Ed Lockwood – Senior Director-Investor Relations Richard P. Wallace – Chief Executive Officer, President and Executive Director Bren Higgins – Chief Financial Officer and Executive Vice President.

Farhan Rizvi – Credit Suisse Timothy Arcuri – Cowen C.J. Muse – ISI Group Krish Sankar – Bank of America Merrill Lynch Bill Peterson – JPMorgan Mahesh Sanganeria – RBC Edwin Mok – Needham Atif Malik – Citigroup Stephen Chen – UBS Weston Twigg – Pacific Crest Securities.

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA-Tencor First Quarter Fiscal Year 2015 Earnings Conference Call. (Operator Instructions) I’ll now turn the call over to Ed Lockwood with KLA-Tencor Investor Relations. You may begin your conference..

Thank you, Mike. Good afternoon, everyone, and welcome to our conference call. Joining me on our call today are Rick Wallace, our President and Chief Executive Officer; and Bren Higgins, our Chief Financial Officer. We’re here today to discuss first quarter results for the period ended December 30, 2014.

We released these results this afternoon at 1:15 p.m. Pacific time. If you haven’t seen the release, you can find it on our Web site at www.kla-tencor.com or call (408) 875-3000 to request a copy. A simulcast of this call will be accessible on demand following its completion on the Investor Relations section of our Web site.

There, you’ll also find a calendar of future investor events, presentations and conferences, as well as links to KLA-Tencor’s SEC filings, including our annual report on Form 10-K for the year ended June 30, 2014, and our subsequently filed 10-Q reports. In those filings, you’ll find descriptions of risk factors that could impact our future results.

As you know, our future results are subject to risks. Any forward-looking statements, including those we’d make on this call today are subject to those risks, and KLA-Tencor cannot guarantee those forward-looking statements will come true.

These forward-looking statements, including references to the future financial performance and condition of the company, future macroeconomic and industry condition, future growth, any anticipated drivers of such growth, the company’s future capital structure, our leverage, recapitalization, a special cash dividend, incremental debt, plans to reduce debt, uses of cash, plans to purchase shares and levels of stockholder return, potential market and revenue opportunities and trends in the semiconductor industry and the anticipated challenges associated with them are based on the company’s estimates, assumptions and expectations of future events and are subject to a number of risks and uncertainties.

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

More information regarding factors that can cause those differences is contained in the filings we make with the SEC from time-to-time, including our fiscal year 2014 Form 10-K and our subsequently filed quarterly reports on Form 8-K and current reports on Form 8-K. We assume no obligation and do not intend to update those forward-looking statements.

However, any updates we do provide will be broadly disseminated and available over the Web. With that, I’ll turn the call over to Rick..

Thanks, Ed. Good afternoon, everyone, and thank you for participating in our earnings call. Today, I’ll discuss our refinancing and recapitalization announcement and the business highlights of the first quarter. Bren will then review the financial details of today’s announcements followed by Q&A.

Today, as part of our ongoing activities focused on returning value to shareholders, KLA-Tencor is announcing our intention to recapitalize our balance sheet.

These actions reflect management and the Board of Directors’ confidence in our market leadership, business model and long-term growth strategies, as well as our leadership and strong commitment to delivering a high level of returns to stockholders.

Bren will have more details of the transaction, but in summary, what we’re announcing today is proposed leverage recapitalization of KLA-Tencor, which would return approximately $4 billion to our stockholders. Subject to closing of the financial aspect of this initiative, we intend to issue a $16.50 per share special dividend.

We’re also announcing that our Board of Directors has authorized an increase to the company’s stock repurchase program by an additional 3.0 million shares of common stock. This increasing value add approximately $250 million based upon the closing cost of our common stock as of October 20, 2014.

We believe our capital structure strategy underscores our confidence and the strength of our strategic objectives in our business model, but also the strength of our balance sheet.

As we’ve invested in our business and executed our growth strategies over time, we have experienced strong cash generation in excess of what believe is necessary to fund our operations and investing our future growth.

We intend to continue to execute our business model and strategies, manage our company profitability and provide a high level of value to our stockholders. Turning now to highlights for the first quarter of fiscal 2015; September quarter revenue and earnings per share results finished as expected.

The new orders in Q1 ended below the guided range at $567 million, as orders from one of our foundry market customers ended below the original forecast for the quarter. We believe this is due to two factors. First, there are many challenges associated with adopting the new technologies required to fabricate leading-edge transistor architectures.

Second, tighter order lead times have become the norm in our industry today. And this coupled with a concentrated customer base is resulting in increased quarterly order variability.

We currently expect a rebound in foundry order levels in the December quarter as customers move closer to the implementation of new capacity additions in leading-edge foundries that are expected to begin in the first half of calendar 2015.

Although the September quarter bookings profile reflects an unusually low level activity from one of our foundry market customers in terms of next-generation FinFET build out, it’s clear that the battlefield for sub 20-nanometer competition has been formed with many players positioning to meet next-generation production ramp schedules.

Recall the near record level of foundry orders booked by KLA-Tencorp in the single customer in the June quarter, with delivery dates for these orders slated for early 2015. These orders combined with a strong foundry order forecast for KLA-Tencor in the current quarter indicate the more aggressive pace of investment in FinFET capacity has begun.

FinFET processes are extremely complex and challenging to bring to market. Our customers rely on KLA-Tencor to help address the ongoing yield issues associated with these new technologies. Logic orders came in largely as expected in the September quarter.

Memory orders grew sequentially in the September quarter, with roughly a 50-50 split between DRAM and NAND Flash. DRAM customers are continuing their investments in 2x nanometer technology conversions. In addition to new capacity activity, the Flash demand continues to be focused on planar NAND.

For KLA-Tencor, our market leadership and growth are driven through successful collaboration with our customers. Our mission is to help our customers navigate the ever-changing landscape of increasing device complexity and yield challenges that accompany each major node transition.

Turning now to our outlook for the second quarter of fiscal 2015, the December quarter booking profile represents a meaningful pick up in order activity, largely driven by the leading-edge foundries as they move to prepare FinFET production capacity ahead of anticipated end customer demand in 2015.

We expect December order quarter bookings to be in the range of $700 million to $900 million, up approximately 40% at the midpoint from September. Guidance for revenue in the December quarter is in the range of $620 million to $700 million, and non GAAP earnings per share is projected to be in the range of $0.46 to $0.70 in the quarter.

December quarter EPS guidance does not consider the impact on other income and expense and tax rate related to the proposed recapitalization transaction. However, upon completion of the proposed transaction later in the quarter, we plan to update guidance to reflect the earnings impact of the proposed transaction.

So, to wrap it up, KLA-Tencor is acknowledged as a the market leader in process control with a proven track record of consistently delivering industry-leading revenue growth, profitability and strong cash flow generation.

KLA-Tencor’s strong business model and the ongoing successful execution of our strategic plans enable us to continue to invest in our business at a high level to fuel our growth and support our customer’s needs. We’re also delivering meaningful returns to stockholders as exemplified by today’s announcements.

Today, the factors driving our growth in market leadership remain favorable. We’re confident in KLA-Tencor’s ability to drive innovation and help customers addressing the increasing cost and complexity of computing at the leading-edge. I’ll now turn it over to Bren for more details on today’s announcement and his perspective on the quarter..

Thanks, Rick. Good afternoon everyone, and thanks for joining us today. Today, we’re very pleased to announce new dimensions to our capital allocation strategy.

To support our ongoing commitments to return capital to stockholders, we plan to pursue a $4 billion leverage recapitalization featuring a $16.50 per share special cash dividend with an aggregate value of approximately 2.75 billion. The special cash dividend would be an addition to our regular $0.50 per share quarterly dividend.

The intended special cash dividend will be funded in part with the portion of cash on the company’s balance sheet and in part with 2.5 billion incremental debt that will be added to the balance sheet.

Our regular $0.50 per share quarterly cash dividend is expected to be declared and paid following our regularly scheduled Board of Directors meeting in November 2014.

In addition to the $16.50 per share special dividend, our Board of Directors has also approved an additional authorization of 3.6 million shares for our stock repurchase program, representing an additional $250 million increase over the $1 billion originally authorized in July.

We expect to complete the new share repurchases over the next 12 to 18 months.

Including the special cash dividend with an aggregate value of approximately $2.75 billion, the $250 million increase to the stock repurchase program announced today and the $1 billion stock repurchase program previously announced in July 2014, the total capitals will be directed to stockholders will be approximately $4 billion in aggregate.

The aggregate value of the special dividend of approximately $2.75 billion includes the portion of the special cash dividend that could be payable to holders of outstanding equity award under the company’s 2004 equity incentive plan.

This leverage recapitalization will add a more permanent tier of debt with longer maturity dates in our current nodes, thereby improving the efficiency of our balance sheet.

As part of our recapitalization, we intend to issue incremental debt consisting of a pre-payable term loan facility which we intend to de-lever over the next three to five years and investment grade senior notes with staggered maturities. We also expect to enter into revolving credit facility.

An unprecedented lending environment coupled with what we expect to be a robust capital spending profile in our industry over the next few years has enabled us to undertake this program and borrow above our long run debt target of 2 to 2.5 times EBITDA leverage to opportunistically optimize the company’s capital structure and enhance total stockholder returns over our base plan.

We intend to maintain an investment grade rating. As Rick mentioned, our strategic positive remains strong, and we’re delivering superior cash flows and financial results. We entered the first quarter of fiscal year 2015 with over $2.9 billion of cash and investments with roughly two thirds of our through cycle cash flow generated in the U.S.

As we look ahead, the near-term priorities for domestic cash include about $500 million of cash to fund operations on an ongoing basis.

We’ll continue to execute the same strategies that have enabled us to sustain our market leadership and process control, deliver long-term revenue growth in excess of the market and deliver superior profitability and cash flows.

As part of these market leadership and growth strategies, we’re committed to continuing to invest at high levels in research and development and evaluating perspective strategic growth opportunities that are complementary to our model.

This is the formula for success that has served us well over the years in extending our market leadership, dealing strong cash flows and establishing KLA-Tencor among the leaders in returning value to stockholders.

Our strategies for growth are driven by goal to deliver better than industry average revenue across the multiyear cycle and earnings growth targeted at 1.5 to 2 times revenue growth over time. We believe today’s news reflects our confidence in the prospects for continued successful execution of these strategies.

As we execute on these long-term growth strategies, we plan to deliver returns to stockholders via dividends, through stock repurchases and by reinvesting in the business and ways to deliver sustainable value. We see today’s announcement as the next logical step in our ongoing efforts to drive stockholder value.

Turning now to more specifics on the financial results for the first quarter of fiscal year 2015; I’ll provide summary highlight in my commentary on the call today, please refer to the supplemental materials we had posted in the Investor Relations page in our Web site for additional detail on the financial results for the quarter.

Revenue for Q1 was $643 million, above the midpoint of guidance, and fully diluted GAAP earnings per share of $0.43. Non-GAAP earnings per share finished the quarter above midpoint of the guided range at $0.47 per share. Non-GAAP earnings would have been $0.50 per share at our guided tax rate of 22%.

In our press release and in our supplemental financial data accompanying our results, you’ll find a GAAP to non-GAAP reconciliation of the $0.04 difference in EPS. My comments on the quarter will be focused on the non-GAAP results, which exclude the adjustments covered in today’s press release.

New orders in Q1 were 567 million, below the guided bookings range for the quarter of 600 million to 800 million, as orders from one of our foundry market customers originally scheduled to be placed in the September quarter were pushed out.

As Rick noted, we believe the delay in orders from this customer for FinFET ramp is partially a timing issue with this customer providing shorter lead times from order placement to shipment than we’ve seen in the past.

Calendar 2015 is expected to be a year of growth for the semiconductor equipment industry with multiple customers simultaneously ramping new leading-edge capacity and foundry, logic and memory in the year.

With that said, we continue to experience low order visibility with a limited number of customers placing sizeable orders comprising the majority of our forecast. And as these plans change, driven by yield issues or lead time commitments, the impact on quarterly forecast accuracy is significant.

Turning now to our customer segment commentary for the September quarter; foundry was 25% of new orders in Q1, and very low compared with recent history. In fact, orders from one of our foundry market leaders finished over $100 million below the original forecast, ending the unexpected low levels in Q1.

Foundry demand is expected to rebound to 62% of orders in the December quarter. As Rick noted, the competitive battleground in next- generation foundry is taking shape. Incapacity plans for FinFET are lining up for the first half of calendar 2015.

As the market leader in process control, KLA-Tencor is well positioned to benefit from what we expect to be a strong broad based foundry demand for 16 and 14 nanometer nodes. Memory was 46% of new system orders in September, up sequentially both in terms of percentage of total orders and absolute dollars compared to June.

Logic was 28% of new orders in September above the original forecast for the quarter. Customer investments in technology of 20-nanometer and below constituted roughly 66% of the orders we received in Q1.

Turning now to the distribution of orders by product group; wafer inspection was approximately 49%, reticle inspection was approximately 3%, metrology was 15%, service was approximately 30%, storage, high brightness LED and other non-semi was 3%.

Total shipments in Q1 were 548 million and below the bottom end of the guided range of 600 million to 650 million as delivery timing for certain orders related the leading- edge foundry projects, originally expected to ship in the September quarter, shipped it into Q2 in early 2015.

This is consistent with the conditions we experienced in the March and June quarters. The shipment delivery dates for tools currently in backlog are featuring extended lead times, resulting in a lower quarterly shipment profile over the near-term. We expect shipments in Q2 to grow approximately 40% sequentially at the midpoint of December guidance.

We entered the quarter with approximately $1.2 billion of total backlog comprised of $993 million of shipment backlog or orders that had not yet shipped to customers and expect to ship over the next six to nine months.

Our current shipment backlog is at historic high levels for the company, providing the baseline for strong shipment and revenue growth as we convert this backlog in the coming quarters; $173 million of revenue backlog for products that have been shipped and invoiced, but had not yet have been find out by customers.

Turning to the income statement; the numbers show KLA-Tencor executed well operationally in the September quarter with revenue, gross margin, and EPS, all finishing in the upper end of the range of guidance. As I previously mentioned, revenue in September were 643 million, just about the midpoint of the guided range for the quarter.

Gross margin was 55.6%; 100 basis points above the midpoint of the guided range for the quarter, in spite of the $91 million sequential decline in revenue. Gross margin exceeded our expectations in the quarter due to lower than forecasted parts cost in our service business and a favorable product mix in Q1.

We expect gross margin to be in the range of 56% to 57% in December. Total operating expenses in the September quarter were 240 million, up sequentially about nine million compared with June, mainly due to higher employee-related cost in the quarter.

Consistent with our expectations, prototype material costs for certain next-generation products are expected to be higher in the first half of our fiscal year versus the second half. But the December quarter, we are modeling operating expenses to be between $236 million and $238 million.

Other income and expense was approximately $10 million in September, prior to the recapitalization, our expectation at OIE will be about 10 million in the December quarter. However, given the unknown currently surrounding the structure and timing of the proposed recapitalization, at this time we’re unable to guide OIE for the December quarter.

We plan to provide detailed guidance update some time later this quarter to reflect the impact of the transaction on OIE tax rate earnings per share. Our effective tax rate was 26% in the quarter, above our long-term planning rate of about 22%.

We believe the appropriate long-term planning rate should be 22%, given our expectations for the mix of business over the next few years. The 22% planning rate also assumes reinstatement of the U.S. R&D tax credit that expired at the end of calendar year 2013.

Given the low probability that this extension will occur in the December quarter, we are modeling a tax rate of 24% for the December quarter. Finally, net income for Q1 was 79 million or $0.47 per fully diluted share. I’ll turn now to the balance sheet and our cash flow statements.

Cash and investments ended the quarter at 2.94 billion, a decrease of 210 million compared with June. Sequential decline in our cash balances is largely due to staff repurchases and annual bonus payments in the quarter. Cash from operations was $35 million in the quarter.

The sequential declining cash flow from operations in Q1 is consistent with seasonal trends and was driven in part by lower revenue levels as well as the timing of our annual bonus compensation payments in the quarter. In the September quarter, we paid $82 million in dividends and repurchased 125 million of our common stock.

Fully diluted shares ended the quarter just under a 156 million.

So with that, to reiterate our guidance for the December quarter is, bookings are expected to be within a range of 700 million to 900 million, shipment guidance for the December quarter in a range of 740 to 800 million, revenue between 620 and 700 million, and EPS of $0.46 to $0.70 per share, exclusive of the impact of the recapitalization.

Once again, we plan to provide an update in the December quarter guidance that will reflect the impact of the proposed recapitalization concurrent with the currently scheduled closing of the transaction later this quarter. This concludes our remarks on the quarter. I will now turn the call back over to Ed to begin the Q&A..

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

So, Mike, we’re ready for your first question..

(Operator Instructions) The first question is from John Pitzer with Credit Suisse..

Hi, thanks for taking the question. This is Farhan asking the question on behalf of John.

Rick, can you just talk about briefly like why you chose to do a special dividend instead of buybacks, and what were the puts and takes in making the decision?.

Hi, thanks for taking the question. This is Farhan asking the question on behalf of John.

Rick, can you just talk about briefly like why you chose to do a special dividend instead of buybacks, and what were the puts and takes in making the decision?.

Hi. Well, I’ll give an overview and then I’ll turn it over to Bren to get the specifics. So look, the way we look at it, there are three uses of cash. And the primary use is to fund our organic growth and we fully satisfy that, and we continue to build upon that. The second is to look for accretive and enabling M&A.

And we’ve done those things and continue to evaluate those and we feel we can do them. And then the third one is returning cash to shareholders and in that we look for the most efficient way, an effective way to do that, considering a lot of factors including who our shareholders are. And also the size of the return and what’s most efficient.

And so, from that I’ll hand it to Bren..

So I think anytime you consider a large return to capital, I mean certainly we start from an assessment of our business around how much cash can the business have, what kind of reserves do we need, also, the potential debt capacity of the company.

And so as we looked at that and to Rick’s point as we assessed our options, we clearly did not see at least for now, anything on the M&A front that looked as compelling to shareholder value is what we’re doing here today. But given the size of the transaction itself, the practice of trying to execute a share repurchase is difficult.

There is a tender offer and the premiums and all those kinds of things, and I think it really comes back to Rick’s point, who are our shareholders, what did they value? We think our shareholders value our dividend practice, our practice of returning cash, the ability to treat all shareholders the same, and the timeliness and efficiency of the execution.

There is a piece of this obviously, that is share repurchase that we will execute over time. We made the previous announcement back in July, up a billion dollars that which was executed a 125 million and we added another 250 to that. So we will be executing that over time as another component.

There are I think different opinions on what’s the best approach. I think it goes back to how we think about our business. How much cash do we need and ultimately we made the call to do it this way where we feel like we’re optimizing between the two vehicles..

Thank you.

And just one question in terms of the calendar first half of next year, what kind of pick up are you expecting in the first half of next year?.

Thank you.

And just one question in terms of the calendar first half of next year, what kind of pick up are you expecting in the first half of next year?.

Well, as you know, we don’t guide beyond the next quarter, but overall for calendar 2015, I think it is setting up nicely for heavily investment in FinFET across the board. And when we look at our foundry customers, really nobody is shipping products today on a large volume with FinFET devices.

And I think by the end of calendar 2015, the expectation is there’ll be multiple devices from multiple suppliers of FinFET technology. So that bodes well for investment. So what we’re anticipating, as we said for the December quarter is a pickup in investment associated with that.

But then throughout 2015, the way the plans look and the way our customers are talking to us about it, I think we’ll see multiple players supporting that ramp..

Yes, I think the only thing I would add to that is given the timing of the second half of the year to be delivering product, it does make sense that you start to see capacity ramping in the first half of the year. Certainly, we are driving our supply chain in building towards that expectation.

And I think it lines up with the end market dynamics that Rick mentioned..

Thank you. That’s all I have..

Thank you. That’s all I have..

Your next question is from Timothy Arcuri with Cowen and Company..

Thanks a lot guys. Two things; first of all, Rick, I’m curious if you can talk about the FinFET timing issues and if it’s possible to segment it out whether it’s process-related or some of it is like customer-related IE, like your customers, a lot of obvious uncertainty out there.

And so I’m wondering whether you could segment the two, and then I had a follow-up. Thanks..

Sure. From what we understand in talking to our customers, I think there is a desire by the end customers to get to the technology, but there is an inability right now in general to have a large scale deployment of technologies that are reliable enough to be deployed in high volume. So I think that that’s really limiting.

Like I said, we expect the first commercial devices to come out, consumer devices to come out by the end of the calendar year within that technology. But that’s really only from one supplier. The other ones are working through a number of issues and there are associated challenges with defect density but also structural reliability.

And I think that for people that haven’t done FinFET, it’s turning out to be a very challenging process. So I think there is a lot of effort going on to deal with that. As you know there has been some success in 20-nanometer.

So given that that’s made it into the current product cycle, we’re really talking about a next product cycle which I think is as soon as we expect to see volume, is mid calendar year of 2015. So, as I said, we expect investment to be ramping in dealing with some of those challenges.

But the people that are in front on FinFET struggle quite a bit getting yield on them and we were involved and work you through some of those challenges. So I don’t think it’s going to be easy.

And I think that on the one hand we’re enabling that but on the other hand, until it starts to work there’s not going to be a lot of customer demands, not a lot to tape out. But then I expect to see an avalanche of demand once the process start working..

Okay. Thanks for that. And then I guess, just a follow-up to the prior question about the decision to pay a special dividend.

Why would you decide to do that when you’re about to put up a quarter that where the guidance is definitely disappointing relative to what Street was thinking and you could have maybe bought stock back at a much, much lower price.

I guess I’m just wondering that calculus around paying that special dividend versus maybe doing an ASR post these results, something like that. Thanks..

Sure. Well, as you can imagine, this is Rick, I’ll start with an overview and then let Bren fill it in.

First of all, this wasn’t a decision that was something about a near-term decision, that is a long-term decision around the capital structure of the company, something that they’re working at for quite a while to figure out what is the right way to position the company and structure it.

So it’s independent of ups and downs of particularly the quarters and we certainly are market timers.

So we look at that, and we say "What’s the best way, what’s the best capital structure?" And then, in this case, there is a blend, but it’s obviously greater in the special dividend and it’s the most efficient way to be able to return cash to shareholders. If that was really thinking, it wasn’t meant to be coincident with any particular quarter.

It just happened to coincide..

The other thing I think I’ll add is clearly the ability to finance this was driven by a very attractive debt market both in terms of rates, terms, and financial flexibility.

Also, our view on being able to overshoot or go further than our long-term target of 2 to 2.5 times leverage was also driven by our views of capital intensity and healthy capital spending environment over the next couple of years to enable us to de-leverage some of this debt we’re taking on back to our target.

I’ve been saying, I think for I think even going back to May and even in the SEMICON that we felt like it made sense for our company given the dynamics or secular dynamics or business model, the barriers to entry, our market share that more assertive capital structure would drive additional value to our shareholders.

And so, this was a process, we made the share repurchase announcement. At the time, we said that that was the first step; this is the next step. So we talk a lot already about the pros and cons of the vehicle, but at the same time I just want to give you a little bit of insight in terms of how we’re thinking about it..

Okay, Bren. Thanks a lot..

The next question is from C.J. Muse with ISI Group..

Yes, good afternoon. Thank you for taking my question. I guess, if I could – I’ll try to ask both my questions at once as they’re partially related. I guess, first off, when you consider this special dividend, I’m curious whether you focused it all on the M&A side or increased R&D.

When I look at your relative to position to WFE over the last two years, you underperform by about eight points each year. I’d would love to hear your thoughts on whether that was a consideration, and how you’re going to rectify this relative underperformance that is going on at least for the last few years.

And then second part of the question is flexibility. If I look at you guys perform a post-transaction, roughly 20% debt to cap and roughly 2/3rds of your free cash flow will cover interest and dividend. And I’m wondering if that’s enough flexibility for what may come for what is still a cyclical industry. Thank you..

Yes. C.J., I’ll take part of it and then again, Bren can look at it. Yes, we can talk about the relative performance. I think as you’re well aware, we have a – we’re biased towards increased adoption in logic and foundry and less so in memory, although memory is increasing.

And what we’ve seen this year clearly is that the memory investment has been higher than maybe anticipated originally and has continued to go up.

We expect that trend to reverse a little bit in 2015 where we do see the foundry customers increasing their investment, and in our expectations, memory will probably normally hold to what they’re doing in 2014. So I think the mix becomes favorable for us. So we look at over the long-term.

The second part, I look at is a big change in the company and the industry I think has to do with – while the near-term volatility has increased, the longer term volatility has actually decreased because of the efficiencies associated with consolidation.

The other thing that gives us a lot of confidence is in our ability to service the debt and do everything else that we want to do, is a growing service business, which is much more aligned with what’s going on in overall semiconductor manufacturing. And we just looked and we had seven consecutive growth of service business.

And so we look at that as a business that can feel and can help dramatically service this debt.

Bren, do you want to fill in?.

Yes, C.J., I think you mentioned operational investment and I think that we have ramped up our investment to support our businesses. We have a product cadence that’s 2XR competitors.

So we believe we are investing enough in our business to be able to maintain our market position, and I think that the underperformance that you talk about is more driven by – it’s the most sensitive element I think, and that is to explain more about customer mix than anything else.

From a flexibility perspective, we are using our offshore cash in this transaction. There is an unfunded revolver that’s a component to it. We also plan to have about 500 million in the U.S. We’re going to execute the share repurchase over time. And certainly there are some elements that provide flexibility there.

As you know, covering this industry for a long time, this is not a capital intensive industry, and so, we don’t need a lot of cash to run the business. We have to grow in service business, that’s a bigger percentage of the revenue.

So, a much more comfortable, given the cyclical dynamics as well, I think we’re much more comfortable with the risk profile. Then, our intent is to de-lever a significant portion of this rather quickly over the next couple of years.

So, all that coupled with the cost of the debt plus the outlook that we have, we think that it’s a prudent structure, and I think we expect our debt to be investment grade and I think that also reflects the structure and our ability to execute our strategies without the risk or the financial distress that affect – sometimes goes with that. So ….

Operator, next question?.

And the next question is from the line of Krish Sankar with Bank of America Merrill Lynch..

Yes, hi. Thanks for taking my question. The first one I had was just a follow-up on the special dividend recap question.

Is it set as you had just pointed, you probably lived around and found out no suitable M&A candidates and decided this is a better way to return capital? And does it impact your 6.9% convert due in a few years? And I have a follow-up?.

Again from the strategic perspective, we have looked at opportunities, we continued to look at opportunities to enable further growth and look for things that are going to be accretive to either our current business or places to grow.

And when we evaluate that, we feel very well positioned with the product portfolio that we’ve developed organically or through the M&A that we’ve done in the past. And we’ve said this on a number of occasions.

While we look, we don’t see anything that’s so compelling that we wanted to move in the past, or would have and we always compare the returns that we’d get from that from what returns we get from an action like this. Second one is we still can do M&A. If there is M&A that’s compelling and accretive over time, we’re not limited to do that.

And so, our view is this doesn’t disable that option. It just would have to pass hurdles that we make it long-term accretive to our company and that’s always been the case. So we don’t think that we’re limited in anyway from the deals that we anticipate might come our way as we look forward.

And then on the question on the 2018 debt, so that’s straight corporate debt and option under consideration is do we – we may consider refinancing that. The financing is not complete yet, we don’t want to get into the details ultimately of the various aspects of it. It’s an option under consideration, and we’ll update you at the appropriate time..

Got it.

And then just as a follow-up, it looks like there is lot of activity going on in the foundry side, besides the FinFET-related yield issues, have you guys seen any pick up or incremental sales for 28-nanometer or are you just focused mostly on 20, 16, 14 at this point?.

We do have some forecast in this. We did expect in the second half to see some incremental 28-nanometer activity. We didn’t see that in the September quarter. We do expect some of that business in the December quarter.

I think some of the lithography orders happened in the September quarter, and I think just given general lead time dynamics that would imply that other tools will follow. So we do expect some of that business. I thought we’d see some of that in September and it looks like I’m going to see maybe more of it in September – December quarter now..

Yes, clearly there are players that haven’t participated with that as a leading-edge node for them that have come to us for support and help, and to Bren’s brands point, we expect to see that because as you know, that’s the node that’s probably generating a lot of the revenue and cash flow for the industry right now, not the very leading-edge stuff..

Got it. Thanks, Rick, Thanks Bren..

Thank you..

The next question is from Harlan Sur with JP Morgan..

Yes. Hi, good afternoon. This is Bill Peterson calling on behalf of Harlan. Congratulations on the recapitalization program. The question is actually more about the outlook particularly in the 2015.

Wondering, with typically long lead times orders in hand, coupled with orders you expect in December, how do you see 2015 playing out in terms of first half, first second half? I understand – I’m not looking for a forecast, but how do you see that playing out. And then I have a follow-up question..

So, Bill, I think the first half given the earlier comments, we think the first half should be strong given the ramp we expected associated with 16, 14 nanometers. Beyond that, though – it’s hard for me to guess, I think we’re consistent with everybody else. We see it as a year growth as we said in the prepared remarks.

In the first half, we’re certainly building to support a strong shipment profile through the first half..

Okay.

And I guess the second part is, I guess, should we expect with some customers that the sort of lead times would be I guess become a new norm or is there something else that play, I’m just kind of curios in your thoughts on where the typical lead times would be going between the key foundry?.

Lead times have been coming in over the last few years. I think one of the byproducts of the mobility-driven cycle that we’ve been in since 2010 is because it’s consumer-centric. Our customers are more sensitive to consumer dynamic. They have less lead time, and so some of that lack a visibility passes through. It tends to be customer-specific.

As we saw on the June quarter, we booked a significant amount of business in the foundry from a customer its end of the lead times. And I think based on another customer that we expect to see some activity from here coming up to support the ramp we talked about. The lead times are pulling in. So it tends to vary across customers.

But over time I think we’ve seen them shrink. I mean, we’re still sitting, I think we ended the quarter around five months a backlog, but it isn’t six to seven months of backlog. And as we model it going forward, we model somewhere between four and five months generally.

It does mean that we carry more inventory to be flexible, and that’s certainly a dynamic that we has changed in terms of how we manage the company and the business. But we need to be able to respond and these are big orders from single customers and so we have to be sensitive and flexible to their plans..

And I think in general, Bill, as you know at the industry has transitioned much more of consumer-orientation for devices, and that drives the business. It’s our customers don’t really have a lot of visibility? So they’re asking us to be responsive to their need to respond quickly.

And I think in exchange for that, what we get is pretty close collaboration on their needs. We just don’t get great inside entertaining largely because in many cases they are not sure.

So we have a lot of provisional plans that change pretty quickly and we try to synchronize those, but it’s a challenge because the end markets move and the players are all trying to be positioned to take share when it’s available to them. So we have to support that and to Bren’s point, we’ve taken on some inventory to be able to do that..

Okay. Thanks for that color, and good luck..

Thank you..

The next question is from Mahesh Sanganeria with RBC Capital Markets..

Thank you, very much. Rick, you talk about next year – one of your peers talk about next year up, 5% to 10%.

Let’s say if the CapEx next year is up 5%, where do you think your revenue can track in that environment?.

I’ll give that to Bren..

So, Mahesh, I think a lot of it depends on the customer mix. I think after two years where we had pretty heavy memory spending, I think, underperformance relative to the market, I think with a ramp of a new technology we think that we should be able to go with the market in the next year. That certainly have, we’re modeling it.

But I think that’s the more sensitive item. I mean, over the last couple of years I think it’s been just a fundamental delay I think around some of the new technologies, whether on the NAND side or even in the foundry.

And certainly that’s put pressure on process control because the customer buying patterns are typically heavier when they’re ramping technology.

So, given the assumption of the ramp into next year, we do believe that next year positions as for its growing at least that the market rate, and perhaps faster if process control intensity moves the way we think they’re going to move on these new technology..

And the second question on the debt. I’m assuming that this is a special dividend and you’re paying the basis. So, it’s going to be tax-free to the investors.

And also if you can give us some math around why do you need 2.5 billion of debt to fund this and because you have so much pretty good amount of cash in U.S.?.

Yes. So the dividend versus return of capital calculation, which gets in whenever you pay a large special portion of it is dividend, and based on the tax retainer in over time, a piece could be return to capital. We don’t have the specifics on that to share with you today. We’ll share with that with you when we ultimately get where we pay the special.

So that’s how that works. On the amount of debt, the way we thought about it was how far, how much debt could we borrow, we want to maintain investment grade profile as we said. We also had a plan around share repurchase. And so, once we pay the special and then go through the share repurchase commitment, we will have the U.S.

cash number right around 500 million. And then most of – the way I am thinking about over time, the way we will drive this is our free cash flow into the U.S. will pay our ongoing dividend, and then the remainder will be targeted towards de-leveraging back to our long-term target to 2 to 2.5 times EBITDA. So that’s how we’re thinking about it.

I think the overall scope was driven by what’s prudent for us, and also, clearly we thought it was important to maintain investment group profile through this..

That’s very helpful. Thank you very much..

Welcome..

The next question is from Jim Covello with Goldman Sachs. Jim Covello, your line is open..

Okay, operator, next question?.

Your next question is from Edwin Mok with Needham & Company..

Great, thanks for taking my question. So first question, we’ve seen quite a bit of activity by (indiscernible) around the 10-nanometer logic process right now. And I’m little surprised at your mask inspection order is low this quarter, I would suspect that some of those guys who start to order mask inspection tool for 10 nanometer.

Can you give some color around that where is mask inspection and do you expect incremental order around 10-nanometer on mask inspection number one and then relate to that as, do you expect ramp up in those 10-nanometer activity to benefit you in 2015?.

Yes, Edwin it’s a good question. So mask inspection particularly around the mash up in your lumpy business, we had a decent quarter in June and we have a forecast for decent quarter in December. So there is some lumpiness to the order profile.

As you might recall, and we’re fairly open with this, we did book for a leading logic manufacture, we did both in multiple set of mash ups rules to support the 10-nanometer node with those tools shipping over the course of 2015, so with a lot of it in the first half of 2015. So, there is some activity there.

I think we’ll start to see more of that activity as we move forward. I don’t know how much of it we’ll see in December. But clearly that’s an aspect obviously of this transition to 10, but very limited activity on 10.

I don’t think we’ll start seeing orders for 10-nanometer beyond what we’ve seen in very early development stuff, I don’t think you will see any meaningful orders until we get closer to the end of next year..

And to that point, the existing capability that we have can support the pilot and R&D work.

And given the fact that there are few sub 20-nanometer designs working anywhere except for some that one customer that then there is a lot of, there is capacity in the system to handle things until we see very ramp up of 14, 16, that will start to consume some capacity.

And then the 10 is really been as Bren said in the path finding usage for the reticle tool. So, (indiscernible) is just not going to – and it’s going to be lumpy but it’s not going to be eminent given the 10 nanometer so far out..

I see, okay. That’s helpful. And then just talk about your commentary on the first half of 2015, you said strong driven by the 16, 14 nanometer investment from your customer.

What about the memory side? Are we at least – are you seeing any subsiding in investment memory or do you think that we remain strong in the first half or is it more called back-half loaded in the memory side. What color can you provide to us? Thank you..

Yes, I’ll give my perspective, and Bren can way in. I haven’t seen a lot of expectations of the building. I think that the strength and memory probably continues through 2015 at some level, probably not growing from here though.

And most of the investment in Flash has been, as we talked in the past, plainer than 3D, there have been some in 3D but I think 3D is yet to come and that will be dependent on a number of factors, although we’re participating in that.

And then the DRAM side, we do see technology investment going and there are definitely some capacity ads being pursued. So I think memory, I don’t see a big difference between Q1 and Q2, or I’m sorry, first half or second half of 2015 for that.

As you know, we don’t really forecast that far out into – our visibility is pretty limited in terms of exactly where things are going to fall. So we struggle to predict much beyond what we’re going to see in December..

Great, that’s actually very helpful. Thank you..

The next question is from Atif Malik with Citigroup. Your line is open..

Hi. Thanks for taking my question, and then congratulations with the team with the special dividend. And the comment on FinFET push outs are quite understandable given your peers, (indiscernible) also talked about the uncertainty in the foundry markets. My question is on the lead times, Rick, and then for the same lines as Tim was alluding to.

So if your customer’s customers, they have to make their devices, let’s say September next year, when is the latest pick in order of your (indiscernible) I’m just trying to gauge if there is further risk in these bookings pushing out into the March quarter given your lead times that longer than your peers. And then, I have a follow-up..

Yes, I think, given what we’re seeing, I think that there is a sensitivity clearly to the end market dynamics there and I expected – frankly, I expected the orders in September. So I have some orders forecasted in December. And certainly that’s the plan based on what we see today. But it does as we’ve seen it has been a little bit fluid.

I think given the calendar timing that we’ve talked about and roughly three month cycle times on devices, you really have to start I think putting that capacity in place in the March and June quarters be able to deliver those schedules. And so that’s I think the calendar, that our cadence that we’re looking at in terms of expected delivery.

But could it be a situation where I get very short lead times, I guess I get orders from customers and they turn around and run shipments in a couple of weeks. That could happen. I wouldn’t be surprised if it does at some level, but this is – we’re trying to give you as much guidance as we get based on the conversations we’re having with the customer.

And certainly, we’re positioned to be able to respond with the flexibility to be able to deliver in a meaningful way end of the first half of the year..

Yes, until the point of – if you might have last two quarters, [we missed] (ph) low in terms of the midpoint and the June quarter, we miss high and then this low. So we’re not very good at forecasting the next 90 days.

And so, we really think about it in a longer term basis and the way I think about it, how it’s adoption relative to our model and expectation and how we’re doing relative to share. And timing is something we have less influence over. But certainly from an adoption standpoint, we’re seeing it.

I think 14 and 16 will be good adoption for – we’ll see strong adoption for process control, but we’re not seeing it yet because that investment is not there. I think our market share continues to be strong. But until they place few orders, we don’t know. So, it is true, we’re going to be I think short term very bald all in terms of the ins and outs..

Got it. And then as a follow-up, you guys talked about the 2D NAND investments are more dominant right now than then CD investment.

Could you rank for us the reason for that? Is it that economics of CD are not at par with 2D or that’s yield-related or just memory makers are just trying to keep a tight supply/demand balance as 3D could add more depth in the market?.

Well, clearly, there is a continuum of process maturity for the different providers. Right, yes. People that are already yielding devices and enable the ship and shipping in small volume, the other still in development, you have others early on development. So, I think it really ranges whereas 2D capacity is much broader.

So, to the degree there is market demand for NAND. I think there is a big opportunity for everybody to participate in that. So, you’re going to see planar NAND continue.

I do believe that people have underestimated the challenges in 3D both in NAND and also in FinFET, in terms of integration and yield and some of that we can help with and some of that’s just debugging the processes. So, when there is a robust market environment, I think many of our customers will produce the products that they can produce.

But the crossover plain, once the 3D is working of 3D flash is going to be compelling as well. But it’s got working in get to economics that makes sense. And we anticipate as soon as that happens in calendar 2015.

But it’s kind of a bit of both, the economics don’t work, the demand isn’t there but if it does work, there is a lot of interest in the customers for it..

All right, thank you..

The next question is from Stephen Chen with UBS..

Thanks. Hi, Rick and Bren.

Just a follow-up question on the recapitalization, did the company consider a management buyout in perhaps seeking shares from the put and take and why not just the management buy out here?.

No. We didn’t consider. This was given our situation that wasn’t something we consider.

What we considered was what’s a prudent level of debt that the company should be taking on to optimize our capital structure and then what’s the best way, the most efficient way to return cash to shareholders after we’ve gone through and evaluated uses one and two of cash, which is invest in our business, look at accretive M&A or enabling technology.

But no, we didn’t, we weren’t looking at management buyout..

I think when you have a business like ours that has strong technology position, a differential margins, the ability to invest and therefore generate strong operating margins and a strong cash flow profile.

I think you take that and you cover it with, what we clearly see our changes in the mix that of our industry that lends itself to I think a more predictable earnings stream overtime.

And so, business like that certainly has the capacity to carry more debt and to Rick’s point, when you look at the first two considerations which we work through, at least for now, as we saw this is the best opportunity to deliver incremental value to our shareholders as we execute what we believe is a very solid plan going forward.

So that was the thought process.

And again, the level of debt determined by our goal of what makes sense for our business as exhibited by the investment grade profile that we have and then obviously how do we move forward with it?.

Okay. Thanks for that, Bren.

And then just a follow-up on the ongoing business, so it looks like you’re seeing the improved gross margins in both the September and December quarter, I missed the main driver that got you back into the gross margin range in September, does it – the period that you’ve overcome those issues that occurred in the June quarter? Thanks..

Yes. The June quarter I had a couple of issues on revenue mix where some of the tools that came in on the revenue side had a weaker revenue mix profile. And I also had higher than expected cost in my service business. And so that drove one-time weakness, if you’ll, into the June quarter.

I think we saw a very normal gross margin structure play out as we went into this quarter, something more consistent with what we’ve seen historically and consistent with our model.

So the mix turned out to be a little bit more favorable, and I think the dynamics I saw on the service business corrected and it’s more consistent with our expectation for that. So – and I think as we look into the December quarter, the same dynamics play out..

Okay. Thanks, Bren..

You’re welcome..

The next question is from Ruben Roy with Piper Jaffray..

Hi, good evening everyone. This is Sean on for Ruben. I just wonder if you could give us an update on how you’re thinking about gross margin, gross margin profile for 2015, given the ramp that you’re seeing for 16 and 14 and then just opportunities for expansion headwinds there, just some kind of directional indication of how things could play out..

Yes. The gross margin profile on our latest products that we’ve introduced is actually – is very solid and very consistent with our historical pattern. We believe we’ll see incremental gross margins between 60% and 70% going forward through 2015.

And so, I think we’re very well positioned as we see this pick up in business into the first half of the year for very good gross margin performance and very consistent with our historical model..

Great, and if we get the – you talked a little bit about ongoing focus on investment in the business, I’m just trying to think about your OpEx levels into 2015, is this something that will continue to grow, how do we think about the magnitude of that growth or whether it’s roughly consistent with where we see it currently?.

Well, the first half of this fiscal year, the September quarter and the December quarter coming up, I expect it to be a higher OpEx level than we expected in the second half. And that was driven by some programmatic timing on some next-generation programs.

So I think the second half of the year comes down from the first half, I’m modeling the year right now, the fiscal year around 935 million, so given the performance in Q1, and what we guided for Q2 does imply somewhere around that $230 million range in the March and June quarters.

And so, our OpEx levels are really dependant on what’s required to support our roadmaps. And I think we’re not necessarily on where the revenue level is. So if the business is stronger, I don’t think it changes our OpEx all that much, it turns out to be marginally weaker. I don’t think it changes that much either.

So it’s really driven by the business requirements in maintaining the differentiation that we need to support the gross margin profile that enabled that investment..

Yes, just to add to that; one of the big initiatives we have been investing in this is what we call the 5D solution for lithography from multi-patterning, and well, we’re seeing little bit of revenue from those efforts.

I think that’s an investment that will show up in future years as we continue to build out the suite of products and solutions we have to support multi-patterning going forward.

So that’s part of the step up in the increase, but to Bren’s point, we’re looking to don’t see dramatic increases beyond our current levels, but we’ll continue to invest in the business as we go forward..

Great, that’s very helpful. Thank you. That’s it..

The last question is from Weston Twigg with Pacific Crest Securities..

Hi, thanks for squeezing in it. I have three really easy questions; one is, shipments last quarter you expected – you said you expected shipments to trend higher each quarter through the fiscal year. It sounds like you’re saying the same thing today, but I wanted to verify that, that is the case.

The second question is – I’m just – if you could remind us how much cash you currently have off-shore? And then the third is, are you planning share count for the December quarter?.

On shipments, we guided next quarter at 70 at the midpoint. And yes, I think given the commentary around the second or the first half of (technical difficulty) exact number, but about 1.2 billion at this point of the total of the 2.9. And share count that we’re modeling is about 165 million in December..

Very helpful, thank you..

You’re welcome..

Operator, that concludes our call for today. Thank you all for joining, and we look forward to seeing you later on in this quarter..

This concludes today’s conference call. You may now disconnect..