Jeffrey Hall - CFO Richard P. Wallace - CEO John Kispert - President and COO

Harlan Sur - Morgan Stanley Jay Deana - JP Morgan Jim Covello - Goldman Sachs Olga Levintan - Lehman Brother Timothy Arcuri - Citigroup Gary Hsueh - Oppenheimer Mahesh Sanganeria - RBC Capital Markets Hari Chandra - Deutsche Bank Ben Pang - Caris & Company

Thank you, Cara. Good Afternoon, and welcome to KLA-Tencor's second quarter fiscal year 2008 earnings conference call.

I'm Jeff Hall, the Chief Financial Officer. Joining me on our call today are Rick Wallace, our CEO and John Kispert, our President and COO.

We are here today to discuss our second quarter results for the period ended December 31st, 2007. We released these results this afternoon at 1:15 PM Pacific Time.

If you haven't seen the release you can find it on our website, www.kla-tencor.com, or call 408-875-3600 to request a copy. Rick will lead off today's call with highlights from the quarter, updates on the current market environment and key product activity and provide guidance for the March quarter.

Afterwards, I'll review the preliminary financial results for the quarter and then I'll open the call for questions. On the investor section of our website, you will find a simulcast of this call which will be accessible on demand for 90 days.

On the website you will also find a calendar for investor events and presentations at investor conferences. You will also find links to KLA-Tencor's security filings.

In those filings, you will find descriptions of risk factors that can impact our future results. And as you know our future results are subject to risk.

Any forward-looking statements we make, including those we'll make on the call today, are subject to those risks. KLA Tencor cannot guarantee that those forward-looking statements will come true.

Our actual results may differ significantly from those projected in our forward-looking statements. And although we take obligation to update those forward-looking statements, you can be assured that any updates we do make will be broadly disseminated and available over the web.

And with that I'll turn it over to Rick.

Thank you, Jeff, and thank you all for joining us for our Q2 earnings call this afternoon. Today I will discuss highlights from the December quarter, provide an update on the current market environment, discuss our four strategic objectives and give guidance for the March quarter.

Pleased to report that we once again produced solid operating results in the December quarter. Revenue was $636 million in line with guidance for the quarter.

Net income, including some one-time charges, was above the range of guidance, $138 million or $0.75 per diluted share. We generated approximately $126 million in cash flow from operations in the quarter.

Jeff Hall will provide additional details on the Company's financial highlights later in the call. Orders for the December quarter were $580 million, up 20% from the September quarter, in line with our guidance for the period.

I would now like to discuss the current bookings environment, provide some more perspective on our various customer segment. In general, the slowing demand environment we first began to experience late in September continues in each of our markets and all indications today point to this condition persisting the next several months, reflecting the impact of the slowing overall macroeconomic climate.

As a result, our customers have become more in their conservative capital investment. Laying or reducing in size, many of the larger capacity addition projects that have been planned for the next two to three quarters while sustaining their investment developing advanced technology.

As those of you who have been following the company over the years are aware, we take advantage of these periods of contraction in capital spending, leveraging our strong financial resources, technology expertise, solid customer relationships, to step up our investment and innovation, anticipating our customers' next generation inspection and measurement need. So, when the demand climate improves again, we're in a stronger position than ever to capitalize on resurging growth to extend our market lead.

I'll have more to say regarding our customer focus and the first of our investment, but first I'll provide some perspective on the current bookings environment, in our various customer segments. Memory was, once again, our largest customer segment during the December quarter.

Memory orders were stronger than expected in the period. We saw particularly strong demand from one of our large diversified memory customers based in Korea.

Memory customers today are investing in advance technology and new materials to enable smaller design role, higher density applications as well as reduced cost. In turn, driving increased adoption of process control to reduce the affectivity.

Looking ahead we expect memory CapEx to be choppy, though seeing continued interest in process control as memory manufacturers struggle with yield in metrology challenges. Advance node, foundry demand was below plan in December.

As one large foundry customer reduced its order forecast in the quarter; another significant order was pushed out. Historically, foundry customers have always been heavy adopters of process control given the unique nature of their business.

Unique to foundries is the challenge of managing ever increasing number of products and processes while at the same time continually reduce their time to market. These conditions makes achieving targeted yields in a shorter period of time critical to success in this segment.

While some major foundries have reported reduced CapEx forecast a continuing need for process control due to the nature of foundry business to be a driver for our business going forward. Logic orders in the December quarter were above our forecast as we saw upside from two of our US based logic customers.

We see investment in leading edge technology as a major driver of demand in the logic segment over the next few quarters. Summarized, although our near-term visibility has become more crowded and order of timing less predictable over the last several weeks, the increased complexity our customers are facing as they invest in advanced technology creating new yield and effectively challenges driving the need for advanced inspection and measurement technology and accelerating adoption of process control.

As a result even in a period of slowing overall wafer manufacturing equipment demand, we expect process controls to continue to outperform the industry in the order of 5% or more in 2008. And in spite of the continued uncertainty as to the timing of some large projects, our long term pipeline remains strong.

Now I would like to discuss some recent highlights for KLA-Tencor. Our four strategic objectives: customer focus, growth, operational excellence and talent goal.

Customer focus is the first of our four strategic objectives in KLA-Tencor. Work hard to understand our customer's requirement and provide solutions in every market that they serve.

Today we enjoy a position leading market share in almost all markets that we serve. The key to our success has been to collaborate closely with our customers innovate with them to develop creative and differentiated solutions and execute in bringing the products to market, supporting them throughout their lifecycle.

Pleased to report that in the December quarter, we sustained our market leadership in each of the key markets and product lines that we serve. As always a great deal of hard work was required to win the bid and even more challenging an environment when capital was tight our customers have to make sure the premium we get on our product was worth the additional investment.

I applaud our team's hard work and successful execution in particularly difficult period. Here are some highlights from the December quarter in our core inspection and metrology market where we offer a broad portfolio of inspection products serving semi-conductors, bare-wafer and write off the [ph] markets.

As in the past our teams did a good job of demonstrating our value and we are pleased with the market share performance across our inspection project. Here are just a few examples of some recent wins in the inspection and metrology space.

The 2810 full-spectrum brightfield tool introduced in July 2007 and designed specifically for memory application, and a large capacity of expansion order with a Korean memory manufacturer in December quarter demonstrating superior sensitivity, capture of unique defect segment for us [ph], and throughput reaching twice the computing speed of earlier generation brightfield tool, as well as new optical modes able to increase defect protection. We also won follow-on orders for the 2810 brightfield tool with a Taiwanese memory manufacturer head-to-head competition.

In the quarter we made the first place with a flash manufacturer of our Puma 9150 darkfield inspection platform. And this Puma solution was chosen in head-to-head competition after a rigorous competitive evaluation, demonstrating a superior throughput, stability and reliability for production-proven system against the competition.

Our new e-beam review and classification tool, EDR 5200 was recently declared tool of record at a major Taiwanese foundry. Continued penetration of major memory manufacturers in the quarter, placements at four major memory manufacturers during this time-period.

EDR 5200 is an e-beam review solution that also enhances resolution improving the productivity of our inspectors. Our e-beam review tool provides connectivity with inspectors to improve brightfield recipes while also delivering very high resolutions in page accuracy, allowing maximum capture of defects on a review system.

We believe the EDR 5200 provides a great solution and positions us for growth in this new market. Metrology, KLA-Tencor continues to be the market-leader by offering a comprehensive suite of metrology products that gives our customers the ability to maintain tight control over process window.

In December quarter we were successful in winning new business by demonstrating superior performance in optical CD, film, overlay metrology or advanced applications in memory, foundry, logic. December quarter, we successfully demonstrated performance of our next-generation overlay metrology platform.

A critical logic customer demonstrating significant performance improvement for existing overlays solution as well as demonstrating the capability to extend the technology into future requirement. These are just a few examples of recent success which KLA-Tencor achieved during the December quarter, solving our customers' mission-critical production problem, and expanding our market leadership.

Across the industry the technical challenges our customers are facing are significant. We are working closely with them to solve those problems.

In addition to that, we are well positioned going forward based upon our product pipeline fueled by our R&D investment across our portfolio. The second strategic objective for KLA-Tencor is growth.

Our goal is to continue to outgrow the industry. Our growth prospects continue to look good, even in this challenging CapEx environment.

Based upon the investments by customers in each of our market segments, driving forward in their advanced technology roadmap. Increasing need for inspection and measurement, pipe-makers address the greater complexity that yield challenges in advance design rule.

We estimate the increased adoption of process control by chip manufacturers at 45-nanometers translates to an incremental revenue opportunity for KLA-Tencor of 30% or more as compared with a 65-nanometer node. We saw evidence of that potential in our relative growth performance in 2007 compared with the overall wafer fab equipment market.

KLA-Tencor revenue growth of 17% in 2007 outpaced the estimated industry growth for the year of about 5%. I said earlier in remarks, we believe we are well positioned to continue to outgrow the industry, result of the increased challenges of 45-nanometers based upon new markets that we have entered during calendar '07.

During 2007, we entered six new markets, both, organically and through M&A activity, increasing our potential addressable market by more than $700 million, a size by industry analyst. That being said, we are very selective about the growth prospects that we pursue.

We would only enter markets that present growth prospects that will enable profitable growth. While, we are willing to be patient, we'll have to make sure we can differentiate and add value, grow in each market that we enter.

In addition to the six new markets that we entered during calendar '07, we have more growth initiatives in place at KLA-Tencor. We will be providing updates as they materialize.

Our strategy would be to continue our organic efforts as well as leveraging our ability especially use acquisition as a way to enter new market. Our third strategy objective at KLA-Tencor is operational excellence.

A year ago we laid out a four-year plan to drive continued improvement in our business model by driving operational excellence throughout the company. We have made steady progress on our plans and have seen the results of our efforts.

Jeff will go through the details of our progress in his prepared remark, but the net result, the actions we have been taking over the past several quarters to achieve higher levels of profitability begin to show up in our last quarter. Our fourth objective at KLA-Tencor is talent development.

None of the success that KLA-Tencor enjoys would be possible without our world-class work force. Historically, we have developed world-class talent and achieved outstanding financial results through the cycles of the industry.

We are increasing our efforts in talent development. Know that our people are the key to our success.

In summary, KLA-Tencor continues to be a company with an unparallel portfolio of inspection and measurement technology, enjoying relationships with every major IC manufacturer, great people who are driven by an unwavering passion for innovation and commitment to ensure our success. These unique attributes are what have sparked our market leadership over the past 31 years, refueled our strong financial performance, driving the resources for continued innovation, strong foundation for growth.

We believe these attributes help to position KLA-Tencor to continue to outgrow the industry in 2008 and beyond. I would like to wrap up my comments now by giving you our guidance for the March quarter.

Orders are expected to be down 10% plus or minus 10% from the December quarter. Revenue is expected to be between $575 million and $595 million, EPS in the range of $0.60 to $0.64, including stock-based compensation, including one-time charges.

Now, I will turn the call back over to John.

Thank you, Rick. We had another quarter of solid operational execution in December.

Even though revenue was down 8% as expected, gross margin was up and both operating margin and EPS were flat with the prior quarter. This strong margin performance was the result of two factors.

First, the actions we have been taking over the past several quarters to globalize our operations, reduce overhead and streamline our cost structure to achieve higher levels of profitability and cash flow began to show up in the P&L this quarter; and second, we continued to execute well in our M&A integration efforts. In December, we accelerated the integration of our recent acquisition, and today, with margin dilution from these deals essentially zero, we have achieved our short-term goals a few months ahead of schedule.

Our ability to quickly integrate these acquisitions and get them at/or above company average margin is the result of great efforts by our operating team to get the systems converted, the product lines rationalized, the sales and service efforts consolidated into our channels, and of course, the elimination of a lot of duplicate activity. Although our industry is currently in a challenging demand environment, as a result of the successful integration of these accretive acquisitions and the business model improvements we have been making, our financial model is stronger than ever.

Margins are higher, operating expenses are lower, we are generating more cash flow on a quarterly basis and our service annuity business has grown by over 45% in the last six quarters. For the calendar year, our revenue was up 17% compared to about 10% for process control and about 5% for wafer fab equipment, as demand for our new products drove market shares to historic highs and increased adoption of KLA-Tencor solutions.

Our operational excellence efforts leveraged the 17% top-line growth to create 49% operating margin growth year-over-year. Incremental gross margin was 70% and incremental operating margin was 66%.

Of course, we are not going to rest here. The completion of the integration efforts will allow us to put even greater efforts on other initiatives, the continued transition of manufacturing and supply chain to Asia, improving our service delivery and spare parts distribution models and improving efficiencies in other areas of our business.

Now, let me spend a minute going through the quarter in more detail. In general, the slowing demand environment we first began to experience in the late September quarter continues to prevail in each of our markets, and today our visibility is very low.

Net bookings for the quarter were $580 million, which is up 20% from the September quarter. This net bookings number includes $22 million of de-booking.

Every quarter we scrub our backlog line-by-line and de-book any order we do not expect to ship in the next 12 months. The product distribution of orders was wafer inspection at approximately 48%, radical inspection was approximately 10%, metrology was 20%, and service was 22%.

We ended the quarter with approximately $1.3 billion of backlog, $827 million of shipment backlog for orders that have not yet shipped and $437 million of revenue backlog for products that have been shipped but have not yet been signed off by customers. Remember, we do not include any service bookings or revenue in this backlog.

And as I said earlier, our service business has grown by more than 45% over the last six quarters and is currently adding about $122 million per quarter of revenue. We remain confident that we have a strong backlog that's shippable over the next six to nine months.

Our ability to maintain this significant level of, both, shipment and revenue backlog continues to help KLA-Tencor sustain high levels of profitability throughout any business cycle. Now turning to the income statement, revenue for the quarter was $636 million, down 8% compared with the previous quarter, and slightly above the midpoint of our guidance for the December quarter.

Gross margin for the quarter was 55.2%, and this includes $16.5 million of charges for de-related amortization. Excluding these items, gross margins, including, stock options was 57.8%, up about 40 basis points from September, despite a decline in shipments from 707 to 588.

This is a result of the elimination of dilution from the recent acquisitions ahead of schedule, as well as the realization of cost reductions in our Singapore facility. In the March quarter, we expect gross margins to be slightly lower as a result of the lower levels of product revenue.

Operating expenses were $257 million. This number includes an $8.5 million charge for de-related amortization, a $67 million charge for legal fees related to the stock options investigation, as during the quarter we entered into an agreement, in principle, relating to the settlement of securities class action losses.

These charges were partially offset by a gain of $9 million on the sale of our manufacturing facility in Livermore. Excluding these items, operating expenses were $191 million, down $13 million quarter-to-quarter as the efforts we have been taking over the last six quarters to reduce the breakeven point of the Company started to bear fruit and the dilution from acquisition was eliminated ahead of schedule.

Breaking down operating expenses, R&D expenses were down $6 million quarter-to-quarter as the reductions resulting from the consolidation of acquired R&D program offset the increasing spending a new technology and customers collaborations at 45-nanometers and below. SG&A expenses were down approximately $7 million quarter-to-quarter.

In this period of contraction in demand, we will continue to accelerate our investment in R&D, both on n plus two innovations and on growth program. So that when the demand climate improves again, we are in stronger position than ever to capitalize on the resurging growth, extend our market lead and grow into new markets.

These increases in R&D spending will be offset by continuing reductions in SG&A, and as a result going forward we expect operating expenses to be flat to slightly down. Operating margin for the quarter was 27.7%, down 30 basis points from the prior quarter as we were able to hold margins despite the reductions in shipments and revenue.

For the quarter, other income was $13.3 million. In the March quarter, we expect other income to be approximately $15 million.

The tax rate was 21.4% in the quarter. Excluding one-time item, the tax rate was 28%.

Net income for the quarter was $84 million or $0.45 per diluted share. Excluding the charges discussed earlier, net income was $138 million or $0.75 per diluted share.

This number includes share-based compensation expenses of $24 million, and in the March quarter we expect expenses for share-based compensation to be about $26 million. Turning to the balance sheet, cash and investments ended the quarter at $1.3 billion, an increase of $14 million quarter-to-quarter.

In the quarter we repurchased approximately 2.7 million shares and paid a dividend of $28 million. After these share repurchases, approximately 8.4 million shares remained authorized for repurchase under our existing program.

Cash from operations was $126 million in the quarter, as we made a $105 million tax payment, about $65 million higher than normal as a result of the sale of IP to our Singapore company, we discussed last quarter. Inventory decreased by $17 million to $483 million, and accounts receivable finished the quarter at $579 million, down $40 million from the prior quarter.

Net capital expenditures were negative $3 million, as the proceeds from the sale of our Livermore facility more than offset capital acquisitions in the quarter. Depreciation was $14.3 million, so on that basis, including retirement, fix assets decreased by $70 million quarter-over-quarter.

Fully diluted shares ended the quarter at $185 million, and headcount was approximately 5,800. Finally, as we commented earlier, we are in a period of very low visibility.

Given this environment, we are continuing to run our Company in a way that will maintain us... allow us to maintain high levels of investment in next generation technology and in collaboration with our customers while maintaining our high levels of profitability and cash flow for several quarters.

With that our guidance for the quarter is bookings down 10%, plus or minus 10 points; revenue between $575 million and 595 million; and EPS of $0.60 to $0.64. This concludes our remarks on the quarter.

We will now open the call for questions.

Let me request you to take refrain from asking multipart questions to give other some time. And as always, we are on a tight schedule.

Cara, can you begin the polling please. Question And Answer

Thank you, and good afternoon. Looking at the soft near-term environment, I am just wondering which segments are going to be weaker.

I am assuming that it's Taiwan DRAM and the foundries, but maybe the team can shed some light on the situation here?

Harlan, yes, I think, it is. Frequently we have seen some softening at foundries, we do expect foundries to pick up a little bit, but that's being said they were off more than we expected in the December quarter.

And I think memory, as we said, we think the forecast is generally pretty choppy. As you know, the challenge for the memory customers is they invest and if they don't invest, then, of course, it's hard to stay in the game.

So that's really I think a decision that many of the memory customers have to make right now.

Has there been any relative differences between weakness from the DRAM suppliers versus the NAND flash suppliers?

Last quarter, I think, we... sorry, DRAM actually was up quarter-on-quarter as a percent from our flash.

So it really kind of comes in pretty lumpy, I think, would be the best way to do it.

Okay, and then just one quick follow-up question. Just wondering, if you guys could just give us an update on the ramp of the Singapore facility, where you are in terms of capacity and where you expect to be over the next couple of quarters?

Hey, Harlan, John Kispert. We had...

it's a pretty key quarter for us in the transition to Singapore, we essentially shipped every SP2 for the company came out of Singapore, and as you know that's flagship... one of the flagship products for KLA-Tencor.

And the focus for the team has really been in predictability, and they passed with flying colors in quality, obviously... out of box quality and have passed with flying colors.

So, we are lining up two more products that over the next six to nine months will be starting up in Singapore. We are seeing the cost advantages that we had hope through the supply chain.

Cleary, we are closer to many of our customers there too, and that's given us substantial leverage in collaborating and in our support infrastructure.

Okay, great. Jeff, shipment expectations in the March quarter?

About same as this quarter. Between 575 and 600.

575-600. Okay, thanks a lot.

Thank you. Good afternoon.

Guys last week in New York, Applied did a analyst meeting and they put out some aggressive projections of gaining 10-15 percentage points of share in process control. Just kind of wondering what the strategy is to make sure that doesn't happen?

Jay, good question. I think we have had attracted competitors in our space, as you know for many years and we have heard some more claims from competitors in the past.

Our challenge is really to be clear on game and that means we keep investing in R&D and we have been doing that. So, we are close to get out customers, we are pretty confident in our position, competitive position and also with what's on roadmap, so our strategy is really to continue to focus on satisfying our customer need.

And ultimately customers will make those decisions based on the products that we provide. So, really no change of strategy.

It's not exact for the first time somebody has said they are coming after our market.

Okay, quick follow-up. If I see units grow say 12% to 13% this year.

Do you think that it's feasible for that to happen with CapEx down 10-15, maybe more percent?

Yes, I mean, feasible. If you see the...

Jay it's all about the ESPs, obviously. But from our standpoint, when we talk to our customers, I think, what you are getting out is the visibility of CapEx spend...

right now, as we said it's pretty murky out there. And that we have very little short term visibility and probably even less long term.

Okay, thanks.

Thank you so much for the question. Guys the question is, obviously, the reason we are in the environment right now because we have too much supply.

How comfortable are you that if we just sort of could eradicate the excess supply today that going forward we are not adding too much capacity. In other words even in Q1 of '08 are we adding still too much supply that we are going to have to absorb, or is this just a function of excess capacity that needs to be absorbed that was added last year?

Hey Jim, John Kispert. It's really hard for us to tell.

I mean, I will give you what we do see. It's hard for me to directly answer your question.

If I look at the sales funnel in front of us over the next six months in all of our systems, it's actually a higher number than the number we're giving you. We're putting our far windage as the senior management team that we think it will be a little bit lower for...

really for the reason you're mentioning. Inside of that though, the orders that look most likely to us are more around next generation technology buys than they are on capacity adds.

There are, certainly, opportunities for quicker capacity adds but those are the ones that we... that are getting discussed and we're going after them, of course, but we are certainly not putting into the model for the company going forward.

But I'd say, that your question still very much in play and hard to understand. Right now, I think over the next 60 to 90 days it certainly will play itself out.

We'll be in much better position, that's our conservative guidance.

Thanks a million John.

Hi. This is Bismel Loui [ph] for Satya Kumar.

One of your peers earlier in the day, not a competitor, was talking about pricing pressure in the market are due to profitability of your customers. And now both of you have the same set of customers, so I'm wondering can you talk a little about pricing trends for KLA, especially in the process control market?

It's always a good question. I'd say that there isn't a quarter that's gone by over the last 15 years, that we haven't had some pricing pressures.

Every deal that goes out there, we're competing against. As Rick said earlier, very worthy competitors, typically we are at a higher price, premium price, but we have learnt through the years is it's all about having the close collaboration with our customers and having the technology, that has the highest performance and the highest throughput and the highest sensitivity.

And that what wins and the lowest cost of ownership by the way also. And that's what wins, so I...

there has been no change, I would say, in the last year or even the last 90 days as far as pricing pressure. We feel it every quarter I don't know if it's an upturn or downturn.

Okay. Also can you...

you normally split orders by device segment right. Can you split that for the December quarter?

About 57% memory and about 28% logic and about 15% foundry.

Okay. And one final question I have is what percent of your revenues is represented by your biggest customer?

We don't have anybody that is 10% customer.

Oh, there is not.

Above 10%. In this environment most folks are, the biggest ones would be around 5% in the quarter.

Okay. Thank you.

Hi this is Olga Levintan calling in for CJ. I had a couple of questions.

On the last call you suggested that looking through 2008, you probably see a revenue run rate in a low to mid-600. Given your guidance for March, do you sort of see that playing, is that the case still, or do you see it being more flattish?

Yes, we don't give guidance out more than one quarter. As we said it's a pretty murky environment for us right now and 575 to 595 is a revenue range that we are comfortable in that, in this environment.

The environment changes that may change, but that's where we are today. The good news for us is that, as we move into this environment, we have done so much operating improvement over the last several quarters that we can hold operating margins above 20% even at those lower levels.

Got you. And then assuming that CapEx is down, our model suggesting down probably 15% to 20% would you...

are you sticking by the... your revenue line basically outperforming that by about 5% or is that sort of...

Absolutely, we historically outgrow, we will continue to outgrow, nothing has changed there.

Okay. And then can you give us, given the orders you have seen in your e-beam product.

Can you talk about your current share and what your target is for 2008 and what your target is for your existing inspection and metrology products?

Yes, we don't break out share by product line. We talk kind of broader in the inspection area, I think by e-beam you mean our review product.

In that case, that's... in most of our markets, as you know, we have leading position, 18 out of 20, that's one of the two where we don't.

And what we have seen is some steady progress, we believe that over the course of the next couple of years we will continue to build our share position in that. But as I also said, we want to grow on a way that's profitable, so there is, sometimes you have people that try to enter our market and will do it at a very low cost and define that that's very dilutive to their business model, we won't do that with this, we are going to differentiate and so it's going to a while.

The good news about slowdown, if there is any good news is it does give our customers more time to evaluate our new products. And we find that that they are liking what they see with our review product.

So, you haven't really set a specific goal, you are just sort of doing it customer-by-customer...

No, we have a specific goal, we haven't, we don't talk externally, the team is well aware of this specific.

Alright, and then I guess one final question, on the Singapore fab. Are you still expecting a one point gross margin improvement in the March quarter from the transition?

I've been overseeing solid gross margin already... we stared to see the benefits in the December quarter where we had gross margins going up despite a decline in shipments and asset gross margin down slightly on lower product revenues going forward.

Certainly, we're incredibly happy with the performance of our team in Singapore and excited about the continued ramp there.

Okay. Thanks so much, that's all I have.

Hi, couple of things, I guess, first thing. Can you...

you broke out orders by customer. Can you break out memory by NAND and DRAM, than I have a follow-up?

About 40% NAND... 40% of memory is NAND.

Okay. And then Jeff, you and I talked about this before.

But if you plot your orders even out to the March quarter and you look at your share of the overall wafer fab equipment pie, and you compare that to a last couple of cycles, usually during a downturn, you guys always gain share, book share. And this time looking out to the March quarter, it doesn't look like you are.

You gained a little in December. But then it kind of lost back in March, so when you look from peak to trough, it doesn't look like you are gaining share of the overall fab budget.

And I'm wondering is that maybe because we haven't seen it yet and it will come in June and September it's kind of coming later this cycle or why do you think that the data shows that or in fact do you think that the data is wrong.

Well I think, what I heard you say was, we gained shares through December but maybe giving it back a little bit in March?

Yes, I am just saying that if you... because your orders are up more in December then everyone else's are, but then they're down more than most companies probably will be in March.

So, I am saying, if you look holistically from the peak to March it doesn't look like, you have gained much share of the overall fab budget, when you have during prior downturns, and I am kind of wondering, why that might be?

I think, we like to stick with the facts for the moment. But through December it looks okay, let's see how March comes out.

But we are happy with our product set, we see products, process control continuing to pick up with our customers, we are seeing increased demand, solid pricing high market share, I don't think we are not done.

Thanks for taking my question. My question refers to or is about the breadth of the market.

I mean you talked about this Korean customer diversified shift. I mean if you took that one customer out, I mean what would be you order guidance here for margin, where the orders have been sequentially in December, just trying to get an idea here about how, how broad the market actually is?

Gary, this is John Kispert. I will read between the lines here, you are talking about one particular customer in Korea that ?

Yes, every company now that is having conference calls right now, is just talking really about that one customer, I don't know if you know but Lam Research is talking about it. And the impact of that one customer on margins, they are seeing a little bit of margin pressure due to pricing for that one big customer, so it sounds like the breadth of the market is pretty narrow?

Yes, I wouldn't say that with us. I think our memory for December was, and we don't like talking specifically about customers for obvious reasons, so listen closely, memory is...

was broader for us in December than you are implying. And in the March quarter, it's broader than you are also implying, it's not to say that both of our large customers in Korea spend with us every quarter.

It's either to add capacity or next generation technologies. I think both of them...

right now, we're working very closely on next generation technologies and... but I don't, either in our guidance or in what we've booked this last quarter that we have a huge part of the order book coming from one particular customer.

Okay. Just a follow-on, since everybody else is asking a multipart question.

Just to imply that since you don't have that much exposure in any one customer, there is really not any concern here in the near term future about the impact of pricing on margins. I think couple of your peers are talking about that right now as we speak.

We have over $1 billion worth of backlog. We feel very good about it.

As Jeff looks at it, he feels as though there is more upside than downside in our margin. We work very closely with all of our customers.

I don't see a huge change in any of our pricing going forward. You never know.

We work creatively with our customers, also to do everything we can to get them what they need and so they can be successful.

Okay, John, and one last one. Just in terms of gross margin flexing down on incremental basis, still business is usual around the 60% to 70%?

Going down is a lot harder. I think you understand the math on it.

But, we definitely not coming off that model, it feels very good.

Alright, great. Thank you.

Thank you very much. Jeff, thanks for giving out those details on the charges in the press release.

That was very helpful. Hopefully you can continue that.

My question is on the weakness. Can you give us a timeframe when you...

when the weakness started developing? Is this something very recent or it has been there, or put it the other way, would your order guidance have been the same if it was two weeks ago?

Weakness started in September. We started talking about in September call.

Certainly, it's got murkier since then. I mean, would have been two weeks ago...

no possible way. I think it's the same.

No, I was referring more towards the last call you suggested that March orders will actually be up, so that's... with reference to that I am asking that question.

If you look at our sales funnel today, anyone of our sales systems in the company in which we spend a lot of time examining, almost on a daily basis nowadays, it's actually a higher number than we are telling you. We are less convinced.

We are taking an ultra conservative position on it. There are folks in the Company who think March could be better, and June could be better, but given the environment that we are operating in, visibility is very low.

We are, again, taking an ultra conservative position and with the big backlog and looks to kind of write this out and be in position... better position, both, from a market share and new product portfolio, when and if the upturn starts.

But, to just add to that. I think, if you look back 30 days, the climate has gotten worse not better.

I think that's the nature of your question.

Okay. Just I have one quick question on the radical inspections.

It seems like radical inspection is following semi-cap kind of trend, it has been weak for a couple of quarters. Should we think of radical inspection similar to semi-cap, I thought that was mostly to March, also they will have a different cycle?

It's a combination of couple of things. One, it has a lot to do with actually our product introduction cycle in radical.

The more we bring out new technologies and new capabilities, we will see increasing demand. So, you are right, we have seen some fluctuation with the overall cycle, but it is definitely true that overall radical is little bit off cycle.

The other thing that some of our radical business now is in wafer fabs, so that tends to be more tied to the wafer fab and that's probably a little bit different than it was a few years ago. But an overwhelming factor is new generation.

So when we look forward we see new technologies coming out then we expect to see increases in radical as a result.

Okay, that's very helpful. Thank you very much.

Thank you. Question is regarding new products you have introduced recently and also the one that you alerted in the earnings release, basically [ph] total available market for them, and how much of incremental sales do you expect from them in 2008?

We could barely hear you. The question was?

New products we talked about in the earnings release is that the...

Am I clear now?

Yes, much better Hari, go ahead.

Regarding the new products, I just wanted to know the total available market for them, and how much incremental sales do you expect from them in 2008?

Sure. The products that we talked about in the press release are products that are just continuation, evolution of the product lines that we have.

So, those are cases where we are bringing out newer technology, but those are really the same market segment. In prepared remarks, we talked about the new markets that we have entered which we said is about a $700 million tam opportunity over the last year that we are now involved in.

That makes sense?

Yes. And how much incremental contribution do you expect from the new products in this year?

Yes, if you look at our backlog, Hari, it's about... I'd 85% of our backlog today is our products that we've introduced in the last 12 months.

Okay.

And another $0.15... 15%, frankly, is for trailing edge.

Quick turn kind of backlog. So, it's really all of our products are we're shipping today for, where these kind of gross margins that you're seeing are products of our latest generation.

Sure. And just a quick follow-up on the share repurchases.

Should we expect the share repurchase activity to accelerate in the face of a cyclical weakness?

No, we don't like to talk about what's currently going on, but we still have 8.5 million shares authorized and we're definitely out in the market everyday, and it is a dollar cost averaging kind of program with the lower the prices the more we buyback.

Sure, appreciate it. Thank you.

We have time one more question, Cara.

Thanks for taking my question. When you guys comment on outgrowing the industry by like 5%, with the overall mix of customer change meaning, your memory in total is like 75% and logic is 15%, foundry 10%.

Does it just follow along the same lines or you guys actually outgrow, let's say on logic or something? Can you give some color around that?

Yes we kind of, we back up and we say what the industry growth rate looks like, overall? And our target is the growth from a top stand perspective to make sure we have programs and products in place to be able to achieve the growth.

And the best example is look back in 2007, the industry grew 5%, so we grew at 17% revenue. That was example of significantly outgrowing the industry.

Now to your point, there are specific segments that grow faster then others and the questions is how are we positioned? Since most of our products serve multiple segments, it's really more about the use case in those customers.

That being said sometimes we have specific products to support specific customer types. So, we have a memory product, the 2810 I talked about, which really is target at memory performance.

So, we set the goal to be overall for the industry, but then we have specific products and programs depending on the segment. Does that make sense?

Yes, one just quick follow-up. I mean, you talked about foundries being down.

In your 5% growth you have a different forecast on the industry average for foundry?

In our 5%

... growing 5% faster, no, not really.

The foundries are interesting because they drive us in a different way than memory does. Memory drives, leading edge design rules, foundries drive the need for a lot of product changes.

So, we don't... if what you are asking us, we count on foundries to achieve our growth target, the answer is, no.

It just exercises a different part of our product portfolio and a different kind of capability on our tools. But we can grow with really any customers spending.

We do need some spending money.

Hey, Ben, let me just... I will summarize I think I know where you going on this.

On foundries, historically, we have done extraordinarily well, just given the business model and what their focus is on, etcetera. So, we as a company, we like it when the foundries want to expand capacity.

One big change over the last year that Rich really pushed hard for with all of us is more focus in tailoring every one of our product lines to the applications in memory. So, we are in much better shape in the other segment, to say we were years ago.

As far as growth with either memory of NAND, where they are pushing lean edge... but the adoption is actually higher than say years ago.

That makes sense?

Very helpful. Thank you very much.

Thank you everyone for your time. We look forward to talking to you again next quarter.