KLA Corporation

Good afternoon. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation June Quarter 2023 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 star 2. Please also limit yourself to one question and one follow-up. Lastly, if you should need operator assistance, please press star 0. Thank you, and I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead, sir.

Thank you for joining us for our earnings call to discuss the results of the June 2023 quarter in our September quarter outlook. Joining me is our CEO, Rick Wallace, and our CFO, Brent Higgins. During this call, we will discuss our results released today after the market closed, along with supplemental materials that are all available on our IR website. Today's discussion is presented on a non-GAAP financial basis, unless otherwise specified. Whenever we make full-year references, they relate to calendar years. 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 KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. Rick will begin the call with some comments and quarterly highlights. Fred will conclude with our financial highlights, including our guidance and outlook. I will now turn the call over to our CEO, Rick Wallace. Rick? Thank you, Kevin. Let's start with a summary of KLA's performance in the quarter along with a few highlights. Further color and detail on my comments and the semiconductor demand environment can be found in our shareholder letter released earlier today. KLA's June quarter results exceeded expectations and demonstrated consistent execution despite a challenging marketplace. Specifically, revenue of $2.355 billion finished at the upper end of the guidance range, declining 5% on a year-over-year basis and 3% sequentially. GAAP earnings per share was $4.97, and non-GAAP EPS was $5.40, with each finishing at the upper end of their respective guidance ranges. As near-term demand headwinds persist, there are some bright spots. In particular, automotive and other markets served by legacy nodes remain strong, demonstrating the diversification of demand and growing adoption of semiconductor technology across multiple industries. Additionally, process control plays a critical role in enabling our customers to execute on node and technology transitions that are the focus of R&D efforts, and that is more resilient to near-term pressures. We work closely with our customers, and they continue to prioritize R&D investments. This is important for KLA as our products are heavily relied upon during the R&D process, as well as the early ramp phase when faster time to yield is critical. KLA remains focused on supporting our customers' requirements while maintaining critical R&D investments to enable our technology roadmap. Our June quarterly results are the latest example of successfully meeting or exceeding our commitments and creating value for our customers, partners, and shareholders. Specific factors driving KLA's performance this quarter include KLA's market leadership and process control, which includes some of the most critical and fastest growing segments of WFE. Growth and market leadership in critical wafer and vertical infrastructure is fueling relative growth for KLA. For example, revenues from our unpatterned wafer inspection and metrology products used in silicon wafer and photomask manufacturing are expected to significantly outperform the overall WFE market. and deliver strong growth in a down year for the industry. The KLA services business grew to $539 million in the June quarter, up 5% year-over-year. Our consistent execution, despite challenges in the marketplace, continues to prove the resiliency of the KLA operating model and the dedication of our global teams. KLA remains well-positioned with a comprehensive portfolio of products to meet customer requirements. I'll now hand it to Bren to go through our financial highlights. Bren? Thanks, Rick. KLA delivered results at the upper end of the range of guidance and commitments, demonstrating consistent execution despite a challenging marketplace. Our continued focus on meeting customer needs while expanding market leadership, sustaining industry-leading gross and operating markets, generating strong free cash flow, and maintaining our long-term strategy of assertive capital allocation is what makes us successful. Quarterly revenue was $2.355 billion, towards the upper end of the guided range of $2.125 to $2.375 billion Non-GAAP diluted EPS was $5.40, also towards the upper end of the guidance range of $4.23 to $5.43. GAAP diluted EPS was $4.97, above the midpoint of guidance. Non-GAAP gross margin was 61.2%, 45 basis points above the midpoint of the guidance range due to product mix, as upside in the quarter was driven by higher margin products, normalizing freight expense and improving factory utilization's overall capacity adjusted to current demand expectations. Non-GAAP operating expenses were $543 million, slightly higher than guidance due to adjustments to variable compensation. Total operating expenses comprised $314 million in R&D and $229 million in SG&A. Non-GAAP operating margin was 38.1%. Other income and expense debt was $49 million, and the quarterly effective tax rate was 12.4%. With a guided tax rate of 13.5%, non-GAAP EPS would have been $0.07 lower, or $5.33. Quarterly non-GAAP net income was $743 million. GAAP net income was $685 million. Cash flow from operations was $959 million, and free cash flow was $880 million. As a result, free cash flow conversion was strong at 119%, and free cash flow margin was 37%. The company had approximately 137.7 million diluted weighted average shares outstanding at the end of the quarter. Breakdown of revenue by reportable segments and end markets in major products and regions can be found within the shareholder letter and slides. Switching to the balance sheet, KLA ended the quarter with $3.24 billion in total cash, cash equivalents, and marketable securities, debt of $5.89 billion, and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three agencies. Turning to our outlook, our WIP outlook for 2023 remains largely unchanged at down approximately 20% from $95 billion in 2022. While the timing of a meaningful resumption in WFE investment growth remains unclear, we continue to see overall demand stabilizing around current business levels for our semiconductor process control systems business, and we expect this demand profile to continue through the remainder of the year. Our 2023 WFE estimate reflects a top-down assessment of industry demand as follows. In memory, we expect WFE investment to decline by approximately 40%, Foundry Logix has declined by about 10% overall, with legacy investment outperforming the segment overall due principally to automotive and continued demand for legacy design nodes. KLA's primary value proposition is focused on enabling innovation through technology transitions, which our customers continue to prioritize across all business environments. While capacity plans are often adjusted due to changing demand expectations, technology roadmap investments are more resilient. This adds additional confidence to our business expectations as customers align shipment slots with roadmap requirements. In this environment, we will continue to focus on meeting customer requirements, maintaining our high-level investment in R&D to advance our product roadmaps and KLA's market leadership in delivering strong relative revenue growth and financial performance. Moving to guidance now, our September quarter guidance is as follows. Total revenue is expected to be $2.35 billion, plus or minus $125 million. Foundry logic is forecasted to be approximately 70%, and memory is expected to be around 30% of semi-PC systems revenue. Within memory, DRAM is expected to be about 90% of the segment mix, and NAND 10%. We forecast non-GAAP gross margin to be roughly flat at 61% plus or minus one percentage point as product mix expectations and cost components are consistent with the prior quarter. Given our current view of a stabilizing demand environment for the remainder of 2023, we expect full-year calendar gross margin to trend near 61%. Non-GAAP operating expenses are expected to be approximately $535 million. as cost measures executed earlier in the calendar year align our current cost structure with top-line expectations. We would expect quarterly operating expenses to remain around this level for the remainder of the calendar year. Other model assumptions for the September quarter include other income and expense net of approximately $48 million and affected tax rate of approximately 13.5%. Finally, gap to the VPS is expected to be $5.02 plus or minus $0.60. and non-GAAP diluted DPS of $5.35 plus or minus 60 cents. DPS guidance is based on a fully diluted share count of approximately 137 million shares. In conclusion, we continue to see process controls importance to technology transitions and advancements key to R&D growth and prioritization despite persistent weakness in our customers' businesses. We are also exposed to wafer and reticle infrastructure investments that are contributing to our revenue performance As a result, KLA remains positioned for strong relative performance versus the industry in 2023. Looking ahead, we continue to see the business environment stabilizing and remain confident that the secular trends driving long-term semiconductor industry demand and investments in WFE remain strong and compelling. Broadening semiconductor demand and simultaneous investments supporting growing semiconductor content across multiple technology nodes remain catalysts for sustainable long-term industry growth. Multiple applications for leading-edge roadmaps are driving competitive dynamics and design challenges requiring more customer engagement and faster time to results. Technology investment and node transitions reflect the value that semiconductors in our industry have in lowering costs for our customers and enabling a broader application universe for semiconductor-based technology across multiple end markets. While the global economy and semiconductor industry are facing challenges, KLA is well-positioned to deliver strong relative financial performance, driven by better-than-market performance of our SEMAPC and SPTS businesses, and continue growth in services. We remain focused on innovation as we execute our portfolio strategy to support our customers' technology roadmaps and multi-year investment plans. With the KLA operating model guiding our execution, we will implement our strategic objectives and drive out performance. These objectives are also the foundation for our technology leadership and competitive differentiation. Our focus on customer success, delivering innovative and differentiated solutions, and operational excellence continues to enable us to deliver industry-leading financial and free cash flow performance while delivering consistent capital returns to shareholders. That concludes my remarks. I'll now turn the call back over to Kevin to begin the Q&A. Thank you, Brent. Chelsea, can you please provide instruction for questions?

Yes, sir. 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 star 2. We remind you to please unmute your line when introduced and, if possible, to 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. Our first question will come from Joe Quattrochi with Wells Fargo.