Varian Semiconductor Equipment Associates, Inc. Q3 2008 Earnings Call Transcript

Varian Semiconductor Equipment Associates, Inc. (VSEA)

Q3 2008 Earnings Call Transcript

July 24, 2008 5:30 pm ET

Executives

Robert Halliday – EVP and CFO

Gary Dickerson – CEO

Analysts

Stephen Chin – UBS

C.J. Muse – Lehman Brothers

Edwin Mok – Needham

Satya Kumar – Credit Suisse

Krish Sankar – Banc of America Securities

Peter Kim – Deutsche Bank

Gavin Duffy – Broadpoint Capital Inc.

Patrick Ho – Stifel, Nicolaus & Co.

Ben Pang – Caris & Company

Jenny Eun – JP Morgan

Paul Siebeck [ph] – Capital Flow [ph]

Presentation

Operator

Good day, ladies and gentleman, and welcome to the third quarter 2008 Varian Semiconductor Equipment Associate Inc. earnings conference call. My name is Lacey and I will be your coordinator for today’s call.

At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator instructions)

I would now like to turn the presentation over to your host for today, Mr. Robert Halliday, Executive Vice President and Chief Financial Officer. Please proceed.

Robert Halliday

Good afternoon. I am Bob Halliday, Varian Semiconductor’s Chief Financial Officer. I want to thank you for joining us for our fiscal 2008 third quarter conference call and webcast. With me in the call this afternoon is Gary Dickerson, our Chief Executive Officer. Before getting into our financial results, we want to remind you that during the course of this call, we may make various comments about the company’s future expectations, plans, and prospects. These forward-looking statements are subject to various risks including those detailed in the company’s public filings including our most recent 10-K filing. The company cannot guarantee that these forward-looking statements will actually occur and we assume no obligation to update these forward-looking statements.

Recent developments include very soft overall business conditions, a continued production ramp-up in PLAD tools and actual and scheduled increased shipments to the high energy in Japanese markets. Now, I will review the results for our third quarter ended June 27, 2008.

Third quarter 2008 revenue totaled $183 million. This 28 % sequential decline in revenues compared with the second quarter of 2008 is due mainly to a substantial follow-up in sales of tools to memory manufacturers especially the web. During the quarter, sales to a large memory manufacturer and a major logic company each accounted for 10% or more of our total revenue. We shipped 20 single-wafer high current tools in the third quarter of 2008, increasing our installed base to over 535 tools. All of these tools were 300 mm tools.

Third quarter 2008 net income was $18 million or $0.25 per share, in line with our guidance. Varian’s third quarter tax rate declined to 38.8 % from 45.1% in the second quarter, slightly less than our guidance of 39.5%. The geographic breakdown of our revenue this quarter based on fab location was Asia 68%, North America 20% and Europe 12%. Third quarter 2008 tool shipments in units were approximately 50% memory, 27% logic, and 23% foundry compared with 56% memory, 16% logic, and 28% foundry from the second quarter of 2008. All third quarter tool shipments were 300 mm.

During the third quarter, we recognized revenue for six PLAD tools at three different customers. In addition, we shipped a PLAD evaluation tool to our fourth customer. Third quarter PLAD sales fell short of guidance as one tool was pushed out by a major memory manufacturer to the excess capacity. We are forecasting two PLAD tools sales in the fourth quarter of 2008, and six more PLAD sales in the first quarter of 2009. Our installed base of PLAD tools has now reached 33. This installed base consists of four customers that have bought multiple tools including a major memory manufacturer that has placed multiple tools in the production and each of four different fabs. Four other customers have either bought single PLAD tools or currently have them under evaluations.

Third quarter 2008 gross margin was 48.2%, in line with our guidance. Third quarter margins improved from the second quarter is non-system sales where greater proportion of total sales and warranty costs were less. Although, non-system sales increased as the percentage of total sales they were down in absolute terms and notify as expected and finished weekly at the end of the quarter. These gross margin improvements will partially offset by lower factor absorption, inventory transition charges, and unfavorable customer mix. R&D expenses of $27.2 million was slightly low than our guidance. Marketing, general and administrative expenses decrease slightly from the second quarter to approximately $32.1 million, but exceed the guidance by $100,000 mainly due to higher than forecasted evaluation and demo expenses. Operating expenses also included approximately $600,000 in restructuring charges for personal reductions. At the end of the third quarter, our full-time equivalent head count was 1,813 down from 1,906 at the end of the second quarter of fiscal 2008. This decrease was due mainly to lower manufacturing in all the headcount but also included customer support and administrative reductions.

During the third quarter, we bought back approximately $75 million or 2.1 million shares of our stock. Here today, we have bought back accumulative total of 21.7 billion of our outstanding shares in September 30, 2005 at a cost of approximately $715 million. Since the start of our buyback in the first quarter of 2006, we have reduced our net outstanding shares even after the impact of additional option exercises by approximately 16%, including 11% in the last 15 months.

Third quarter 2008 capital spending was $3.1 million. Depreciation expense for the quarter was $4.2 million. In the fourth quarter of fiscal year 2008, we anticipate revenues of between $130 million and $140 million. Revenue is expected to decline due to reduced systems revenue caused by a continued significant decline in DRAM spending and postponed Flash purchases. Foundry revenue will also decline in the fourth quarter. Logic however remains in line with prior estimates. Exacerbating the situation is the fact that we plan to ship six tools to Japan in Q4, mostly for memory. Five of those tools will have the revenue deferred out of the quarter. To give some more color in Q4 memory shipments, we expect total memory shipments to decline from 82% of our shipments in Q1 2008 and 70% in all of fiscal 2007 to 21% in Q4 2008. Additionally, we are forecasting that our DRAM shipments will go from 158 tools in fiscal 2007 to 83 tools in fiscal 2008.

In the fourth quarter, we anticipate the tool shipments in units will be approximately 21% memory, 55% logic, and 24% timing. We anticipate the gross margins will decrease to between 40% and 45.5% in the fourth quarter of fiscal 2008. We expect that our fourth quarter gross margins will be negatively impacted by, first, a rapid deterioration in the non-systems business as customers continued reform slowdown. Our fourth quarter gross margin forecast between 45% and 45.5% would have been a couple of percentage points higher if we had achieved the expected level of non-system revenues. As the slowdown continues, our customers are running at lower utilizations using up spares from their existing inventory and aggressively trying to make the spare parts last longer. Secondly, unfavorable cost index including some penetration shipments to new memory customers. Third, unfavorable product mix. For instance, fewer PLAD tools. Fourth, some unfavorable factor absorption and with lower volumes, some slow down in our level of sourcing from low-cost regions.

We expect that R&D expense will remain flat at approximately $27 million in the fourth quarter. We continue to manage our program expenditures tightly in light of the current business environment.

Marketing, general, and administrator expenses should increase approximately $800,000 to $32.9 million in the fourth quarter. Included in our fourth quarter outlook for marketing expense is an increase in our funding for new evaluation tools of approximately $500,000 which should lead the future market share opportunities. The placement of evaluation tools is a combination of an extensive new product R&D effort and penetration opportunity in new customers. Our MG&A expenses will increase in Q4 as we are in the midst of going from seven evaluation tools in Q2 2008 to a projected 14 evaluation tools in Q4 2008. The areas of focus for these evaluation tools include high energy Japanese and PLAD markets.

In fourth quarter’s spending, there is an additional $750,000 reinstruction charge related to some cost reduction actions that we will take in the fourth quarter.

One of the structural problems that we have at Q4 spending is that once every four years we include 14 weeks of payroll in the quarter. Q4 is that quarter. As a result, we anticipate that earnings per share will be slightly above breakeven in the fourth quarter of 2008. We expect capital expenditures in the fourth quarter to be approximately $3 million mainly for R&D projects and facilities improvements. To mitigate this bad business conditions, we have already had one shutdown in this quarter, the first week of July. We also had a shutdown in the last week of last quarter, the last week of June. We are now having another shutdown during the last week of August. We are also planning additional shutdown in the first quarter of fiscal 2009. We have drastically cut back on all of the spending that are keeping all of our options open to minimize our cost. Now I will turn the call over to Gary for his remarks.

Gary Dickerson

Thanks, Bob. The semiconductor’s proven industry is obviously in a significant downturn in 2008. During this downturn, we have an excellent opportunity to position ourselves for further gains and widen the gap with the competition. Broadly speaking, we are focused on growing implant's addressable market and our share of that market. Transistor engineering is becoming more difficult as customers move to smaller design rules. An implant is a critical technology to achieve targeted device performance and yield goals. This emergence of the implant as an enabling technology positions Varian for future growth including new implant capability to improve device performance, the growth in our Japan market share as customers continue to transition from batch to single wafer and recognize the increasing need for more precise implant capability, the transition from batch to single-wafer high energy tools, the emergence of PLAD to provide ultra high dose and conformal implant capability, and the growth in precision materials modification applications.

The implant’s impact on device performance and yield is increasing for future technology nodes. In this, combined with Varian’s technology leadership will have a positive impact on our business. Some specific highlights include customers planning to add additional implant stats to tune the multiple transistors that are part of advanced devices. The angle control needed for these implants is increasing and this improves our competitive position with our patented Varian control system. The yield impact is particle is increasing and this improves our competitive position with our dual magnet architecture. The implant has an impact on device leakage contact resistance and other areas including nickel sole side typing yield loss. We are focused on validating new capabilities that provide a significant improvement in device performance. Initial results had been very positive and could extend our technology leadership and overall market position.

In the Japanese market despite some recent slow down in customer demand, we are forecasting to ship six tools in Q4 up from three in Q3. We are primarily focused on the high current market in Japan but we also penetrated a new PLAD account and see an increase in the potential to penetrate new medium current and high energy accounts. In high energy market, customers are realizing an inflection point for single wafer high energy. The drivers for the switch from batch to single wafer are better device performance through less wall leakage and more chips per wafer with precise zero degree implants. We recently placed single wafer high energy evaluation tools at major memory and foundry fabs. Early results are compelling as the first tool already implanted several hundred thousand production wafers achieved 98.5% up time and 2.5 minute 10 times. We believe that we have an excellent opportunity to directly capture share in the high energy market with our single way for higher energy tool. We can also indirectly cash our high energy share with our VIISta 900XP as customers’ transition more high energy recipes to extended energy range medium current tools.

The PLAD market is also growing. In fiscal 2008, PLAD should go from an installed based of 16 tools to 36 tools, six customers to eight, and from one customer in volume production to four.

An emerging area of new application development and time expansion is the concept of precision materials modification. Precision materials modification involves using an implanter not just to modify the electrical but also the physical properties of a device. What enables an implanter to modify the physical properties of a chip is a very clean précised implanter. A major customer has been quoted to saying that the Varian implanter is the cleanest tool in the fab. Our clean, précised tools enabled the concept of precision materials modification. This is driving the adoption of Varian tools into new applications including resist stabilization, implanting to increase strain, and films modification.

I would also like to thank all of our employees for their effort in Varian’s receipt of the 2007 VLSI award for customer satisfaction. Varian has been the winner of this customer survey for 11 of the last 12 years. Last year’s win was particularly important for two reasons. First, it showed that even at a high capacity, our factory was able to ship high quality tools. Second, it validated our ability to help customers to achieve higher yields and better device performance while maximizing their tool productivity.

In closing, we would like to take this opportunity to invite each of you to our annual investor day program at our factory on Thursday, August 21. These activities will be followed by a clambake on Atlantic Ocean at Hammond Castle.

Now, we’re happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Stephen Chin with UBS. Please proceed.

Stephen Chin – UBS

Thanks. Hi, Bob. Hi, Gary. In the opening remark, I think you mentioned that there are additional shutdown plants for the rest of the calendar year. Can we infer that to mean that sales could potentially decline sequentially again in the December quarter? And if that’s true, do you think you’ll be able to take enough costcutting actions to ensure possibility in that December quarter?

Robert Halliday

Let me give you of some insight without giving you guidance to the December quarter. We correlate rolled up numbers that are up in December from September. Up, in goodly amount. The problem we have is at this stage of the business cycle, we’re not completely confident of them. So, we’re taking proactive steps because if it falls apart, it will too late to take them down the road and we’re a little bit biased towards the conservative now. So we’re looking at a shutdown, not only in the last week in August, but also Thanksgiving week and the week between Christmas and New Year.

Stephen Chin – UBS

Okay, a second question I had is, you mentioned I think 14 evaluation tools set to ship in the September quarter, could you give us some more color on that, if those are – how many of those are going to Japanese customers and perhaps how many of those are higher energy tools? I’m just trying to gauge the potential opportunity that you have developing here in Japan and in energy.

Robert Halliday

Sure. We’re going from a balance of seven tools to a balance of 14. So, it sort of an increase of seven and let me get the list. Do you have another question Stephen?

Stephen Chin – UBS

Yes. The last question I want to just see if you could elaborate on this, you mentioned that you think memory customer shipments are all likely be about 21% of the total in September quarter. Do you get the sense that this 21% could mark the drop shipments to your memory customers as the percentage, or is there a likelihood that December could also see a lower number than 21%?

Robert Halliday

Well, our forecast today is that December quarter is better than the September quarter and memory is better in the December quarter. There are couples of big projects that are on the drawing board, one in Taiwan in particular and in some other DRAM spending; believe it or not, it is forecasted for December quarter. So, our forecast is the 21% below but we’re not confident of December yet.

Stephen Chin – UBS

Ok thanks, Bob. That was...

Robert Halliday

I will give the details to you, Stephen. So we go up from seven to 14 and we’re going to have increases in PLAD, we’re going to have increases in high energy, and we’re going to have some increases in Japan, so those areas I have mentioned earlier are PLAD, high energy, and Japan.

Stephen Chin – UBS

Ok, thank you.

Robert Halliday

You’re welcome.

Operator

And our next question will come from the line of C.J. Muse with Lehman Brothers. Please proceed.

C.J. Muse – Lehman Brothers

Yes. Good afternoon. Thank you for taking my question. I guess to follow on that last question, are you planning or have you ship eval tools for PLAD to a logic or non-DRAM customer?

Robert Halliday

No.

C.J. Muse – Lehman Brothers

And I guess there are plan to encounter it?

Robert Halliday

Yes.

C.J. Muse – Lehman Brothers

Okay. And I guess secondly on, you discussed, I guess five tools that would be deferred in terms of revenue recognition to December, could you help us on the, I guess, the data in the total amount between what you expect to ship in the September quarter versus your revenue guidance?

Robert Halliday

Yes, we got shipments of six and of those six, I think we revenue one and I think we revenue one other in the September quarter that was shipped in the June quarter.

C.J. Muse – Lehman Brothers

Okay, and…

Robert Halliday

And we also shipped an eval tool to Japan that is not on the sixth, right?

C.J. Muse – Lehman Brothers

Okay. And then I guess the last question here is multipart. Is it fair to assume that the service and spares and upgrades are running at a $200 million and $205 million clip in calendar 2008?

Robert Halliday

We’ll upgrades and services for the calendar year will exceed that somewhat. Right now, the rate has come down some but we will beat that for the year.

C.J. Muse – Lehman Brothers

Okay. So I guess even higher than that, would suggest based on you the run rate that you gave us the revenue for September and potentially up in December that implant is declining probably somewhere between 40% to 45% in counter 2008. Do you subscribe to that view and I guess can you comment on how, that appears to be trending worse than overall wafer fab equipment?

Robert Halliday

Yes. I don’t think it’s a high scheduling [ph]. Our current estimate is, it’s AMAT at 25 to 35 last week. Our guesstimate is that it is, so it’s a high end of that range but not as high as you said.

C.J. Muse – Lehman Brothers

Okay. Very helpful. Thank you.

Robert Halliday

You’re welcome.

Operator

And our next question will come from the line of Edwin Mok with Needham. Please proceed.

Edwin Mok – Needham

Hi. Thanks for taking my question. Regarding the PLAD that you should aim in September quarter, do you expect to recognize revenue in December quarter? Can I ask how many of them, I thought maybe a little conscious on the numbers, how many of them are for the Japanese market versus the new customer versus existing customers?

Robert Halliday

Well, we are shipping six – seven tools total to the Japanese. We shipped a PLAD evaluation tool in the June quarter. That tool will be evaluated for a number of quarters probably and then hopefully at the end of the evaluation period, they will purchase it. I don’t anticipate that we purchase in September or December. Then we also are shipping six revenue type tools to Japanese market in the September quarter and those always, almost always, give revenue of one quarter later. There was one of those six which we expect to revenue in the September quarter. The other five would be recognized in the December quarter.

Edwin Mok – Needham

I see. Great. And then on the medium current markets, you guys seem pricing pressure; it looks like based on your guidance, you are implying to me according to (inaudible) trend down quite a bit for the quarter?

Robert Halliday

No. I think we are okay with medium current. I think the problem, that is incremental problem – is coming incremental problem recently, one is that there’s some more customers who want to save in the last few weeks. Our equipment buyers in general and secondly, is that customers have financial challenges, they are trying to cut cost by deferring spare parts purchases, using up their inventory spare parts, and also keeping spare parts in production longer. So, it goes to pieces the news that are new more than medium current. I think medium currents consist of –

Edwin Mok – Needham

Great. That’s all I have to know. Thanks.

Robert Halliday

Thanks.

Operator

And our next question will come from the line of Satya Kumar with Credit Suisse. Please proceed.

Satya Kumar – Credit Suisse

Hi, Bob, Gary. You mentioned that on these 6 tools that you shipped in June and your revenue in, I guess, in December; and was there any revenue that you’ve got in June for shipments that are made prior to June due to these deferred revenues? I'm just trying to get us sense of how to think of the increments.

Robert Halliday

Yes. Let me give you the numbers. We are shipping six tools in the September quarter.

Satya Kumar – Credit Suisse

Okay.

Robert Halliday

One of those six will be revenue in the September quarter, rest five will be deferred. In the June quarter, I think we shipped one or two – hold on, it’s in here – in the June quarter to Japan, we shipped two tools and recognized revenue on two and one of those was from previous quarter.

Satya Kumar – Credit Suisse

So, could you repeat the June numbers again?

Robert Halliday

We shipped two, revenue of two.

Satya Kumar – Credit Suisse

Shipped two, revenue two, okay. And you recall in the December, you mentioned this how many DRAM project? Is this a JV project that might be contingent on financing and if this project weren’t to happen, would your December still look up?

Robert Halliday

It’s a joint venture project whether or not it’s contingent of financing I’m not sure. But we would be up. I don’t know, I guess, we would be up but – I guess without just that, we would be up. There is a couple of other contingencies that concern me in December.

Satya Kumar – Credit Suisse

Noted. And as you look at PLAD for next year, what sort of a growth do you see that completely try the DRAM spending going backward. If you assume for example a scenario where DRAM is flat, what sort of a PLAD profile would you get from this year to next year?

Robert Halliday

Well this year, fundamentally, if you go back to 12 months ago or 9 to 12 months ago, we thought in this fiscal year we do about 90 million of PLAD, up from 46 last fiscal year. And we’re going to do about 80, I think, so about two to three tools left out of the fiscal year but fundamentally the PLAD plan held together. We would anticipate that most of the PLAD ramp would hold together next year because you got about four customers who haven’t ramped and they got a big cost savings to ramp, and they ramped at the future nodes. So I think if business conditions are good, PLAD does about 110. If business conditions are bad for DRAM, PLAD does about 80 maybe. The truth might be somewhere in between

Satya Kumar – Credit Suisse

Okay that’s helpful, and I guess a couple of things do wind up. Tax rates for fiscal 2009 and also on market share, I guess, the adoptable market share runs in the high energy in Japan probably high current and medium current on the outside of Japan. Are your competitors getting more given how bad the cycle is and everything’s okay there?

Robert Halliday

It’s hard to rate next year, went just okay this condition as far above 30% because the royalty we are paying is quite loaded, so it goes down next year. So, the outside Japan medium current high current energy on the other question? We do pretty well. High current, we don’t see much action at all in our competitors but the only revenues they’re getting are tools they shipped a year ago that got a few accepted when I see virtually no new shipments. Medium current, we’re still pretty luck. I don’t see much problem outside that. I think the only issue we might have a little bit is just makes who is buying. Second, I can’t give you, we are very strong. They are not buying as much, but we’re doing well pretty well with the accounts.

Satya Kumar – Credit Suisse

Got it. Thanks.

Operator

And our next question will come from the line of Krish Sankar with Banc of America Securities LLC. Please proceed.

Krish Sankar – Banc of America Securities

Okay. Thanks for taking my question. I have a couple of quick questions, one on the December quarter. Again, not to be the dead horse but if you actually strip out these five tools revenue recognition that you are going to get from Japan, is it fair enough to still assume fundamentally that business is going to be up in December?

Robert Halliday

If you take out just that, I’m still optimistic about December, but I’m concerned about what’s in that forecast.

Krish Sankar – Banc of America Securities

Okay. Second thing is I was looking at the numbers and if I go, according to my calculation, implant from $1.3 billion in calendar '07, I come at about $816 million market size and about $275 million for you guys, and so its revenues in calendar '08, if I strip that out, you will probably around flat market share year-over-year, is that right? Assuming like it does not basically mean there’s no market share up or down calendar '08 for you guys?

Robert Halliday

I think what did you say for non-systems number?

Krish Sankar – Banc of America Securities

About $275 million.

Robert Halliday

I think your non-systems now is probably high, frankly. I think our market share can go up a little bit this year, not a lot. I will tell you why. We are making penetrations in the new accounts evidenced by the eval tools, which will help us, so we are making progress in Japan, we are making progress into high energy, and that will help us, but the only evaluation tool do not turn into revenue until the evaluation period is over and we have a very high success rate in turning evaluation tools into revenue, but that means that mechanically they would not turn into revenue until 2009. This year, we will gain some revenue tools at new accounts – the two memory guides I mentioned to you and there will be the two that we certainly need to make progress, one in Japan. So we will get some revenue dollars in there that we did not have the year before, so that helps our share. What hurts our share a little bit is the second tier DRAM (inaudible) where we are strong as a percentage but Japan where we are making penetrations is largely still buying and our absolute share is not as big as it was with second tier DRAM there. So, we are gaining shares in head-on competitions but the mix of who is buying is hurting us a little bit.

Krish Sankar – Banc of America Securities

Okay. Eventually, when these evals comes like a year down the road or something, is there any margin pressure that dampen the gross margin line?

Robert Halliday

It's okay. I mean, the eval tool itself is okay. The question is do you have gross margin pressure on the brand new piece of business? Sometimes you do, because you put in some spare parts for free in the first tool because they don’t – they would say, “Hey, we don't want a bunch of equipments before, we know if it works, give us some free spare parts in the first tool.” So, it’s so much eval tool but the first one or two tool penetrations are usually a little worse.

Krish Sankar – Banc of America Securities

Okay. Just last question, what is your share (inaudible) function for the September quarter?

Robert Halliday

I don’t know – the weighted average shares for the P&L were about 72 and change.

Krish Sankar – Banc of America Securities

And how much do you have left on your buyback?

Robert Halliday

85 million.

Krish Sankar – Banc of America Securities

Okay. Thank you.

Robert Halliday

I don't think we will use all of that this quarter, because of cash flow.

Operator

Our next question will come from the line of Peter Kim with Deutsche Bank. Please proceed.

Peter Kim – Deutsche Bank

Hi. Thanks for taking my question. I wanted to ask – you normally characterize the book, the bill ratio that you recorded for this quarter, I do not think you have mentioned that. I was wondering if you could give us – if you could characterize what the book or the bill was like this quarter.

Robert Halliday

Believe it not, I was thinking about this, but later on, this is about to tell us the truth, we exceeded the industry average. So I think this is too somewhat honest to goodness true spending – I would be a little bit – I think much virtually all of what we are saying, other people will see, okay, number one. Number two, the book and the bill quite is quite meaningful as it used to be as a forecast tool because most of what we bill, we both can account quarter.

Peter Kim – Deutsche Bank

Okay. Would you care to characterize how you push out and cancellations affected your backlog?

Robert Halliday

It was not too bad, actually. We had about three push outs and three pull-ins roughly. We do not have any cancellations.

Peter Kim – Deutsche Bank

Okay. And lastly, could you tell about the Japanese market, particularly for high current transition using Japanese companies’ customers looking to transition high energy to single wafer or high energy to medium current? And, when you compete in that business, who do you compete against, SEN or Axcelis?

Gary Dickerson

So I think Japan overall is we have talked about is a great opportunity for someone making real progress – continue to make real progress in high current. One of the customers has slowed down the ramp of tools or our next quarter shipments would have actually, probably, been the highest in many years than to Japan. So, in a high current, we are making good progress in establishing good credibility with customers. As we talk about PLAD, we are penetrating there and now with new customers. In high energy, there is a lot of interests also from customers and we have recently had some evaluations where we validated higher yield with single wafer high energy, so we are relatively optimistic that we will have more placement of high energy tools into the Japanese market. There is some movement as we have seen in other customers also, transitioning some of the well implants to extended energy range medium current tools. The good thing for us there is that with the 900XP, we have the highest productivity and best angle precision of any medium current tool so the goodness for us is that if that transition happens, it actually increases our competitive opportunity to penetrate even into Japan and we are seeing some fraction there also.

Peter Kim – Deutsche Bank

Okay, great. Thank you.

Gary Dickerson

The possibility competing with – into terms of who we compete with on that, it is SEN in high energy in Japan.

Peter Kim – Deutsche Bank

What about the – for single wafer?

Gary Dickerson

There are no single wafer high energy tools in Japan from the competition. We have some tools there but no competitive tools.

Peter Kim – Deutsche Bank

Okay, thank you.

Operator

Our next question will come from the line of Gavin Duffy with Broadpoint Capital, Inc. Please proceed.

Gavin Duffy – Broadpoint Capital Inc.

Thanks guys. I just have a couple of questions. One is, we talked on the cost-cutting measures here and the shutdown and then we looked one of the OpEx numbers for the, I think it is in the September quarter. Are the shutdowns basically just trying to help you guys in the cost of goods sold area since the rest of the OpEx goes up?

Robert Halliday

They are helping us in both areas. The OpEx is going up, highly because the eval tools I have mentioned were about 500, 000 and the other thing better the OpEx guide is this restriction of about 750 for the next quarter.

Gavin Duffy – Broadpoint Capital Inc.

All right, thanks. And just kind a like on a broader picture note, some upside for next year. But what else is going to help us kind drive memory market next year and we heard AMAT semicon talking pretty positively about (inaudible) drives driving the need for Flash equipment ramp. Now, could you expect any of that next year or is that more 2010?

Robert Halliday

Well, I will speculate. I think that the fundamental problem in 2008 is you had excess capacity added in 2007 and they have slowed down their buying so that they will get the utilization rates higher. So, are we are saying, they have slowly down their buying about 50% almost. They will use up their excess capacity hopefully by your calendar year end. So then, they should get to more normalized level hopefully next year. The second thing that would be helpful is that towards the end of, and there is more of a flash thing I guess, towards the end of 2009, you might be sad to see some incremental purchases of equipments for 2010 production of flash for start of 3DIC [ph] which has yield solid state disk drives. So my personal guess to it is that 2009 is better than 2008 but not as good as 2007 but that is just a guess right now Gavin.

Gavin Duffy – Broadpoint Capital Inc.

All right, thanks a lot guys.

Operator

Our next question will come from the line of Patrick Ho with Stifel, Nicolaus & Co. Please proceed.

Patrick Ho – Stifel, Nicolaus & Co.

Thanks a lot. Bob, there are some quick housekeeping question. First, what was the stock options expensing this quarter and what was cash flow from operations?

Robert Halliday

Our cash flow from operations was $82.1 million and then the total cost related to start this compensation on the quarter’s 3.1 in the components, 200 by line at them.

Patrick Ho – Stifel, Nicolaus & Co.

I will take it if you have it.

Robert Halliday

COGS was $510,000, R&D was 1.151, MG&A was 3663 and has a credit to the tax line of 2172 (inaudible) 3161.

Patrick Ho – Stifel, Nicolaus & Co.

Right. In terms of the September quarter outlook, obviously it is related to the pushouts from the memory market, you mentioned one-man supplier pushing out. Is it primarily because of that one customer or is it due to several others also pushing out their projects?

Robert Halliday

Oh, it is all of the above. It is across the board pretty much.

Patrick Ho – Stifel, Nicolaus & Co.

Okay. And do you expect those push-outs to come back in the December quarter or are these potentially going to bleed out into 2009?

Robert Halliday

My current hope is that some of Flash stuff happens in calendar Q4 and my current hope is that some set of DRAM business, including one we mentioned earlier in Taiwan, is better in calendar Q4 than it was in calendar Q3. The basis for that hope – outlook is that we have names and tools and dates next to those forecasts so it is a real forecast. The second thing is I have been pessimistic on the September quarter for a long time – for a pretty long time because I felt we had not only excess capacity we are fighting but I thought we were fighting tough financial conditions for our customers and seasonality, the September is seasonally the worst quarter usually. I am hopeful that it is a little better in December and that is our outlook but we do not know for sure yet.

Patrick Ho – Stifel, Nicolaus & Co.

Great. Thanks a lot, guys.

Operator

And our next question will come from the line of Ben Pang with Caris & Company. Please proceed.

Ben Pang – Caris & Company

Thanks for taking my question. Just a couple of clarifications on the PLAD. At the end of the year, your installed base is 30-36 tools, is that right?

Robert Halliday

End of the fiscal year?

Ben Pang – Caris & Company

End of the fiscal year. How many of those will have already like find off for revenue?

Robert Halliday

I think all except one, mainly.

Ben Pang – Caris & Company

Okay. And in terms of the penetration for logic, are the logic manufacturers using this tool for the same reason and in how many generations could actually get the benefit?

Gary Dickerson

They are not using it for the same reason and it is more for future device architectures and it won’t generate any near-term revenue for us. That is more in R&D.

Ben Pang – Caris & Company

Okay, okay. Are you counting that as part of your increasing available market for the material modification? I guess that is my question – when you talked about the implant factor growing with the material modification, is the logic adoption of PLAD something different?

Gary Dickerson

Yes. We do not have much forecasted for that. There are other much bigger opportunities in materials modification, not including PLAD.

Ben Pang – Caris & Company

Okay, okay. What is the biggest near term one, 2009?

Gary Dickerson

Well, we have customers – again, when people implement this new process, it is typically they implement it on the next device technology node so we know for sure that people have it implemented additional steps for resist stabilization. We know that the implant for strain is another one that is a good opportunity for us. There are other films modification types of applications that customers also were implementing so it is really, again, in a number of different areas but PLAD – and PLAD also has some opportunities and memory for additional steps. Logic and for PLAD will be a little bit longer term, I think.

Ben Pang – Caris & Company

Thank you very much.

Operator

(Operator instructions). Our next question will come from the line of Jenny Eun with JP Morgan.

Jenny Eun – JP Morgan

Oh, hi guys. Just a couple of good questions. You talked about at the end of the year that memory might be picking up with a couple of large projects. What are your expectations for foundry and logic and some of the other segments? If you could give me some color there?

Robert Halliday

Logic, I don’t have that quarter in front of me. My sense is they’ll probably put a study on the quarter but I don’t know if all the numbers are finally there. We don’t have any disrupts in emphasis. It is just when they take the shipments.

Jenny Eun – JP Morgan

You’re not too worried about those project machineries like that?

Robert Halliday

Not logic.

Jenny Eun – JP Morgan

Okay. What about foundry. Can you talk about what’s going on there?

Robert Halliday

Foundry has been a little steadier through the year so far than people expected earlier in the year. Right now, there’s a little bit of concern, I would, in my gap level that they could soften a little bit.

Gary Dickerson

Yes. Actually, I was just over in Taiwan a couple of weeks ago. What I was told from our foundry customers is that 2009, they are looking at increasing purchases CapEx for our products. One of the good things for us was 45 nanometer implant steps are a fair amount and again they are looking at higher CapEx for us. As Bob said, the near term is bumpy to a certain extent and then in 2009, and as far I thought there is not a great deal of visibility but the feedback I had when I was there was pretty positive and it also related to TAM associated with the foundry customers.

Jenny Eun – JP Morgan

Okay and then yet given that you said that there is going to be additional implant step at 45 nanometers. Do you think the ion implant segment out grossly for fab equipment in 09?

Robert Halliday

Just that with the 64,000 on question? I tell you what I know Jenny and I’ll speculate. What we know is we’re really getting a lot call from customers to use an implant in additional applications. Okay. So, this resists stabilization all the stuff we talked about, that’s genuine. What we also see is us not loosing any business or accounts or anything like that. So, see stuff going away really. So those are positives. What I don’t know is how fast this stuff ramps in production and I don’t know how fast the other segments grow. So my got no answers will sort go around the same as the other segments but I don’t honestly know.

Gary Dickerson

I think again for Varian in specific as we talked about PLAD ramping with more customers in production is positive for us. The switched from batch to single way for high energy is positive for Varian. Japan, again, we have more momentum there. That’s positive for Varian and as we talked about 2009 all of those trends are extremely positive for us and anything, I think, is in the down term; we continue to move our technology forward at a high rate and our goal is to widen the gap with the competition. So, in all of those areas, we will widen the gap with the competition and that will all be positive for 2009 from a Varian perspective.

Jenny Eun – JP Morgan

Okay, great and just one last question on gross margin, do you think in September, like I think there is a gross margin of around 45%?

Robert Halliday

Jen, 45% to 45.5%.

Jenny Eun – JP Morgan

Okay. As you talk about as PLAD kind of ramp and I know that is a higher gross margin, would it be safe to say that if I model September quarter as the draft for gross margin and just increase it from there or how do you feel about gross margin going forward?

Robert Halliday

I think everything that could have gone wrong in gross margins in September went wrong because fair business get softer, the mixed of customers and products cuts was not good particularly with these cut backs from some of the bigger good-sized deal and some of our manufacturing variances were all worse with more volumes. I’m not confident that all those things get better in December quarter. It’s a lot of those macro issues. My position is fundamentally strong. We have the big drive to launch of gross margins. We have a highly differentiated products, strong market share, and a widening gap that gives your customers advantage. Yes. Yes. Yes. We have all that but in the middle of this top economic condition for our customers, I am not confident that we can grow gross margin to December because their buying even less than approximately it did last quarter.

Jenny Eun – JP Morgan

All right. The PLAD is a higher gross margin developed.

Robert Halliday

PLAD is a plus.

Jenny Eun – JP Morgan

It may not be strong enough to offer that with these other things?

Robert Halliday

I think it’s helpful but I don’t know if is sufficient.

Jenny Eun – JP Morgan

Okay, thank you very much.

Robert Halliday

You’re welcome.

Operator

And our next question will come from the line of Paul Siebeck [ph] with Capital Flow. Please proceed.

Paul Siebeck – Capital Flow

Thank you. Bob, I hope you’re feeling better than you sound.

Robert Halliday

I was hoping I sounded better than our forecast.

Paul Siebeck – Capital Flow

Anyway, just a quick comment. Overall, when I talked to the Semi guys, they are very cautious and there is very little visibility and they are very conservative, but they admit that they are shipping, so that is kind of 10% or more growth rate and they are optimistic for the fall. What I wanted to asked for is presently if I call you up in your various product sectors, what happened to lead time? Where are they now if we call you up and order systems?

Robert Halliday

I have not changed a heck of a lot, I mean; it is fundamentally around three months and what you really talking about is the pipeline of raw materials, that is the biggest component in that, over two-thirds. So, I would say they have not changed a heck of a lot. We don’t really delay things so we are pretty confident.

Paul Siebeck – Capital Flow

Thanks.

Robert Halliday

We are going to wrap up today. We appreciate everybody joining us on the call. Although the outlook for September is not what we would like it to be, I think if anything Varian continues to position itself very well in terms of products, markets, growing the TAM and driving profitability with (inaudible). So, we appreciate your support and in fact we are very sincere about that and we hope to see all of you on August 21st on our Investor Day. So thanks for your time today and hopefully we will see you then. Thank you. Bye-bye.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.

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