KLA Corporation

Good afternoon. My name is Leo, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation June quarter 2022 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. 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 and Market Analytics. Please go ahead.

Thank you and welcome to KLA's fiscal Q4 2022 quarterly earnings call to discuss the results of the June quarter and the outlook for the September quarter. Joining me today is Rick Wallace, our Chief Executive Officer, and Bren Higgins, our Chief Financial Officer. During this call, we will discuss our results released today after the market closed. You can find the press release, shareholder letter, slide deck, and infographic on the KLA IR section of our website. Today's discussion is presented on a non-GAAP financial basis unless otherwise specified. Whenever references are made to full-year business performance, they are calendar year references. A detailed reconciliation of GAAP to non-GAAP results is in the earnings materials posted on our website. Our IR website also contains future investor events as well as presentations, corporate governance information, and links to our 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 factor disclosure in our SEC filings. Any forward-looking statements, including those we make on the call today, are subject to those risks, and KOA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. Our CEO, Rick Wallace, will begin the call with some brief comments on our recent June quarter results before discussing our view of the semiconductor industry demand environment and then a few June quarter highlights. For Higgins, our CFO will conclude with some additional financial highlights from the quarter, as well as our outlook and guidance. I'd like to now turn the call over to our CEO, Rick Wallace. Rick? Thank you all for joining us today. I'd like to begin with a few comments about the quarter. First, KLA continues to benefit from multiple growth drivers reflected in our June quarter results. Specifically for this quarter, our revenue of $2.5 billion was at the top end of our guidance range. and up 29% year-over-year and 9% sequentially. GAAP EPS was $5.40, and non-GAAP EPS was $5.81, both at the top end of our guidance range. The talented global teams at KLA have remained focused on responding to evolving customer needs and strategically navigating supply chain challenges. They are steadfast in their commitment to creating value for our customers, partners, and shareholders. Our teams continue to follow the KLA operating model as a guide to meet our challenges and benefit from the opportunities of an evolving market. Driving this performance is strong customer demand across major product groups. Macroeconomic uncertainty and the resulting effects of consumer demand are areas we are monitoring closely. Our customers have indicated some end markets, specifically PCs and mobile devices, have softened over the past few months and we have seen memory pricing in both segments weaken. While we have elevated concerns, we continue to see strong demand beyond our ability to supply from our customers with no material change in our shipment profile beyond the normal facility readiness issues and customers aligning tool deliveries with their production. In assessing the full CY22 WFE outlook, We have evaluated the persistent supply chain challenges and recently announced CapEx adjustment in the memory category. With this in mind, KLA's outlook for WFE growth in 22 has tempered. Bren will expand more on the details when he discusses the outlook. We still see high single-digit WFE growth in calendar 22 and are confident in our ability to deliver relative WFE outperformance. If supply chain challenges abate, this would be an additional upside. Process control is one of the fastest-growing segments of the overall WFE market, and as the market leader, KLA is in an enviable position amidst the current demand landscape. We see continued investment in technology at the leading edge and increased demand for legacy nodes. We also see growth in technology categories, including advanced packaging. These factors all support steady long-term growth for the WFE category. We attribute KLA's consistent and strengthening market leadership to our focus on investing in innovation at a high level to drive differentiation through a unique portfolio of products and technologies that address the most critical process control challenges. Our technologies help our customers drive their growth strategy. I'd like to now briefly summarize a few quarterly highlights. First, KLA continues to drive strong relative outperformance versus peers. In Foundry logic, simultaneous investment across multiple nodes remain a tailwind. In memory, even with some customers' investment signal to slow, demand diversification remains strong across multiple other industries. Second, our wafer inspection business again delivered impressive results in the June quarter as revenues grew 20% sequentially and 49% year over year. Third, KLA delivered record quarterly revenue from our electronics, packaging, and components business in the June quarter. Fourth, the KLA service business surpassed the half-billion-dollar quarterly revenue level for the first time, as revenue was $512 million, up 15% year-over-year. Finally, the June quarter was another exceptional period from the perspective of free cash flow and capital returns. we generated quarterly free cash flow of $746 million, amounting to 23% year-over-year growth. We also announced a $6 billion share repurchase program, a 24% increase in our quarterly dividend level. Additionally, we increased our long-term targeted capital returns to 85% of free cash flow. We remain focused on returning capital to shareholders via our dividend and stock repurchase programs. Also, this quarter, we introduced our new long-term revenue growth targets and financial model for 2026 at our June 16, 2022, Investor Day in New York City. KLA's new 9% to 11% revenue growth objective through 2026 features strong relative growth in each of our major business lines over that period. Our long-term model assumes a baseline semiconductor industry growth taker of 6% to 7% through 2026, with many forecasts today for the semiconductor market to exceed $1 trillion by 2030. In summary, KLA's June quarter results once again demonstrate sustainable outperformance. Our consistent execution against various challenges in the marketplace, both in terms of macroeconomic uncertainty and in addressing persistent supply chain issues, highlights the resiliency of the KLA operating model, the dedication of our global team, and our commitment to assertive capital allocation and delivering long-term value to our stakeholders. Chief Financial Officer Brent Higgins will now go through our June quarter financial highlights and outlook. Brent? Brent Higgins Thank you, Rick. As Rick just said, KLA's June quarter results reinforce the success of our execution and strong market position. Revenue was near $2.5 billion, non-GAAP gross margin was 62.4%, and non-GAAP diluted EPS and GAAP EPS were $5.81 and $5.40, respectively. Non-GAAP operating expenses were $514 million, below our expectation of $525 million, mostly due to the timing of new employees joining versus our plan. In addition, we also realized the cost benefit from the strong U.S. dollar impact resulting from our global footprint. Total operating expenses comprise 297 million in R&D and 217 million in SG&A. Given the strong demand backdrop, rapid expansion over the last couple of years, and our revenue expectations going forward, we expect to continue our important investment in our global infrastructure and systems to scale the leverageable KLA operating model to facilitate growth. Our investments include new product development programs and volume-dependent resources to support our business expansion as we position the company to execute against our long-term structural growth thesis. As a result, we expect operating expenses to be approximately $530 million in the September quarter, and we forecast quarterly operating expenses to continue to trend higher over the balance of 2022 to support our sequential revenue growth expectations. We will size the company based on our target operating model, which delivers 40% to 50% incremental non-GAAP operating margin leverage on revenue growth over a normalized time horizon. Non-GAAP operating margin was strong at 41.8%, almost one point higher than the guidance midpoint implied. Other income and expense net was $22 million, below guidance at $43 million, with a positive variance from guidance reflecting a gain on a strategic investment that was transacted in the quarter. offset by a recurring mark-to-market adjustment of a supply investment. For the September quarter, we forecasted at approximately $75 million to reflect the impact of the new debt issuance. The quarterly effective tax rate was 14.8%, higher than the 13.5% guidance due principally to the equity market impact on deferred compensation programs. At the guided rate, non-GAAP earnings per share would have been $0.09 higher at $5.90. We continue to guide 13.5% as a long-term tax planning rate. Non-GAAP net income was $867 million. GAAP net income was $805 million. Cash flow from operations was $819 million, and free cash flow was $746 million, resulting in a free cash flow conversion of 86% and a free cash flow margin of 30%. The breakdown of revenue by reportable seconds and end markets and major products and regions can be found within the shareholder letter and slides. Moving to the balance sheet, where we saw a lot of activity this past quarter. ALA ended the quarter with $2.7 billion in total cash, debt of $6.7 billion, and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three agencies. In June, S&P upgraded KLA one notch to A-, citing improved scale and outlook for further profitable growth. Later in June, we issued $3 billion in new debt and announced the completion of a tender offer for $500 million of senior notes due 2024. These actions reinforced that KLA maintained active and diligent oversight of our cost of capital and awareness of the impact on shareholder value of the appropriate capital structure for our business and productive capital allocation. As demonstrated by the new calendar 2026 financial targets and the capital return actions announced at our recent investor day, KLA has confidence in our business over the long term and is committed to a consistent strategy of cash returns that includes both dividend growth and increasing share repurchases. Consistent with this, we increased our long-term capital returns target, as mentioned earlier. Over the last 12 months, KLA has returned $5.5 billion to shareholders, including $4.9 billion in share repurchases and $639 million in dividends paid. Turning to our outlook, We have adjusted our overall WFE outlook for calendar 22 to reflect persistent supply chain challenges that are gaining shipments and revenue recognition for many of our peers. We now expect the WFE market to grow in the high single digits to approximately $95 billion in 2022, off a baseline of roughly $87 billion in calendar 2021. This outlook reflects the continued broad-based strength of demand across customer segments. While we work hard to manage capacity at KLA and with our suppliers, supply chain shortages continue to constrain our ability to meet customer demand. While our supplier engagement strategy that we discussed at our investor day has been validated through this cycle, supplier visibility remains challenging and has not improved over the past three months. As indicated in the last couple of quarters, we continue to expect sequential growth through this calendar year and expect KLA's total revenue growth to meet or exceed the low 20% range. with semiconductor process control systems growing several points faster than the company average. Finally, we expect demand to continue exceeding supply during the calendar year's second half. KLA is in position to deliver another year of sustainable outperformance in our semi-PC business, which should translate to strong relative growth overall. Looking ahead, as indicated earlier, we're concerned with the macroeconomic environment and how it may affect the demand for our customers' products. and their capacity plans as we move into calendar 2023. Today, the pressure from customers to deliver remains high and is driving our expectations for sequential growth through calendar 2022. We're encouraged by the diversification and sustainability of our current demand profile and the company's operational execution. We are strategically adding capacity across our global manufacturing footprint to support our customers' growing process control requirements, our near-term outlook, and our long-term through cycle growth thesis. Our September quarter guidance is as follows. Total revenue is expected to be in a range of $2.6 billion, plus or minus $125 million. Foundry logic is forecasted to be approximately 64%, and memory is expected to be around 36% of Semi-PC systems revenue. In memory, DRAM is expected to be about 40% of the segment mix, and NAND 60%. We forecast non-GAAP gross margin to be in a range of 62% to 64%. Finally, GAAP-deluded EPS is expected to be in a range of $5.28 to $6.38, and non-GAAP-deluded EPS in a range of $5.70 to $6.80. The EPS guidance is based on a fully-deluded share count of approximately 143 million shares. In conclusion, despite the macro and supply chain headwinds, see the secular trends driving semiconductor growth and investments in WFE as both durable and compelling over the long run. Broad-based customer demand and simultaneous investment supporting growing semiconductor content across technology nodes remains important trends in our industry. These are long-term secular growth drivers for the industry, as technology investment and the resumption of scaling reflects the value that semiconductors in our industry have in lowering the cost for our customers and enabling a broader application universe for semiconductor-based technology across multiple end markets. When it comes to KLA, considering our track record of execution and the power of our portfolio, we have confidence in our ability to continue to deliver sustainable outperformance throughout changing economic periods. As we look at the leading indicators for our business, including our backlog and sales funnel visibility, we continue to invest in expanding our business infrastructure and the required capabilities to support our outlook and maintain our product development investments to enable industry growth and support our customers' multi-year investment plans. This provides an element of stability that shores up our confidence in the demand outlook for the future. These factors, combined with the KLA operating model that guides our execution, position us to continue outperforming our industry as we execute our strategic objectives. These objectives fuel our growth, reliable operational excellence, and differentiation across an increasingly diverse product and service offering. They are also the foundation of our sustained technology leadership, wide competitive mode, industry-leading financial performance, long-standing track record of robust free cash flow generation and consistent and growing capital returns to shareholders. That concludes the prepared remarks. I'll turn the call back over to Kevin to begin the Q&A. Kevin? Thank you, Brent. Leo, we're ready to queue for questions.

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. In the interest of time, we ask that you please limit yourself to one question and one follow-up. One moment while we queue. We'll take our first question from Harlan Sur of JP Morgan.