Ladies and gentlemen, thank you for your patience. Welcome to the KLA Corporation Third Quarter Fiscal 2020 Earnings Conference Call. I would now like to turn the conference over to Mr. Kevin Kessel, Vice President of Investor Relations at KLA Corporation. Thank you, sir. Please proceed.

Thank you, Charlie. And welcome to KLA's earnings conference call to discuss the results of the March 2020 quarter and the outlook for the June quarter. Joining me today is Rick Wallace, our Chief Executive Officer; and Bren Higgins, our Chief Financial Officer. During today's conference call, we will discuss quarterly results for the period ended March 31, 2020, that we released today after the market close and can be found on the Investor Relations section of our website. Today's discussion and our financial results and outlook is presented on a non-GAAP financial basis, unless otherwise specified. A detailed reconciliation of GAAP to non-GAAP results is in today's earnings press release and the earnings slide presentation posted on the KLA IR website, along with our newly published shareholder letter. Our IR website also contains a calendar of future virtual investor events and presentations, corporate governance information, including our quiet period policy as well as links to KLA's SEC filings, including our most recent annual report and quarterly reports on Forms 10-K and 10-Q. Our comments today are subject to risks and uncertainties reflected in the risk factor disclosure in our SEC filings. Any forward-looking statements, including those we make on the call today, are also subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. I'd like to now turn the call over to our President and Chief Executive Officer, Rick Wallace.

Thank you all for joining us today in these extraordinary times. I hope you and your families are safe and healthy. KLA delivered strong results in the March 2020 quarter. Revenue finished at the midpoint of our guidance, and non-GAAP EPS was above the midpoint of the guidance range, demonstrating strong demand from our customers and exceptional execution across our global KLA operations. KLA's performance in the March quarter highlights how the company's operating model and long-term strategic objectives provide a strong and resilient framework to guide our execution and consistently deliver on our commitments even during unprecedented challenges. In our prepared remarks today, we will discuss how KLA's unique and sustainable competitive advantages helped us consistently deliver strong relative results, while showcasing the enduring strength of the KLA investment thesis. We will also discuss how KLA is positioned to confidently navigate through these periods of uncertainty. To lead off, I want to highlight KLA's priorities and actions in addressing the COVID-19 crisis. First and foremost, we are prioritizing the health and safety of our employees, their families and our partners. We began taking proactive measures for our teams as soon as we saw the outbreak begin in China, including immediately eliminating nonessential travel, canceling our annual sales conference, our global engineering conference as well as the KLA Lithography Users Forum at SPIE. A large percentage of our workforce is in China and the Pacific region, and we initiated a global crisis management team to ensure we had insight into needs and activities at the local levels to provide assistance as needed. As information and shelter-in-place orders began to roll out across the globe, we prioritized rapid communications to our employees. And we immediately instituted guidelines and policies to ensure that our essential workforce could operate in safe conditions, and we remain focused on that daily. Specifically, as our teams worldwide have largely had to shift to working from home, we worked hard to maintain our ability to support our customers in this unique scenario. At our manufacturing facilities, we have focused on creating a significantly reduced employee footprint. We have rigorous social distancing and cleaning guidelines and health checks to allow our teams to be safe while staying on track with shipping, installing and delivering the essential services we provide to our customers. I'd like to personally commend our global team for their resourcefulness and commitment to executing under these challenging circumstances. Our customer feedback has been outstanding. And our business is healthy and performing well under unprecedented conditions. I'm really proud of the way we as a company have responded to these challenges. It really reflects the extraordinary strength of our teams guided by the KLA core values of perseverance, drive to be better, high-performing teams and indispensability. For our global employee base, we recognize that this crisis also extends well beyond the disruption to their work life. And we're focusing on continuing to ensure that we can support them in any way that we can. I'd also like to note that we took action to support our communities by creating a KLA Foundation Global Relief Fund, where we committed $2 million in global relief efforts to benefit local nonprofit organizations, which are working in areas identified as having a high number of affected individuals and with those who are with high-risk populations in Asia, Europe, Israel, and the United States. Above all, we remain advocates for the holistic health and safety of our employees as well as the communities they work and live in. Turn now to Slide 5 for some comments on the industry demand environment. Though we were encouraged to see many of our customers in China return to full production late in the quarter, COVID-19 has already impacted global economic growth. The question remains whether it will result in a short-term pushout in global demand supported by substantial levels of monetary and fiscal stimulus from governments or whether it leads to long-term demand decline followed by an elongated recovery. Many economic prognosticators now expect a global recession as the effects of business disruption, rising unemployment and reduction in consumer spending are felt across the global economy. So at KLA, we're not predicting the depth or duration of this impact until we have more evidence about the evolution of the crisis. But if there's one thing we do know, it's the situation is rapidly evolving. And at this stage, the full impact of COVID-19 on consumer demand and the global economy remains unclear. But from our point of view, although the semiconductor equipment industry is currently supply-constrained, customer demand remains strong in the first half of 2020. And to underscore that point, KLA delivered record shipments of our semiconductor process control systems during the quarter, and total backlog finished at record levels exiting March. It's also important to point out that KLA is most levered to our customers' strategic R&D investments and their product road maps for leading-edge technologies across foundry, logic and memory. Our customers use these investments as critical to their long-term growth strategies and their competitive positioning. And therefore, they tend to be more resilient. Now in the near and medium term, we see increased semiconductor device demands for enterprise and cloud applications in response to the surge in work from home and a pickup in gaming. Now this is somewhat offset by a decline in some consumer-facing end markets. We also see strong results in our specialty semiconductor markets with demand driven by 5G infrastructure investment, particularly in China. We're fulfilling urgent requests to supply products essential in MEMS manufacturing and power technologies focused on medical applications such as smart thermometers and ventilators, which are directly addressing the crisis. It's clear health care will be one of the many industries which will be profoundly impacted with the acceleration of technology implementation, virtual capabilities, and automation. We know that KLA is not immune to the impact this crisis may have on customers' capital investment plans over the next several months. However, we do draw some confidence from the historical evidence that our customers tend to maintain their investment in next-generation development in times of semiconductor industry contraction and uncertainty, which makes KLA's revenue more resilient in times like this. As an example, I'd point out that in 2019, according to the recent Gartner market share analysis, total WFE investment was estimated to decline about 6%, but KLA semiconductor process control business grew at 1%. Taking a step back even further, it's worth highlighting that KLA's business has always declined less than the industry in periods of general contraction. Also, KLA's service business, which accounts for roughly 1/4 of our total revenues today and has strong and growing profitability, also tends to demonstrate exceptional resilience throughout the business cycle, given the unique nature of our service model with 70% to 75% of the revenue being subscription-like contracts. Given the continued focus on innovation and execution, combined with our market leadership and strong balance sheet, KLA is in a very strong position to navigate this period of uncertainty and to capitalize on opportunities to drive long-term growth for our industry once the conditions eventually normalize. Even though we couldn't have anticipated what we're experiencing today, we believe that secular factors driving the industry demand and our 2023 revenue and EPS targets remain largely intact, and they'll drive diversified growth with operating leverage over the long term. Finally, in many ways, the global response to COVID-19 is accelerating secular drivers of the industry growth that we outlined in our 2019 Investor Day. And that gives us strong optimism that we and our industry will emerge from this crisis stronger than before. We always knew we had compelling secular growth trends a year ago, but if anything, these trends will be stronger and more important going forward. Whether it's the move to Industry 4.0 or factory automation, the rising semiconductor content in automobiles, remote medical diagnostics and care, 5G, ubiquitous connectivity supported by continued data center build-outs or new, more capable handset offerings, the new work-from-home reality or the overall acceleration of digitization and move to the data era, everything will depend on advancing semiconductor technology that KLA helps to make possible. Please turn to Slide 6 and 7 for a review of the KLA operating model and our strategic objectives. As in prior industry downturns, one thing that remains a constant, serving as our guide as we manage through this uncertainty, is the KLA operating model. This codifies our corporate values and management principles and defines the critical core competencies that drive our performance and represents a solid and enduring framework for the execution of our long-term strategic objectives. The KLA operating model is essential to aligning the company on a consistent strategy. It ties accountability to results, ensures product development execution and facilitates continuous improvement, while ensuring the company always operates with strong financial discipline while driving long-term performance and profitability objectives. As we indicated during our September 2019 Investor Day, we're also leveraging the KLA operating model to strengthen the performance of new businesses. We have recently reorganized the former Orbotech units under the leadership of long-term KLA Executive Vice President Oreste Donzella, creating the new Electronics, Packaging and Components or EPC group. This new organization will help drive synergies and growth across the broad electronics value chain, including specialty semiconductors, packaging, printed circuit boards, and flat panel display. Guided by this and with our global team's experience navigating through various industry cycles and downturns over the years, we have the benefit of history and the processes in place to maintain a high level of investment, which is critical to our market leadership and our customers' technology road map, while at the same time, protecting and preserving operating margins. Please turn to Slide 8 for the March quarter 2020 business highlights. In closing, I'd like to mention four highlights that stood out this quarter. First, as I mentioned at the outset, KLA achieved record company-wide shipments driven by record shipments in our Semiconductor Process Control segment, and we ended March with record backlog. This illustrates the overall momentum we are having in the marketplace across various product platforms with particular strength in mask inspection, patterned optical inspection, and films metrology. And it further shores up our confidence in the long-term future growth position for the company. Secondly, we're really pleased to see KLA's customer success being further validated by third-party market share analysis from Gartner. KLA's market leadership is the result of ongoing successful execution of the company's customer-focused strategy, which is based on investing a high level of R&D to drive differentiated products and a portfolio of products and solutions that address the most critical process control market challenges. And we're pleased once again to see the success of our strategy being validated by our customers' purchasing decisions. The report shows that process control grew as a percent of overall WFE, and KLA strengthened its process control market leadership by gaining 2.5 points of market share. The past year marked a record or new record demand in KLA's core franchises such as optical wafer inspection, overlay metrology, and mask inspection. This data also shows KLA's first meaningful revenue in e-beam inspection since 2015. We expect the process control intensity will continue to stay at a similar level in calendar 2020 or better and that KLA will maintain our market leadership, driven by an expanding EUV investment environment as well as advanced technology development in memory and continued semiconductor industry expansion in China. Third, we saw continued strength in both foundry and logic. Foundry and logic revenue grew sequentially as customers accelerated the ramp of both 7- and 5-nanometer nodes and continue to prioritize their leading-edge technology road maps. And finally, our services business continues to perform well and remains on track for growth and steady free cash flow in calendar 2020 despite all the uncertainty. Total KLA service revenue rose to $373 million, thanks to the continued growth of our Semiconductor Process Control installed base as well as the expanding service businesses from recent acquisitions. Please turn to Slide 9 for my concluding thoughts. To summarize, before I turn the call over to Bren, we're in extraordinary times. And in that, we're facing both unprecedented uncertainties as well as opportunities. But amidst this background, one thing that's not changing is KLA's strong fundamentals. And we're confident that our strategies and the actions we're taking today will continue to lead us in the right direction and position us to emerge even stronger and more resilient. KLA's March quarter indicates the soundness and strength of our ongoing strategy. We expect to be able to continue to meet customer needs and expand our market leadership while protecting operating profits, generating strong free cash flow, and maintaining our capital return strategies. As I stated earlier, we will remain laser-focused on continuing to preserve the health and safety of our employees and their families. We believe that this is a new reality, and we're going to be in this for some time, but we're confident we can work together to get through it and continue to deliver in the way we know how. I'll now turn the call over to our CFO, Bren, to discuss our financial results and guidance. Bren.

Thank you, Rick. Please turn to Slide 11 for quarterly financial highlights. KLA delivered a solid quarter in March with revenue at the midpoint and non-GAAP EPS finishing at the upper end of the company's guidance ranges. Total revenue was $1.424 billion. Non-GAAP gross margin was 61.2%, at the upper end of the guided range for the quarter of 59.5% to 61.5%, driven by a richer product mix than was modeled at the beginning of the quarter. Non-GAAP operating margin was 34.6%. GAAP EPS was $0.50 and non-GAAP EPS was $2.47. At the guided tax planning rate of 13%, EPS would have been $2.52. The reconciliation between the GAAP and non-GAAP EPS includes an impairment of goodwill of $257 million and a $22.5 million loss related to the extinguishment of our November '21 notes that we refinanced in a new bond offering in February. Let me briefly provide more context on the goodwill impairment. During the March quarter, and consistent with our policy, KLA conducted its annual goodwill impairment assessment based on the discounted cash flows for each reporting unit. Given the uncertainty of the current environment and the associated unknown long-run trajectory of economic growth, we recorded a noncash impairment charge of $257 million in the third quarter to write down a portion of the carrying value of the goodwill associated with the Orbotech acquisition. Before going into further detail on quarterly results, I want to echo Rick's comments and say that while the COVID-19 situation is unprecedented and presents new challenges to running our business, one thing remains clear. KLA has a resilient business model underpinned by a rock-solid investment-grade balance sheet. We will continue to be agile in the marketplace and actively manage and responsibly navigate our way through this crisis. Additionally, we remain committed to maintaining our investment-grade credit ratings, and our recent bond offering and refinancing means that we are in a great position and don't have any bond maturities until late 2024. To further expand on that point, I want to highlight that in February, KLA issued $750 million and 3.3% 30-year bonds to redeem $500 million in aggregate principal amount 4.125% senior notes due in November of 2021, and S&P upgraded our credit rating one notch earlier in the quarter to BBB+. Given our solid balance sheet and consistently robust free cash flow that our business generates, we believe KLA has enough cash and liquidity to respond to any operating condition, while still being able to execute our long-term strategies, invest at a high level in new capabilities across our product portfolio and maintain our well-articulated capital returns approach, which includes our current $3.40 annual per share dividend. Regarding capital management and deployment, as you would expect, we are reviewing all operating expenses and capital expenditure plans to prioritize and optimize them given the current business conditions and economic environment. One thing is certain. We remain committed to returning 70% or more free cash flow to shareholders over the long term, balanced between dividend payments and share repurchases. In March, we were consistent with our long-standing capital return framework, returning 113% of quarterly free cash flow to investors, consisting of $133 million in quarterly dividend distributions and $316 million in repurchases of common stock. KLA currently has approximately $1 billion remaining under our share repurchase authorization. Please turn to Slides 12 and 13 for the breakdown of revenue by segments, end markets, products and regions. Revenue for the Semiconductor Process Control segment, which includes associated service business, was healthy at $1.18 billion. Foundry was once again very strong in March at approximately 55% of Semi Process Control revenue, up from 52% last quarter. Memory was 31% in March, down from 40%. Logic was 14% versus 8% last quarter. Revenue for the Specialty Semiconductor Process segment was $85 million, up 13% sequentially, driven by strength in RF, MEMS and advanced packaging. PCB, Display and Component Inspection revenue was $160 million, down 14% sequentially and slightly below our internal plans as these businesses, which are closer to consumer markets, softened somewhat as we moved through the quarter. Now for the breakdown of revenue by major products and regions, starting with the distribution of revenue by major product category. Wafer inspection was 38%. Patterning, which includes reticle inspection, was 21%. Wafer inspection and patterning are part of the Semiconductor Process Control segment. Specialty Semiconductor Process was 5%. PCB, Display and Component Inspection revenue was 7%. Service was 26% of revenue in the quarter and other was 3%. The regional split of revenue was as follows: China was 25%. Taiwan was 24%. Korea was 21%. The U.S. and Japan were 11% each. Europe, including Israel, was 5%. And the rest of Asia was 3%. Please turn to Slide 14 for other income statement highlights. Total operating expenses were $378 million, including $215 million of R&D expense. Operating expenses were modestly below our targets for the quarter, with the largest delta to plan coming from lower travel and entertainment expenses and a slower hiring pace than was originally planned. Operating margin was 34.6%. Other income and expense in the March quarter was $38 million. The non-GAAP tax rate was 14.6% and above the company's long-term tax planning rate of 13% due to negative capital market impact on expense deductions in the company's employee deferred compensation program. Going forward, based on the company's expectations for geographic distribution of profit, you should continue to use 13% as a long-term tax planning rate. Non-GAAP net income was $389 million, and the company had approximately 157 million diluted weighted average shares outstanding. Turning now to a review of our balance sheet and free cash flow on Slides 15 and 16. KLA ended the quarter with $1.6 billion in cash, total debt of $3.4 billion and a flexible and attractive bond maturity profile supported by investment-grade ratings from all 3 agencies. KLA has a history of consistent free cash flow generation and high free cash flow conversion. Our innovation and differentiation in the marketplace are what drives our industry-leading gross and operating margins and ultimately our free cash flow conversion. Cash from operations and free cash flow were both strong, coming in at $442 million and $399 million, respectively. Free cash flow margin was 28%, and the annualized free cash flow yield was above 6%. For a frame of reference, over the last 10 years, KLA's free cash flow margin averaged 25%. KLA's business model generates strong free cash flow and is very resilient across the various phases of the business cycle and economic conditions. Over the past 5 years, the company has averaged 98% free cash flow conversion. Please turn to Slide 17 for an overview of our capital return activities. KLA continues to deliver on its pledge to return capital to shareholders through dividends and share repurchases. Since its inception 13 years ago, the dividend payout has grown at an annual rate of about 15%. Share repurchases have similarly increased, with the average price for repurchased shares being around $73 and approximately $4.1 billion allocated for repurchases since 2010. Now, moving to our guidance for June 2020 on Slide 18. I want to emphasize that we have addressed the supply chain issues associated with COVID-19 that developed in the past quarter, although the ongoing situation creates daily management challenges as countries manage their coronavirus responses. The uncertainties and complexities linked to global social distancing measures, including travel restrictions and mandated quarantine periods, continue to hinder our ability to install and support KLA systems. As a result, we have implemented additional steps to ensure flexibility and continuity of supply for essential components in our supply chain. KLA's business model is characterized by longer material lead times and volume hedging strategies that enhance flexibility with key components in our products. While this strategy slows inventory turnover, it enables us to withstand short-term supply disruptions. For parts with short lead times, we utilize dual supplier strategies, primarily partnering with suppliers from different countries to optimize capital commitments and ensure we can adapt supply to meet changing customer delivery schedules. Moreover, our customers depend on KLA to support their long-term technology development programs, which are typically sustained and safeguarded during periods of short-term demand fluctuations and disruptions, such as the ones we are currently facing. We continue to maintain close ongoing communication with our suppliers to ensure continuity and identify supply chain pressure points, and we remain confident today in our ability to meet our demand and be able to continue to service and support our customers in the field. KLA is managing this situation with both determination and creativity. We have fully mobilized our teams and are taking action to minimize disruption in our operations, meet essential customer needs and maintain the resilience of our supply chain to limit the overall impact of COVID-19 across our business. Given the scale of our worldwide service and support infrastructure, we are supporting our customers with local resources and are executing well. However, it is taking longer in some cases to complete rigorous acceptance criteria for certain products without the support of our factory-centric teams. In all cases, we've done our best to contemplate these factors in our guidance, including the broader range of guidance in our June quarter outlook, which is as follows. Total revenue for the June quarter is expected to be in a range of $1.26 billion to $1.54 billion. Foundry is forecasted to be about 51% of Semi Process Control system revenue, depicting the strength we continue to see amongst our foundry customer base. Memory is expected to be approximately 39%. Logic is expected to be about 10% of Semiconductor Process Control system revenue. We forecast gross margin to be in a range of 59% to 61% as product mix is modestly less favorable and slightly higher costs are expected in our service business than in the March quarter. Other model assumptions include operating expense of approximately $380 million, interest and other expense of approximately $40 million and a non-GAAP tax rate of approximately 13%. Finally, GAAP diluted EPS is expected to be in a range of $1.58 to $2.64 and non-GAAP diluted EPS in a range of $1.81 to $2.87. The EPS guidance is based on a fully diluted share count of approximately 156 million shares. For my financial conclusion, please turn to Slide 19. I'd like to share our perspective on the demand environment for the balance of the year 2020. First, I'd like to address the new export rules published by the U.S. Department of Commerce on April 28, which will go into effect on June 29, 2020. Those rules will expand export license requirements for U.S. companies to sell certain items to companies in China that have operations that could support military end uses even if the item sold by the U.S. companies are used for civilian purposes only. On this issue, I would note that the new rules do not impact the majority of our business as most of our products are manufactured and assembled outside of the United States. I would also like to point out that we routinely ensure that our products are not used for prohibited military end uses in China. However, the question remains today whether these new rules, when enacted, would make it more difficult to ship to certain customers in China that might be deemed military end users under the new rules as a result of their potential activities supporting military end uses. We are still assessing the new rules and working with trade associations and others to obtain additional guidance from the U.S. government regarding the scope and practical application of these new rules. Once we have clarity on how these rules will be implemented, we can better determine the impact on our business, if any, in the second half of the calendar year. Notwithstanding this recent trade issue, our outlook for customer demand in the Semiconductor Process Control business is virtually unchanged today from what we expected in February. As I mentioned earlier, we continue to drive our supply chain in our factories to meet current customer expectations for deliveries. However, we do expect that the overall macroeconomic environment will put pressure at some point on some of our customers' demand for products in certain segments and ultimately could affect their capacity investment plans, both in magnitude and timing. Obviously, the depth and duration of this impact is unknown today, so we will continue to run our business to maintain the flexibility to respond to any demand scenario. We do expect our customers to continue to progress their technology road maps across all segments, and KLA products are critical to those transitions. We expect investments to continue in this area at a normalized pace, independent of the macro environment. For our more consumer-centric businesses, we have seen some weakness over the course of the March quarter. And while we are well positioned, we would expect some impact to these businesses compared to what we thought in early February. Finally, collaboration across global teams and partners on large-scale product development programs without direct in-person engagement is creating some execution challenges, and while early, could put pressure on release dates for new products expected over the next 12 months. To summarize, as we look ahead to the balance of the year, KLA continues to be well positioned to navigate the uncharted territory we find ourselves in. We derive our strength from our strong balance sheet and liquidity and comfort from not having any bond maturities until late in 2024. Our strong operating performance helps us prioritize critical investments across our technology portfolio and protects our margins while generating strong and consistent free cash flow. Our market position has never been stronger. Despite the usual competitive noise, our share gain and improving process control intensity validate that our products and solutions are adding critical value to our customers' technology road map differentiation and their ability to yield new technologies at production volumes. How we allocate capital has never been more important. You can be assured, we will continue to make smart capital allocation decisions, invest in important R&D to support our customers and new product launches, fuel our long-term growth strategy, maintain our ongoing dividend strategy, and preserve our ability to be opportunistic with our buyback program to fully deploy the free cash flow of the company. Lastly, predictability and business model resiliency matter more now than ever. Our growing diversification, significant exposure to our customers' critical process technology transitions, our subscription-like service revenue stream, and our focus on driving operating leverage are key attributes of our business model. We are confident we can continue to excel in managing these areas and position KLA for a brighter future. Before we begin the Q&A, just a reminder that KLA will participate in many virtual investor webcasted conferences this quarter. Please keep an eye out for notice of future event scheduling, and we look forward to seeing some of you virtually later in the quarter.

Thank you, Bren. Okay, Charlie, we're ready for the first question.

Your first question comes from the line of Harlan Sur with JPMorgan.

Solid job on the quarterly execution. On the increased revenue guidance range for June, $280 million range versus $200 million for last quarter. You called out the COVID-19-related impact. It sounds like it's still more operational, logistics, personnel support. But I wondered if there's some part of that, that is demand related, potential pushing out of the business by customers either in your process control or Orbotech businesses on the potential for maybe some second half macro demand weakness. I'm just trying to figure out where the bias is skewed towards the larger range.

Harlan, it's Bren. I hope you're doing well. The bias is mainly due to operational constraints. As I mentioned earlier, we need to support the tools with our local teams, especially regarding installations, which can take a bit longer. Consequently, we have accounted for some additional risks in our overall execution. The environment varies significantly by country, so we must be careful in navigating that. There is a supply chain component, but as I noted earlier, we are confident in our supply chain positioning. Overall, the main concern is the general uncertainty and the operational adjustments we need to make to manage it.

Okay. Great. And then congrats on the 300 basis points of share gain in process control last year. I think now you're about five times larger than your nearest competitor. On your commentary on the sustainability of process control intensity for this year, where are you seeing the biggest sustainable increases of this intensity? Is it China and NAND? Or is it just across all of the sectors given rising complexity? And then it also looks like your large logic customer is executing and finally getting back to sort of this 2-, 2.5-year cadence on node migrations after a long pause and much reuse. How does this also change your longer-term view on intensity for the team?

Yes. Great question, Harlan. I think that the biggest difference we see right now, I think, in the process control intensity is the realization that EUV and those in support of it really need more capability. And specifically, we've talked about Gen5 in the past being used for print check, and that's definitely driving adoption. In addition, we believe the sustainability is there based on new products that we introduced that we outlined in our Investor Day. And so it's really not one particular customer. It's really now we have Gen5 is really humming at every major customer and is growing in adoption. And maybe in the last couple of years, we went from being in the development phase to people actually expanding their footprint with that. But we also saw strength in laser scanning. And so I think even optical metrology, we mentioned in there, it's really pretty broad-based across the portfolio. And I do think in times like this, even if customers are going to back off capacity, which could happen later in the year, they're going to continue to invest in capabilities that allow them to bring out new technologies, which is always favorable for process control.

Your next question comes from the line of John Pitzer with Crédit Suisse.

Glad to hear that everyone is doing well. I guess, Bren, I want to go back to just the COVID-19 impact and whether or not you have a number that quantifies the March quarter impact. And was it an impact to shipments and rev rec or just rev rec? And I guess is the broader range for June just a realization that you're expecting the impact to be larger in the June quarter than the March quarter?

So John, back in March when we provided guidance, we anticipated there might be some risks due to delays related to tools being shipped to the affected areas in China, especially in Hubei province. We factored that into our guidance and believed that, without the impact of COVID, our expectations would have been higher. As the quarter progressed, we managed to ship some products to that area, which was a positive outcome for us, along with some variations in other parts of the business. However, we faced challenges with quarantine and travel limitations, which made it difficult to align resources. Without the necessary resources for installations, some customers needed to adjust their delivery dates. These issues were more related to shipments than revenue. Looking ahead to the June quarter, the situation remains quite challenging. As I mentioned in the prepared remarks, customer demand has remained steady, and we expect that to continue in June. Therefore, we expanded the risk range to be cautious, given the challenges we currently face. We went through the analysis tool by tool and feel confident in the guidance provided. However, we are continually learning about the evolving situation and wanted to incorporate some of the uncertainty that exists.

And then just as my follow-up, despite the wider range for June, I think we all appreciate the fact that you're trying to give us a guidance number out there with all the puts and takes, even more so, Bren, your commentary about the full year. But I'm kind of curious. I think 90 days ago, you would have characterized calendar year '20 as sort of an above trend year for growth for you guys, trend being sort of the 7% to 9% that underpins your 2023 target model. Relative to the puts and takes you talked about in your prepared comments, should we think about 2020 as being more of a trend growth year? Or is there not enough visibility to even say that?

Well, I think the visibility question is challenging. We have peer companies that couldn't even guide the quarter given some of the challenges. So when we look at it, I mean, it's hard to believe that we wouldn't see some impact into the second half from the environment we're now operating in. We do expect, based on our current view, that it will be a growth year for the company. But as I look at it today, again, a lot of moving parts. But I would say that it would probably likely be below that trend line. Not much below, but I think it'd be below.

Your next question comes from the line of Krish Sankar with Cowen and Company.

I had two of them. First one, either Bren or Rick, can you give a little bit color on the sales into China that you saw in March? What is the split between domestic and multinational and split between foundry and memory? And any kind of color into the June quarter on geography would be helpful. Then I have a follow-on.

Yes, Krish, I don't have that information broken down in that way. As we mentioned, the revenue mix for China was 25%. We'll need to follow up with you regarding that for the March quarter.

Got it. Got it. That's fine. And then the second question I had was, when you look into your June guidance, when you look at the numbers, it looks like foundry is probably slowing a bit and memory is coming back. I understand no one has a crystal ball at this point, but would you expect the trend to continue to the calendar second half? Or is it more a function of just customer CapEx spending in Q2?

I believe our main assumption is that we will experience a stronger memory environment in the second half of the year. This segment of the business might be more influenced by the overall economic situation. However, we expect memory to recover and perform better in the second half. On the other hand, the foundry and logic segments appear to remain steady throughout the year so far, and I wouldn't say that one half is currently more significant than the other.

Your next question comes from the line of C.J. Muse with Evercore.

I guess first question, Bren, to go back to John's earlier question on COVID and the impact there. Can you share with us what kind of, I guess, impact to revenues you're embedding in the guide? Or should we take the midpoint as indicative of what you would do with or without indicating no supply chain issues? And then as part of the challenges around supply chain management and logistics, can you share with us what impact that might have on your cost structure as well?

So C.J., it can be difficult to speculate on our situation given the current environment and the adjustments we've had to make. Reflecting on the last few months, I would have anticipated our revenue to be approximately $100 million higher at the midpoint in a stable environment. However, we are far from stability and uncertain about when we might return to it. Most of our adjustments relate to our capacity to allocate resources effectively to support our customers. As we mentioned earlier, overall demand remains largely unchanged this year. We have observed some effects on clients whose markets are more consumer-oriented, but typically, our largest customers continue to focus on executing their strategies, and we are maintaining flexibility to meet their needs. I don't see any significant supply issues hindering us; our factories are operating to support this. Our customers are looking to position themselves effectively, and we are managing our supply chain and factory resources with the flexibility to accommodate that. Should there be a substantial decline in business, we are holding more resources than the current business level would indicate, which would necessitate some adjustments to address the overall cost implications. But for now, this is our operational approach, and we will adapt as necessary. This is not new for us.

Very helpful. If I could follow up regarding the Department of Commerce ruling, and I know it's still very early, and I'm sure you're waiting clarity on how broad or narrow the rules will be pursued. But if you think about what's been written to date, the major ruling is for manufacturing in the U.S. And considering you do make tools and assemble tools offshore, is your first interpretation that you will not be impacted in terms of shipping into China based on kind of what you've read today?

Sure, C.J. To your point, this is a relatively new situation, and we're still trying to fully understand it. We're actively seeking clarity, but our current understanding is that it will affect the tools manufactured in the U.S., specifically those made for us in California. We have three major manufacturing locations: Israel, Singapore, and here. Depending on the customer and our final understanding of the ruling, there may be an impact on the tools produced in California. However, based on our discussions and the information we've received, there is still a lot that is unclear. We are receiving guidance and working through the details, but we haven't reached any more conclusions at this time. Nevertheless, as we look ahead to the year, we remain aware of the risks, as Bren mentioned, and we feel optimistic about the year ahead.

Your next question comes from the line of Vivek Arya with Bank of America Securities.

So sticking with this China export control, and again, I appreciate that it's somewhat earlier in the process. But I think you mentioned you already restrict shipments for military end use. So I'm curious, what else do you need to do to satisfy these new requirements, right? Whether or not you ship the end product from the U.S. or from overseas, if according to you, you're not shipping something for military end use already, what more do you need to do? Like what is the mechanical process, I mean, going and asking for a license if you are not shipping anything for a military end use already?

We are currently going through a thorough process to understand the intent and execution of this rule. We are collaborating with both external and internal counsel on this matter. As we mentioned, we are already aware of certain constraints. This rule is broad and not solely focused on semiconductor equipment, although that category is included. We will continue to navigate this process, which is why we have already taken steps to address some of the inquiries being raised. As we gain more clarity—especially since there is a period of further definition until the end of June—we will share any updates.

Got it. For my follow-up, I'm interested in what you've observed regarding demand and any supply chain issues in the first few weeks of the quarter. From an outside perspective, it appears that there are expectations for improvement in the second half of the year, that macro conditions may get better, and that people are gradually starting to return. I'm curious if it's reasonable to consider June as the lowest point for the year. How would you describe what you've seen regarding demand and supply in the initial weeks of the quarter?

So I think Bren covered the demand aspect well, but I can add to that. I've spoken with several customers, and overall, everyone is proceeding with their plans. The significant exception is in consumer-facing sectors, particularly those in direct contact with the automotive industry, which seems constrained. However, this has been balanced by other customers who are experiencing increased demand due to work-from-home trends. Overall, we are observing this balance. The supply chain has improved regarding our supplies from Asia, particularly China. Coming out of the Chinese New Year, we were uncertain about the effectiveness and efficiency of the supply chain there, but it's fully recovered and is now above previous supply levels for certain components. We have successfully navigated the various supply opportunities and feel confident about our ability to continue doing so. As Bren mentioned, this isn't always easy, but we believe we can manage it. Therefore, we don't see a reason to alter our outlook. We are also considering the macroeconomic implications of the downturn and subsequent recovery. Since we can’t predict the long-term impact as nobody truly knows, we create models for different possible scenarios. Right now, we do not have any leading indicators suggesting significant changes in behavior.

Yes. The internal forecast indicates that the second half is expected to be stronger. The challenge we face, as Rick mentioned, is the uncertainty surrounding our customers' demand profile and its impact on supply. There are lead times to consider, and customers must think about how they manage their capacity. This is where we currently stand, and we need to see how this evolves and what it ultimately means for their demand for our products. We continue to invest in supporting technology road maps at a normal pace. We expect that products focused on enabling technology transitions will be more resilient than those centered around capacity, depending on the environment. However, I'm not ready to declare a low point in the June quarter until we have better visibility on how things will look in the September quarter, which is one of the challenges we're facing. While we don't discuss it much, our management of the supply chain gives KLA a competitive advantage. Our operating model largely revolves around how we handle supply chains and run our factories. We collaborate closely with suppliers who provide us with high-end capabilities, and we engage them early by purchasing parts sooner and making commitments earlier. This allows us to navigate potential disruptions for key components, ensuring they are prepared to support us in any environment. Our service business is contract-based, and our products have a long lifespan, so having extra parts occasionally is not a major concern for me as the CFO. This situation works in our favor. Additionally, the extension of demand affects the longevity of our products, and we tend to utilize the parts we have. While this may slow down inventory turns, it is a fundamental aspect of our operating model, and I believe the margin profile reflects that.

Your next question comes from the line of Timothy Arcuri with UBS.

Bren, I wanted to ask about the changes in Commerce. It appears that you have some clarity on the direct product rule regarding items produced outside the U.S. when examining the CCL list and the ECCN categorizations. However, the language concerning end use and end user seems unclear. We hope to receive a clear interpretation from Commerce before June 29, but the experts I’ve consulted suggest that the ambiguity may be intentional. My question is, if you need to err on the side of caution, would you agree that the risks are likely greater on the foundry/logic side compared to the memory side?

Tim, I think it's too early to speculate. Yes, it's too early to speculate.

Okay. And then, Bren, I guess, a follow-up on the impairment. So 15% of the acquired goodwill was written down. So can you just quantify, did that have any impact on the sort of long-term growth prospect for the Orbotech businesses? Or do you think that even though that was written down that long-term numbers that were put into the model at Analyst Day still hold?

Yes. Tim, as you know, these are asset-light businesses. There is a significant amount of purchase consideration that is reflected in goodwill. This does indicate that when valuations are conducted, particularly through discounted cash flow methods, the timing of cash flows and the discount rates applied affect the overall value. In the short term, some of our businesses, like the specialty semiconductor sector, have been impacted by trade issues from last year and certain automotive trends this year, which have influenced our near-term forecasts. Moreover, regarding the flat panel sector, we had anticipated a greater recovery in flat panel capital expenditures in 2020, which has not materialized. We have made some minor adjustments due to COVID-related issues and general uncertainty, which also impacts the discount rate applied. However, we remain confident in the growth rate trajectory we presented at Investor Day in September, a confidence rooted in the factors I mentioned, all considered within the context of the current environment we are navigating.

Your next question comes from the line of Quinn Bolton with Needham & Company.

Bren, just wanted to ask on the gross margin. You guided 59% to 61%. Wondering if there's any impact from spacing requirements and social distancing on that manufacturing capacity or your cycle times within your own facilities.

Yes. That's a good question. I mean in our facilities, most of our builds are bay builds, and so we're able to comply with some of the social distancing challenges there pretty effectively. So it's not really related to that. I think from a cycle time point of view, we're executing generally in line with our plans. Quarter-to-quarter, it's really more around just some of the mix of products that we expect to see this quarter versus last quarter. And the service profitability levels were particularly strong last quarter, I think, with some of the delays in just activity out there and so how that affected our cost structure. So I would expect some of those costs to come back as we move into this quarter. So overall, it was a little bit richer than we expected in the March quarter, and we're seeing some adjustment into the June quarter. But the long-term view at the current sort of expected revenue levels is to see gross margins between 60% and 61%, with the biggest factor being mostly around the mix of products.

Great. I have a follow-up question. You mentioned the three main manufacturing sites: Israel, Singapore, and the U.S. Do you have the capacity to build the same tool at multiple sites? If you don't currently have that capacity, are the export control actions and the COVID outbreak prompting you to reconsider whether having redundant manufacturing capacity should be included in a long-term plan for the next three to five years?

Yes, it's a great question. We definitely have the ability to leverage the similarities in what we do at these different sites, which gives us some flexibility. Over time, this has led us to transition more manufacturing to locations outside the U.S., specifically in Israel and Singapore. We're continuously assessing our capability to produce various products in different locations based on customer needs, supply chain considerations, and staffing. Naturally, this is a strategic option we have as we evaluate the best positioning for the future.

Your next question comes from the line of Joe Quatrochi with Wells Fargo.

Yes. Looks like you're thinking about a nice sequential increase in implied memory revenue for the June quarter. I was wondering, can you help us understand the drivers of that? Is it more of a market recovery? Or are there also some kind of embedded assumptions around new product shipments that you've launched recently?

It's interesting to note that if you examine the March quarter revenue levels for memory, they were likely the lowest we've seen since around 2016. This indicates a slight downturn in the overall memory business. However, we are now observing an improvement. This improvement is fairly balanced, with expectations for the quarter divided evenly between flash and DRAM. I wouldn't attribute this to any specific factor; rather, it simply reflects a stronger revenue outlook this quarter compared to the very low figures we experienced last quarter. We currently have a record backlog due to a strong order quarter, which gives us confidence in meeting customer demand. We have the necessary backlog and parts, allowing us to be prepared for various scenarios. However, we need to monitor our customers' actions, as they may adjust timelines. Still, the backlog reassures us about our outlook for the next six months.

I believe that as you consider the long-term outlook and the 2023 plan, the major factor affecting us is what occurs in the macro economy. When we examine the trends we've discussed—new products, market share, and secular dynamics—everything is progressing as we anticipated, and we are executing well. What we cannot predict right now is the severity and duration of any economic disruption. This factor will ultimately influence the overall industry's pace. I do think certain segments of the semiconductor and semiconductor equipment industry will perform well. Unlike past general recessions, there are aspects of our business that help people continue to operate during this period. However, if there is a macroeconomic shock, its duration will impact our plans regarding how long it takes to recover from this situation, something we are currently unable to predict.

Ladies and gentlemen, that concludes our Q&A session for today. I'll now turn the call over back to the presenters.

Thank you very much, and we appreciate everybody tuning in today. We look forward to chatting with you going forward. This ends the call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating; you may now disconnect.