KLA Corporation

Ladies and gentlemen, thank you for standing by and welcome to the KLA Corporation September 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance Please press 5-0. I would now like to hand the call over to Mr. Kevin Kessel, Vice President of Investor Relations for KLA Corporation. Thank you. Sir, please go ahead.

Thank you, Christian, and welcome to today's KLA Earnings Conference Call to discuss the results of the September 2019 quarter and outlook for the December 2019 quarter. I recently joined KLA, and today marks my first KLA Earnings Call. I'm glad to be here and look forward to meeting and talking with all of you over the quarters and years ahead. Joining me on the call are Rick Wallace, our President and Chief Executive Officer, and Bren Higgins, our Executive Vice President and Chief Financial Officer. During today's conference call, we will discuss quarterly results for the period ending September 30, 2019. We released these results this afternoon after the market closed, and they are also posted on the investor relations section of our website at ir.kla.com. Today's discussion of 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 Investor Relations website. Our IRR website also contains a calendar of future investor events, presentations including those from our recent investor day, and corporate governance information, as well as links to KLA's SEC filings, including our annual report on Form 10-K for the year ended June 30, 2019. Our comments today are subject to risks and uncertainties reflected in the risk factors 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. With that, I'd like to now turn the call over to our Chief Executive Officer, Rick Wallace.

Rick? Thank you, Kevin, and welcome to KLA. Good afternoon, everyone, and thank you for joining us on today's call. I'll start with a brief strategic overview before I cover the business highlights from the quarter. Please turn to slide four. KLA continues to see strong momentum in our business from the secular trends we articulated at our recent September 17th Investor Day. Our performance this quarter clearly demonstrates how KLA is benefiting from our strategies for growth, technology leadership, and operational excellence. We delivered another solid quarter with revenue in both GAAP and non-GAAP EPS finishing above the range of guidance, a result of strong customer pull for KLA solutions and focused execution, despite a backdrop that still includes some industry headwinds in key segments. As a global leader in process control and supplier of process-enabling solutions for the data era, KLA remains at the forefront of the most important industry trends and technology inflections in the electronics industry. Our deep collaborative customer relationships, broad IT portfolio, and differentiated solutions that address our customers' most complex challenges is the recipe that sustains our market leadership. Our business also continues to benefit from more complexity within semiconductor devices, as well as multiple megatrends driving demand across multiple product generations and numerous key industries. Please turn to slide five. Five, underpinning our success and consistent outperformance is the KLA operating model, which codifies our corporate values and management principles. We have been running the company this way for a long time, but we discussed it much more extensively at our recent investor day to better illustrate its power and impact on the KLA business and explain how it represents critical core competencies that we believe can enhance the long-term performance and profitability of acquired businesses. The KLA operating model is essential to align the company on a consistent strategy and execution, heighten accountability, and facilitate continuous improvement while ensuring we always operate with strong financial discipline and rigor. Please turn to slide six. Strategically, we have four objectives that serve as our guide and drive our high-performance culture. I also spoke about this extensively at our recent investor day, but it's worth reinforcing for those who couldn't attend. These four objectives are market leadership, product differentiation, operational excellence, and attracting and developing talent. We run all our businesses, including acquired ones, with a focus on these key four objectives, and it shows in our overall results published today. Please turn to slide seven for the September quarter business highlights. Before I cover the business highlights for the quarter, I'd like to provide some high-level perspective on the current industry environment. The long-term growth opportunity for the semiconductor markets remains compelling, driven by the proliferation of electronics across more diversified end markets, the introduction of new advanced technologies supporting 5G and artificial intelligence, growing semiconductor investment in China, and continued device and process innovation to deliver superior performance and return on investment. KLA's strong results are primarily driven by demand momentum we see due to support both development and capacity growth in advanced logics. The demand to support advanced logic nodes is expected to remain healthy through the balance of 2019 and into 2020, driven by investment in EUV, competitive dynamics, and capacity additions. Given the recent news of increased CapEx investment in 2019 at leading-edge logic and better-than-expected demand from domestic memory customers in China, our outlook for WFE investment in 2019 has improved since our initial view for the year. We now expect WFE levels to decline by approximately 10% to 15% in 2019, with KLA's semi-process control business, inclusive of our guidance today, outperforming the broad semiconductor capital equipment market and growing modestly compared to 2018. Now let me cover some of the product highlights from the quarter. KLA's market leadership is evidence of the successful execution of our portfolio strategy focused on differentiation and to address our customers' most critical challenges. We're happy with our product positioning and the strong customer acceptance we are experiencing across our portfolio. We continue to see accelerated growth of our flagship Gen5 optical inspection platform, with customers now deploying Gen5 for both technology development and production monitoring at the advanced nodes. Driven by this expanded use case, we expect Gen5 shipments to double in 2019, an adoption to continue to grow in 2020 as customers are under intense pressure to ramp quickly, and KLA's advanced optical inspection platform is on the critical path to their success. The accelerating adoption of EUV and increased investment in leading-edge Foundry and Logic will continue to drive strong Gen 5 demand in the near term. Also, at last month's Investor Day, we announced the first new e-beam inspection platform in several years. I'm pleased to report that we're receiving very positive feedback from our early customers related to the initial tool performance. KLA's differentiated e-beam inspection platform works with Gen 5 optical inspection platform with seamless connectivity to offer customers the best inspection performance combination at the lowest overall cost of ownership to identify and detect yield killer defects at the most advanced nodes. Demand for mask inspection continues to be a highlight for KLA. In the September quarter, we saw a continuation of the momentum we have experienced over the past several quarters, and better-than-expected demand in the September quarter, helping to contribute to the revenue upside we experienced in the quarter. We're seeing strong demand from leading foundries for our Tehran mask inspection platform for optical and EUV applications, and expect this to continue as customers ramp their advanced technology roadmaps. And finally, KLA's service business continues to deliver excellent revenue growth performance while simultaneously generating record free cash flow. Semi-process control service revenue is on track to top $1 billion in 2019, with over 70% of the revenue generated from subscription-like service contracts. This gives us high confidence that this business can deliver long-term revenue growth rates in the range of 9% to 11%. Several factors drive growth in our service businesses, including increased complexity of our systems, expansion of the installed base, and extended demand at the trailing edge nodes. With high fab utilization in Foundry and Logic and stable or bottoming in memory, our customers are also looking for opportunities to enhance productivity and extend the life of their installed base. As a result, we see robust service contract penetration, and our service business is providing a steady recurring revenue stream to our business. Please turn to slide eight. In summary, the KLA operating model drives our investment thesis. This is accomplished by driving sustained technology leadership with a strong competitive moat supported by a track record of free cash flow generation and capital return. Despite near-term headwinds in the industry demand environment centered on the timing of memory capacity investment, KLA continues to execute exceptionally well and deliver healthy relative revenue and earnings growth. Our focus on driving innovation and providing a steady stream of differentiated products and solutions sets the stage for growth in 2020 and positions KLA to achieve the long-term growth targets we established in our September Investor Day. 2019 is turning out to be a banner year for KLA, showcasing the enduring value created by the successful execution of our strategic objectives. Looking to 2020 and beyond, we're very excited about our prospects for growth, and market leadership, building on the momentum we've established in our process control markets and capitalizing on the market expansion opportunities from the Orbitech acquisition. We remain impressed with the Orbitech team and excited by market opportunities and technology leadership. Our integration and product synergy programs are on track and progressing well. With that, I'll turn the call over to Bren for his commentary on the September quarter financial results and our December quarter outlook. Bren?