KLA Corporation

Good day. My name is Priscilla, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation first quarter fiscal year 2021 earnings conference call and webcast. All participant lines have been placed in a listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, please press the pound key. Lastly, if you should need operator assistance, please press star zero. Thank you. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations. Please go ahead.

Thank you, Priscilla, and welcome to KLA's Fiscal Q1 2021 Quarterly Earnings Call to discuss the results of the September quarter and our outlook for the December quarter. Joining me today is Rick Wallace, our Chief Executive Officer, and Brent Higgins, our Chief Financial Officer. During today's call, we will discuss quarterly results for the period ending September 30, 2020, that we released today after the market closed in the form of a press release, shareholder letter, and slide deck. All of these documents can be found on the IR section of our website. 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 and non-GAAP results is in today's earnings material posted on the KLA IR website. Our IR website also contains a calendar of future virtual investor events as well as presentations, corporate governance information, including our quiet period, and 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 we make on the call today, are also subject to those risks, and KLA cannot guarantee that Those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. We changed the format of these calls last quarter to include pre-publishing a shareholder letter that provides deeper insights into our business. We will also start by providing some streamlined highlights from our full prepared remarks while still providing more time overall for your questions and answers. With that, I'd like to turn the call over to our President and Chief Executive Officer, Rick Wallace.

Thanks, Kevin, and welcome to everyone joining us today. As we rapidly approach the end of the calendar year, it's amazing when I stop to think how much has changed over the last 12 months. I hope you and your families are safe and in good health, and I appreciate your continued interest in and support for our company. I want to make sure I begin my remarks today by conveying my appreciation for the worldwide KLA team. It's your perseverance, drive to be better, and determination that exemplify KLA's core values and enable us once again to meet our commitments and to deliver exceptionally strong financial performance in the September quarter. On behalf of the entire KLA executive team, I want to thank you. In this quarter's shareholder letter that was published today, we highlighted how our results demonstrate the resourcefulness of our global workforce, the resiliency of our business model, and our continued commitment to returning value to our shareholders. As many of you may have already seen, our September quarter revenue and non-GAAP EPS both finished at the upper end of our guidance, a result of continued strong demand from customers, exceptional execution by our global teams, and the enduring strength and resiliency of the KOA operating model in guiding our strategic objectives. I'm pleased to say that we are continuing this momentum into the December quarter and nearing the end of what truly has been an unprecedented year in calendar 2020. Most importantly, we're executing at a high level, operating from the position of strength in our marketplace, and are solidly on track to meet or exceed our 2023 financial targets. In terms of the resourcefulness of our global workforce, we just completed the third quarter of operating through a pandemic. COVID-19 has presented an unexpected opportunity to showcase KLA's resilience and resourcefulness in these unprecedented times. We have began proactively taking steps to mitigate disruption in our business and remain vigilant of the risk posed by the virus to our people. We've done this by adopting strict safety protocols to protect our workforce while innovating in new ways to collaborate with customers and partners As demonstrated by our strong performance throughout 2020, we are successfully meeting customer needs, executing our R&D roadmap, and operating our worldwide manufacturing facilities efficiently. We continue to evaluate and adapt at various facilities in accordance with local regulation, prioritizing employee health and safety. Our worldwide teams deserve praise for never losing sight of what our customers want and need to improve their businesses, and to drive better yield management. We've benefited from them being exceptionally resourceful and, as always, remain committed to customer satisfaction and meeting our commitments. While we consider the challenges our worldwide teams are facing today, we recognize that they extend well beyond the workplace, which makes us intently focus on ensuring that we're supporting our teams and our people in every possible way. Lastly, investment in the long term remains an important priority for us. We're confident that our R&D programs will help strengthen our technology and market leadership. And we're gratified by the effectiveness of our business continuity actions, which have allowed R&D activities to adapt, although not without challenges, and to continue through this pandemic. Now, turning to the industry demand environment, in the September quarter, we saw broad diversified strength across each of our segments. Semiconductor process control revenue was solidly above plan, and our services business delivered strong operating leverage and is on track to deliver double-digit growth in 2020. We also ended the quarter with strong backlog, reflecting the enabling role KLA plays in our customers' technology roadmap and investment. Driven by the secular industry trends and the ongoing commitment by our customers to invest in R&D for next-generation technology, The stage is set for KLA to outgrow our market in calendar 2020. Today's environment continues to accelerate the adoption of several industry growth drivers that we originally outlined in our 2019 Investor Day. The integration of digital technology into our lives is transforming the way we live and work, resulting in fundamental change to how businesses operate and deliver value to customers. This digital transformation is fueling secular demand drivers such as high-performance computing, artificial intelligence, and accelerated migration to the cloud from on-prem applications, as well as 5D communication, driving investments and innovation in advanced memory and logic device technologies. Process control is on the critical path of enabling this digital transformation, driving our growth in long-term revenue and profitability, And the addition of the Orbitac in 2019 to our business portfolio has expanded our exposure to the compelling industry trends. We're all driving this all-important digital transformation in our own business as well, including adopting new productivity tools to improve collaboration with our global teams and customers. For example, our customer service organization has been working closely with customers to expand remote service technologies which augment our in-country service and installation engineers. We've also recently adopted and integrated a new cloud-based platform for managing our global HR management systems It should continue to benefit us as we scale. Finally, we're also integrating cloud-based manufacturing and service planning tools to increase the visibility of our parts demand to our suppliers and to allow us to more proactively respond to customer service requirements. Here are just a few examples of the accelerated digital transformation that we ourselves are experiencing inside of KLA as we adapt to this new environment. Here are five top highlights from our most recent quarter. First, as expected, we saw continued strength and breadth in Foundry and Logic demand in the September quarter. These customers are benefiting from investment in digital transformation to support the secular growth drivers that we mentioned earlier. We expect this demand to remain healthy in 2021. In memory, tool utilization is high, and memory customers continue to drive down device inventories and plan for higher bit growth in 2021 to meet expected improvement and end demand. We expect higher business levels across a broader range of customers in December quarter, with momentum continuing into 2021. Second, the end of the quarter was strong backlog. demonstrating momentum in the marketplace across multiple product platforms in both the semiconductor process control and EPC groups. Fueled by new applications in our optical inspection portfolio, such as EUV PrintShack for Gen 5, and the success of our new offerings, including the ESL-10 eBeam inspection platform, we're seeing strong adoption of our pattern wafer inspection product suite, driving our market leadership in what we expect will be a year of growth for process control. Third, our service business continues to perform well and is positioned for double-digit growth in 2020. Taylor's service revenue is 25% of the total quarterly revenue and is delivering long-term growth at a rate that's double the underlying industry WFE growth rate. Fourth, it was another strong quarter for our electronics packaging and components group, or EPC, highlighted by the record demand of our PCB division. The strong growth in PCD was driven by EPC's high exposure to the 5G infrastructure and smartphone market. The SPTS and ICOS divisions are also benefiting from the transition to 5G, along with increasingly more complex advanced semiconductor packaging. Finally, in keeping with our commitment to deliver strong and predictable capital returns to our shareholders, we announced back in July that our Board of Directors approved our 11th consecutive annual dividend increase. During the September quarter, we returned $329 million to investors via dividends and buybacks. Over the past 12 months, we've returned $1.3 billion to shareholders or 82% of free cash flow. We believe our track record of delivering strong capital returns is a key component of the KLA investment thesis and offers predictable and compelling value creation for our shareholders. Before I hand it over to Brent to get into greater detail, On our financial highlights, let me briefly summarize. Despite the disruption and unforeseen challenges in the year associated with the pandemic, KLA has benefited from the resourcefulness of our global workforce. We've adapted well and we're very well positioned for a strong finish to 2020. This demonstrates the critical nature of our products and services in enabling the digital transformations of our lives, the resiliency of our business model, and the return of value to our shareholders. We believe the secular factors driving our industry demand that we identified at last year's Investor Day are as relevant now as they were then, and they'll help us enable us to achieve our 2023 financial targets. At the same time, our strategy of driving diversified growth with strong long-term operating leverage should fuel consistent returns for our shareholders. And with that, I'll turn it over to Brad. Thanks, Rick, and good afternoon, everyone. KLA's September quarter results once again demonstrated both the soundness and strength of our ongoing strategy. We continue to exhibit our ability to meet customer needs and expand our market leadership while growing operating profits, generating strong free cash flow, and maintaining robust capital return strategies. Total revenue was $1.54 billion. Non-GAAP gross margin was 62.1%. At the upper end of the guided range for the quarter of 60.5% to 62.5%. Non-GAAP EPS was $3.03. At the high end of the guided range of $2.42 to $3.06. GAAP EPS was $2.69. Gross margin of 62.1% with 60 basis points above the midpoint of guidance as higher semiconductor process control product mix lower inventory reserve requirements due to strengthening demand, and services leverage drove the F-side realized in the quarter. Revenue for the semiconductor process control segment, including its associated service business, was $1.27 billion. In terms of approximate customer segment mix of process control systems revenue to semiconductor customers, Foundry was strong, as expected, at 59%. Logic was 10%. and memory was 31% in the September quarter. Within memory, the business was split roughly two-thirds DRAM and one-third NAND. Revenue for the specialty semiconductor process segment was $89 million, down 11% sequentially, but up 29% year-over-year. Demand in this segment is driven by growth in RF, MEMS, and advanced packaging. PCB display and component inspection revenue was $181 million, down 10% sequentially, but up 1% year-over-year. In terms of balance sheet highlights, KLA ended the quarter with $2.04 billion in total cash, total debt of $3.45 billion, after retiring $15 million outstanding on a revolving line of credit, and a flexible and attractive bond maturity profile supported by investment-grade ratings from all three agencies. From a cash flow and capital returns perspective, Free cash flow was $456 million in the September quarter. Free cash flow conversion was 96.1%, and free cash flow margin was 29.7%. For capital returns over the past 12 months, we have returned $1.3 billion to shareholders, or 82% of free cash flow, including $542 million in dividends paid and $789 million in share repurchases. During the September quarter, we repurchased $188 million of common stock and paid $141 million in dividends. As it relates to guidance, our view for WFE growth this year is approximately 10%, growing off a baseline of $52 to $53 billion in 2019. Given this and our outlook for revenue growth in the calendar fourth quarter, KLA is in position once again to outgrow our industry. Looking forward, though early, based on our current backlog and sales funnel visibility over the next couple of quarters, we are encouraged by the sustainability of our current demand profile for the first half of calendar 21. We will have more to say about our views of 21 WFE in our January earnings report. Before turning to our specific December quarter guidance, we'd like to comment on the current trade situation regarding the United States and China. As you all know, in the September quarter, the U.S. Department of Commerce stated that SMIC or SMIC may pose an unacceptable risk of diversion to a military end use in China. So, we must obtain an export license prior to shipping certain systems and spare parts to SMIC and certain related parties that are subject to the U.S. Export Administration regulations. This new license requirement did not have any effect on any shipments in the September quarter. We are complying with the new rules and have already applied for licenses for expected shipments in the December quarter. Given the expected level of business in the quarter subject to license requirements, the results of the license requirements will not have a material impact on revenue, and as a result, we have made no adjustments for this situation to our plans or guidance ranges. The trade situation remains fluid, and we've done our best to give you our perspective on the impact to our business, and we'll refrain from speculating on the situation further." Our December quarter guidance is as follows. Total revenue is expected to be in a range of $1.585 billion, plus or minus $75 million. Foundry is forecasted to be about 52% of semiconductor process control systems revenue to semiconductor customers, depicting the strength we continue to see amongst the Foundry customer base. Memory is expected to grow to be approximately 37%. Logic is expected to be about 11%. We forecast non-GAAP gross margin to be in a range of 61% to 63% as we expect similar product mix and service leverage as in the September quarter. The market reception to product offerings in our semiconductor process control business has been strong, and as outlined at our investor day last year, the company has made solid progress on our plans of driving cost and efficiencies on new product platforms and leveraging scale derived by our worldwide service infrastructure. In addition, better than model gross margin improvement in acquired businesses is a tailwind to our gross margins overall. Other model assumptions include operating expense of approximately $380 million, interest and other expense of approximately $42 million, and an effective tax rate of approximately 13%. Finally, GAAP diluted EPS is expected to be in a range of $2.59 to $3.23, and non-GAAP diluted EPS in a range of $2.82 to to $3.46, or $3.14 at the midpoint. The EPS guidance is based on a fully diluted share count of approximately 155 million shares. In closing, KLA is executing well with increasing confidence that we are on track to meet or speed our 2023 target model, both in terms of top-line growth and profitability. Growth in semiconductor revenue looks compelling over the long run, with solid demand across end markets and at multiple technology nodes. We're encouraged by the strength and resiliency of the KLA operating model, which guides our strategic objectives. These objectives heal our growth, operational excellence, and differentiation across an increasingly more diverse product and service offering. They also underpin our sustained technology leadership, deep competitive mode, and strong track record of free cash flow generation and capital returns to shareholders. With that, I'll now turn the call back over to Kevin to begin the Q&A. Kevin?