Richard Wallace, CEO, KLA-Tencor

Rick Wallace (Source: KLA-Tencor)

Rick Wallace was appointed CEO of KLA-Tencor last January. Over the past 18 years, he has held a number of senior management positions within the company, including president and COO; executive vice president, overseeing the company's Reticle and Photomask Inspection Division, and Films and Surface Technology Division; CTO of the Software and Customer Groups; and executive vice president of the Wafer Inspection Group. He has served as group vice president for the Lithography Control Group, as well as vice president/general manager and vice president of marketing for the Wafer Inspection Division. Wallace joined KLA-Tencor in 1988 as an applications engineer. Earlier, he built his expertise in lithography and yield management through engineering positions with Ultratech Stepper and Cypress Semiconductor. He has a BSEE from the University of Michigan and a master's degree in engineering management from Santa Clara University. KLA-Tencor (San Jose) is a leader in yield management and process control solutions for semiconductor manufacturing and related industries.

SI: In January, you were appointed CEO when Ken Schroeder retired. How has your transition from president and COO to CEO gone so far? How do you view your new position?

Wallace: Words like "exciting" and "challenging" sound trite these days, but that has been the case. We're a company that plans ahead, so I was well prepared for the transition, especially since the process had been started some time before. However, it's different when the CEO is no longer in the building and you have the new responsibility.

SI: When you became CEO, John Kispert, the CFO, became president and COO, and Jeffrey Hall was made CFO. Although all of you are KLA veterans, and this seems to be, basically, a round of musical chairs, from your perspective what is different?

Wallace: (Smiling) With musical chairs, there's usually one less seat, which hasn't been the case here. There's much that's different and a lot that is the same, in the sense that if you take the top dozen people of the management team, 11 of them are the same. We're in different roles, but not in a new company, and we're all well familiarized with the business and each other — we've worked together for many years.

SI: Surely something is different?

Wallace: There are certainly differences in management style and how we approach things from the previous management. We are continuously evaluating our processes and looking for ways to improve. The new team wants to make a positive impact on the company, and we have the long-term stability and recognized brand to support us.

SI: Now that the dust has settled, are you planning to do anything differently? Will there be changes in your short- or long-term plans and strategies?

Wallace: We've carried out some changes, some of which had been in the works before the changes in management took place. It's more a function of changes in the industry and KLA's position in the industry than of management changes. There are three areas of focus for us right now. First, we've recognized — and done an analysis that supports it — that process control is a great position to be in. As you know, the hurdles at 65 nm production, at 45 nm development, at 32 nm R&D, all place additional emphasis on inspection and metrology because of the challenges developers face — new materials, lithography roadblocks, and economic challenges. The second is that when we look at our market, we're in a strong position, but see room for expansion; there are areas into which to expand and gain share. The final one is that we're convinced we can improve in our financial model to grow our earnings faster than our revenues.

SI: From your perspective, how is the industry changing?

Wallace: Almost all production capacity has left Silicon Valley and moved to Asia. This has been an ongoing trend; I now have to get on an airplane to see a great majority of my customers. This means we must be a global company, a transformation we're well into. More and more manufacturing in Asia means that we must be mindful of the fact that decisions are going to be increasingly made over there, and U.S. companies must figure out how to be close to their customers in Asia and think and plan on a global scale. Another change is that now our customer's customer is the consumer, and consumers are focused on cost and time to market. For us, this represents both an opportunity and a challenge. An opportunity, because we want to lever the overall productivity of a $3B investment; a challenge because people look at the spending on inspection and metrology and they want to ensure they get values from it. So the value factor is something we must continuously grow.

SI: The cost of R&D continues to rise. How are you coping with this?

Wallace: It certainly is getting more expensive to do R&D. This is a reason why we see so much consolidation, precompetitive R&D. Companies like ours must engage early with those players and determine how to help in the transfer from development and manufacturing. We must be more responsive to customers' changing requirements.

SI: Everything seems to be becoming a moving target.

Wallace: Indeed! Take NAND flash, which is leading-edge technology. The accepted wisdom was that consumer electronics would never be leading-edge. Well, all predictions have been defied, and the growth rate for NAND is phenomenal — 200% — and inspection and metrology has a big part to play in this.

SI: How have you redefined the market for KLA?

Wallace: We have large share in certain sectors, but there are other metrology and inspection opportunities for us. There are areas we previously haven't considered or competed in; if we look at them now, there are share growth possibilities.

SI: Is this something you would consider doing through mergers and acquisition, as with ADE?

Wallace: Certainly. That, and a combination of organic growth; I believe we have a good model for doing this. (Smiling) The merger of KLA and Tencor, nine years ago, is a good example of what I mean. We know what works in these cases and what the challenges are. The universe is consolidating. Customers want to deal with fewer suppliers.

SI: Much of your R&D effort is aimed at lithography process optimization, and you're presently working with Cymer. What should the industry expect from all this?

Wallace: We're going to help the transition to immersion lithography by helping to ensure that defectivity isn't a roadblock. Work is needed here, because it's very easy to underestimate the degree to which defectivity can affect these changes. We're working with academia, other companies, and key customers on this. The R&D ranges from reticle inspection to metrology needs if we go to things like double exposure, alignment accuracy and so forth.

SI: The recent iteration of the roadmap shows that the needed R&D to meet requirements will be a tough row to hoe, certainly from the economic perspective. How do you think the industry should cope with R&D costs?

Wallace: Customers want more capable platforms and better cost of ownership. To do this, we must engage with them earlier than ever before; this is why we're doing more advanced work at customers' facilities these days. This is one sure way to ensure you're solving the right problems. You cannot ask customers what they need — you cannot survey innovation. What you can do is determine what problems they think they are going to have. Once we understand these problems, we can begin working on the solutions ahead of time. Even with a narrow focus, R&D is still expensive. This is a reason why we've concentrated on the concept of the reusable platform. Thus, when we're developing new capabilities, we keep from redeveloping anything that is not new. This can be a problem for minor players who lack our leverage. If we do the next-generation brightfield inspection tool, we're going to reuse 75-80% of what is already there. Our current reticle inspection tool has 10 million lines of code in it. If you think about that and how you transition into the next generation without redoing everything, this can be a considerable challenge. Throughout the company, we have more than 100 million lines of active code, which is why 65% of our engineers are software engineers. So part of the answer to keeping R&D costs down is reuse.

SI: Every politician, from the president down to the lowest alderman, seems to regularly come to Silicon Valley to tell us how wonderful and necessary we are. Do you think that the government should be doing more to assist us as an industry?

Wallace: Government and business must work together to remain competitive. There are issues, such as managing healthcare costs, supporting immigration to ensure availability of talent, and funding education to prepare our future workforce. I am concerned about the quality of education and how it will impact our company's ability to obtain the skilled workforce required to stay competitive. Today, innovation takes place everywhere around the world; it is not a Silicon Valley phenomenon. A great portion of the work our industry needs to do is software and algorithm work, and that can be done anywhere, not necessarily in the U.S. So the industry will go to where the talent is; it is not just a function of the talent's cost, but of its availability. The majority of the semiconductor and electronics manufacturing capacity has shifted outside the United States. If you're a company like KLA, you have to be where your customers (and their customers) are.

SI: What is our biggest challenge in all this?

Wallace: It's the ability to train people and visa restrictions. It's almost as if we were being encouraged to base more elsewhere. Overall, the problem is higher education — generating the science graduates, educating the talent. Not being an educator, I'm not sure what should be done, what the alternatives are. Just as an observer, looking at the talent pool — where it is developing, coming from and where it is needed — you have to agree that there isn't much manufacturing left in the U.S. Things will get increasingly difficult in this respect.

SI: KLA was recently subpoenaed by the U.S. Attorney's Offices for the Eastern District of New York and Northern District of California requesting information about past stock option grants. As a result, your board of directors appointed a committee of independent directors to conduct an internal investigation relating to past stock options granted to employees from 1995 to 2001, and the timing of such grants and related accounting and documentation. Can you update us on the findings, if any?

Wallace: First, I want you to know that we consider this a serious and important issue; having said that, my legal and fiduciary responsibilities preclude me from commenting on the specifics of the situation. I believe we have a sound plan in place for resolving the issue quickly, starting with the appointment by our board of an independent committee that is investigating the issue. During this time, I can assure you the KLA-Tencor operating management team remains focused on operating the business and serving our customers.