KLA Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the KLA Corporation Fourth Quarter Calendar Year 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press the star 1 on your telephone keypad. If you require any further assistance, please press the star 0. Please be advised that today's call is being recorded. I would now like to hand the conference over to Mr. Kevin Kessel, Vice President of Investment Relations for KLA Corporation. Please go ahead, sir.

Thank you, Charlie, and welcome to KLA's earnings conference call to discuss the results of the December 2019 quarter and the outlook for the March 2020 quarter. Joining me today is Rick Wallace, our Chief Executive Officer, and Brent Higgins, our Chief Financial Officer. During today's conference call, we will discuss quarterly results for the period ended December 31, 2019, that we released today after the market closed, and is currently 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 slides presentation posted on the KLA website. Investor Relations website. Our IR website also contains a calendar of future investor events and presentations, including those from our September 2019 Investor Day and 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 factors disclosure in our SEC filings. Any forward-looking statements, including those that we make on the call today, are 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.

Rick? Thank you, Kevin, and thank you all for joining us today. I'm going to begin with a high-level strategic overview aimed at what drives KLA's long-term business success and differentiation strategy. before I cover the near-term December quarter business highlights. Please turn to slide four. KLA continues to benefit from multiple secular growth drivers we discussed in depth at our September 2019 Investor Day. Our performance this quarter in our strategies for diversified growth, technology leadership, and operational excellence are playing out according to our plans. By numerous measures, the December 2019 quarter was strong for KLA. Revenue and both gap and non-gap EPS finished at the upper end of the range of guidance, a result of strong demand and exceptional execution. This performance was particularly satisfying, given it was set against a backdrop of still lackluster memory demand. As the global leader in process control and supplier of critical 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 IP portfolio, and differentiated solutions that address our customers' most complex challenges are the essential ingredients in the recipe that sustains our market leadership. Our business also continues to benefit from increasing complexity and advanced semiconductor device design and manufacturing processes as well as megatrends driving demand across multiple product generations and in numerous key industries. Please turn to slide five. Underpinning our success and consistent outperformance is the KLA operating model. Many of you are becoming more familiar with this model, given that we spent a fair amount of time in our investor day discussing it. And while it's not new to KLA, we understand talking about it may be, which is why we decided to codify it the way that we did. Expect to continue to hear us refer to it as it does the best job of simplifying how we run the company. It also helps reinforce the critical core competencies that we believe can enhance the long-term performance and profitability of acquired businesses such as Orbitek. Most importantly, the KLA operating model is critical 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 sustainable high-performance culture. I find it's always worth reinforcing objectives when speaking with investors and analysts as they provide a helpful window into our strategy going forward. These four objectives are market leadership, product differentiation, operational excellence, and attracting and developing talent. We run all our businesses and integrate newly acquired companies with a focus on these four key objectives. Today's results point to our alignment and achievement of all four of these. Please turn to slide seven for the December 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. I'll begin by addressing the coronavirus situation. First and foremost, our primary concern is with the health and well-being of all affected by the situation. We are taking the recommended precautions and have implemented appropriate measures within our global business operations, including widening the range of guidance for the March 2020 quarter to reflect the uncertainty we see in the marketplace. Bren will provide further color on this. We are closely monitoring this situation and will update investors as material new developments arise. Nonwithstanding this hopefully short-term issue, the long-term growth opportunity for the semiconductor market remains very compelling, driven by the proliferation of electronics across more diversified end markets, the introduction of new advanced technologies supporting the development and rollout of 5G, growing semiconductor investment in China, and continued device and performance innovation to develop superior performance and return on investment. KLA's strong results are primarily driven by our industry-leading positions across various markets and the demand momentum that has continued for both technology development and capacity growth in advanced logic nodes. The demand to support advanced logic nodes is expected to remain healthy through 2020 and in 2021, driven by accelerating investment in EUV, competitive dynamics, and new capacity additions. 2020 is setting up to be our fifth consecutive year of year-over-year growth for KLA, with top-line growth currently expected to be in the high single to low double-digit range. tracking ahead of our long-term revenue growth of 7% to 9% that underpins our 2023 target model. In terms of our outlook for the WFE wafer demand environment in 2020, given the recent news of increased CapEx investment from leading Foundry and Logic customers and the improving business conditions in memory, we are aligned with the consensus expectations for 2020 to be a growth year for WFE, coming off a stronger than anticipated finish to 2019. Now let me cover some of the product highlights from the quarter. KLA's market leadership is the product of successful execution of our portfolio strategy, focused on differentiation to address our customers' most critical challenges. We are confident in our product positioning and the validation from strong customer acceptance across our portfolio. We continue to see accelerated growth of our flagship Gen5 optical inspection platform, deployed for both technology development and production monitoring at the advanced nodes. Our customers are now using the Gen5 platform to identify and solve yield-limiting issues at the 7-nanometer node and beyond. We're also encouraged by the growing adoption of patterned wafer print check applications to qualify reticles for EUV. Gen5 offers the best solution to make sure EUV masks are defect-free and optimized to achieve process window requirements. Boosted in part by this expanded use case, Gen5 shipments nearly tripled in 2019. and adoption is expected to grow in 2020. Also, at our recent investor day, we announced our first new E-beam inspection platform in multiple years, and we continue to receive very positive feedback from initial customer evaluations, and we're starting to receive purchase orders. KLA's E-beam inspection platform works seamlessly with our Gen 5 optical inspection platform through built-in connectivity, offering customers the best inspection performance combination at the lowest overall cost of ownership. This combination is a unique differentiator in the marketplace today, and we can identify and detect critical yield-limiting defects at the most advanced nodes. After proving the value of the technology in initial customer evaluations, we delivered the industry's first production-ready version of the X-ray metrology platform to customers in the December quarter. Introduced initially at our September Investor Day, the Axion platform is a small angle x-ray scattering technology for inline metrology applications to monitor the high aspect ratio features in advanced 3D and DRAM device architectures. This platform provides a lower cost of ownership and improved cycle times when compared with existing destructive metrology techniques. We're now focused on establishing new use cases with all leading memory customers. Last but certainly not least, KLA's service business continues to deliver excellent revenue growth performance while simultaneously generating strong free cash flow. Semi-process control service revenue reached $1.1 billion in 2019, with 70% of this revenue generated from subscription-like service contracts. This performance continues to give us high levels of confidence that KLA services can deliver long-term revenue growth rates in the range of 9% to 11%. Several factors drive growth in our services business, including increased complexity of our systems, expansion of the installed base, and expanded demand at the trailing edge nodes. With high fabulization in Foundry and Logic and signs of improvement 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 for all our businesses. 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 mode, supported by a track record of strong free cash flow generation and capital returns. As we begin the new year with the expectation that the industry will see a resumption of growth in 2020, we are energized by the prospects that lie ahead. 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 position KLA to achieve the long-term growth targets we established at our 2019 Investor Day. Despite industry headwinds, 2019 was a historic year for KLA, showcasing the enduring value created by the successful execution of our strategic objectives. As we look ahead, we are confident that we're investing in our future and are well positioned for growth and market leadership, building on the momentum we have established in our process control markets and capitalizing on the market expansion opportunities from the Orbitek acquisition. Our Orbitek integration and product synergy programs are firmly on track and progressing well. I'd like to now turn the call over to Bren for his commentary on the December quarter financial results in our March quarter outlook. Bren?