to that to that are out there today and for us to position.

This business from an efficiency and support point of view, even better going forward.

Yeah, I, just add to that I mean, our service guys. It really heroes.

Hi, guys and Gals this last quarter in this year they've done an amazing job when we look at all our customers even back in lieu of on during the early stages of this crisis. The only people that were going anywhere inside of valves were our service guys and they were there to support our customers and so often with our customers when they don't want to have visitors of any kind that they accept.

In a service because they want to keep these fabs up and running so really it's been remarkable to see the resiliency of that and a as Brent said the long term trend looks good and this year.

We feel really good about services ability to hit the targets, we set out pre cove. It for them. So we feel really good about that.

<unk>.

Hi, good as one entity or the recovery.

Beginning in memory I'm, just kind of curious on the DRAM side. It was always give me late year I was just curious if that part of any of the recovery you're targeting.

I think DRAM, just a little bit I think flashes is better in a and as I said earlier I think flashes better in the the second happened here and that DRAM is.

Probably stronger in the first half of the year overall, but I mean again that can move around a little bit, but that's that's how we see it right now.

Your next question comes from lined it Quinn Bolton with Needham and company your line scandal.

Okay. Thanks for letting me ask a question just wondering to come back to the China business. Obviously, you haven't seen a major impact from the Commerce Department action, but wondering if you've seen any increase thread of de americanization of equipment in China, especially from the domestic suppliers and probably more on the metro.

Paul G. side than the inspection side of your business, where I think you guys are pretty well entrenched.

So Glenn this is Rick I think since scale I started doing business internationally when I run the company back in Japan, and whatever the late eighties, there have always been attempts by our our customers in different regions to have supply base. So there's never been a lack of interest and motivation that happened.

In Japan of course that happened in Korea, I'm, not quite as much in Taiwan, but definitely happened in China. So for sure. There is interested in desire to have their own capability, but you know like that as you know this business. That's the impetus on us is to keep driving performance capability and making sure we're competitive so that.

What more more of the competitive were compelling so that we win that business, but yes of course, there is interest in trying to have alternatives other than us, but but I think the practical business of running semiconductors as you got to be competitive on a worldwide basis and so you've got to have the capabilities to eat worldwide and that's always.

Ben our belief is we have to win overall because any opportunity any region has to go with another so solution, they're going to do it. So we don't see that is particularly different than it's been in the past.

Thanks for that quick follow up for brand just a nice gross margin guidance September wondering if they're entering any lingering cobot 19 costs that are still affecting that the gross margin, possibly in the freight and logistics shipping would be one area.

Yeah, I don't think it will there there are and I don't think it'll change in the September quarter, and probably not in the December quarter. So there is a bit of a headwind there.

About 40 basis points last quarter on some revenues up a little bit so similar impact.

Well this quarter in already factored in the in the margin guidance. So yeah, I think as we start to normalize whenever that might be will start to we'll get a tailwind from.

Increasing competition in the in the freight market overall, but yes inbound freight is a costs have gone up there.

As a reminder to ask the question you will need to press star one on your telephone keypad and leap for you need to be now to lead while your question press. The pound keep your next question comes from the like Sidney Ho with Deutsche Bank Your line Standalone.

Great. Thanks.

You talk about these set up it's pretty good for next year foundry and logic is it mostly driven by the five nanometer ramble are you expecting any contribution from bringing nanometer development I know, it's still early but maybe broadly speaking do you have a view when you're going to start seeing the revenue relate to three data Peters.

Yes, both for sure we'll see I mean, the as you know these things go in.

In cycles of the early the early work and then you get the build out and we also how some of the as Brent mentioned earlier, we have a fair amount of logic Thats a trailing the continues to be the investment but on leading edge sure. We'll see early at already in those conversations about that early capability and that'll be of course, our leading edge.

Leading edge tools not as many early on but that's really in the debugging phase of that.

I would expect to to follow on there I would expect a.

Broader levels of investment into the first half of next year.

Brett that you talked about this year, we expect a continuation of that into next year.

So a lot of compelling opportunities or for for a number of players.

The logic space.

Great and maybe as my follow up to two follow up question. Historically, you see process control strength early in the process and then it states once a promising volume production do you expect this pattern to continue or do you see more sustainable stream through tech transitions going forward given what you talked about earlier about the dynamics happening in into memory market.

It really it is true I mean that trend is true, it's especially true when there is fewer there's less innovation I think that difference now and the leading edge is what do you view has done is brought back scaling and so that was really more pronounced in a period, where we have that long GAAP, where there was there was.

No. He would be there was not another lithography technology for several years.

And so that really exacerbated that trend that so the of the two other factors now you've got additional designs, which is kind of a surprise from where maybe the world was a while ago and then you have multiple players trying to.

So the phase of that is different where you have different players trying to cut in and since there is a leader and then the other folks are are behind that gives another way of at a different location. So I think the net of all that is it tends to be.

More sustainable plus we have more products that are more tied to production. An example would be overlay, which is much more correlated to production in the number of layers. They get measured at overlay doesn't really decreased that much now given the challenges. So you don't have that same reduced sampling and reduce the number tools and some of these.

Product areas as we might have had in the past.

Operator, I think we have time for one last question.

Yes, Sir we have a question for Weston Twigg led Keybanc capital markets. Your line is now.

Hey, Thanks for taking my question I, just there's something you said earlier that really resonated with me for Kayla, which.

Even more product this helps with intuitively makes sense in the foundry. So you see more chips more high, especially theres five de chips chips going in a different things that are all sort of custom.

Can you help us think about how that provides uplift for clack overall over the next few years.

Yes, sure I mean think about though the worst case scenario for US is there one device made by one person right and they dial that process and then they lock it in for three years and they don't change anything right now would be the worst case, because as you know what they really want to do is dial in the process get everything under control and.

Habit be just ramp and then not pay any attention like the thing Ron have all the CP kase inline so the other into that continuum is lots of process designs. What's interesting about foundry is they don't force one process in fact part of their selling proposition is you have multiple process flows through a foundry. So if you look.

You can publicly go do this and look at TSMC you can detect tons of different process flows. What's that means is the large number of change. The other thing that we've seen the reverse trend in the last few years as you have hyperscalers datacenter people designing their own ships because they want to have an advantage you know in their own design. So.

You have a lot of customers, we have our customers customer traditionally is far greater than it used to be which is why there's so many designs happening at advanced nodes. When the view was at some point that it was going to keep restricting the number of designs. That's not what's happened so that creates more and more flow of process and change and the need to.

Manage that is all upside. So we're really excited when we started seeing the number of relevant designs become more and more successful because that that's a factor that favors process control in order for people to be so successful at producing those that makes sense.

I think he's gone.

Okay Charlie.

I guess, how we had no for his question as it's fine I will now turning to call that back to persons.

Okay. We wanted to thank everybody for their time and interest and this concludes the call Charlie Please provide instructions.

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

Good bye.

[music].

[music].

[music].

Thank you Vincent taper standby and welcome to the Kaylee Corporation fourth quarter fiscal years 20 twin engines.

At this time all participants are in listen only limited after the speaker's remarks, there will be question answer session to ask the question give me. The session you will need to press star one on your tone and keep have you quantified and forget assistance. Please press Star you gave it I would now like 10 conference and because that Kevin.

Yes.

Precedent.

Sure.

Yes.

Thank you and welcome takeaways fiscal Q4, 2020 quarterly earnings call to discuss the results of our June quarter and outlook for the September quarter.

Joining me today as Rick Walter Chief Executive Officer, and Bren Higgins, our Chief Financial Officer. During today's call. We will discuss quarterly results for the period ended June Thirtyth 2020.

At least today after the market growth in the form of a press release.

Shareholder letter and slide deck. All these documents can be found on the IR section her website.

Our IR website also contains a calendar future virtual investor events as well as presentation corporate governance information, including our quite accurate coffee and links to Kaylee strategy filings, including the most recent annual report and quarterly reports on forms 10-K kind of Q.

Our comments today are subject to risks and uncertainties reflected in the risk factors disclosed.

Our SEC filings any forward looking statements, including those we make on the call. Today are also subject to those risks and came away cannot guarantee those forward looking statements will come true.

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

As we mentioned last quarter, we're changing the format of these calls to provide deeper insight into scaling our business performance.

And also a lot more time for QNX beginning this quarter, we will provide some highlights from our full prepared remarks, which can be found in the shareholders letter before beginning our Q any session.

I encourage you all to read the letter it can be accessed on our catering IR website.

With that I'd like to turn the call over to our President and Chief Executive Officer, Rick Wallace.

Thanks, Kevin and thank you all for joining us today.

On behalf of all of US the Kayla, We hope you and your families are safe and then good health.

And we thank you for your continued interest and support of our company.

In many ways our performance in the June quarter. Once again highlights how the Kaylee operating model and long term strategic objectives provide a dependable framework to guide our execution and help us consistently deliver on our commitments.

Thanks to the dedication engagement and perseverance of our global workforce in the face of the challenges posed by the coated 19 pandemic Haley delivered strong results in the June 2020 quarter.

Revenue and non-GAAP EPS each finished above the midpoint of our guidance ranges.

Demonstrating strong consistent demand from our customers exceptional execution by our teams and the enduring strength and resiliency of the Haley operating model under today's extraordinary circumstances.

For my opening remarks today I plan to touch on some of the key messages from our letter to shareholders.

I'll start with an update on our priorities related to Kogan 19.

John the industry demand environment, then cover five highlights from the quarter before passing it through brand, who will review our financial highlights and our outlook.

In terms of Kogan 19, we continue to take proactive measures to ensure the health and safety of our employees their families and our partners. Our action to date have been successful and effective as reflected in our strong financial results in the first half the calendar 2020.

But more importantly, and our safety record to this point in this pandemic.

It's also important is that our worldwide teams have never lost sight of what our customers need.

Our teams have been exceptionally resourceful and committed to executing for our customers most pressing needs and challenges.

Customer feedback has been outstanding.

Hayley consistently delivering on our customer commitments.

And that's one of them long term remains an important priority for us during this time.

Competent that our R&D investments will help ensure a bright future.

Now turning to the industry demand environment customer demand is strong we ended the quarter with our second highest level of quarterly backlog ever in the June quarter, we saw broad diversified strength across each of our segments semiconductor process control was above plan multiple PC business has set records and our services businesses.

Record installations.

Today's environment continues to accelerate many of the secular industry growth drivers that we outlined in our 2019 Investor day.

Datacenter demand fiveg infrastructure, the revival of PC demand to support work from home virtual collaboration remote learning and entertainment and gaming are driving an acceleration of the data era that translates across end markets and industries.

We're also seeing this acceleration in our own business adopting new digital productivity tools to improve collaboration the teams and customers. We've also increased investment to accelerate digitalization of our global Enterprises for example, and our services business, we're working closely with our customers to expand remotes surface Technologies' second.

Men are in country service and installations engineers.

Five highlights that stood out the most during the past quarter.

First we saw continued strength in foundry and logic in the June quarter, and our revenue forecast for the remainder of 2020 shows relative balance between businesses from these customers.

Business from memory customers is improving somewhat in the second half of 2020 versus the first half with higher business levels and more customer breadth expected in the December quarter would that momentum continuing into 2021.

Second Kaylee ended the June quarter with near record total company backlog.

Demonstrating momentum in the marketplace across our portfolio newly launched products such as the well received DSL 10 E beam inspection platform helped drive our market leadership.

Third our services business continues to perform well and remains on track for growth and healthy free cash flow generation. Once again this calendar year.

Services business set a record for system installations in the quarter.

We see robust service contract penetration, which has risen steadily from the 70% plus contract penetration to 75% plus over the past several quarters and delivering a strong recurring revenue stream.

We're forecasting service revenue growth in 2020 inline with our long term annual 9% to 11% target.

For the newly formed electronics packaging and components are APC group delivered record results in the June quarter and finished above our internal forecast.

Within a PC, we achieved the key milestone with the SPT us delivering record the quarterly revenue of $100 million in the June quarter, We expect 2020 to be a year up double digit growth for Sps.

I'd also had a record quarter driven by improved market positioning supporting five de infrastructure in handsets.

The strong results for CPC are coming about 18 months post the acquisition of Orbotech. We're very pleased to see the successful demonstration of our strategic growth strategy is bearing fruit.

Also on pace to achieve cost synergies from the Orbotech acquisition above the original targets.

Finally in keeping with our commitment to deliver strong and predictable capital returns to our shareholders. Today, We announced our board of directors has approved the 11th consecutive annual dividend increase the increase raises our quarterly dividend by five cents to 90 cents per share for an annual run rate dividend of $3.60 per share.

Hey, like dividend payout has grown at a CAGR of approximately 15% since inception.

Before I hand, it over to brand, let me summarize by saying Taillights focus on innovation and execution combined with market leadership robust free cash flow and helped us successfully navigate through these challenging times.

We believe the secular factors driving industry demand in our 2023 targets remain firmly intact.

I have diversified growth the strong long term operating leverage that positions our business to be even stronger and more resilient in the future with that I'll turn it over to Brian.

Thanks, Rick candidly is June quarter results highlight both the soundness and strength of our ongoing strategy, we are demonstrating our ability to meet customer needs and expand our market leadership, all while growing operating profit generating strong free cash flow, maintaining our robust capital return strategies.

Total revenue was 1.46 billion non-GAAP gross margin was 60.3% slightly above the midpoint of guided range the core of 59% 61%.

Non-GAAP EPS was $2.73 towards the high end of the guidance range of $1.81 to $2 an 87.

GAAP EPS was $2 and 63.

Revenue for the semiconductor process control segment was modestly above expectations for the quarter.

Foundry was once again strong at approximately 50% of semiconductor process control systems revenue.

Logic was about 10% of semiconductor systems revenue and memory customers roughly flat at 40% in the June quarter within memory. The business was evenly split about 50 50 between DRAM and NAND.

Revenue for the specialty semiconductor process segment was a record 100 million up 18% sequentially and 50% year over year is on track for double digit growth in calendar 2000.

PCB display opponent inspection revenue was also a record at 202 million.

26% sequentially, and 10% year over year and above internal plans.

In terms of balance sheet highlight kaylee ended the quarter with $2 billion in cash total debt of 3.5 billion and a flexible unattractive bond maturity profile supported by investment grade ratings from all three areas.

From a cash flow on capital returns perspective free cash flow was $411 million in the June quarter free cash flow conversion was 96.5% free cash flow margin was 28.2%.

For capital returns over the past 12 months, we've returned 1.35 billion to shareholders or 83% free cash flow, including 522 million in dividends paid and 829 million in share repurchases.

We believe our track record of delivering strong capital returns is a key component of the Kayla investment thesis and offers predictable and compelling value creation for our shareholders.

As Rick mentioned, a moment ago, our board approved our 11th consecutive annual dividend increase resulted in annual run rate dividend $3.60 per share.

As it relates to guidance for the September quarter, we'd like to start out by saying that our operations teams have done a great job mitigating the supply chain challenges in disruptions related to code 90, although we're carrying more inventory to mitigate unanticipated disruptions should they occur.

The extra measures, we have taken to maintain flexibility and continuity of supply for critical components in our supply chain has definitely been affected as demonstrated by clearly strong results for both our March and June quarters, either met or exceeded the midpoint of guidance ranges.

With that said, we are narrowing our guidance range as we generally see consistency in the current operating environment.

The demand profile today for the second half of the years Fermi and we now anticipate that the second half will grow versus the first half of 2020.

For the calendar year, we expect a faster than market growth year for semiconductor process control business growth for the total company in line with or above our long term revenue growth target range.

With that guidance for the September quarter is as follows.

Total revenue is expected to be 1.48 billion, plus or minus 75 million.

We forecast non-GAAP gross margin to be in a range of 60.5% to 62.5% as product mix is more favorable versus the June quarter.

The market reception to new product offerings in our semiconductor process control business has been strong and as outlined at our Investor day back in September. The company has made solid progress on our plans of driving cost inefficiencies on new product platforms and leveraging scale derived by our worldwide service infrastructure.

Finally, GAAP diluted EPS is expected to be in a range of $2, an 18 cents to $2.82 and non-GAAP diluted EPS range of 2042 cents to $3 to six cents.

In closing, we have adapted to a challenging environment.

We are executing well and had even more confident that we're on track to meet our 2023 target model both in terms of topline growth and profitability.

We are encouraged by the strength and resiliency of the Kaylee operating model, we've guided their strategic objectives.

These objectives fuel our growth operational excellence and differentiation across an increasingly more diverse product and service offerings.

The also underpin our sustained technology leadership.

Competitive mode, and strong track record of free cash flow generation in capital returns to shareholders.

With that I'll now turn the call over to Kevin to begin acuity.

Charlie plan.

Provide instructions for the queuing and again, making money.

Sure, Jason Ladies and gentlemen, if you would like to ask the question. Please press star one when your telephone keypad and wait for you need to be now if you wish to canceling Kris Kris town key please limit your question to one question and one follow up.

Your first question comes from the line your Portland food with JP Morgan Your line.

Good afternoon, so I'll jump on the quarterly execution, no three months ago, the industry supply chain as well as demand trends look pretty uncertain you fast forward to today supply chain has come back semiconductor fundamentals, while we can June or is fully showing signs of improvement entry into second half the year. If I look at your was.

Well, it's in died and make some assumptions on December think you'll be towards the upper end of your pre Colgate 19 revenue outlook or sort of in that low double digits percentage revenue goal for this calendar year first is that a fair assumption and maybe some commentary on your WSE spending outlook today versus pre.

Global 19 earlier this year.

Arlon, it's Brendan I'll go first here. So I think your conclusions are generally corrected we said in the prepared remarks.

We see our view on the year to be generally.

Within our long term target growth range up 7% to 9% or above.

And so as we look at the year overall I don't think things have changed all that much I mean, you're right. When there was a lot that had to be done back in March and June in terms of managing supply chain and supporting customers, but we've worked through all that and we've got some consistency now in our overall view so in general I would say that our views overall or are virtually unchanged.

<unk>.

On WFP, everybody counted up a little bit differently, but I would so I don't want to put a point number out there, but I wouldn't say that somewhere in the mid to high single digit type growth 55 to our mid Fiftys to high Fiftys, probably the right way to think about it.

Great. Thanks for that and you entered the June quarter, I remember with in view of strong specialty semiconductor trends, but maybe more muted trends within some of your other EGPC segments like PCB in display as these are more consumer and sort of autofocus automotive.

Okay segments for you guys and probably more impacted by coupled with 19, but do you guys delivered strong double digit sequential and year over year growth in you know the the PCB display in components inspection business. So what drove the solid trends in how are you thinking about this particular segment as you move through the second half will.

This year.

Yes, Thanks Harlan.

Really pleased with their performance NEPC and I think you have to when you think about the different divisions.

We saw strong continued momentum in packaging and that's really the Ecost business. We're also seeing us Pts specialty semi business had a very strong showing and we mentioned that set a record there for revenue PCB was earlier in the year looked like it was going to soften in strengthened and driven a lot.

By Fiveg infrastructure build out and we feel really good about the execution that team display is still.

In a tough spot and thats not one that really.

We saw a lot of strength and we're following through on the conversations we've had on display where were working on the cost structure and being positioned for for when the recovery happens there, but but I think the other businesses. The other thing is really notable as Sps had a very strong quarter in spite of no automotive business. So that's really upside as we go forward I think it.

Pretty fair to say automotive semiconductors have bottomed and so we feel pretty good about.

It's pretty much all upside from here as the spending has probably been curtailed, but it shows signs toward the end of next year over this year and then into 2021, we'll see some resumption of investment.

As a electrification projects continue so yeah, we feel good about where we are with that and we are definitely getting traction having those under one organization and engaging with customers at a high level.

Harlan its brand the only other thing I'll add to that as we go back to two.

Role, we're thinking about the quarter was unclear what the what the handset environment would look like in the second happen here and so I think one of the encouraging signs that we did see to Rick's point was it the PCB business was really driven by by Fiveg and the preparation for.

For the handset introductions that are to comp so that was a bit of a surprise for us or or perhaps had some unknown built into it just related to overall covance. So drove the SPT, yes business as Rick said, but also.

Drove incremental upside in PCB.

Your next question comes from lined up John It's true with credit Suisse. Your line scandals.

Yeah. Good afternoon, guys congratulation to fall results. Thanks, Let me ask the question Brent just on the gross margin guide into September pretty good sequential growth. What do you just unpack that a little bit is this a larger percent coming from the semi process control or is it mix within SPC. It I guess importantly, do you think that that the G.

June quarter now growth in the September is a trend that you can sustain going forward or is this kind of an anomaly quarter relative to mix.

Yes, Hey, John So I'd say that yes, I mean quarter to quarter, we're seeing sequential growth in semi PC and so that's having a positive effect on on gross margins and so so I think that what we're seeing there I am encouraged as I said in the in the shareholder letter we.

Talked a lot about driving cost and efficiency improvements in new platforms customer reception has been strong. So we feel pretty good about the product portfolio, we have and the margin position. So let me just say that I.

Have more confidence around our margin trajectory moving forward, although quarter to quarter that the mix dynamic tends to be the biggest factor that drives our margin around this.

This range, but but certainly as we look forward, we feel pretty confident that.

We should be able to to maintain this sort of 61% and above type trajectory that.

Right now.

Helpful. Then as my follow up Rick you talked about second half of the calendar year growing over the first half of that kind of curious if you could break that down between sort of memory and logic foundry and how might that have changed over the last 90 days I don't want to put words in your mouth, but it sounds like maybe you're less optimistic about a memory uptick in the back half.

For the year, perhaps more optimistic about lot logic foundry sustaining and if thats. The case in any read as we go into calendar year 21.

Yeah, we do see.

We think there's.

A lot of evidence that the foundry logic is going to hold through the second half and I think that also now we're getting indications of strength going into 21.

Part of the uncertainty I think around the year that everybody has is the memory recovery probably towards the end of the calendar year, and that's really where we would expected in Q4 to strengthen there. So that's that's a I think maybe the less certain part of that but the set up for logic looks really good I think the progress that.

Customers and designs and the ongoing investment by our customers and in multiple design wins in multiple.

Proliferation of devices and multiple players. So we're also getting breadth and our products are doing really well. So we feel pretty strong about how the the logic foundry is going to hold up.

Your next question comes from the line net Krish Sankar building and company your line scandal.

Yes, hi, transmitting the question left two of them close when either brand you know clearly like dual fuel largest logic and foundry customers have spoken about push out of either the seven nanometer confusion to clean out of it in the plan. Despite the backdrop. How do you think of can these losses conclude revenue opportunity over the next year that too.

Given that some of the meeting as you noted that getting pushed out and then I'll follow up.

Yes, there's.

There's really nothing that's been discussed publicly that hadnt been the way we had been factoring in forecasting our business, it's pretty much consistent with what we've seen I think some of the public announcements are catching up with some of what what's going on.

You have to look at why there are delays when there are delays in the delays tend to come from.

It's much more an inability to execute than it is a demand there's plenty of demand at the leading edge, it's the challenges associated with.

Yield management with process control with the overall process integration and those are factors that we're heavily involved in so when we think that there's a lot of continued momentum for us and process control, both metrology and inspection on the leading nodes and so we that's part of why earlier comments in the last.

Just a given a question were about the strength that we see through the calendar year and then into 21. So we feel pretty good about how thats going and I think are in partnership with our customers, we're helping them work through some of the most challenging metrology and deep activity issues, some of which frankly, they did not anticipate but we did and we've been showing savannah.

You and getting.

Adoption as a result that makes us.

Yes, no spends a lot.

Then just.

Just to follow up on the product side you guys introduced.

Pardon me for eating inspection tool at Semicon, I'm, just trying to figure it out.

Hi, good evening tools to focus on depicted the generally food looking at I think because of the deal voltage worked its going to and you won't companies are going to link.

Multi being too.

'cause, it's still a single beams I just wonder if we go the E beam roadmap. Thank you.

Yes so.

What we wanted to make sure is that we can provide differentiated performance for to address the market gaps that existed and that we could provide customers a complimentary solution along with her optical tools, because what they're really trying to balance is how do they get all the characterization understanding.

And product development.

Looking for out of portfolio. So we have some unique capabilities in our E beam inspection tool, we think that the coverage it provides in the uniqueness.

In addition to the fact that its closely coupled with our optical tools gives a very strong advantage to our customers by using them in parallel and that's what we're seeing we have mapped out if we.

I have a lot of confidence that we understand what the roadmaps look like in terms of the different E beam architectures, and we feel very confident about our ability to be competitive any being we wouldn't have re entered the market. If we didnt feel like we had a differentiated solution and so thats the ability both defined the defects of interest and define them as throughput.

What's that are compelling for our customers and we as we map out the future we don't see any gap between us and competitors. In fact, we see that we have the ability to continue to differentiate our solution.

Your next question comes from the line its seeking east with Evercore ISI. Your line is now.

Yeah. Good afternoon. Thank you for taking the question I guess first question was hoping you could provide a little more color on your prepared comments regarding memory and greater breadth of spending into Q4, the beyond into 2021 would love to hear kind of what you're hearing in dialogue with customers.

Yes, you Jay its brand so I mean judging by our.

<unk> percent a business for for the September quarter, Thats memory, it's a lighter than.

Then in June so most of what we see in the second half and this was one area where it wasn't all that clear be backup three months ago and say, okay. We thought we'd see some memory recovery into second half of the year I wasn't exactly sure when we'd see it but as weve. So it looks like it's more December December focused and it a I would say it is probably.

The heavier on the flash side, although there is fluidity in terms of how customers are thinking about those investment plans, but I think you can look at all the players that are out there.

That we would expect to see business start to improve in that timeframe and then I think are solid momentum as we move into into next year I don't want to provide color on on 21, but I think as we take a step back and look at it.

We're memory has been I mean, starting in the middle of 20 team, we've seen a pullback and very disciplined management of memory capacity and most of the investment focused on.

Technology transition so as that market.

Continues to recover I think that the markets in a pretty healthy place overall is as we move into 21.

That's helpful. As my follow up for for the PC display and component business, including service. How are you thinking about second half calendar year versus the first half.

And then as part of that how should we be thinking about seasonality.

In terms of peak quarter Q3 versus Q4 given.

How dominant PCB is within within the construct here. Thank you.

Yes, SPT asked I would expect it potentially could be flattish half to half love to see how it how it plays out I think PCB second half will be slightly.

We'll probably be lower in the second half given what's driven that the strength. We saw in the June quarter I would expect a lot of focus on execution as we move into the second half there on the flat panel business I wouldn't expect.

Much to change on that front. It is 100% consumer focus theres virtually no LCD investment out there and so theres a fair amount of digestion of that capacity that are still being worked through so I don't expect.

Any growth in fact, maybe second half might be flat to modestly down in that business.

I mean religion.

Punch.

Your next question comes from the line that Patrick who did Stifel. Your line is now.

Thank you very much and congrats on the nice quarter, just maybe following up.

He jays question about the memory spend and timing.

Typically memories, a little bit more metrology biased.

Versus.

Say logic and foundry being a little more inspection bias is there any decrease on the timing of your tool deliveries because what I'm trying to get at is especially tight tends to lead some of the process tools, but metrology may come in conjunction with process tools. So am I looking at that correctly or are there still.

Quote we times.

In terms of metrology shipments relative to process tools.

It's a good question.

Currently metrology certain parts of metrology like in film measurement and overlay tends to scale with.

When capacity, but you also have on pattern inspection that scales also with capacity.

On the on the pattern inspection side, it tends to be a little bit more front end.

In terms of just the development process itself. So.

Now I think from a a lead time point of view I don't think the lead times on the products are all that much different a few months or so but generally that's a that's how it plays out.

Great that's helpful and maybe brand as a follow up in terms of the Opex management, you probably have gotten some savings over the last several months due to cope with 19 and the diminishing of travel and things of that nature as we get back to a more quote normal life.

The environment, how do you balance some of the increases that will come from that versus these attractive opex levels that you're you're achieving today.

Yes, that's a good question and more probably operating right now $10 million to $15 million below what I'd consider to be normalized run rates.

We certainly wish we could add people faster both in terms of new heads, but also a replacement head count and so this process. The situation has slowed us down from that perspective. So I think if you just look at overall spending levels today relative to revenue, we're sizing the company in that $380 million to $385 million range I mean all.

Ultimately the way, we're going to run the company over the long term is to drive a one and a half X drop through wouldn't have ex the revenue growth rate drop through to the earnings and so that implies 40% to 50% incremental operating margins. So for every incremental dollar revenue were probably.

The increase costs tend to 10 to 15 cents or so so that's.

The way to if our incremental gross margins are above 60%. So it's a way to think about it so.

So we're going to look into the opportunities to invest we always invest in our in our portfolio. It's why our market share is almost fivex or nearest competitors why we introduced products faster than our competitors is is that we want to make sure. We've got the best products out there and we continue to innovate and so we're going to look at the opportunities first and foremost and then size overtime consistent with our long.

Our model.

Your next question concerns, allowing it to Nikki Keith would you be asked your line Standalone.

Thanks, a lot so Brian I guess the my first question is on the process control revenue so.

You are down in June and I know that you know there was maybe some difficult comps because of the Q4 last year, but WSP in the first half of this year is definitely up in your process control shipments have been down in March and June and but it sounds like you think that you're going to at least keep up with the Wi Fi for the year. So.

I would imply a pretty big back half of the year given what's happened here in the first thing.

Can you maybe holder hand, a little bit and tell us why you seem to a loss like a little bit of sharing the first and maybe why.

You know.

Process control will be up so much and maybe help us gauge how much will be up in September are you talking 10% to 15% Q on Q. Thanks, and then they have hollow.

So Tim we don't really look at dinner he spent half to half here as I just look at overall expectations and the way we laid out the year at the beginning of the euro more or mostly in line with a with the plan that we had and against the backdrop of let's say WSE levels that are mid single digit growth for the year I would expect our process.

As control business too to outperform the market so as I said earlier around.

Since it's such a big part of our business that we had expected to be within our target revenue range for the year slightly above process control that's that statements consistent for process control.

Segment as well.

Okay.

Good I guess.

What is expected to be out I would've expected to be up half to half.

And then.

I guess just on that point can you give us a sense for where you think it'll be in September and then I guess my follow up was.

You didn't repurchased any shares in the quarter, which is kind of interesting watt why why not thanks.

So Tim we guide the overall company, we manage and deploy resources across all of our businesses too.

To meet our expectations and so.

I don't want to guide the semi PC business, but in terms of just overall expectations I'd expect that business to grow mid single digits versus the June quarter, but that being said if I've got strength in other parts of the company and I may.

Deploy resources in a different way that that helps us sort of manage to our overall numbers, but but at the end of the day, what we're really trying to do is.

His drive to our expectations and.

And to continue to ship and support customer support and their timing, but I would expect it mid single digit sort of quarter to quarter growth in that in that segment.

Your next question comes from the line doesn't get back on the bankruptcy I never get skew east inline skating.

Thank you for taking my question I think Brinker brand you mentioned some signs of foundry demand, perhaps sustaining into next year I was hoping if you could give us some more color because I think consensus seems to be that foundry demand could activity.

Possibly decline next yet and I realize it's early but.

From what you see today is it possible that foundry demand could actually be positive.

Next year.

Yeah, It's really early for next year, but what we do see is.

Multiple customers, making investments in foundry and so far this year, it's been largely.

A smaller group so one and so the expansion of that is really and the conversations we've been having into commitment to that is what gives us the the competence for the second half of the year and then the follow on projects that are coming after that or why we think it's a good set up for 2021, but obviously there there's a.

There's a long time between now and then but I think the notion that there is success of the advanced nodes that you have the fiveg infrastructure building out you have a lot going on in the advanced computing and high performance computing along with the work toward AI is all very positive for what we're seeing.

In terms of the continued investment in foundry and logic and a lot of that is driven by the additional capability people are getting from the advanced nodes. So that's what gives us confidence that plus the conversations we're having and the.

Our challenge in meeting some of the slot demands through the rest of the year just to keep up with what customers are are talking about needing and we have pretty good ways of judging their actual intent. There also a number of projects in China that are aiotv RF sensor focused and so.

It's made foundry a higher percentage of the mix overall this year and we wouldn't expect some sustainability in that as we move into.

Into next year, so to Rick's point, there's a fair amount of diversification really across them.

All end markets, we would expect.

A modem and industrial in those areas, which sort of funds back with the China statement or more trailing edge.

The better next year and Theres enough in market demand at the leading edge, that's driving driving incremental customer investment in mitigating reuse and so on so I think the setup as we continue this year at the rest of year, but also as we move into next year looks.

Looks pretty good Hey, there was a question earlier Tim's question on share repurchase I just want to spend a second on it. So so we as we started the quarter we.

Focused on on overall liquidity and wanted to see how the market shaked out given all the unknowns uncoated. So as we progressed in the quarter. We did pause our share repurchase plan, we did buyback a fair amount of shares in the March quarter and.

We expect it will start our our capital allocation program will will begin at this quarter again at least around share repurchases and should finish the year inline with our objective of returning at least 70% of the cash flow, we generate to shareholders I would expect this year to be above that.

Above that baseline.

And if I could ask a quick follow up.

There are two big trends going on so DSMC appears to be getting stronger.

So there are fewer perhaps the high end.

Leading has customers to go off guard and then that has also this trend of more sovereign and manufacturing, which I understand is probably the same demand, but may be scattered across more places that could cause some cyclicality and I don't know how how do you think cash outlays position when there are fewer leading edge foundry customers and then.

That is more sovereign and manufacturing does that shift more of the spending towards your competitors, what expose more to capacity rather than to technology shifts or use.

Improvement just how do these two big trends play out for Kelly over the next few years. Thank you.

I wouldn't say there are fewer.

So I think if you look at leading edge or investment and certainly our expectation for what we've seen in this business, where we expect going forward is terrific earlier point.

No correlation between any of the announcements or conjecture, that's in the marketplace versus.

It is what we're doing internally so we feel very good about the leading edge adoption that's out there and I think that as you see the end markets adopt I think that that deploys more capacity and with boundaries of franchisees are providing more of a more of that capacity then.

That tends to be higher process control intensity and as those customers have to deliver a lot of yielded product the tight market window. So we feel pretty good about that there's a lot of end demand in this specific designs for those four that demand and so I think on the trailing edge site.

There is some startup cost for new projects or maybe inefficiency in the market, but over time, there they're building to specific markets and you might see some training capacity, there, but but overall I think we feel pretty good about the leading edge environment, particularly end demand, but also the technology scaling thats now happening with the.

Your next question comes from the line to kill Quickselect cheap wed love what do you lines.

Yeah. Thanks for taking the question.

In the past you've talked about opportunities for higher metrology intensity. It NAND flash at higher layer counts. So I'm. Just curious you know as we go into this next memory spending cycle relative to the Pratt half cycle, how do we show how should we think about just your opportunity there for kind of peak cycle revenues relative to the last.

Cycle.

Yeah I'll take the first part and then brand can fill in the number thinking that industry, Joe I mean, what we've seen in two things one as the design rules have.

ER or the design complexity has pushed both in flash and of course in DRAM that does create more opportunity in some cases the opportunity was already there or what was missing from us was necessarily a solution. So part of it was having the capability and tools to support the advanced node and the needs and that's something that.

We're pretty happy with in terms of as we laid out in the past our ability to drive up process control intensity in memory and we've already seen the first part of that so we feel validated and not approach. The only thing it's interesting and we didnt necessarily know is going to happen, but on DRAM, the and the introduction of you V for DRAM dry.

Being more deep activity needs and capability in the usage of that so.

There are some really positive trends in terms of driving process control intensity well above what it was in the past for memory, we really went backwards when the first moved to NAND.

What was first introduced because they went back a couple of design rules and now they're back moving forward. We have some product capability, we've learned how to solve some of these problems and we are engaged closely with customers. So we feel good about the progression of process control intensity as the design rules continue to to move.

For the technology nodes continued its not just design rules as you know, but the the challenges in the increased number of players so brand from a from a standpoint of the numbers Yeah, I think we've seen process control share.

The increase two to three points from the transition from planar NAND.

Vertical NAND.

To Rick's point, we do have some new products in the pipeline that that if.

These products are effective and can be deployed in multiple units across fabs give us an opportunity to left to improve that intensity, even higher both in terms of metrology.

With some extra capability that that we're working on but also.

If we can help solve the the.

Deep activity challenge and defects within the stack and locating feedbacks within that depth dimension of the stack. So so there are no shortage of opportunities and I think we've seen and improve so far and and we look to see a little bit of improvement moving forward on the DRAM side with the introduction of either is infrastructure for you the weather as one layer or more you still have to have it.

Reticle Inspector.

To be able to qualify radicals you'd have to qualify blanks and then of course, you have to do print check to validate reticle fidelity.

In the fat itself. So there is also infrastructure investment that needs to happen.

Support.

I'm sorry.

Thanks for that and then as a follow up I just wanted to clarify in your prepared remarks, you talked about the new a U.S. restrictions.

Is there a change in that at all relative to what you talked about last quarter in terms of yeah. I think in their prepared remarks, you talked about its difficult to predict the near term dynamics related to those.

Well.

And it was I mean, we had to go through the exercising the exercise as did our peer companies.

Determining whether or not we were.

How to be compliant with the regulations and I think all the peer companies have gone through that exercise and weve.

Been able to navigate that as we said we're gonna obviously, if all the law I was just there were some uncertainty as to what exactly how to interpret it. So we've had the benefit of working through those details and.

Feel like we've we've moved on from that.

Your next question is from the line it Joe Moore with Morgan Stanley Your line now.

Great. Thank you.

I Wonder if you could talk a little bit about your business in China, it's been pretty stable as a percentage of revenues how is that mix shifting between multinationals and China sovereign kind of customers and what are you seeing specifically from trying to sovereign customers.

What we're seeing that we're seeing growth this year.

And so so you've got the pieces that are part of PCB and display so might grow statement is is more.

WFP centric, but I would expect it to be up 20% or more so I think WSE levels in China or.

For the native China customers are probably somewhere in that.

$9 billion to $10 billion range. So.

It certainly is growth this year, and it's more foundry and I would call it infrastructure centric.

Okay, great. Thank you very much.

Your next question comes from the line.

In the late with Sidoti Your line is now.

Hi, Thanks for taking my questions, the Dublin results and guide and good to see you see delivering record the June quarter that I've. A question on Fiveg. You are fights you smartphone exposure on the PCB side gives you an edge what will you appear to have based on our work and perhaps the higher stock multiple how much of the PC.

The system and services revenues are five de exposed on an annual basis.

So when we're looking at a right now it's about 50% and.

And it feels like the success that we've had there as you pointed out we've got good exposure. We've got good products to serve those customers and we feel like that's this is early days for Fiveg build out. So we think there's a there's continued opportunity there as we go forward.

Great and then it given the question earlier on delivery at the U.S. logic make a longer term I see you have limited exposure to foundry versus that logic maker based on your 10-K is that shipped up capacity from the U.S. logic maker, who five on foundry essentially neutral well your logic.

Opportunity on a modest positive.

You know, it's really hard to say I mean, I think part of what we've experienced over time is that there are customers.

Historically, we've seen a high correlation between their ability to stay on leading edge and their engagement and investment and Calite process control equipment. So what we're seeing now as people that feel like they're needing to catch up our investing more to do that but but I think it's pretty clear if you want to stay on the leading edge.

Lot of logic, and foundry and you don't have the ability to fully understand and the learning cycles in the fab, you're going to you're going to struggle. So anybody that's trying to get into a lead or maintain a lead ends up changing their investment profile. That's why what's really good for us as people that want to do advanced node technology, because they need doing.

And so I would say that if it moves that because then that they've struggled and if they want to be successful then they end up investing more so I think that what's really good for Kayla as advanced nodes and the desire people have to support them I.

I think and as you know in a foundry, especially a multiproduct boundary.

The other challenges they have as there are multiple process flows. So it also is a challenge for inspection and metrology to be able to support. So many flows because all the designs are all going through the same process flow. So we generally feel really excited when we see the large number of increasing designs.

Advance nodes, that's what's really been encouraging.

The other thing on the sustainability of it just does the one thing we would have wondered earlier. This year was if we were to see utilization in the fabs of logic and foundry go down and we haven't so we feel pretty good about the sustainability of of the investments across the board.

Your next question comes from the line at Blayne Curtis that workplace two lines.

Hey, guys. Thanks, there a question that result, just curious on the service side, you had delays getting in and actually doing service you talked about record number I'm just kind of curious.

You mentioned earlier, whether you actually are caught up or plan to catch up as you're looking at September.

Well, we installed a record number of tools in the June quarter, and so we feel very good about that on the circumstances and being able to transition to much more localized teams to to handle the.

The installation requirements for four tools and of course, our guidance for the September quarter contemplates. Those those plans overall service has been as has done extremely well Rick talked about utilization rates and foundry and logic. We've also seen very strong utilization rates and memory, which is another indicator.

Of health of the market so we.

We feel pretty good about all of that we think we're going to grow our long term growth rate expectation annual growth rate expectation for services, 9% to 11% and we think we'll be in our target range and because of the scale that we're now able to drive and some of the investments we made over the years in China in particular, but.

Also in Taiwan, and Korea, and so on is what we're able to drive.

More economies of scale in our and our profit structure as well so that's.

It's it's a pretty good situation right now for service and I think we've adapted pretty well and we're trying to leverage.

Some of that promote capability that that are out there today for us to position.

This business from an efficiency and support point of view, even better going forward.

Yeah, I, just add to that I mean, our service guys. It really heroes.

Hi, guys and Gals this last quarter in this year they've done an amazing job when we look at all our customers even back and move on during the early stages of this crisis. The only people that were going anywhere inside of Fabs, where our service guys and they were there to support our customers and so often with our customers when they don't want to have visitors of any kind that they accept.

Turning to service because they want to keep these fabs up and running so really it's been remarkable to see the resiliency of that and as Brent said long term trend looks good and this year.

We feel really good about services ability to hit the targets, we set out pre cove. It for them. So we feel really good about that.

<unk>.

Hi, good I just want to ask me on the recovery.

Getting in memory I'm, just kind of curious on the DRAM side. It was always give me late year, just curious if that part of any of the recovery you're targeting.

I think DRAM, a little bit I think flash is better in the and as I said earlier I think flashes better in the the second happening here and that DRAM is.

Probably stronger in the first half of the year overall, but I mean again that can move around a little bit, but that's that's how we see it right now.

Your next question comes from Lynette Quinn, Bolton with Needham and company your line scandal.

Okay. Thank you let me ask a question just wondering to come back to the China business. Obviously, you haven't seen a major impact from the Commerce Department actions, but wondering if you've seen any increase thread of de americanization of equipment in China, especially from the domestic suppliers and probably more on the metro.

Oh, Gee side and the inspection side of your business, where I think you guys are pretty well entrenched.

So Glenn this is Rick I think since scale I started doing business internationally when I've been the company back in Japan, and whatever the late eighties. There have always been attempts by our our customers in different regions to have supply base. So there's never been a lack of interest and motivation that happened.

In Japan of course that happened in Korea, I'm, not quite as much in Taiwan, but definitely happened in China. So for sure there is interest and desire to have their own capability, but.

Like the as you know this business that's the impetus on us is to keep driving performance capability and making sure we're competitive so that.

More more of the competitive were compelling so that we when that business, but yes of course, there is interest in trying to help alternatives other than us, but but I think the practical business of running semiconductors as you got to be competitive on a worldwide basis and so you've got to have the capabilities to eat worldwide and that's always been.

And our belief is we have to win overall because any opportunity any region has to go with another so solution, they're going to do it. So we don't see that is particularly different than it's been in the past.

Thanks, a quick follow up for brand just a nice gross margin guidance September wondering if they're entering any lingering cobot 19 costs that are still affecting that the gross margin, possibly in the freight and logistics shipping would be one area.

Yeah, I don't think it will there there are and I don't think it'll change in the September quarter, and probably not in the December quarter. So there is a bit of a headwind there.

About 40 basis points last quarter on revenues.

Little bit so similar impact.

Well this quarter in already factored in the in the margin guidance. So yeah, I think as we start to normalize whenever that might be will start to we'll get a tailwind from.

Increasing competition in the in the freight market overall inbound freight is a costs have gone up there.

As a reminder to ask the question you will need to press star one on your telephone keypad and leap for you need to be now to lead while your question Press Pankey. Your next question comes from them like Sidney Ho with Deutsche Bank Your line Standalone.

Great. Thanks.

You talk about the set up is pretty good for next year foundry and logic is it mostly driven by the five nanometer ramble are you expecting any contribution from three nanometer development I know, it's still early but pretty broadly speaking do you have a view when you're going to start seeing the revenue really to three data Peters.

Yes, both for sure we'll see I mean, the as you know these things go in.

In cycles of the early the early work and then you get the build out and we also how some of the as Brent mentioned earlier, we have a fair amount of logic Thats a trailing the continues to be the investment, but I'm, leading edge sure. We'll see early at already in those conversations about that early capability and that'll be of course, our leading edge.

Leading edge tool thought as many early on but thats really in the debugging phase of that.

I would expect to to follow on there I would expect a.

Broader levels of investment into the first half of next year.

Brett that you talked about this year, we would expect continuation of that into next year.

So a lot of compelling opportunities for for a number of players and.

Logic space.

Great and maybe as my follow up too to follow up question. Historically, you see process control strength early in the process and then it states once a products on volume production do you expect this pattern to continue or do you see more sustainable string through tech transitions going forward given what you talked about earlier about the dynamics happening in the memory market.

It really it is true I mean that trend is true, it's especially true when there is fewer there's less innovation I think the difference now and the leading edge is what do you view has done is brought back scaling and so that was really more pronounced in a period, where we have that long GAAP, where there was there was.

We would be there was not another lithography technology for several years.

And so that really exacerbated that trend that so the of the two other factors now you've got additional designs, which is kind of a surprise from where maybe the world was it while ago and then you have multiple players trying to.

So the phase of that is different where you have different players trying to cut in and since there is a leader and then the other folks are are behind that gives another wave at a different locations. So I think the net of all that is it tends to be.

More sustainable plus we have more products that are more tied to production. An example of the overlay which is much more correlated to production and the number of layers that get measured at overlay doesn't really decrease that much now given the challenges. So you don't have that same reduced sampling and reduce the number tools and some of these.

Product areas as we might have had in the past.

Operator, I think we upon for one last question.

Yes, Sir we have a question for Weston Twigg lid Keybanc capital markets. Your line now.

Hey, Thanks for taking my question I, just there's something you said earlier that really resonated with me for Kayla, which.

That is it more product those helps with intuitively make sense in the foundry side, you see more chips more AI especial nsfivea chips chips going in a different things that are all sort of custom.

Can you help us think about how that provides uplift for clack overall over the next few years.

Yeah sure I mean think about though the worst case scenario for US is there's one device made by one person right and they dial that process and then they lock it in for three years and they don't change anything right now would be the worst case, because as you know what they really want to do is dial in the process get everything under control and.

Habit be just ramp and then not pay any attention let the thing Ron have all the Cpk is in line. So the other end of that continuum is lots of process designs. What's interesting about foundry is they don't forced one process in fact part of their selling proposition as you have multiple process flows through a foundry. So if you look.

You could probably go do this it look at TSMC you can tech tons of different process flows. What's that means is the large number of change. The other thing that we've seen the reverse trend in the last few years as you have hyperscalers datacenter people designing their on ships because they want to have an advantage in their own design. So.

You have a lot of customers, we have our customers customer traditionally is far greater than it used to be which is why there's so many designs happening at advanced nodes. When the view was at some point that it was going to keep restricting the number of designs. That's not what's happened so that creates more and more flow of process and change and the need to.

Manage that is all upside. So we're really excited when we started seeing the number of relevant designs become more and more successful because that that's a factor that favors process control in order for people to be SUS successful at producing those that makes sense.

I think he's gone.

Okay Charlie.

I guess you how we have room for his question as this time I will now turn the call them back to.

Okay. We wanted to thank everybody for their time and interest and this concludes the call Charlie Please provide instructions.

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

Good bye.