Good afternoon. My name is Candice, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA-Tencor Second Quarter Fiscal Year 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Ed Lockwood, Senior Director of Investor Relations. You may begin your conference.

Thank you, Candice. 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 to discuss second quarter results for the period ended December 31, 2014. 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 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. This quarter we prepared a brief slide presentation to supplement this earnings call, which includes the GAAP to non-GAAP reconciliation of the EPS guidance and other supplemental financial information. These slides can be found on KLA-Tencor’s Investor Relations 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 make on this call today are subject to those risks, and KLA-Tencor cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. More information regarding factors that could 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 10-Q 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 joining today’s call. KLA-Tencor posted solid results that met or exceeded our expectation for the second quarter of fiscal year 2015. Our financial performance in Q2 was highlighted by gross margin and non-GAAP EPS finishing above the range of guidance. Reflecting KLA-Tencor’s strong competitive positioning in the most critical process control markets as well as a heightened focus on cost discipline across our worldwide operations. New orders were also strong in Q2, finishing above the midpoint of the range of guidance at $865 million and up 53% compared to Q1. The recent end market demands trend continued in the second quarter with new orders from leading edge foundry and logic for sub 20-nanometer production comprising the majority of system bookings in December, followed by 20-nanometer capacity conversions in DRAM. As we look ahead to calendar 2015, with leading edge device demand expected to be strong and customer profitability expected to remain at high level, we are planning for another year of growth for the industry and for process control, with semiconductor WFE investment forecasted to grow in a range of 5% to 10% in the year. In this environment of sustaining strong investment in the leading edge, the demand outlook for process control and KLA-Tencor’s prospects also remain very favorable. In the near term however, demand remains fluid, particularly in foundry and logic, where we have recently seen orders from select customers slated for sub 20-nanometer, originally expected in the March quarter, pushed to later in the calendar year. We believe these delayed orders reflect yield and process stability issues associated with bringing these advanced device architectures to market. Demand from memory customers remains robust, and in fact we achieved our highest quarterly bookings level for memory in Q2. Memory demand…

Thanks, Rick and good afternoon. Revenue for Q2 was in the upper half of the range of guidance at $676 million and non-GAAP earnings per share finished above the guided range for the quarter at $0.68, driven by stronger than expected gross margins in the quarter and good execution of cost management, fully diluted GAAP earnings per share in Q2 was $0.12. The GAAP earnings per share in Q2 included $0.53 of charges related to the leveraged recapitalization transaction, which we completed in Q2 and $0.03 of restructuring and acquisition related charges, net of the income tax effect on these adjustments. My comments on the quarter will be focused on the non-GAAP results, which exclude these adjustments. A detailed reconciliation of GAAP to non-GAAP earnings per share can be found in the press release and supplemental materials posted on our Website prior to this earnings call. New orders in Q2 were $865 million above the midpoint of guidance of $700 million to $900 million for the quarter. We continue to experience a high degree of variability in order timing and delivery day commitments from our customers. We believe this is the new normal for our industry, with our top five customers accounting for approximately 75% of demand today and often with one or two customers accounting for a significant portion of order and shipment volume in a given quarter. With each customer having their unique timeline for executing their technology, investment and capacity expansion plans and with shorter product delivery lead times becoming normal in our industry, forecasting accuracy of bookings within a 12 week window has clearly become even more of a challenge. With that, though December orders and shipments were strong, the near term shift in customer demand requirements that Rick mentioned have resulted in certain shipments which…

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

[Operator Instructions] Your first question comes from Timothy Arcuri with Cowen and Company. Your line is now open.

Bren, your commentary on the first calendar half of the year, did I hear that right in that it suggests that the June orders are going to be up like 35% - 40% sequentially and I guess does that assume that the push outs on FinFET, that they come in June or is that they’re more additive to that during the back half of the year? Then I had a follow-up.

So Tim, it’s a good question. So when we looked at it, we saw a similar profile to the second half of calendar '14 with the weaker first quarter with some bounce back into the June quarter. So it looks -- as we size the six month period, it looks pretty similar to us. And as I said in the prepared remarks, I think that the 12 week widow dynamic is becoming a more challenging dynamic for us to forecast with the customer concentration we have and size of orders and so on. So as we look at the six month window, it looks like it’s roughly the same size.

Okay thanks. And then just on margin, Bren. At this revenue level, margins are a very good 150 basis points below. I'm just looking at the March guidance. They’re good 150 basis points below where -- if you kind of average out where they've been over last couple of years at that particular revenue level, it seems like you’re giving up about 150 basis points on margins. What exactly is happening there with the mix and will you get that back in June?

Well, the mix factors are -- for the same reasons we talked about with the shipment plans, as you ship tools to customers and you’re shipping more to individual customers, you’re revenuing tools faster. So in some ways, your margin is impacted by the mix of products your shipping to a greater degree than what we’ve seen in the past. Clearly margins were extremely strong in Q2 for the reasons we talked about and there is some correction of that in the March quarter. I think if you’re modeling out our business at this $3 billion run rate, I expect to see gross margins somewhere between 57% and 58%. There are obviously the mixed dynamics that will play out in any given quarter, but that’s how we’re modeling it today.

And I think the other thing to keep in mind is the growth of our -- Tim, I think one other thing to keep in mind is the growth of our service business, while accretive at the operating margin level is dilutive to our gross margins. The way we do our accounting, there is no operating expenses there. So we believe it’s -- there is an impact, dilutive impact to gross margins from that dynamic in services in the low 20 percentile of our revenue mix.

And your next question comes from Farhan Ahmad with Credit Suisse. Your line is now open.

Can you briefly talk about, like the push outs that you saw, are they coming more from the leading edge sub-20 nanometer production as you mentioned? Is it coming from primarily in U.S. region or is it coming from overseas, some foundries? Can you just briefly describe which region did you see the push outs from?

Well, we came in obviously stronger versus the midpoint in Q2. So certainly that impacted our views on Q3 with some pull ins in the Q2. But in terms of Q3 versus what we thought, it’s really a mixed bag across foundry and logics. So its leading edge, but also some of the trailing edge business that we’ve been forecasting for some time and has been a bit allusive and I think that’s dependent ultimately on some competitive dynamics in terms of second source strategies and so on. So I would say it’s across the Board in terms of what we saw in Q3, and as I said earlier some of it we think comes back in Q4.

And then, second question I have is just talking about your next six month forecast, you're talking of revenues being flattish, half and half. If I look at the EBITDA level that you had in second half of calendar year, it's about $313 million. Assuming that your profitability and revenues are similar, you're looking at like EBITDA levels of about 600 -- $26 million and $30 million, do you think that there is some risk to the debt-to-EBITDA covenants as we look for a year or two? Your EBITDA profile seems pretty low compared to what it was a year ago, in terms of like -- if I look at the six months period from now and the past six months, and compared that to the previous one year, it's down quite a bit?

So our commentary on the first half was bookings related, not revenue. So I expect the revenue to be higher than bookings. I won't guide June obviously but I don't we will see sequential growth into the June quarter. So I don't have the math in front of me on EBITDA, but as I've looked at it relative to the covenants I have with bank debt is that we feel pretty comfortable with the level we have relative to what our expectations are for the business going forward. So I don't have any concerns based on what we see today. Obviously with the backlog position we have and our expectations for shipments into this quarter, June should set us for a sequential increase and improving operating profitability.

And your next question comes from Krish Sankar with Bank of America Merrill Lynch. Your line is now open.

Two of them. First one, Rick or Bren, it looks like you're running at a $600 million run rate for bookings in March and $800 million or so in June. What do the composition of those orders look like in March and June in terms of memory and foundry? And I had a follow-up.

Yes, so we're not guiding the June quarter but for March. March looks to be pretty foundry centric, so 70% foundry. And memory is 19%, logic 11%. And NAND as a percent of the total memory mix is up 31%.

Okay. That's helpful. And then a second question is one of things I noticed, both December, March and your guidance on OpEx is that, the OpEx seems to be coming up pretty strongly. It seems like -- just trying to find out, is this a function of you guys responding much faster, more aggressive on the OpEx side given gross margin or pricing might be under pressure or is it a function of the fact that there are some projects that don't need to be executed any more, like 450 or something else like that?

Krish, you said coming up? Did you mean OpEx is coming down?

OpEx is coming down, yes.

Yeah.

Okay

So, Krish I think that's right. If you look at the last couple of years, we have had sustained investment in a number of key platforms in the program. Obviously we're investing in 450, investing at a slight level but investing EUV in addition to some growth opportunities like our 5D solution. Customer support, another area. And so we've invested according to the road map. We think we're in a position now relative to our road maps and our competitive position that we think that there are opportunities for us to start to scale this down somewhat. And so saw that momentum play out in the December quarter. We think it continues in March and progresses through the year. So we're also doing some things underneath the surface in terms of how we think about our sustaining engineering, how do we use offshore engineering resources more efficiently and so on, that we think we can drive the operating run rate down to the 220 range as we move through the calendar year.

And your next question comes from C.J. Muse with Evercore ISI. Your line is now open.

I was hoping to go back to your comments on your customer concentration, because if we go back in time, you guys had great ability to manage through a six month backlog give or take, and clearly there was customer concentration issues then as well. And so just curious, is it movement of market share from one player to another? Is it enhanced customer concentration? What's driving the change in your business model?

Well I think it's really our customers. Given the lead times that they have in the markets that they are supporting, I think their lead times have come in and I think we've seen that same pressure pushed back on us. So we have -- we had to change our business somewhat in terms of our ability to be flexible and respond. But in a lot of these cases, we will have these conversations where we'll ask for more lead time and our customers will push back, given the dynamics that they are facing. So there is less predictability. We've seen it for a while and I think it just changed versus where we were in the past. I think it's more the end markets and I think the concentration we have, very sizable orders, sizable shipments that are going to ship out, and as the customer changes the plan, that has a dramatic impact obviously on a given quarter's shipment. So our shipments tend to be pretty close to the ranges that we're guiding, but it's more of a challenge today and certainly impacts not just the overall shipment level, which has an impact on revenue but also the gross margin, given the mix of products that you're shipping.

I also think if you think about consolidation, one way I would think about it is, I look at consolidation of our customer's customer in terms of their influence on the spend. So especially in the foundry space, their actions actually are often not really clear until very late to our foundry customers and that’s part of the dynamic of the movement. That’s why we don’t get more visibility I think from our foundry customers.

That’s helpful, and I guess as a follow up – Tier 1 was, how should we think about the uplift in your account receivables? And then the second one is, you’ve shown really good growth on the service side. Will that continue, and how should we think about I guess service spares, as well as upgrades as part of that mix?

Yes, I’ll take the service side. I do think we’ll continue to see growth out of service. One of the things service is benefiting from on the, one way I think about it, the Internet of Things isn’t really driving a lot of front end WFE spend, but it is driving the longevity of a lot of these fabs which is good for our service business. And so I think part of what’s happening is that some of these fabs run longer and get more devices, we're the extension of the life of the tools that are being serviced and that’s part of the underlying driver for our service business, which is great, and I'll let Bren handle the accounting part.

So the day sales outstanding was, on revenue about 85 days. So significant uptick there. And that was really a function of the monthly shipment linearity. We shipped a number of tools in December and in the last part of December or so. The cash collection will happen in the first quarter on those shipments and so I’m expecting reversion back to normal 70ish or so DSO levels, plus or minus a few days, and it will drive operating cash flow probably up in the $250 million to $300 million range as we move into March, based on what we’re expecting to ship today and the timing of those shipments so.

And your next question comes from Harlan Sur with JPMorgan. Your line is now open.

Yes hi, good afternoon this is Bill Peterson calling for Harlan. I was hoping you can I guess share a little more color on this push out. Is it basically just one customer or is it broader participation? And I guess what gives you the confidence that these will materialize for the second half of the calendar year? What do you base the confidence on?

Well, if you look back, even some of the stuff that we pushed out, even within December and we were having very high level of conversations with customers that felt like they had pretty strong commitments from their customers to move forward and they were in process of allocating space and slots to support their ramp, and then very late in the day that got pushed and so some of those things even pushed outside of the March -- and into the second half. So when we look at the overall dynamics you say that we’re in great shape share wise. The adoption seems to be working. What happens is these guys slide as the dynamics behind them are moving. And we see that both as Bren mentioned to the prior question, both at the leading edge and as we’re seeing some of that in logic, but also some of the not leading edge, in the foundry space we’re seeing movement. So just go back to what are your assumptions about WFE for the year and what do you really think of foundry spend, and our view is, if in fact the WFE numbers work out, then we’ll see them in the second half; but until -- as you know, until the orders are placed, it’s very hard to know if they will. But if you go back to -- our underwriting assumption is WFE up 5% to 10% this year and the mix largely intact with what it was last year, we feel pretty good about how the year is going to play out. It’s just the uncertainty has increased the volatility due to concentration.

Your next question comes from Jim Covello with Goldman Sachs. Your line is now open.

Hi, this is [indiscernible] on behalf of Jim, thanks for taking the question. Can you talk about your plans for paying down or refinancing the new debt, and whether or not 2 to 2.5 times is the leverage level to be thinking about?

So, we just borrowed the money. So we're not planning to refinance. We're pretty happy with the structure of the debt that I laid out in the prepared remarks. Our goal -- our long term target is 2 to 2.5 times. We think that makes sense for a business with our characteristics. We went above that in this case as I talked about in the last call, given the attractive lending environment, but also what we expect to be a healthy CapEx environment over the next couple of years. We structured the debt in a way that we can pay it down and we’ll pay it down with -- the term loan piece, which is pre-payable with a lot of flexibility and how we do that. And so we’ll do that over the next couple of years, working down to our long term target. So that’s how we’re thinking about it.

Great, thanks. And as a follow up, you mentioned in the last call that you’re expecting multiple players to be on FinFET by the end of 2015. Have you, are you still expecting multiple players, or is that more of a one player?

In the foundry?

Yes, in foundry.

So, I think you’ll see multiple players. I think that’s still our expectation, but to the point earlier, we’re seeing a much more measured ramp up capacity for FinFET. I think the leader is comfortable with their position and the other players are working quickly to try to catch up, and I think the competitive dynamics on that front will ultimately drive how much capacity gets added over the course of the year. We think that is what’s driving some of it into the second half, but ultimately I think you end up with multiple players with the capability.

And your next question comes from Edwin Mok with Needham and Company. Your line is now open.

First one, did I heard correctly that you said you expect your shipment in the memory space to be roughly the same this year or flat to the last calendar year? And if that’s the case, that would imply a very strong growth in foundry potentially in the second half. Is that how we should think about kind of shipment trajectory for your business?

Well we said orders. The order mix as a percent of the total, we expect it to be roughly similar, in the low 30 percentile. That was memory in calendar ‘15 versus calendar ‘14. There could be some timing issues, but generally that should translate mostly to shipments in a similar mix, but obviously the timing issues and the lead time can have an effect on that. For us from a pricing perspective, product mix perspective and so on, there’s not a lot of difference in terms of what we ship in memory and foundry. So it doesn’t really have an impact necessarily on the revenue levels or the margin profile of the various segments. So it’s all pretty consistent across the segments for us.

And then on this foundry push out, maybe just some clarification there. So you mentioned there is some push out, not just in leading edge but also trench [ph] orders right? But then you also mentioned that as your quarter came in a little stronger than expected and there was some [indiscernible] on order. I’m just trying to understand the dynamics, are these pushed out? Are you expecting a lot of these push out to be captured in the June quarter, which is you guide for higher order in June quarter, but some of that expect through the second half? In terms of shipment of these order given the push out, should we expect the shipment to come back in the second half, or is it more potentially delayed to ‘16?

Well, we had a nice bounce back in foundry from Taiwan specifically in the December quarter. So that was encouraging to see, but foundry was weaker than we expected going into the quarter. Most of the strength came from a much stronger memory and mix of business than we were remodeling. As we look at the next quarter or so, a couple of quarters, as we said earlier, it’s a mixed bag. Its 20-nanometer and below. It’s also some 28-nanometer business. And obviously there’s also some 10-nanometer early activity that’s part of that as well. So it’s a collection of customers, and not huge amounts of dollars, but in the aggregate obviously had an impact on what we were planning for in the first half of the year.

Your next question comes from Patrick Ho with Stifel Nicolaus. Your line is now open.

Maybe a big picture question for Rick in terms of memory process control intensity. If I recall, at your Analyst Day last July, you mentioned that you expect to see process control intensity rise for the memory space. Looking at the DRAM spending that we're seeing today and the conversion to 20-nanometers, one, are you seeing this? And secondly is there a bias towards inspection or metrology, particularly as you see more multiple patterning steps at 20-nanometers?

Pretty much tracking the way we laid it out at SEMICON, in terms of memory. The one caveat I would say, for DRAM it is and back to the mix, it looks like historical mix. You do get overlay. To your point you get some strength there. But you also have advanced defect [ph] inspection to find some of these smaller nodes as you’re pushing DRAM technology. So DRAM looks very much like we said. And as we said then, and even said in the last call, it’s too early to tell on 3D Flash because there just hasn’t been enough of it and its still early days on that. So whether or not that plays out to be at the intensity that we laid out, time will tell. And given the latest -- the view that there is going to be more push out of 3D from what was expected even at SEMICON, I think that it will be the best of the calendar year for we'll really have validated that model. But I think for DRAM it has been tracking the way we assumed in this -- the historical mix looks pretty similar between metrology and inspection.

And as my follow up question, maybe also for your Rick. In terms of the foundry process control intensity, you guys saw a big pick up when 28-nanometers was rolling out, given the yield challenges. I guess the two part question there is, one, how come you haven’t seen it yet with the 16 and 14 given the challenges there? And secondly do you think you’ll get that kind of incremental step up that you saw at 28?

Yes. I think that the challenges associated with the yield right now, we’re seeing sub-20 are not necessarily things that inspection and measurement can address. I think it’s more a function of some of the just process integration. And while we could be helpful in diagnosing that, that’s very different than addressing the manufacturing RAM. So we’re still early days on that. Will we see it again? We’re too early to say whether that will be validated in the rollout, because people aren’t really far enough along in that development to know. But our expectations are that the signs are good. There are also some questions about utilization of existing facilities. For example will customers roll what is 20-nanometer capability to 16 and then what happens to the intensity in that scenario? And again, it’s too early to know that.

Your next question comes from Mehdi Hosseini with Susquehanna. Your line is now open.

Rick, it seems like you a pretty good confidence with opportunities this year. It's just that the quarterly booking and shipments are lumpy, something that we went through last year. So given your confidence and also the lumpiness, why not provide us with kind of the year end guide so that we could avoid debating whether June will be up 30% or flat, and put the focus on your longer term opportunities, rather than trying to time the specific orders that have such a big variance, given the customer concentration.

So maybe I’ll go ahead and start. So we try to provide a little bit more color in broader windows, six month window about we’re seeing in the business over the last few quarters. And I think that’s important. We’ve also tried to give you some insight into where we are, based on where the industry is projecting to be where, we think we’ll end up relative to that. So for example, when we talk about calendar ’15, I think in Rick’s prepared remarks we thought given the dynamics of the mix of business across foundry and logic versus memory, that we would expect if the industry was up 5% to 10%, we ought to perform somewhere in line with market. We think that obviously the process control intensities of the two segments or three segments are different, with memory as a higher percentage. That does impact our ability to outperform the industry. So as we look at it this year with roughly the same mix of business, we see a market perform year and I think that translates from a 12 month perspective into a $3 billion to $3.1 billion type performance level at the $33 billion and $34 billion WFE level, which is that plus 5 to plus 10 range. So we’re trying to do it, all but at the same time, we feel like we don’t to be less transparent in the process. We think the quarterly bookings are less relevant to our business today, given concentration and given that the industry is not as difficult as it was in the past. But it is something that we’ve always provided and we’ll continue to provide it. We've put a broader range on it and we’ll do the best we can and then try to bridge it back to what happened versus what we thought would happen.

And Mehdi, to your point, I know you’ve made this point before. I don’t disagree with the thought process in terms of the lumpiness and how much help is it really. But on the other hand, as Bren said, we’re reluctant to remove something, given the general view of the desire to have transparency. But it is something we debate from time to time. I could tell you it’s not exactly how we run the business. When we go back and think about how do we run the business, how do we size the business and how do we make investments, it’s not based on the quarterly numbers. It’s based on what we view as trends, and even then, it's not even annualized. It's on a longer term basis than that. But your point is once again made.

That’s fair. And then my follow has to do with EUV. When you presented at a competitor conference in December, you highlighted some of the intimate conversation you’re having with some of your customer. The big foundry in Taiwan is proceeding forward. What are you going to come down to? It seems like you’re waiting for investment, the largest customer is proceeding forward. Is there a timeline here or are you just not going to proceed forward, even if your largest customer wants to move forward?

Well, I think that the way it stands today, that any production done with EUV before 2020 is going to be done without at [indiscernible] wafer, a reticle inspection. We are now too late to make any insertion point. And that’s based on the fact that there is still a lot of debate by our customers about the relative tradeoff between the cost of us developing that technology and their confidence its need in production. So I'm not saying EUV won’t go into production before 2020, because we don’t know that. But I can tell you it won’t go in production before 2020 with [indiscernible] reticle inspection. So either it won’t go in production or they'll have to figure out how to deal without it.

Your next question comes from Mahesh Sanganeria with RBC Capital Markets. Your line is now open.

I just want to get one more clarification on the foundry push out. ASML reported a pretty good booking, and I think that primarily came from Taiwan, and I think you commented that your booking had a pretty good Taiwan component. So my guess is that the push out you were seeing is not from Taiwan and other places?

Well, as I said earlier, I think it’s a mix group and it comes from a number of regions and in a number of nodes. So I think given lead time, I think certainly customers tend to get into the queue with litho sooner. I don’t know exactly what ASML set or they positioned it. But as we look at it today, and into Rick’s point earlier there is some fluidity to these orders, certainly at 28 nanometer and so they’re moving around a little bit and so the timing is uncertain. And we're set to see how it plays out.

So can you comment on what could be the driver -- we know that was 2016 the driver is that the yield issues and customer giving allocation to different foundries, that’s a big driver for 16-20 nanometer fluidity. What in your opinion is driving the changes at mature technologies?

I think it's a similar dynamic. It’s just not happening so much with the leading edge foundries. I think there is significant competition for 28-nanometer foundry capacity, and we are seeing movement among those players as they try to win that business. So similar thing but just not with these exact same players.

And your next question comes from Weston Twigg with Pacific Crest Securities. Your line is now open.

Just wondering real quick on the reticle inspection business, which I know is a good high margin business, but you've mentioned it’s somewhat saturated. I was wondering if there is any opportunity for that to pick up a bit more as customers move to multi-patterning schemes, or do you think the installed base is generally pretty sufficient at this point?

It’s a great question, Weston. I think that the -- we don’t know the answer yet. I think that it’s not as much about multi-patterning per se as it is sub 20-nanometer technology. So the multi-patterning above 20 I think is pretty well positioned. The question will be sub-20, are there new kind of inspection modes that require new algorithms new developments as people try to figure out exactly how to tune those reticles to support sub-20. And there are some indications that will create some boost in demand. But again, it’s relatively early in that and we don’t really see it. So what mostly is happening now, we did have some good reticle business last quarter, but mostly what happening is in the fab and those tools are not fully -- those are not as complete tools. So you have a tool that’s targeted at fab line that’s a different kind of tool than what we sell in our shop. But we’ll wait and see on that. I think that there is a good possibility that we’ll see some increase in demand. I wouldn’t forecast that in the very near term, no. I think that’s a longer term thing.

Okay that’s helpful and then just really quickly, wondering with the new cash balance, can you give us just an update on what’s offshore versus onshore?

It’s -- about 1 billion [ph] of it is onshore.

$2.4 billion onshore

Your next question comes from Romit Shah with Nomura. Your line is now open.

Rick, ASML said the other day that every single memory maker is increasing capacity. And I know you indicated that visibility in 3D NAND as a bit limited today, but I was wondering on DRAM, how do you see capacity playing out here in the first half? Is it increasing? And how would you describe the pace?

Yes, I think memory is setting up to have a good year again in 2015. We have seen strength in our memory business as we commented on the call. The December quarter was our best memory quarter and we see that continuing, and it is mostly in DRAM and we think for the year it looks that way with the 3D NAND being later in the year. So I think it’s true and I think our adoption has improved, but again it’s at the lower level that foundry. So from our standpoint, a mix shift toward memory doesn’t increase our available market.

And Bren just on the special dividend, I think it was a little controversial at the time, but in retrospect it looks it was a very good decision, and I'm curious how you’re thinking about this going forward? Have you considered at all the idea of doing a smaller, but perhaps more frequent special dividend based on the performance of the business?

So I'll back up and our process is that as we evaluate the Company’s strategic plan and we look at not only our cash reserves but the debt capacity that we have, we go through that process and we think about the alternatives of how we invest operationally, M&A considerations or shareholders return consideration. So that’s a regular process for us. Clearly the shareholder return options are viable options, and I think in terms of value creation, the other options are juxtaposed against that. So clearly we have a long-term target, and in terms of leverage levels we think that makes sense, and as we de-lever the debt and we see the growth in EBITDA and our business we’ll -- to the extent that that affords a position for us to run through that process and consider it again, it’s a possibility but we'll run through the process and make the right call, based on what we think is in the best interest of the shareholders long term.

Your next question comes from Sundeep Bajikar with Jefferies. Your line is now open.

Two questions on foundry. First, what level of sub 20-nanometer foundry capacity do you currently expect to see get built or converted overall? And how much of this did you actually see get built in the December quarter, if at all?

So we just -- I think some of the 20-nanometer conversion will be largely determined by what happens with the end markets and whether -- the major customer there, as they migrate away from 20 does that capacity get consumed by other fabless customers. So I think that's the wildcard. I think that the 14, 16 capacity is really just starting to get at it. And so we'll see that capacity get at it over the next few quarters or so through this calendar year, with FinFET designs coming out of the foundries probably sometime in the fourth quarter of the calendar year. At least that's our best estimate at this point.

Okay. And just as a follow-up. What's typically the lead time in foundry? I know you said you don't have a lot of visibility, but if you can provide a perspective on how much the lead time might have shrunk, I think that would be helpful?

It varies by customer across products, but I think we're -- generally if you look at our backlog with most customers we're usually -- it's about four months from the time that we get orders to the time we ship the tool. So it varies, but I think that's a reasonable way to think about it.

And your next question comes from Sydney [indiscernible] with Deutsche Bank. Your line is now open.

I just want to make sure that I hear that in your prepared remarks you mentioned the WFE market is going to grow 5% to 10%, but you expect your mix to be similar to 2014. I don't know if it's orders or revenue. But at the same time you also expect to grow in line with the WFE market. If I look back at 2014, I think the mix was -- if the mix is the same but you actually under grow the market in 2014, as well as '13, and I believe that one of the major reasons is because of mix. Can you help me reconcile how you're going to be able to grow in line with the WFE market? Is there some customer specific -- is there some intensity increase, that kind of thing?

Well think of it this way. If the mix stays the same year-on-year, then we shouldn't see under the market grows less than the overall market, right? What happened in '14 is the mix swung to memory. That make sense?

Yes.

So therefore it drove down the overall potential market for process control, because memory intensity is lower. If year-on-year the mix is the same as last year, then our compare is last year and then we ought to be able to grow with the market for this space. Does that makes sense?

Yes, I guess the point is the mix didn't turn more unfavorable.

Well it stays where it was. So as opposed to shifting. What happened in '14 versus '13 is it increased for memory, and that drove down available market for process control, right.

Okay

If '15 ends up looking like '14, then that's your compare. And of course we hope to outgrow it, but when we're looking across the board. Now if memory is actually a larger percent, if that makes increases, then we'll be up against that headwind and we'll have to grow either through market share or driving additional adoption.

That makes sense. My follow-up question is on foundry. I think there are many questions on foundries, but it seems like there should be a big push for foundries in the first half and I know you talk about some push outs and what not. Is there enough visibility right now to look at what you think you're first half versus second half is?

Well I think overall we can do the whole year and we look out and that goes back to WFE for the year. And as things slash around, and they are -- to Bren's point it can impact it, because late enough in the year our ability that revenue -- because of the shipments and revenue. But the dynamic right now is shaping up. We still think the year looks consistent with a up 5 to 10, but with some moving parts and we're not certain how they're going to play out. But we don't give guidance beyond the next quarter other than commentary on our perspective on the year.

[Operator Instructions]. And we have no further questions at this time. I'll turn the call back to Mr. Lockwood for closing remarks.

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