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?

Thanks, Bren. Priscilla, I think we're ready for you to queue for questions. Please provide instructions.

At this time, if you would like to ask a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing the pound key. We remind you to please unmute your line when introduced, and if possible, pick up your handset for optimal sound quality. We request everyone limit themselves to one question in order to get in as many as possible. given the limited amount of time we have for today's call. We'll now take our first question from John Pitzer with Credit Suisse. Your line is open.

Yeah, good afternoon, Rick. Brent, congratulations on the solid results. I just wanted to follow up, Brent, on your commentary around China. You said the results of licenses will not have a material impact on the December quarter revenue. Is that because you've already adjusted for it in your guidance, or you just don't think – that most of your shipments to SMIC require a license. And in that same vein, just given that China continues to be extremely strong, I think one of the key investor concerns out there is that the fear of bans are causing customers to pull forward. I'm wondering if you could just talk a little bit about the mix of your China business between domestic and multinational and kind of that concern of pull forward.

Thanks, John. So on the SMIC situation, as we said in the prepared remarks, we've applied for licenses for the December quarter where we think we need them. And if you look at just overall, I mean, SMIC, just for some background, is an important customer but not a particularly large one. And over the last six months or so, we've been discussing a broad need of investment, and certainly they've participated in that. There's probably timing factors that are involved in terms of how others are seeing this business come in over the course of – over the year. But as we look at what we revenued in the September quarter and where there was no effect, and then we look at the December quarter, we've applied for licenses, as I said, where we need them. And at the end of the day, when we look at the overall expectation of revenue on our business for the quarter, we just don't see it having a material impact. We didn't have to adjust anything, frankly. So our plans are consistent overall. So there's no change there. On your second question, pull-ins are really difficult in our business. I mean, certainly demand overall has been very strong. And so when you have a customer try to pull in a delivery, it means that they're taking a slot from another customer. And given the overall demand profile, most of the customers are sticking with their slots. We haven't really seen a change. We've been, I think, fairly consistent in our view of shipments for the year, about 800 million. It's been second half loaded. It's what we are seeing today. So I haven't seen much of a change overall in terms of the beginning for customers, at least in regards to our products.

Awesome. Thank you, guys.

Thank you.

And we will take our next question today from Harlan Sir with JP Morgan. Your line is open.

Good afternoon, guys. Great job on the quarterly execution and strong results. On the innovation and new product front, you know, there's a good correlation in years where the team rolls out new tools and platforms and then the forward revenue momentum for the next few years. Last year, you guys, I think, launched about 10 new tools or platforms, second iteration of your Gen 5, your new X-ray metrology platform. and also your multi-column e-beam inspector for mask inspection, just to kind of name a few. Are these platforms contributing to the incremental upside in revenue performance this year, and how many new platforms do you guys have in development and or will be introducing over the next 12 months?

Thanks, Harlan. As you might imagine, these programs are at different points in their life cycle. So, yes, we have seen contribution. For example, we talked about print check for EUV with VVP platform, and that's been a continuation and a broadening of that demand. In other cases, we've talked recently about where we are in terms of the x-ray metrology product or the multi-beam reticle tool, those are not contributing in a material way to the revenue in the near term, but those are products that we do expect to fuel our growth in 21 and beyond in support of the 2023 plan. In terms of how many programs we have under development, we have a number, as always, of significant investments going on. But as you might imagine, there are various phases of introduction. But when we laid out our 2023 plan, we're pretty confident that the programs that we've got in place and the ones that are under development are where they need to be in order to support the 2023 plan. The challenges of some of those, as you might imagine, there have been some COVID challenges which maybe hit us harder early in COVID and then we, in terms of program execution, but we feel like we've made great progress in terms of navigating that and we feel good about where we are, which is why we say we're on track to meet or exceed the 23 plans that we've laid out. Brent, do you want to add to that? Yeah, Harlan, I think one of the things that we're pretty excited about is that over the last year or so, we've introduced platforms in a lot of our core businesses, and those platforms have had really strong market reception. We think you mentioned Gen 5, but also new iterations of the Gen 4 product line and customers mix and matching across both tool sets and supporting a wide variety of designs and different process flows, which has been great for the business. But new laser scattering offerings. You mentioned eBeam. We have a new eBeam inspection product. And the portfolio strategy of the company, if we connect those tools and we leverage common interfaces and common algos, common software, it's been able to, I think, provide a pretty competitive offering out there in the marketplace. And so we've been able to maintain our share. We grew share in 2019. We think we're going to maintain that in 20, maybe improve it a little bit, and been able to do it at very strong margins. So certainly growth of the overall business is a factor there, but also the product position is a factor. So we're pretty pleased with what's out in the marketplace. And to Rick's point, we've got some new things coming down the pipe that hopefully will drive our performance against our 23 targets.

Yep, thanks for the insights.

We will go next to CJ Muse with Evercore. Your line is open.

Yeah, good afternoon. Thank you for taking the question. I guess I was hoping perhaps you could speak a little bit about the confidence that you have on sustainable spending in the first half of 21. And in particular, I would love to hear your thoughts around boundary and logic contributions. And as part of that, if you could touch on what impact at all, if at all, you might see if we see greater spend on 5 nanometer versus 3 nanometer at TSMC. Thank you.

CJ, I think the first part, it's been, we've got, as we said in the prepared remarks, we had very strong backlog coming into the quarter. We had a positive book to fill this quarter. And if we look at the funnel of expectations into the December quarter, Just the overall order outlook as we look into December and into March and then the backlog position we believe we'll take into the year gives us some confidence of sustainability of these business levels. And so while it's early for us to spend a lot of time sizing 21, and we'll have more to say about 21 in the next earnings call in January, that overall position gives us confidence that we'll see some sustainability here. From a FoundryLogic point of view, when you look at the overall market, and there are puts and takes there, but we are pretty confident in the fact that FoundryLogic looks like that it has sustainability as we move into the first half of the year. I don't see it changing. Obviously, quarter to quarter, there's always fluctuation, but in general, I feel very good about the profile of that business as we move into the first half. Yeah, and just one thing to add, CJ, I think one of the – beliefs and our investment thesis on some of our new capabilities, for example, EV print check, was that we were going to be highly relevant in the advanced nodes. But, of course, people really hadn't hit much volume. So we've really seen proof of that concept, and we're getting a lot of customer pull for capacity and capability to support those ramps. And it's not just at one customer. So we feel very good about the process control intensity there. expectations that we had going into these notes, we're seeing them being realized. So we view that as another positive indicator, not just on the overall foundry spend, but on the process control related spend. So for multiple customers in N5, we would expect N5 to have some growth next year and wafer starts, and we'd also expect to see some what we call mini-line risk reduction type investment on N3 more towards the middle of the year and into the second half.

Thank you. And we will move to Krish Sankar with Calvin & Company. Your line is open.

Yeah, hi. Thanks for taking this question, and congrats on the great results. I have a question for Rick or Brent. You guys mentioned in your prepared comments, you know, memory should see growth next year. I understand you're going to give more color in January. But just within that context, how would you expect KLA revenues to trend? The reason I'm asking is there's a genuine view that within the memory vertical, KLA has more exposure to NAND than DRAM. I'm kind of curious to hear your thoughts on 21 memory and KLA's performance.

Well, really, since the middle of 2018 or so, we've seen very disciplined spending by our memory customers, and so we've seen that continue through after a strong down year in 2019 to a flattish year here in 2020. We see some modest recovery here in the December quarter, as you see from the disclosures we gave for the quarter. And we see that continuing as we move into next year. I don't see, just if you look at the overall pricing environment, and certainly the smartphone and timing of data center recovery will have an impact on the overall memory environment. You've got D-to-D introduction into DRAM, which could be a factor as well as we move into the second half of the year. that we would expect to see memory as an improving business for us as we move into 21. As I said, I think that the discipline has been there, and as we start to see price recovery, I think you'll see more investment there. But I wouldn't say it's a huge expectation in terms of growth, but I think a lot of it will be dependent on some of the in-market dynamics that I mentioned. From a process control intensity point of view, it's a little bit higher today in 3D flash than DRAM, although the introduction of EUV and DRAM is an opportunity for us to drive process control intensity. So I think we're optimistic about that when we start to see that play out. And then also as stacks, layer counts increase in flash, that we will see more opportunities for our metrology product lines. We've got some new product offerings. We also have the evening inspection tool we talked about, where things that we believe will ultimately create some opportunities for us for either intensity improvement or share. So I think we're pretty optimistic about those opportunities.

Thanks, Jim.

Thank you. And we will move next to Joe Moore with Morgan Stanley. Your line is open.

Great, thank you. Sorry to go back to this, but I just want to make sure I understand the SMIC situation. You say you didn't have exposure in the September quarter, and then I guess as you look at these rules, is there sort of an equal impact whether you ship out of the U.S. or whether you ship out of Israel or Singapore?

In the September quarter, the change of the notification from the government came at the very end of September, so there's no impact in the September quarter. And so as we look at the December quarter, as I said earlier, when we have to apply for licenses, we've applied for those. And we don't think that the granting of those licenses within the timeframe we're talking about or not will have a material impact on the business. I see.

And is there a difference as to where you ship out of? Is it a different licensing process whether you ship out of the U.S. or from a foreign location?

You have to – the licensing requirement is – there isn't a licensing requirement that comes from a foreign factory.

Got it. All right. Thank you so much.

Thank you. And we will go next to Patrick Ho with Spiegel. Your line is open.

Thank you very much. Rick or Bren, in terms of your PCB business, it's actually had a few strong quarters, and you mentioned that 5G has been a big driver. You've given us the roadmap and a lot of the development on the process control area. Can you just talk about, I guess, the product roadmap on that business end? Because these type of tools typically have a long, you know, lifespan. When do you feel the need to, quote, refresh and upgrade for this next wave of buying that's being driven by 5G?

Right. It's a great question. And the answer is, you know, we're relatively new to this business, so about a year and a half, very impressed with what the Orbitech team had been doing. And I think in conjunction with them, we're really working hard to make sure we have the right amount of investment to continue new products meeting customer needs. And I would say that they had great engagement, and we've added that. And as a result, we're investing heavily in that business to make sure that we're meeting some of the emerging demand, the Flex PCB and all the new substrates, all the things. This is the beginning, as you know, of the 5G, and we think there's a continued opportunity there. for sustained growth over time. So we're very bullish on what that team has done, and in combination we think it's been a tremendous success so far and a lot of upside as we go forward. But like KLA businesses, it requires continued investment in new capabilities, and we're doing that right now. Great. Thank you.

And we will move next to Timothy Arcuri with UPS. Your line is open.

Hi, thanks. Brad, I have a question about your CENI systems business. If I sort of take your prior comments about the PCB and the display business for, you know, calendar half-on-half, you said it would be down half-on-half. So that would imply that that segment is sort of at best flat for December. And that's the biggest piece other than, you know, CENI systems. So it seems like CENI systems have to be up about 5% to, like, 935 to 940 for December. So I guess, A, is that right? And, B, assuming it is, then your systems – you know, for the year are up about 10%, which is about in line with what you think WFE is, yet you say that you're outgoing in the market. So I just wanted to see if you can fit those comments because, you know, it doesn't seem like you're really gaining WFE share this year, and you didn't gain any last year either in a period where we've seen pretty big mix shifts, you know, toward Foundry Logic. So I guess can you sort of speak to that? Thanks.

I have a few questions in there, Tim, and I'll try to answer this for you. Yes, your conclusion around December sequential STEMI systems is right. Mid-single digits, obviously, we run the business at a total company level. But in terms of our expectations, it looks like it's sequentially a mid-single digit growth year. And so when you take, in aggregate, you add all that up, that puts our STEMI systems probably somewhere in the neighborhood of about 15% growth year-over-year. against a market environment that's 10%. So that's an outperform. And if you look at last year, WFD was down about 7%, and our semi-business was up 1%. So that's an outperform, too, in 2019. So we can spend some time with you on the math on all of this, but that's how to think about your questions.

Okay, yeah, we'll have to do the details. All right, thanks.

Thank you. We will go next to Atif Malik with Citi. Your line is open.

Thank you for taking my question. Rick, if I look at inspection and measurement industry sales attach rate to lithography sales historically, it makes a new high as industry introduces newer wavelengths. As you look at EUV now since introduction at 7 nanometer growing to 26 steps at 3 nanometer and some introduction at 1 alpha DRAM, do you think the defect challenges associated with EUV remain the tailwind for your process control business or are they leveling off?

Well, I think it's a good question. What we've seen so far – As you know, we're relatively conservative, but we have had indications, and we believed earlier in EUV, that we would see increased penetration of our advanced optical tools as well as in the mashup. That's really playing out. So we do model process control intensity going up as a result of increased EUV adoption. And part of why that's working for us is I mentioned the EUV print check. That's essentially kind of a new category where we're able to deploy additional BBP tools to support the ramp of EUV. And as you might imagine, those wafers are incredibly expensive, so there's a real focus by our customers to make sure that they're obviously optimizing their yield and catching excursions. At the same time, the size of the defect is becoming – more relevant at smaller defects. So our tools end up having to run in modes where they capture smaller defects with increased algorithms, which also means that the capacity needs increase as the design rules go down in order to cover and detect. So, yeah, I would say that those are both tailwinds, and our customers tell us that because they're very ambitious about ramping the advanced nodes and wanting to make sure we're in a position to support them. Does that answer your question? Yeah.

Thank you. We will go next to Quinn Bolton with Needham & Company. Your line is open.

Thank you, guys, for taking my question. I wanted to first ask just the patterning business at 21% sequentially. It looks like we're at a pretty strong quarter. I wonder if you could highlight sort of what areas within patterning really drove that growth, and then I've got a follow-up. Patterning overall, we had a strong quarter in reticle inspection, so quarter to quarter, that was the biggest driver. Do you expect that to continue, or is that a fairly lumpy business? Well, it's big ASPs, and so it's low integers and big ASPs, and so depending on timing, it does tend to be lumpy. Overall, reticle inspection, because of the number of design starts and advanced boundary has been a really strong business for us. So I think that when we look at it overall, it was a very strong year in 19, 20. It's down a little bit from 19 in that business, but still pretty strong. So I think those drivers will continue. And as we move into the next year and we start to move into some of our offerings to support additional EUV activities, we should see some contribution from there as well. But the reticle inspection was a driver, but to your point, it did launch quarter to quarter. Just a follow-up question. Just ASML on this call talked about some modulation in its EUV system deliveries giving no transition timing to some of its customers. Wondering as you look in the next year, do you see continued growth in EUV print check, or do you expect that to perhaps soften for some period of time? Thanks. I wouldn't say soften. I mean, the challenge that customers have with EUV print check is it's a new application. There are new algorithms. There's new defects that they've got to run down and do source. And so there's a huge appetite to get that. In fact, we're getting a lot of pressure to get systems that work forecast delivered to support that. And there are additional algorithms, as I said, we're developing. So all the indications we see are an expanding opportunity for EUV print check. And I think that'll go for some time based on the early indications that we're getting.

Great. Thank you.

Thank you. We will go next to Vivek Arya with Bank of America. Your line is open.

Thanks for taking my question. I wanted to dig into the gross margins and your operating margins. Both were above your longer-term margins. plan for September. And I believe the midpoint of your guidance says that they can sustain at these levels. I'm curious, how should we think about the trajectory of these margins going into the next several quarters? Can they sustain at these levels? Or do you think that there was anything abnormal, whether it was COVID or mixed related, that helped you? And as kind of part B of that, You know, it was good to see you restart the share buybacks, but the levels are still somewhat below, I think, what you have done in some prior quarters. So, any color around just the sustainability of margins and how you can re-accelerate share repurchase would be very helpful. Thank you.

Sure, Vivek. Of course, margin, as I said earlier, we've been very pleased overall with the product positioning overall, and and the pricing related to that positioning. So that's been a good thing for our business. I mentioned operating leverage and service. And so with the growth of the service business, the utilization rates and the install base, that one thing with the consolidation in the industry allows you to really drive good utilization across your resources. And we've invested in a lot of infrastructure over the last few years, and we're starting to see the benefits of that now. We are getting the tailwind, too, in our EPC group related to acquisitions that the acquired businesses are doing better from a margin point of view. So there's a number of factors that are driving it. If you look at our long-term plan, we talked about a 60% to 61% at these revenue level type gross margin performance. And I would expect us now to be somewhere between 61% and 62%. You do have mixed factors in any given quarter, but I do think there's probably a good point here of sustainability there. versus the model that we had. If you take it down to operating margins, I think we're underspending our normalized spend levels just because of some of the COVID constraints around travel, but also how quickly we can hire people and so on. So I do think that the spend levels probably understated a bit when you compare it to what normalized would look like. But I do think that there's a point here that drops through that has sustainability to it, mixed issues notwithstanding in any given quarter. On the buyback, as we back up and just look at it, we start with a principle in terms of how we look at the overall capital structure of the company and then how we allocate the capital. And so we start with a cash target of $1.5 to $2 billion. So we're operating within our target range today. And so most of our buybacks or returns generally are funded through ongoing cash flow. So it was a little bit lower in this quarter compared to the March quarter, I guess. I can't recall exactly what that number was. I think March and December. But I think as you look at that and we look at our go-forward expectations around cash flow, we would expect it will be roughly around these levels on an ongoing basis. So somewhere it was, what, $188 million. I'd say somewhere around $200 million, plus or minus. And it's a systematic approach because, again, it starts with sort of a process that we run through. So we have some opportunity around that that we can work around it, but at the same time, it tends to be much more principle-based than anything else. So I think that's how you'll see it play out. At the end of the day, we're going to return at least 70%. We returned 82% in the last 12 months, and we're going to return at least 70% of the cash flow we're going to generate today. through the share of repurchases and dividends and pretty balanced across the two. Thank you.

As a reminder, if you would like to ask a question today, please press star and 1 on your touchtone telephone. We'll move next to Blaine Curtis with Barclays. Your line is open.

Hey, good afternoon. Thanks for that question. Just want to revisit a prior question on memory. You mentioned in your letter customers were looking for higher bid growth to meet demand. Is there any more color? I know you want a guide for memory next year, but just any color on what type of magnitude outside you're seeing.

Like I said, we're optimistic. We see some improvement in the December quarter, and I think that continues as they move into next year. So most of it coming from customers supporting 5G and handsets. We think that's probably the biggest driver. but it's pretty modest growth at these levels, right, just given where the industry has been, but we're optimistic that we'll see growth as we move into next year.

Thank you. I'm showing that we have no further questions at this time. I'll turn the call back to Kevin Kessel for any closing or additional remarks.

Thank you very much, Priscilla, and thank you, everybody, for your questions and your interest.

We will be talking to you shortly during our virtual investor event. This concludes the call.

This concludes today's KLA First Quarter 2021 earnings call and webcast. Please disconnect your line at this time and have a wonderful day.