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.

Hey, good afternoon, guys. Congratulations on those solid results in quarterly execution. You know, you guys' lead times are quite long, right? You guys have good visibility into next year. And I think even into, in some cases, 2024, you highlighted some of the demand headwinds in your prepared remarks and also maybe some of the early signals from your customers on their sort of conservative capex spending plans going forward. I know you're not seeing anything meaningful in terms of near to midterm shipment plans, but given your customers are all booking into next year, Have you guys seen any changes in longer-term orders as a result of your customers' increasingly negative views on demand for next year?

Yeah, Harlan, thanks for the comment and the question. I would say that certainly in the near term, we've seen no changes from our customers. In fact, the pressure is as high today as it was three months ago. And our adjustments to the near-term WFE were really related to some of the challenges that a lot of our peer companies are facing in terms of their ability to either ship tools or recognize revenue, and that would have an impact on WFE given the expectations for the second half. in terms of growth in the second half versus the first half. It's too early for us to call 23. Certainly we're monitoring what we see there. As we think about our planning and as we move into, as we move outside of this year, at least from where we sit today, We see a sustainability in our output levels as we move into the first part of 23. Now, we'll have to watch and see what our customers end up doing and, you know, particularly some of the challenges in the memory space and what that might mean. But at least from where we sit today, we see no real churn in the backlog and in expectations in terms of delivery timings. Yeah, even to add to that, Harlan, one of the things we have seen, because obviously we've been talking to customers recently, and they know we're aware of some of the talk, is that they're telling us basically two things. One, keep our slots, and two, if somebody else's slot opens up, could you please give it to us? So what we're seeing for process control, I feel like we're probably a little bit in a different position than the process players are.

Great. And, you know, in the event of a WFP decline next year, you've got several positive buffers, right? And I feel like one of the biggest ones is that your services business historically does not decline during downturn. So like, if I look back over the past 20 years, I think there's only been one year that your services business has been down. And then more near term, I think over the past four downturns, the KLA team has actually grown its services business in all four of those downturns. So Outside of the stable annuity-like subscription service contracts, and I know you guys talked about expansion on services opportunities on legacy nodes, what else has allowed the team to grow its services business in periods where WFE spending is weak? And what's the historical track record on the ETC services business during downturns?

So kind of two questions you threw in the EPC one at the end. Let me start with the process control one. Often what we've seen historically in downturns is customers don't want to get productivity. And one of the ways they do that is they focus heavily on yield improvement or process stability. So we actually see utilization stay high on the services in order to keep the tools capable. And sometimes they'll actually deploy some of their limited budget toward upgrading their installed base. In terms of EPC, obviously we've not really been through a cycle with that, so it's a little bit secondhand knowledge. But it depends on the segment that they're in in terms of – but as you know, as a percent of our overall business, that will not change the dynamic that we see overall for our services should we hit some headwinds going into next year. The only other thing I'll add, Harlan, is that we're seeing investment across multiple nodes. And so from a leading-edge point of view, certainly the complexity of the tools that are going in to support those markets, the drivers of those markets, particularly around data center and high-performance compute, will drive our customers to, given how they buy process control, to want to keep these tools up and use them as they're trying to navigate through these technology transitions. And so that's an important aspect of the value that we add. So even if they're pulling back on some of the capacity investments they might be making, they're still investing in R&D and ramping facilities. And the way for start goals within a particular timeframe may just change. If you think about within memory or even within some of the trailing edge areas, those areas are areas where process control intensity tends to be a little bit lower. And so I think just in terms of how we see the investment play out, those are areas that we're less exposed to. So I don't think that they would impact the business to the degree that they might impact other more capacity-centric players.

Okay. Thank you. Our next question comes from Krish Sankar of Cowan. Your line is open.

Hi, this is for Chris. Thanks for taking my questions. My first question was just around if you could provide any color on a potential impact to the business in terms of shipment to China, if there were any sort of restrictions. what this might look like, whether tool specific or based on tax base, uh, you know, sub 14 animator shipments, um, just sort of how you're thinking about that. And then I have one follow up. Well, specific to that question. And of course there was some, I know some of our peers have gotten this question as well, but we did receive a notification from the U S government about the licensing requirements for China, uh, related to sub 14 animator development and production. Of course, we'll continue to engage with the government and have an active dialogue, and we'll fully comply with all applicable laws and guidance here. I would say that given the lead time and timing unpredictability of new licenses, that this has no effect on our guidance for the upcoming quarter or comments on the remainder of 22. And I would say, as I look at the funnel over the next 12 months, given the where investment is happening and what we expect we don't see any material impact to our business from this new requirement so i don't want to speculate on on on what else could happen but in based on what we know today and what we've been asked um that's mostly what i have to say about the topic okay that's helpful and then just real quick Have you provided in the past a breakdown between domestic and international shipments to China? If I remember correctly, maybe you mentioned domestic customers were more skewed towards smaller foundry players. Is that a fair assumption? Yes, that's still true. The multinational activity in China is more mature, and so most of our business is in China. It tends to be native China as it relates to semiconductor process control. So within semiconductor process control systems, about 25% or so of our shipments are to China. And now overall for the whole company, as you service and include other parts of the company, EPC and so on, you end up closer to, well, in this last quarter it was 29%. So most of the business is there, and most of it is across multiple projects. There's a lot of projects. They tend to be more boundary logic. You also have investment in infrastructure related to reticle infrastructure and wafer infrastructure. And so there's investments that are happening there, and we have products that serve those parts of the market as well. Great. Thank you. That's all for me.

Our next question comes from Joe Quattrocchi of Wells Fargo.

Yeah, thanks for taking the question. I was wondering if you could go through kind of the puts and takes on gross margin this quarter and how we should think about the cost passed through this quarter and what's embedded in the guidance.

Yeah, it pretty much played out the way we expected. We had more EPC revenue quarter to quarters. We had a record quarter in EPC, and that was a little diluted from a mixed point of view. Certainly, the challenges related to supply chain and what that means in terms of factory efficiency is also a bit of a drag. on our margins. But we had modeled that in for the most part. And I think the guidance midpoint was 62.5 and we were 62.4. So pretty much as we had expected. As we look at the September quarter, most of the growth is coming from our, in fact, all the growth and then a little bit, because I would expect EPC to be down some quarter on quarter, is coming from semi-PC. It's a richer mix. And so we'll see that go up about 50 basis points for show at the midpoint. We are seeing pressure from cost increase, both in terms of parts, but also in terms of freight and logistics. And I think that's taking away some of what you would expect to see in terms of incremental leverage in an expanding revenue environment like we're in. So it's offsetting some of those benefits. But at the end of the day, we felt like we'd be operating somewhere around 63% through this year, and that's been the guidance I've been giving. And we're, for the most part, in line with that.

That's really helpful. And then maybe I missed it, but what was the mix of DRAM versus MAN for this quarter? I know you did it for the September quarter guide.

Yeah, so 45% was memory, and the mix was two-thirds DRAM.

Perfect. Thank you.

Our next question is from Patrick Ho of Stiefel.

Thank you very much and congrats on the nice quarter. Maybe first off, in terms of leading edge versus trailing edge foundry logic, obviously I think a lot of your leading edge customers are still powering through with their investment plan. It's more the question of timing of when they can get tools. Can you characterize what you're seeing on the trailing edge, given that there's a lot of noise around that? Have you seen any changes in that marketplace, or are investment plans for that device marketplace still on track on a going forward basis? And yes, you're right. The leading edge guys are continuing, and we don't expect in our conversations with them, we don't expect any change in that. In terms of the trailing edge, it's not really been a big part of our business. And as we look forward, we're still struggling with supply for some of them. And so actually the conversations we've been having have been more about them asking if they could accelerate deliveries than changing the profile. So given the conversations we've had and their desire to upgrade their facilities, it's not really a change in our profile. It may soften, but it hasn't yet. In fact, if anything, A comment I made earlier, people are asking if spots open up, could they get access to them? And that's really been more the conversation that we've been having because some of the products that they need, especially in the trailing edge, tend to be BBP kind of oriented products where we have tremendous demand. Yeah, Patrick, the other thing I would add is about 80% of the revenue tends to be leading edge. So where we are selling to the trailing edge, you do have customers that are strategically trying to insource more, so they're making more investments in longer-term investments. And as specifications for end products are changing, that could change process control requirements. But generally, if they're just expanding capacity to run parts that they've been running for a long time that are just inflecting as a result of the strong demand environment, you don't see real significant changes in process control intensity. They just add their process control equipment as they're expanding the wafer starts in a particular facility. So that drives the process control intensity that's fairly light. Now, over time, I think what's happening in the end markets is creating some opportunities for us but it is less of an impact in terms of the financial or the revenue contribution from those customers to KLA. It's great revenue, and it's profitable revenue, given that we're selling older platforms or platforms that we've been able to extend into those markets. But the big driver for our business is much more around leading edge than what we're seeing in the trailing edge. That's really helpful. And Brent, maybe as a quick follow-up question for you, you guys have done a really good job of managing through the supply chain issues that the industry and the ecosystem is seeing.

The costs are obviously elevated, whether it's freight and logistics, the movement of components and things of that nature. How do you look at the cost environment over the next several quarters? Is this something that we're just going to have to assume at least through the rest of 22 and possibly into 23?

Yeah, you know, it's a good question. And, of course, everything's more expensive. And so we're seeing that flow through. Earlier and prior quarters, maybe the last quarter of the quarter before I talked about this year, expecting to see a 100 basis point kind of impact at one point or so from incremental cost increase. If you add freight into it, it's probably a little bit higher than that. And so we are seeing that play through. Generally, you know, when prices go up, they don't necessarily go down. And so we're not really planning on it. And we'll have to, as I said at Investor Day, there's work for us to do in terms of how we think about it. in this overall. Our products generally, you know, we're a value sell. And so we think about the returns our customers are getting from our products and we try to share in the value of that return. And part of our new capability cadence in terms of how we offer that to the market, managing not only new capability from a competitive point of view is important to that, but also what it means to financial model in terms of an opportunity for us to reassess the cost situation in a particular tool and how cost of ownership plays out in terms of the improvements that we're offering and how we will share that. So we're being opportunistic where we can. Certainly we're not benefiting from the revenue expansion from a scale point of view, and so we're not giving discounts related purely to volume to the extent that we have in the past. And so we're resetting some of that with our customers. But in general, I think it's much more about the value offering and how things are priced over time. Great. Thank you again.

We'll take our next question from Atif Malik of Citi.

Hi, thank you for taking my question. I have a question on CHIPS Act, and I understand it's early.

It looks like equipment companies might be able to get money to expand manufacturing of equipment in the U.S., with priority going first to companies that already manufacture in the U.S. I understand you guys have manufacturing both inside U.S. and outside. How would this change, if at all, your long-term manufacturing strategy?

Thanks for the question. It doesn't really change our strategy. We're not going to make decisions based on that. We're going to make decisions, as we always have, based on where it makes the most sense for us to build the products to support our customers, where we can get the talent, and where we can have the supply chains that we need. So it will not impact our decision-making. You also have to remember, as I said, we're fairly asset-light. So to the extent that we're building or expanding our facilities anywhere, it's really about space more than anything and some equipment. So it's very different than what our customers in terms of significant billions of dollars investment in a production facility. So to Rick's point, it's much more about the operational motives that we have in terms of why we build what we build where. And incentives, whether they come in the form of grants, they come in the form of taxes or secondary. Obviously, we always optimize for wherever we are, but the primary motive is very operational for us. Great. As my follow-up, Brent, 90 years ago, you were talking about EPC systems growing 20% for the year, and I understand June was a record quarter.

Are you still looking at 20% growth for the EPC systems for the full year, and what are you seeing in the mobile segment versus the auto segment of the veteran market?

Yeah, that's a great question. Auto continues to be strong, auto and power, but we have seen some pressure, particularly in the PCB part of the business, driven by the softness in the mobile market. I would expect EPC systems to be in the mid-teens in terms of growth this year, a little bit stronger in the second half versus the first half, just as the whole company is a little bit stronger. But, yeah, it's mostly been – we've seen strength and improvement in SPTS, our specialty semiconductor industry, given its exposure to automotive and power, but we've seen some softness on the PCB side. So net net, still nice growth, mid-teens growth, but not 20%. Great.

Thank you.

And once again, if you have a question or a follow-up, please press star 1 now on your telephone keypad. One moment while we queue. We'll take our final question from Vedvati Shrotra of Jefferies.

Hi, thanks for taking my question. I just wanted to go back on something that was asked earlier. So you mentioned that your customers are sort of looking for slots in case any opens up. So can you help me understand how that works? So if you get a push out from your customer, does that mean that slot is sort of closed and the customer has to go back in the line? Is that the right interpretation?

Yeah, so I think our customers have the same kind of question you do. It doesn't really work that way. I mean, what they really want to do is move up the priority list. But as we keep explaining to them, we have far more demand than we have supply. And while we're working hard to expand it, so it's just the question of can we get things done sooner? And that's really what they're asking is can you help? But my point is, That is, for many customers, the way they're approaching this, they're hopeful that this will give them a chance to get some of the products that are pretty far out in delivery. That's kind of the way to think about it. It's not really exactly the same. We do have allocations for people, but there just are no free slots. So if somebody were to drop out of the queue, the next person would just move up in terms of the way that would work. So people aren't going to jump ahead in the line.

And so if I understand correctly, so if in case, you know, if there's a push out and not a cancellation, does that necessarily open up a slot or is push out kind of different from a cancellation?

So if somebody had a December slot right now and they said we don't need that until June, the next person in line in December would get that slot and they would be fit in somewhere in June.

Got it.

And there likely are customers that have slots in June that would love to have a slot in December. So given the lead times on some of our products. So that's the natural churn we see. And a lot of it is tied to sometimes facilities and facility readiness. It also can be tied to whether they receive certain tools from other customers as they're setting up or other suppliers as they're setting up their production lines. So you always see a little bit of movement like that. But to Rick's point, we're underserving the level of demand we have, and so customers are having to get in line a long way out in a lot of cases. And so the ability to satisfy that demand earlier would be an opportunity for a lot of our customers that they would certainly want to take advantage of, given the strength of the demand that they have seen, but also their desire for these products and our constraints around them.

Got it. Thank you very much. It's very helpful.

Thank you, and thank you, everyone, for joining us. We know how busy of a day it is today in terms of earnings, so appreciate your time and interest. With that, I will turn the call back over to Leo to close it.

This concludes the KLA Corporation June quarter 2022 earnings call-in webcast. Please disconnect your line at this time and have a wonderful day.