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 December quarter 2023 earnings conference call and webcast. All participant lines have been placed in a listen-only mode to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star one on your telephone keypad. If you wish to remove yourself from the queue, please press star two. Please also limit yourself to one question and one follow up. Lastly, if you should need operator assistance, please press star zero. Thank you.

Thank you for joining the earnings call to discuss the December 2023 results of the March quarter outlook. I am joined by our CEO, Rick Wallace, and our CFO, Brian Higgins. We will discuss today's results released after the market closed and available on our IR website along with supplemental materials. Today's discussion is presented on a non-GAAP financial basis unless otherwise specified. Our folio references all relate to calendar years. A detailed reconciliation of GAAP to non-GAAP results in the earnings material posted on our website. KLA's 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 Q and 10-K. 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 board-looking statements. Rick will begin the call with some comments and quarterly highlights. Brent 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. I will briefly summarize KLA's performance for 2023 calendar year and the December quarter, and then set up our view for 2024. For 2023, KLA revenue was almost $9.7 billion. down 8 percent versus the prior year. This was higher than our expectations coming into the year as strength from legacy node customers and semiconductor infrastructure offset weaker-than-expected leading-edge investments in both logic and memory. While overall WFE spending was down for the year, there were areas of growth in KLA business segments, including the infrastructure business supporting wafer and mask manufacturers, automotive, and specialty semiconductor process equipment. KLA's service business grew 7% to $2.2 billion for the year. The company continued to deliver strong industry-leading margins with non-GAAP gross margins of 62% and a non-GAAP operating margin of 39%. Free cash flow grew 6% in 2023 to a record $3.2 billion. Moving to KLA's December quarter results, which were ahead of expectations as revenue grew 4% sequentially to $2.49 billion. Quarterly non-GAAP net income was $839 million. GAAP diluted earnings per share was $4.28, and non-GAAP diluted EPS was $6.16. We saw sequential growth in all three of KLA's business segments, and you can find specific details in our shareholder's letter released earlier today. Additional highlights in the quarter include growing adoption for KLA's 8900 series platform for high-throughput macro inspection Increased demand in the legacy node and advanced packaging categories made the platform one of the best performing product lines in our optical inspection portfolio in 2023. Continued growth in AI enables KLA's differentiation and helps drive industry growth. We continue to deploy deep learning and physics-based algorithms across KLA's inspection and metrology product portfolio. This has improved signal and noise recognition and reduce process learning cycles as customers resolve critical yield challenges. Daily, service business grew 1% on a sequential quarterly basis to $565 million and remains on track to resume the targeted 12% to 14% annual revenue growth trajectory in calendar 2024. As we look at CY24, we're encouraged by recent reports from many of our customers that the demand environment is expected to continue to gradually improve throughout the calendar year. Through collaboration with customers, KLA is focused on preparing our teams for our return to growth at the leading edge and leveraging the KLA operating model to ensure readiness to support our customers' needs as the demand environment improves. In the near term, we see the March quarter as the low point for the year. We expect business levels to improve as we progress throughout the year. The KLA team will, as always, prioritize commitments to our customers and executing on our product roadmaps. I'll now hand the call over to Brent to provide more specifics around the financials and our guidance. Thanks, Rick. Our results demonstrated the consistent execution of our global team. Despite the challenges and complexity of the current industry environment, KLA continues to show resourcefulness and the ability to adapt to meeting customers' changing and fluid requirements. Revenue was $2.49 billion, slightly above the guidance midpoint of $2.45 billion. Non-GAAP diluted EPS was $6.16, above the midpoint of the guided range of $5.26 to $6.46. GAAP diluted EPS was $4.28. GAAP EPS was negatively impacted by $1.59 for a goodwill and purchased intangible asset impairment charge. Non-GAAP gross margin was 62.6%, just above the high end of the guidance range of 60.5% to 62.5%. Non-GAAP operating margin was 40.7%. Quarterly non-GAAP net income was $839 million. GAAP net income was $583 million. Cash flow from operations was $622 million. And free cash flow was $545 million. As I just mentioned, during the quarter, KLA recognized a goodwill and purchased a tangible asset impairment charge of $219 million for the PCB and display reporting unit attributed to a weaker long-term outlook, primarily for the flat panel display business. We have begun investigating strategic alternatives for this business, which accounted for 1.4% of total revenue in calendar 2023. The breakdown of revenue by reportable segments and end markets and major products and regions can be found within the shareholder letter and slides. Turning to the balance sheet, the KLA ended the quarter with $3.3 billion in total cash, cash equivalents, and marketable securities, debt of $5.95 billion, and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three agencies. In December 2023, Fitch Ratings, upgraded KLA's debt rating to A from A- with a stable outlook. Moving to our outlook, looking ahead to calendar 2024, the exact timing of a meaningful and sustainable resumption in WFE investment growth continues to remain uncertain. Though there are signs of improvements in some end markets, this improvement is off low levels, impacting our customers' profitability and cash flow generation in the near term. KLA's overall demand is stabilizing around current business levels plus or minus the guidance regions. As of now, this translates into KLA revenue bottoming in the March quarter, driven mostly by a customer project delay occurring in the last couple of months. Based on current VAB schedules and our June quarter shipping plan, we expect sequential growth to return in the June quarter and continue for the remainder of the calendar year. For calendar 2024, we currently expect WFE demand to be in the mid to high $80 billion, roughly flat to modestly up from the anticipated level in calendar year 2023. We expect that the second half of the calendar year will be stronger than the first half for WFE investment. This WFE estimate reflects our current top-down assessment of industry demand as follows. In memory, we expect WFE investment to be slightly up from low levels with investments focused on high bandwidth memory capacity and leading edge node development. Both NAND and DRAM fabs are still at low utilization levels, as consumer markets have not yet returned to the growth levels needed to bring factory utilization back to the high levels seen in recent years. Once customers consume this excess capacity and focus on node migration, we would expect to see new investments. Foundry logic is expected to be slightly up, with leading-edge investment returning to modest growth levels, legacy investment declining versus 2023. and China legacy note investments remaining relatively flattish to current levels. As for guidance, KLA's March quarter guidance is as follows. Revenue is expected to be $2.3 billion, or minus $125 billion. Foundry logic is forecasted to be approximately 60%, and memory is expected to be 40% of semi-process control systems revenue. Within memory, DRAM is expected to be about 85% of the segment mix, and NAND the remaining 15%. Non-GAAP gross margins forecasted to be in a range of 61.5% plus or minus one percentage point as product mix weakens quarter to quarter due to lower overall semiconductor process control systems revenue. For calendar 2024, based on current industry outlook, top line growth expectations, higher forecasted growth in services and expected systems product mix, we are modeling gross margins to be relatively stable around the mid 61% range to what we delivered in 2023. Variability quarter to quarter is typically driven by product mix fluctuations. Operating expenses are forecasted in the March quarter to be approximately $545 million, relatively flat with the December quarter. For calendar 2024 operating expenses, we expect $5 to $10 million incremental growth per quarter beyond the March quarter, in line with expected sequential growth in revenue. Prototype material purchases can drive variability quarter to quarter. For the calendar 24 tax rate, based on current forecast, we do not expect material changes. You should continue using the 13.5% effective rate for modeling purposes. Other model assumptions for the March quarter include other income and expense net of approximately $45 million. Gap diluted EPS is expected to be $4.93 plus or minus 60 cents. A non-gap diluted EPS of $5.26 plus or minus 60 cents. UPS guidance is based on a fully diluted share count of approximately 135.6 million shares. In conclusion, we are optimistic that most end markets are showing signs of improvement. KLA will remain focused on supporting customers, executing on our product roadmap, and positioning the company for a return of growth at the leading edge. Though visibility into the precise timing of a sustainable demand recovery is still unclear, KLA is running the business to ensure delivery of a differentiated product portfolio that meets customers' technology roadmap requirements and to execute our business in line with our longer-term growth expectations. The KLA operating model guiding best-in-class execution, KLA continues to implement strategic objectives which are geared to drive out performance. With a focus on customer success, delivering innovative and differentiated solutions and operational excellence, KLA is able to deliver industry-leading financial and free cash flow performance and return capital consistently. The past few years have strengthened our confidence in the increasing importance of process control and enabling technology advancement and optimizing yield in a high-design mixed volume production environment. This bodes well for KLA's long-term growth outlook, despite still challenging near-term demand trend. In the meantime, KLA business continues to stabilize, and the long-term secular trends driving semiconductor industry demand and investments in WFE remain very compelling. That concludes the prepared remarks. Kevin, let's begin the Q&A. Thanks, Brian. Chelsea, if you can just give the instructions and set up the queue.

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