KLA Corporation

Good afternoon. My name is Doug, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the KLA Corporation March Quarter 2024 Earnings Conference Call and Webcast. All participant lines have been placed on a listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question at that time, please press star and 1 on your telephone keypad. If you wish to remove yourself from the queue, please press star and two. And please limit yourself to one question and one follow-up. Lastly, if you should need any operator assistance, please press star and 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 for joining our earnings call to discuss the March 2024 results in the June quarter outlook. I am joined by our CEO, Rick Wallace, and our CFO, Brent Higgins.

We will discuss today's results released after the market closed and available on our IR website along with the supplemental materials.

Today's discussion and metrics are presented on a non-GAAP financial basis unless otherwise specified. All four-year references are to calendar years. The earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future investor events, presentations, corporate governance information, and links to the 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 disclosures of risk factors 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 introductory comments, followed by Brent with additional financial highlights, including our outlook. We'll now turn the call over to our CEO, Rick Wallace. Rick? Thank you, Kevin. Today, I will review KLA's March quarter results and highlights and address the new market share reports as well as a broader industry outlook. KLA's revenue of $2.36 billion was above the midpoint of our guidance range. EPS results, both non-GAAP and GAAP, were above the midpoint of the adjusted guidance we provided on March 18th in conjunction with the decision to exit the flat panel business. Market conditions have stabilized, and we expect our business to improve as we progress through the year. We're encouraged by the improvement in our customers' business across multiple end markets, which is driving discussions with our customers about future opportunities for leading-edge capacity investments. At the start of each year, new global market share reports are published by third parties that provide additional insights into the state of our industry. These reports show consistent long-term KLA market leadership and process control and demonstrate the strength of our diverse portfolio that offers our customers unique capabilities to address their technology challenges while meeting their productivity demands. This year, following significant gain in 2022, KLA's 2023 market share declined by nearly 1%, driven primarily by a loss in access to approximately 10% of the China market as a result of U.S. government export controls. That said, KLA's consistent market leadership and process control in some of the most critical markets in WFE reflect the success of our customer-focused strategies and the power of our portfolio. We're confident that KLA's quarterly revenues bottomed in the March quarter, as expressed in our prior earnings call. In Foundry logic, simultaneous investments across multiple nodes and slowly rising capital intensity continue to be a long-term tailwind. Additionally, the increasing complexity in advanced packaging applications for AI and other advanced technologies drive demand for both our process tool and process control products. Overall demand growth, along with increasing technology requirements, will drive the need for more capability from inspection and metrology systems. Our advanced packaging business will generate approximately $400 million in run rate in 2024, and we expect this business to achieve growth rates meaningfully above the growth rate of WFE going forward. In services, our business grew to $590 million in the quarter, up 4% sequentially and 12% year-over-year. Quarterly free cash flow was $838 million, and the last 12-month free cash flow was $3.1 billion, with a free cash flow margin of 32% over the period. KLA's quarterly results continue to demonstrate our sustained process control leadership and the success of our broad portfolio and product strategies. Customers continue to prioritize and invest in leading-edge technology transition, and this aligns with KLA's highest-value product offerings. In this industry environment, KLA will continue to focus on supporting customer requirements, executing on product roadmaps, and preparing for growth at the leading edge. Bren will now discuss the financials and our outlook further. Thank you, Rick. KLA's quarterly results demonstrated a 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 requirements. Quarterly revenue was $2.36 billion above the guidance midpoint of $2.3 billion. Non-GAAP diluted EPS was $5.26 above the guidance midpoint of $4.83. GAAP diluted EPS was $4.43 above the guidance midpoint of $4.06. In the March quarter, both non-GAAP and GAAP diluted EPS were negatively impacted by a $62 million charge for excess and obsolete inventory related to the company's strategic decision to exit the flat panel display business announced on March 18. This charge had a $0.40 impact on EPS. Excluding this item, diluted non-GAAP EPS would have been $5.66. Non-GAAP gross margin was 59.8%. above the top end of the revised guidance range. Excluding the FPD charge, non-GAAP gross margin would have been 62.4% and roughly flat sequentially. Non-GAAP operating expenses were flat sequentially at $544 million, comprised of $320 million in R&D and $224 million in SG&A. Non-GAAP EPS at the 13.5% guided tax rate would have been 4 cents higher, or $5.30. Non-GAAP operating margin was 36.8%. Non-GAAP other income and expense net was a $34 million expense. And the quarterly non-GAAP effective tax rate was 14.2%. Quarterly non-GAAP net income was $715 million. GAAP net income was $602 million. Cash flow from operations was $910 million. And free cash flow was $838 million. The breakdown of revenue by reportable segments and markets, and major products and regions can be found within the shareholder letter and slides. Turning to the balance sheet, KLA ended the quarter with $4.3 billion in total cash, cash equivalents, and marketable securities, debt of $6.7 billion, and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three agencies. On February 1st, KLA issued $500 million of 4.7% senior notes due in 2034 and $250 million of 4.95% senior notes due in 2052. The company expects to use the net proceeds from the notes offering for general corporate purposes, including the repayment of outstanding indebtedness at or prior to maturity. Moving to our outlook, We remain encouraged by constructive customer discussions around their future investment plans, which are further supported by recent reports of an improving end market demand environment and customer profitability. Consistent with these industry trends, as we indicated last quarter, we believe our business bottomed from a revenue perspective in the March quarter, and looking ahead through the balance of calendar 24, growth is resuming in the June quarter, and we expect business levels to improve as we progress through the year. For calendar 2024, our high-level outlook remains unchanged. We still expect WFE demand to be roughly flat to modestly up from 2023, and that the second half of the calendar year will be stronger than the first half. KLA's June quarter guidance is as follows. Revenue of $2.5 billion, plus or minus $125 million. Foundry logic revenue from semiconductor customers is forecasted to be approximately 82%. and memory is expected to be 18% of semi-process control systems revenue. Within memory, DRAM is expected to be about 78% of the segment mix and NAND the remaining 22%. Non-GAAP gross margin is forecasted to be in a range of 61.5% plus or minus one percentage point based on product mix expectations. 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 non-GAAP gross margins to be relatively stable around the mid-61% range. Variability quarter to quarter is typically driven by product mix fluctuations. Non-GAAP operating expenses are forecasted in the June quarter to be approximately $550 million as our merit adjustment process occurred in the March quarter. Looking ahead, we continue to expect $5 to $10 million incremental growth in quarterly operating expenses for the remainder of calendar 2024, supported by expected revenue growth. Other model assumptions for the June quarter include non-GAAP other income and expense net of approximately a $38 million expense. GAAP diluted EPS is expected to be $5.66 plus or minus 60 cents. and non-GAAP diluted EPS of $6.07, plus or minus $0.60. EPS guidance is based on a fully diluted share count of approximately 135.4 million shares. In conclusion, as we articulated 12 weeks ago, we are encouraged with the indicators of improvement ranging from our customers' conversations to the public reports over the past few months. KLA remains focused on delivering a differentiated product portfolio that anticipates customers' technology roadmap requirements and drives our longer-term growth expectations. With 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 solidified our confidence in the increasing importance of process control in enabling technology advancements and optimizing yield across a high semiconductor device design mix volume production environment. This bodes well for KLA's long-term growth outlook as near-term industry demand trends are continuing to improve. In alignment with this, KLA's business is improving, and the long-term secular trends driving semiconductor industry demand and investments in WFE remain intact in both legacy and leading-edge markets. That concludes the prepared remarks. Kevin, let's begin the Q&A. Thank you, Brian. Operator, can you please provide instructions for Poland?

Absolutely. At this time, if you'd like to ask a question, please press star and one on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing star and two. We remind you to please make sure you've unmuted yourself when you are introduced, and if possible, to pick up your handset for optimal sound quality. In the interest of time, we also ask that you please limit yourself to one question and one follow-up. We'll now take our first question from Harlan's

Good afternoon. Thanks for taking my question. You know, last year and first half of this year was more mature, no bias spending, maybe more infrastructure focused as well. As you step into the second half of this year, it does feel like advanced, no momentum is starting to accelerate, right? Both boundary and logic. and memory and, you know, appears to be reflected in your confidence on improving spending outlook for this calendar year. Given your relatively longer lead times, your critical role in enabling these advanced technology migrations, like how are customer discussions and initial forecast visibility and outlook for calendar 25 shaping up for the team? I mean, I assume it's a more advanced technology-driven profile next year, which should be good for the team, but wanted to get your views.

Great, Harlan. Thanks for the question, Mr. Gray. Absolutely, we are having different kind of discussions now than we've had for a while with our leading edge logic and memory customers. As they prepare for the ramp and we're seeing increased demand for, they are seeing increased demand, they're talking about you know, tool availability, scheduling of resources, making sure that they don't get behind, really conversations we haven't had for a while. I think the build-outs are still, as we indicated, we see kind of stability with rising demand through the year, but the real build-out is going to come in 2025 and beyond that, as we see some of the conversations we're having. So, really good indicators, leading indicators, design starts. advanced node discussions, R&D work, so we feel pretty good about the setup.

Great. Thanks for that. And, you know, good to see the continued growth in the services business. With industry utilizations clearly on an upward trajectory, we've got record number of tools coming off warranty. Customers, I think, wanting more value-added services and offerings just given the complexity challenges ahead. Has the view on the services growth profile improved relative to the last earnings call? I know you talked about being at the upper end of that sort of 12% to 14% sort of target range this year on the last call. Has that changed?

I would say, hey, Harlan, it's Brent. I would say, look, we're continuing to see very strong momentum. Utilization rates are improving. We had a lot of tools come off of warranty, and they go into contract, and our conversion rate is about 95%. So, that's very positive. Customers are extending lives of the systems, which bodes well for long-term service growth overall. So I think as we track here, I think we feel pretty good about the range that we have, and we're closer to the upper end for sure than the lower end as we move forward over the next few years.

Thank you. We'll take our next question from CJ Muse with Cantor Fitzgerald. Please go ahead. Your line is open.

Good afternoon. Thank you for taking the question. I guess first question, a near-term question on the mix you expect for June, which is, pretty massive shift to foundry logic from memory. So I guess as part of that, can you speak to some of the underlying drivers? And within that, you know, do you see perhaps a pickup from domestic China memory beyond the June quarter? Or, you know, I think in the prior quarter, you talked about revenue rec pushed to the June quarter. So curious about the moving parts there.

I would say, as far as China memory goes, it's more first-half heavy than second-half. While we're having very positive conversations with our customers on the memory front, as Rick indicated, in terms of long-term plans, we're seeing their businesses now improve. We're seeing profitability and cash flow starting to improve. But we don't expect any significant investments as we move through the rest of the year. Now, things could change. But I think that the profile, it might tick up a little bit in the second half overall non-China, but I don't see it changing in a real meaningful way. If you look back at our business, we were a little bit over 70%, maybe Logic Foundry in 2023. And I think we're going to be right around 70%. I think it's going to be a pretty similar overall mix this year.

Excellent. And then in terms of your commentary around accelerating top line revenues throughout the remainder of calendar 24, I guess, can you speak to, you know, the main drivers there as it relates to perhaps two nanometer pilot, you know, logic in Arizona, you know, handset related EPC, you know, what's really driving that? And is there sort of a percentage growth rate we should be thinking about half on half? Thanks so much.

Yes, CJ, I think you covered most of them. We will see some early investment in two nanometers. You have the three nanometer build-out. You have the investment that you mentioned in Arizona. Those are all pretty good for the Logic Foundry segment. Right now, when I look at the overall business, first half versus second half, I think the second half is high single digits. versus the first half in that ballpark. You know, we're not guiding, but I think it's going to end up in that range as we progress through the year. On the EPC front, I think it is a little bit stronger. You do have some seasonality in EPC in the first part of the year, but we'll see some improvement there, I think, as we move through the second half of the year as well. And, of course, service is growing, you know, quarter on quarter, so you've got that effect as well.

And we'll take our next question from Krish Sankar with TD Cohen. Please go ahead. Your line is open.

Yeah, thanks for taking my question. I have two of them. One is, Rick O'Brien, last quarter you kind of said that for KLA, the overall calendar 24 revenues could grow mid-single digits based on WFC, and obviously there's expectation WFC growth is going to be higher thanks to LITO. Given that you do have some exposure on that side, I'm just kind of curious, How do you think about your overall revenue profile for this year, year over year, and then add a follow-up?

Yeah, so, and when you look at the WFE level, you know, we talked about a flat to modestly up, and that, I think, depends on your view of WFE as everybody adds it up differently. You know, our view is that, you know, WFE was probably $90 to $91 billion, and then slightly up from there, or flat to slightly up from there in terms of how we're looking at this year. So, I think that's the way to think about it. Simply put, given that WFE is more or less flat to modestly up, that we were going to see this increase in service that we talked about. We're going to see some modest improvement in EPC. And we've seen some improvement, given the outperformance we saw in March, the incremental guide into June in our semi-EPC business. I think overall, Semi-PC share of the overall market is probably going to be fairly consistent, maybe a little bit up from what we saw in 2023. All that translates into our Semi-PC business roughly performing mostly in line with where we think the market's going to be for this year.

Got it. Got it. That's very helpful. And then a quick little follow-up on China. I'll give you a long lead time. So I'm kind of curious, though, how do you think about China? You did say memory would be separated. Overall, China revenues. And along the same path, if I back up the SPD, gross margins from March to June is down 90 basis points. You said it's product mix. Is it mainly from China? I'm just kind of curious on that. Thank you.

Yeah, no, it's mostly product mix quarter on quarter down from the FPD adjustment related to the inventory that we took related to the decision there. It's mostly just product mix across our semi-PC business. You do have some growth in service quarter-on-quarter, and service is diluted to the overall gross margin. We believe it's accreted to the operating margin, but to the gross margin, it's a little diluted. The rest is just the normal product mix we have across the portfolio. different margin profiles across the portfolio. And so, depending on what we're revenue in a given quarter, it can cause some fluctuation. But, you know, I think the guidance range is appropriate. Like we saw, you know, I think we guided somewhere around 61.5 last quarter. It came in above 62%. Depending on how things end up revenuing as we engage with customers and ship systems, there's always, you know, room for upside, which is why, you know, we give the range that we give. So, there's nothing really particular to actual customers. It's more about the product mix of all regions. It's more about the product mix of the products we're shipping and getting acceptance on.

Is China's shipment to the rest of the year similar range?

Oh, so China, you know, interesting. I think it's probably flattish over the course of the year. second half is is more or less flattish with the first half the mix is changing a bit in terms of the end market mix but uh we see it as a percent of the totals come down as we see most of the growth in the year coming from our non-china customers thank you very much thank you we'll take our next question from brian chin with stiefel please go ahead your line is open

Hi there. Thanks for letting us ask a few questions. I guess, you know, this was sort of asked earlier, but with all these CHIPS Act announcements continuing to roll in, has this solidified the timing or magnitude of any of the U.S. greenfield fab buildouts? Or maybe what is your latest thinking on some of these projects?

Well, yes, there have been many announcements, and it's exciting to see. But when you look at the timing for those projects, even, for example, the one that was announced today in New York, that one's quite a ways out. So I think the approval of the funding relative to the timing The customers we talked to, they're excited about this, the chance to reshore under the U.S., but they're still building their capacity based on market demand. So, it doesn't really affect the overall capacity investment. They're gauging that based on the overall demand. And I think what happens is, it's the size of the investment in terms of how many wafers start to go out and what point is driven by the market. So, we'd stick to the comments about when the you know, what we see for the business environment, relatively independent of what location that the customers are choosing to make those investments.

Yeah, that's fair. And then maybe, I did notice in the shareholder letter and on the call, you highlight advanced packaging revenue could be around $400 million in calendar 24. What growth rate does that represent versus calendar 23? And then how would you size your served restful market in advanced packaging, which I know certainly crosses, I guess, boundaries across your portfolio?

Yeah, so it's... Greater than 25%. We're somewhere down around 300 in 23, a little over 300, and close to 400 expectation for 24. It's across a broad portfolio. We have process control, which we sell to those customers, which is inspection and metrology, but also process tools in our specialty semiconductor business. It's about 50-50 in terms of the contribution from each part of the portfolio. And I think on the go forward, we feel pretty excited about the opportunity to see a growth rate that's meaningfully faster than WFE. Yeah, and I think for opportunity, there's a couple of factors that are in play. One is the speed with which customers are accelerating their packaging efforts. The degree with which those are requiring leading edge, you know, our ability to make it make sense from a business standpoint, the packaging challenges really need to be leading edge. So there's still a number of packaging applications that are in markets that are served by lower-end competitors that we're not really competing for. So it has to do with how quickly the new technologies come on. But this has been an increased conversation in meetings that we've been having with leading customers for the last, year or so. It was already talked about, but it's accelerating. I think it's hard to judge exactly what the growth rate will be at this point, but it's pretty clear that there's a huge demand. For many customers, they view it as the competitive necessity. There's very much of a race of getting that new capability into the market, especially as it pertains to some of the AI applications. I would say that It's a huge driver for our customers. We're engaged. There's a lot of requests for new capability, and some of it comes down to us developing solutions in conjunction with those customers to meet those demands. But on its own, as it stands right now, it'll outgrow WFE, and we think it has the potential to go well beyond that, depending on how the adoption goes and how we continue to execute against it.

Great. Yeah, thanks for all that, Keller.

We'll take our next question from Tim Mercuri with UPS. Please go ahead. Your line is open.

Thanks a lot. I wanted to ask about N2, Rick. So there has been a lot of talk recently about the big volume for N2 is not going to be probably until 26, although there will certainly be some customers, you know, crypto customers and whatnot that will ramp in you know 25 so there will be capacity that you know gets installed next year so i i guess my question is how much of a driver do you think n2 uh will specifically be for your business are you seeing any of that yet is it more of a back half of this year thing is that so i'm just asking about like timing when that starts to help your business

Yeah, great question. It is definitely being one of the conversations we're having with critical customers about timing. And we have seen part of our optimism going forward is those conversations are being pulled in in terms of the needs because our customers are feeling end market pull. So, I think you're right that the bulk of it, the highest volume, will be in 26. But for KLA, we're already seeing those conversations, and we'll start to see some meaningful business in 25 for that, with orders coming toward the end of 24, as customers figure it out. The other thing is, we're seeing a number of advanced design starts for the two nanometer node. It's a big, as you know, Tim, it's a big power favorable node. And so for a lot of customers, some of the challenges around data center and, frankly, around AI are power related in terms of customers being able to even build those sites. So it's a big driver for our customers right now. So we think N2 is going to be a very significant node, and we're going to definitely see a lot of that. We're already seeing the activity, but it'll be a big factor in 25 and then as we go through 25.

Got it. Got it. Okay, perfect. And then I want to ask about China. Brent, you just said, I think you said China is going to be flattest, shorter than the back half of the year. I mean, it sounds like every quarter China keeps getting stronger, and everyone thinks it's going to downtick, and it doesn't because they're just going to take tools as long as they're allowed to take tools. So my question is really just on the mix around China. Is the back half filling in a bit because of new customers? I mean, there's probably 30 or 40 new hubs being built, if not more than that, that are part of these – constellations just under different names. And so is it these new, you know, newly named fabs that are coming on that are sort of filling in the back half of the year? And then if, you know, we've seen a lot of headlines around potential entity lift additions. If this happens, which there's been a lot of headlines about it, but if it does happen, is this downside to what you're thinking for the back half of the year or for next year? Thanks.

Well, Tim, I don't want to speculate about hypotheticals about what might come or not come from the U.S. government in regards to further export controls. And we'll continue to work very closely with the government and spend a lot of time and resources to make sure that whatever the rules are that we're compliant. It's a pretty decent mix. I talked about DRAM being down. I think the wafer infrastructure in the second half, I think the wafer infrastructure is probably down a little bit. In the second half, I think the reticle infrastructure is probably up, and then the logic foundry is up overall. And when you net it all out, it's basically a flattish profile. The customer mix, you do have a number of new projects continuing to take systems, but you also have the, I'll call them the more mature legacy customers in China that are also part of that mix. So I think, you know, it's continuing to be healthy, I think, through this year. And I think the profile as we, you know, even beyond this year feels like, you know, it kind of continues more or less at, you know, current levels. Obviously, you know, those are like half-to-half comments. I mean, in any given quarter we'll see some movement. But that's how we see things today.

Okay, awesome. Thank you, Greg.

We'll take our next question from Charles Shee with Nita. please go ahead. Your line is open.

Thanks. I want to ask a question built on what was discussed with the team earlier. So TSMC definitely said that the revenue is going to ramp in 2026 for N2. And you kind of alluded to that, that you think a 26 volume for you will be higher than 25. But if I look at the how the three nanometer ramp looked like. And it occurred to me that the 2022, which was M minus one year in terms of the production timeline for the three nanometer was a higher volume for you guys compared with the probably 2023. I just really wonder the fact that you said you think the 26 will be a high volume for you compared with 25. Was that coming from some discussion with the customers? And what's changed this time? Why they want to kind of, I mean, move the capacity a little bit closer to the high volume at the point of entry to the high volume production? Thanks.

Yeah, it's a great question. There's a couple of things to consider when thinking about N2. First of all, this is now very clear in our customers' minds, a race for AI capability. You see several design starts happening, not just the ones we're most familiar with, but other players too, designing for capability. So, you have a very different demand environment. You also have a constrained capacity environment, now constrained somewhat even by the ability to build facilities. but the last factor is you have the kla phenomenon is we get pulled in early so we're front end loaded into some of these facilities because you need our systems to be able to qualify the rest so it is a different node than what we've seen in quite a while because of of those factors and they're you know as we meet with customers they are very concerned about supporting the demand that they're seeing that's why we believe we're going to get a lot of pressure to support the end of this calendar year to start supporting some of the POs that we're going to see as they plan out those nodes. We're talking about volume in 26 for them, but toward the end of 25 is when we'll be seeing more and more of that business. Of course, we don't know how much broader it's going to get in terms of the number of design starts. It is remarkable that there are this many designs specifically for one application at this point in the process, but it's pretty remarkably consistent as we talk to different customers and even their customers.

Maybe a second question I want to ask you about the advanced packaging capability you're building there. Sounds like you're having more of the constructive conversation with your customers, maybe to put more of the KLA, more advanced process control capabilities into the packaging side of the process control. I get the overall idea, but I just really hope for you to provide a little bit more color. What kind of areas do you think the customers are facing challenges in terms of maybe wrapping up co-ops, maybe wrapping up SOIC, and where do you see, from process control perspective, the biggest opportunities for KLA? Thanks.

Yeah, I'll give you some color just from two stories. One, years ago when we bought Icos, part of the theory of that case was it was giving us exposure to the back end. And I remember meeting with one of our big customers and their back end people, and they literally said to me, why are you guys talking to us about the back end? That's not a KLA market. And fast forward to the end of last year, calendar year, in a meeting that Ahmad and I had with a critical customer, they had two topics they wanted to talk about. One was our support of EUV and the ramping of EUV. continuous ramping of EUV designs and capabilities, and the other was advanced packaging. And these were the folks that were historically and traditionally responsible for the front end. And one of the things they said is, we think you guys have the capability in a lot of your front end tools, but we need that modified, and we need that for the back end, because the back end is a critical part of our differentiation, and that's the part that we need you to work with us to take what you consider front end tools And what we're more concerned with than cost, and this is often the case at the beginning of a node, they're more concerned with capability than they were necessarily on cost. So the dynamic has shifted pretty considerably. And again, I go to one of the biggest drivers for all this is all the work that's going on with AI. And if you look at the success and the requirement to have advanced packaging as part of those solutions, that's what's driving it. So, we kind of anticipated a few years ago this more-than-more trend was going to become more and more relevant, but we're seeing it very specifically with customers bringing front-end people that they've worked in the front-end, having them work on these back-end challenges and asking specifically for capability that we have in the front-end to be used in the back-end. And in some cases, we've done that with some of our inspection tools and capability. But as you know, we have to make modifications to handling and some of the operating conditions to make that work. So we're definitely seeing that. And in some cases, our ability to support and modify those systems will be the gating item for us to realize revenue on it, not the demand. The demand is there. And from a competitive standpoint, we're uniquely positioned to do that. So we feel pretty good about the opportunity, and it's a major focus area for the company.

Thanks so much.

We'll take our next question from Chris Geso with Wolf Research. Please go ahead. Your line is open.

Yes, thank you. Good evening. This is a follow-up question with regard to memory. And I think I understand what you're saying with regard to, you know, this year, you know, perhaps some improvement in non-China memory, but nothing significant. I guess What are your customers telling you to be prepared for perhaps as you're going into next year? You know, we're starting to see some prices go up, utilization up. You know, what's your expectation for the potential improvement in 25? Yeah, Chris, you're seeing all the things you want to see, right? You're seeing pricing improve. Customers are taking up utilizations. Utilizations were very low, and so there's a fair amount of capacity that's been out there. We're seeing the profitability improve, and ultimately that will translate into cash flow and then what we expect to be investment next year. I think we're seeing more DRAM driven by the leading edge of DRAM or expect to see more there. And then of course the drivers related to high bandwidth memory. But I think in some ways it's the device market, part of the market's improving this year and that'll translate into investment next year. Got it. As a follow-up with regard to service, I think last quarter you talked about your expectation that being kind of the high end of a 12% to 14% target. Is that still the right way of thinking about it? Again, we've seen utilization rates improve here. Does that change your view of where services come out for the year? Well, it's certainly a factor in the growth that we're seeing this year. So I've been pretty open that I thought that we'd be somewhere between 250 to 300 million of incremental service this year versus in 2023. I think we're closer to the top end of that range than the bottom. So it is a factor, and given the nature of process control, and the complexity of our systems, the mix and the relatively lower volume, our customers tend to rely on us to ensure that they're optimizing their capital, particularly in environments when capital is constrained, yields matter a lot. And so our utilizations never drop as much as process tools where they have more redundancy, but we are seeing it continue to improve. And so I think it's a good sign in terms of the overall market health and our confidence about some of the growth drivers into next year.

Thank you.

We'll take our next question from Joe Quattrochi with Wells Fargo. Please go ahead. Your line is open.

Yeah, thanks for taking the question. I'm wondering if you could comment. Obviously, you seem pretty positive in terms of just the opportunity of looking into next year and thinking about the size of N2 and recovering the memory market. I guess, how do the conversations with your customers over the last several months and just thinking about your lead times give you confidence in your ability to reach that 2026 target model?

Well, I think our confidence is pretty good. We've made a lot of investments around the company in 21 and 22, both in terms of our own capacity, but also to ensure that our key suppliers have the capacity to support that kind of demand environment. So it's one of the reasons why my inventory levels today are higher than – and they continue to grow even where the market has corrected some because of the commitments we've made to ensure that the suppliers keep that capacity in place. So we feel very good about our ability to leverage what we have. I don't think we really have to make a lot of big investments to be able to support that trajectory. And I think because of the investments, I think, frankly, they're a little bit of a headwind today in terms of the margins. So I think over time, the leverage opportunity is also compelling if we see the kind of growth environment that we expect over the next couple of years.

Okay. Excuse me. As a quick follow-up, Brent, I was wondering if you could give us RPO, the accident in the quarter.

It wouldn't be a quarterly conference call without your question, Joe. So 9.9-ish, we're going to file the Q in the morning or sometime tomorrow, I think. 9.9 billion. It was down about $750 million quarter-on-quarter. Deposits are about $677 million. Perfect. Thank you.

We'll take our next question from Tom O'Malley with Barclays. Please go ahead. Your line is open.

Hey, guys. Thanks for taking my question. I think there's been a lot of discussion on the call about advanced packaging, and you guys have talked about how you've had conversations already about potentially bringing some of your solutions from the front end to the back end. There's obviously some adjustments to those tools to get them ready. Can you talk about the timing of bringing those solutions there? Obviously, you're seeing a big growth rate in the back end, but from the moment that you say, hey –

we want to take a tool and address the back end to when you're actually selling that to a customer can you talk about how long that takes sure and and we have yeah let's be clear i mean we have some of our products already from the front end that are being used in the back end but that started a while ago we're just seeing an accelerated conversation about more tools where some customers will actually name specific tools that they want so it very much depends on the tool And, you know, I can give you a range where it could be from three months, it could be a couple of years, depending on whether you're modifying something that's already being used in that kind of application and specializing it. So, it really depends. But I do think that we have some that are already there. So, part of our $400 million is from tools that were from the front end, a fair amount of those, probably half of those, actually, and some are process capability from SPTS. So it's really, those are examples where we have it. And then also the case is some of those tools need to be upgraded to the later specifications as customers move forward in technology. So that's why, you know, net-net, it's a positive, it's a growth segment for us. We think it'll continue to grow. Bryn talked about the growth from last year, and it was a big driver for, you know, going back in time for the Orbitek acquisition was our belief that packaging opportunity was going to continue to grow. So that's where we are on it. But it's very tool-specific how long it takes to modify. We also have new products that are going to support the substrate transition as the substrate integrates into the package. On the inspection side, as the lines and spaces shrink in the connecting layers, it will drive the need for more capability for more advanced inspection and metrology systems. And so anytime you add sensitivity, you add capability, there tends to be a throughput or a volume hit. So it creates an opportunity for us to sell you know, higher ASP systems that have more capability, but if you're going to maintain the same sampling rate, then you'll need more systems. So it's all a factor in terms of all these factors are all positive in terms of how we think about the long-term opportunities.

Super helpful. And then my second one is just kind of on the tidbits that you've given for the year. So you said second half over first half, high single digits. And you talked about kind of the mix of foundry logic being similar to calendar year 23, about that 70%. If you take those clues, you obviously see some really strong growth in memory in the second half. Could you just help us with any color? Obviously, from March to June, your DRAM percentage went down a bit in terms of its contribution to memory. But In the second half, how should we be thinking about the DRAM and NAND growth profiles? Thank you.

Yeah, I think – I don't think it's going to – you know, it'll be a little bit stronger potentially in the second half than the first, but not much because, like I said earlier, that expected DRAM investments in China I would expect in the second half to be lower than the first half.

And as a reminder, if you'd like to ask a question today, please press the star and one keys on your telephone keypad. We'll take our next question from Srini Parjui with Raymond James. Please go ahead. Your line is open.

Thank you. Sorry, guys. I joined a little late, so these questions have already been asked. I apologize. But I think last quarter, Bren, you had a customer push out that kind of impacted your revenue for the year. I'm just wondering if there's any change or any update to that customer, you know, if you're including that in the current year's guidance.

Yeah, it affected the March quarter as we had some shifting around. Frankly, it affected a little bit of the December quarter and the March quarter. But the shifting around to make the December quarter work, obviously, the shortfall was in March. So, I don't think anything's really changed. I don't expect to see much activity from that customer until we get into 2025. I mean, things could change. we could see some surprise. But right now, at least from a planning point of view, we put it in 25. And if it pulls in, great. We can support it.

Got it. Thank you. On the two nanometer, you know, I think your foundry customers are transitioning aggressively to get all around. Obviously, that helps you. But at the same time, I think the EUV layer count is going to be somewhat flattish. So I'm just wondering what sort of impact kind of, you know, it will have on process control intensity if you go to GA and keep the, I guess, you know, EUV kind of flattish in terms of layers, you know, should we expect any impact or is it kind of a non-event for you? Yeah.

It's an event. You think about the dynamic. Our customers don't want to add process control intensity if they can avoid it. They also want to ramp and yield. That's the trade-off. In the prototyping stage or the early pilot, they inspect more and they measure more in order to debug the process, if you will, and ramp it. The question is, how much do they have to maintain when they ramp? That's really what drives process control. They're definitely using more capability at the front end, and there's some areas where they're going to have to increase their sampling or measurement to keep up with the additional challenges of a smaller design role. And there's also some new capability they have to bring because of FinFET. And so, we've talked in the past about modifications of a Gen 4 optical inspector to be able to support the FinFET, but it's not the only change in that process. So, the EUV layers matter, but the process integration challenges are still going to be there. When we model it, though, we do see an increase. We have different scenarios for how much process control intensity will go up, but it's consistent with we think there'll be a modest increase in the overall process control intensity for the leaders who have been successfully doing three nanometers. Anybody else that tries to jump to that node, though, will see a dramatic increase in their process control intensity because they don't benefit from the learning of having done three at volume. So, in aggregate, depending on how many people are supporting it over time, it will drive our intensity up for our customers. We're also expecting a more robust design environment certainly in the first few years than what we saw with three nanometer and likely a steeper ramp. So in addition to the challenges of just the gate-all-around architecture, what it means from inspection, but also metrology, but also, you know, more volume earlier, steeper ramp, and a more robust design environment, which will challenge the customer's process integration more than you see when you just have, you know, a few designs. So we're encouraged on a number of fronts. Got it. Thank you.

And we'll take another question from Krish Sankar with TD Cohen. Please go ahead. Your line is open.

Yeah, hi. Thank you for my follow-up. Rick, I just had a follow-up on gate all around. Clearly, you have exposure to your central optical inspection and the metrology for high-key metal gates. Is there a way to quantify what do you think a gate all around revenues could be in calendar 24?

Yeah, I'd be making it up, Krish. I mean, we haven't... We don't really look at it that way. We do think about what is the node requirement. From that standpoint, if you think N2, you'd attribute it all to gate all around. We think about node intensity for process control and blended. As I said in the prior answer, that's slightly up. but we don't have a specific number specifically around gate all around. But obviously, that's the big driver for the change and why customers are pushing for M2. And we don't know yet, but that's consistent with the 2026 model that we've had where we see rising process control intensity or corresponding increase per share for KLA.

Got it, got it. That's helpful. And then just like if I could squeeze one more in – Just kind of curious about your Gen 4 lead times. I think last time we said it was like seven to nine months. Has it changed? If you assume that, you know, mature nodes are kind of slowing, China might moderate as the year progresses. Is there a view that the lead times are coming in or is it still like seven to nine months?

Well, Gen 4 is highly demanded across nodes. It's a very configurable system. And in fact, we recently introduced a non-upgradable version specifically for gate all around. So it's a product that has a lot of extendability. It's been challenged in terms of supply, the ability to get supply to meet demand. I would say, and we will see some increase this year in revenue from that system, which hurt us last year just because we weren't able to set any incremental supply around key components. I'll see that increase this year, and so that will help. I still think lead times are probably in the 18 to 24-month range for that product, although we do a lot of juggling to make sure that we're in position to support all of our customers. But it has demand on multiple fronts, and I think it's you know a testament to its extendability and the favorability of a broadband system which has you know the the the ability to scale the the plants to meet very different inspection requirements across multiple nodes thank you thank you yeah thank you christian and i do think chris you were referring to what we said about gen 5 the seven to nine months a quarter ago brand so i don't know on gen 5 if there's any change there but gen 5 is in the same ballpark still the same ballpark perfect All right, so that brings us to the end of our call. We want to thank everyone for your time and attention. We know it's a very busy day. With that, I will pass the call back over to our operator to conclude.

This does conclude the KLA Corporation March 4, 2024 earnings call and webcast. Please disconnect your line at this time and have a wonderful day.