KLA Corporation

Good afternoon. 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 March Quarter 2021 Earnings Conference Call-In 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. Please limit yourself to one question and one follow-up. 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 Q3 2021 quarterly earnings call to discuss the results of our March quarter and the outlook for the June quarter. With 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 ended March 31, 2021, that we released this afternoon after the market closed in the form of a press release, shareholder letter, and slide deck. All are available on the KLA IR section of our website. Today's discussion 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 materials posted on our website. During today's call, whenever we make references to a year, we are referring to the calendar year. Our IR website also contains future investor events as well as presentations, corporate governance information, and links to our SEC filings, including the 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 disclosed in our SEC filings. Any forward-looking statements, including those that we make on the call today, are also subject to those risks. 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? Thanks, Kevin, and thank you for joining KLA's earning call today. KLA's March quarter results demonstrate continued momentum in our business. We delivered strong 27% year-over-year revenue growth. Non-GAAP gross and operating profit rose 30% and 48% year-over-year, respectively. And free cash flow grew 47% to a record level. We accomplished these by executing our strategic vision amidst a dynamic business environment. Year-to-date, we've seen a sharp increase in business levels across each of our major markets. This is primarily due to secular demand trends driving semiconductor industry growth across a broad range of markets and applications. such as 5G and cloud computing. Our customers are increasing their strategic CapEx investment to address these growth markets while continuing investment in leading-edge R&D efforts. Against this backdrop of strong demand, we continue to navigate evolving customer requirements and dynamic supply chain challenges. Still, KLA has not missed a beat and continues operating at an exceptionally high level, delivering on our commitments, staying focused on creating value for our partners, customers, and shareholders. We would be remiss if we did not mention that achieving these results would be impossible without the extraordinary contributions of our talented global teams, who always rise to the challenges of meeting our customers' needs in an increasingly complex global business environment. Three key things enabled KLA's record results and momentum. One, successful innovation and market leadership. Two, the resourcefulness and talent of our global workforce. And three, the strength and resiliency of the KLA operating model. Before we discuss this further, let me begin by touching on how we see the industry demand environment now. Strong secular demand trends continue to shape multiple markets and are fueled by the increasing digitization of end markets and industries. In addition, there's a heightened focus on the strategic nature of our customers' investments around both leading-edge development, optimizing facility utilization, and regionalization. As a result, our WFB forecast has improved even further from January, reflecting the strength of demand we're experiencing over the past couple of months, with momentum continuing into calendar 2022. In this environment, KLA is experiencing a sharp increase in customer demand for systems and support for 2021 deliveries, and our expectations for KLA revenue growth have increased from our initial assessment in January. This momentum in customer investment is happening against a backdrop where process control intensity maintains its momentum and KLA continues to drive market leadership at levels approximately 4x the nearest competitor. Propelled by the upside we're experiencing in the underlying WFE markets, KLA market leadership, increasing long-term process control intensity, our broader reach into electronics ecosystem, and the contributions of our large and growing service business KLA is on track to achieve our 2023 financial targets well ahead of our original expectations. KLA's market leadership results from the ongoing successful execution of the company's customer-focused strategy, which is based on investing a high level of R&D to drive differentiation with a unique portfolio of products, technologies, and strategies that address the most critical process control market challenges. We're pleased to continue to see the success of our efforts being validated by our customers' purchasing decisions. Here are some recent success stories to illustrate the point. The most recently published Gartner data shows that in 2020, the total optical inspection market grew at a rate double that of the growth rate of the overall WFE market to approximately $1.9 billion, with KLA maintaining our strong market leadership and 83% share of this critical market for process control. Many already know that KLA is participating in the automotive electronics through our semiconductor packaging and PCB product lines. We're excited by near-term plans to launch new versions of our process control products tailored for the automotive industry. This quarter, expect to hear more about how KLA has positioned our wafer inspection portfolio to help customers drive higher reliability, quality, and yield in automotive applications both 200 millimeter and 300 millimeter production which will help address some of the reported automotive semiconductor shortages going forward calendar year 2021 is positioned to be the sixth consecutive year of revenue growth for kla demonstrating strong through cycle growth the success of our diversification strategies and our market leadership and process control and a large and growing contribution from our services business let's briefly cover the top five highlights from the march quarter results First, we saw continued strength in breadth and foundry logic demand in the quarter. As expected, memory demand also grew as memory customers planned for growth and equipment investment in 2021 to meet improving end demand. We expect higher business levels across a broader set of customers in the March quarter, with demand momentum continuing throughout 2021 across major end markets. The strength in demand we're seeing reflects KLA's essential role in supporting our customers' drive to innovate continue to invest in future technology nodes. Second, Gartner's recent market share report for 2020 sized KLA's share of process control over 53% for the year. KLA's market share in process control has maintained a steady growth trajectory over the past 10 years. Highlights of the 2020 report show KLA continuing to strengthen our core franchise in optical inspection and strong momentum in gains in e-beam inspection and optical metrology. Increasing investment in leading-edge foundry logic, the accelerated adoption of EUV continues to be major factors driving equipment spending. KLA's market leadership once again demonstrates the success of our portfolio approach to solving complex customer requirements at the leading edge. Third, our services revenue was $428 million in the March quarter, or 24% of total sales. with over 75% of services revenue in our semiconductor process control segment resulting from recurring contract agreements. Services is on track for another strong double-digit growth year, driven by our growing installed base, higher utilization rate, and increasing expansion of service opportunities in the trailing edge and the EPC group. Our semi-process control service business revenue continues to grow faster than the rate of the installed base, growing approximately 2.8 times faster over the last five years. Fourth, this was another growth quarter for our electronics, packaging, and components, or EPC group, highlighted by record quarterly bookings for the specialty semiconductor business. Growth was driven by automotive, 5G wireless connectivity, and advanced packaging applications across various end markets. With EPC, KLA is now providing a more comprehensive and broader product portfolio across fast-growing new markets in the electronics value chain, such as RF, automotive semiconductors, and advanced packaging. As it relates to EPC's opportunities in the advanced packaging markets, KLA is strengthening our engagement with the top five semiconductor market leaders in packaging, and we're expanding our reach with OSETs. KLA is ramping our investment in advanced packaging market to drive adoption of new technologies in this exciting growth market, in addition to new inspection products for high-level production and assembly. Finally, in keeping with our commitment to deliver strong and predictable capital returns to our shareholders, in the March quarter, we repurchased $273 million of our common stock and paid $139 million in dividends for a total capital return of $412 million. or 71% of free cash flow of $585 million, which was also a record. Last July, KLA's Board of Directors authorized the 11th consecutive annual dividend increase to a yearly run rate of $3.60 per share. Since its inception in 2006, KLA's dividend payout has grown at a CAGR of approximately 15%. We believe KLA's 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 Bren gets into greater details of our financial highlights, let me recap. KLA's March 2021 results demonstrate the critical nature of KLA's products and services in enabling the digital transformation of our lives, the resiliency of the KLA operating model, and our commitment to productive capital allocation. ALA is exceptionally well-positioned at the forefront of technology innovation with a comprehensive portfolio of products to meet demanding customer requirements, balancing sensitivity and throughput. Semiconductor and electronics landscape is constantly changing. We're seeing broadening customer interest driven by more technology innovation than ever before at the leading edge. We believe there are multiple secular factors driving industry demand, And KLA will continue to benefit from and position us to exceed our 2023 financial targets and reach them earlier than anticipated. At the same time, our strategy of driving diversified growth and strong long-term operating leverage should provide robust cash flow generation and consistent capital returns to our shareholders. And with that, I'll pass the call over to Brett.