KLA Tencor Annual Shareholder Meeting (2010)

I attended KLA-Tencor’s (KLAC) annual meeting on November 3, 2010. The company offered shareholders coffee, hot tea, and pitchers of iced tea (which were surprisingly delicious). About 30 people attended the meeting. This year, the people attending the meeting were much more diverse. In fact, KLA-Tencor appointed a new director, Emiko Higashi. Kudos to KLA-Tencor for bringing her on board. President and CEO Richard Wallace led the applause when she was introduced.

President and CEO Richard "Rick" Wallace, a Santa Clara University graduate, is impressive. I don’t tend to use that word when referring to executives, but Mr. Wallace deserves every accolade he gets. He answers question directly, anticipates questions before they’re asked, has both broad and specific knowledge of KLA-Tencor’s industry and finances, and is a very effective speaker. While some CEOs are condescending and arrogant, Mr. Wallace inspires people with his down-to-earth style and substantive knowledge.

In any case, back to KLA-Tencor’s shareholder meeting. The company’s general counsel handled the formal portion of the meeting. Another employee used a fingerprinting identification module on the laptop to grant him access to the shareholder presentation. (Very nifty technology.)

CEO Wallace handled the informal shareholder presentation. The highlights:

1. KLAC retains about 95% of its employees. The most important goals are to have “fully engaged” employees as well as happy employees.

2. KLAC invested 18% of its revenues on R&D in Fiscal 2010.

3. KLAC’s large backlog provides resiliency and drives its business model. Due to the high backlog, KLAC is “well-positioned” for Fiscal 2011.

4. KLAC derives most of its revenue from its IC Foundry, Memory, and Logic end markets.

5. KLAC may use its cash flow to acquire other companies; do share buybacks; or increase dividend payouts. KLAC was the first company in its field to introduce a dividend in 2005.

6. 80% of KLAC’s customers are in Asia; it has no customers with fabs located in Silicon Valley.

7. Customer satisfaction has become a key area of focus for the company.

During the Q&A session, someone asked whether KLAC would use its cash flow to pay down debt, more specifically a $750 million bond. CEO Wallace said the terms of the bond were favorable, and he did not anticipate paying it off early.

Another shareholder asked whether R&D would continue to increase in Fiscal Year 2012. (To maintain its market share, KLAC must invest a lot of its cash flow into R&D, but it may not see tangible results until three to four years out.) CEO Wallace was pleased with this question and said he did anticipate KLAC increasing R&D in FY 2012, and the real issue was FY 2013 and how much more KLAC could increase R&D while also controlling costs. The major decisions revolve around making the right “architectural design choices.”

I asked what challenges KLAC anticipated in the future. CEO Wallace talked technological innovation and maintaining market share. (My take is that unlike Coke, which doesn’t have to innovate much, tech companies either innovate or die. The key challenge is to invest enough in R&D to prosper, but not so much to kill margins or the bottom line.)

I mentioned that Applied Materials’ CEO seems to be focusing on solar power, and I hadn’t seen a similar emphasis coming from KLAC. CEO Wallace said that as a percentage of overall revenues, he anticipated solar power product sales would be fairly small. Also, he questioned the profitability of solar power products once government subsidies are removed. (Most people don’t realize that China now manufactures most of America’s solar panels, so when the U.S. government promotes “green jobs,” it is helping to subsidize Chinese solar companies.)

After the meeting, I asked CEO Wallace what we could do to wean ourselves off of OPEC, and he said Americans would have to collectively reduce our overall energy use. He said he’s doing his part by biking to work at least 3 times a week. He also advocated insulating homes. (CEO Wallace is ahead of the curve. Several years ago, his home was built by a “green” builder who utilized recycled materials, radiant heat, a solar water heater, etc.–before green was “cool.”) America has been trying to reduce its reliance on foreign petroleum since the Carter administration, but I am beginning to think that as long as we are one of the world’s largest economies, we will continue to be one of the world’s largest consumers of foreign oil.

After the shareholder meeting, I took a short tour of the campus. Although Google gets raves about its campus and employee perks, KLAC also has a decent corporate campus. First, the place is massive–over 700,000 square feet, all owned by KLAC. Second, I saw basketball courts, volleyball courts, and other indicators that KLAC heavily promotes physical fitness (CEO Wallace rides his bike to work). Third, believe it or not, KLAC once gave its employees free iPads.

I learned later that KLA-Tencor is one of the few companies in Silicon Valley that still has manufacturing facilities in the Bay Area. KLAC handles over half of its manufacturing right here in Silicon Valley.

I will leave you with an anecdote. When I posted on my Facebook wall that I had met KLA-Tencor’s CEO, several of my friends in the technology industry hit the “Like” button. One even said, “Oh a big name from my past customer list!” KLA-Tencor appears to have a well-deserved positive reputation, and much of that is probably due to CEO Rick Wallace.

Disclosure: I own an insignificant number of KLAC shares. My holdings may change at any time.

Bonus: I was recently in San Francisco, CA, and I happened to see the Skechers USA (SKX) store. I've been intrigued with the Karl Malone and Kareem Abdul-Jabbar ads for Skechers Shape-Ups, and I wanted to check them out. I tried on the Shape-Ups, and they felt strange. The design forces you to walk from heel to toe, which promotes posture and calf muscle build-up. I would buy them for 40 or 45 dollars, but they were retailing for 110 dollars. Most of the time I was there, I was the only person in the store. I had bought a little bit of SKX stock after the recent drop in price, but after seeing the lack of foot traffic in the S.F. store, I sold all but one of my shares.

Bonus II: click on the following hyperlinks for my reviews of Applied Materials' 2008 shareholder meeting and KLA-Tencor's 2009 shareholder meeting.

Disclosure II (update on November 14, 2010): a KLAC employee invited me to the Milpitas campus after the annual meeting and bought me lunch from the company's cafeteria. (That day, I was so busy with my usual work, I did not have anything except a banana and water until around 1:30PM at KLAC.) I had two sandwiches from a self-help sandwich bar and one soda. I estimate the value of the lunch to be under ten dollars. By the time I visited KLAC's campus, I had already written the article that was eventually published. After the meeting, I changed a few sentences, primarily relating to my misuse of the term, "fabs." The correct term was "manufacturing facilities." I also removed and expanded a "Bonus" section relating to EA (a different company) and made it into a new article, which can be found here.