KLA Corporation

Good afternoon, everyone. My name is Beau, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation's September quarter 2024 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 star 2. Please limit yourself to one question and one follow-up. Lastly, if you should need operator assistance during the call today, please press star zero. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead, sir.

Welcome to our earnings call to discuss the September 2024 results in the December quarter outlook. I'm joined by our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results released after the market close and available on ir.kla.com along with the supplemental materials. Today's discussion and metrics are presented on a non-GAAP basis unless otherwise specified. All full-year references we make 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 our SEC filings, including the most recent annual report and quarterly reports on Forms 10K and 10Q. Our comments today are subject to risks and uncertainties reflected in the disclosure of risk factors in our SEC filings. Any forward-looking statements, including those we make on our call today, are also 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 start with some introductory comments, followed by Brent with financial highlights and our outlook. Before I turn the call over to our CEO, Rick Wallace, I wanted to provide a save-to-date for our 2025 Investor Day. It will be held on the morning of June the 18th, 2025, in New York City at the NASDAQ Market Site. We will provide more details closer to the event. Now over to Rick. Thank you, Kevin.

HALA's September quarter exhibited strengthening customer demand and solid execution by our global team. Results exceeded expectations and delivered continued relative outperformance with revenue of $2.84 billion, non-GAAP diluted EPS of $7.33, and GAAP diluted EPS of $7.01.

All results came in at the upper end of their guidance ranges. As expected, we are encouraged by the signs of a strengthening leading-edge logic and memory environment for our top customers, and we remain confident in our plan for steady improvement and continued growth in 2025. Porter saw a number of highlights, including strong double-digit sequential and year-over-year revenue growth. In Foundry logic, the continuation of scaling and incorporation of new technologies and slowly rising capital intensity continue to be a long-term secular tailwind. In memory, technology development investments supporting AI and high-bandwidth memory in an improving supply-demand environment positioning memory makers for return to growth for the wafer fab equipment industry in 2025. This quarter continued to demonstrate growing customer adoption of KLA's advanced packaging portfolio, and we remain confident that revenue in this category will exceed $500 million in CY24 and continue to grow in CY25. We also continue to see AI as an important driver and enabler of our business. Growth in demand for AI chips supports rising process control intensity, which benefits KLA meaningfully. Additionally, KLA was an early adopter in using and incorporating AI into our products and designing our computer architectures to leverage GPUs. KLA's future product enhancements will leverage AI to improve the performance and customer cost of ownership of our leading edge systems. Daily service businesses grew to $644 million in the September quarter, 5% sequentially and 15% year-over-year, making this the 49th consecutive quarter of growth on a year-over-year basis. Finally, the September quarter was strong from a cash flow and capital returns perspective. Quarterly free cash flow was $935 million. Over the last 12 months, free cash flow was $3.2 billion, with free cash flow margin of 31% over the same period. Total capital return in the September quarter was $765 million, comprised of $567 million in share repurchases and $198 million in dividends. Total capital return over the past 12 months was $2.6 billion. We are confident the KLA operating model positions the company well for sustainable outperformance relative to the industry over the long run. I will now pass the call over to Bren to cover financial highlights and our outlook.

Thanks, Rick. KLA's September quarter results demonstrate market leadership combined with the consistent execution and dedication of our global team. Quarterly revenue was $2.84 billion, above the guidance midpoint of $2.75 billion. Non-GAAP diluted EPS was $7.33, and GAAP diluted EPS was $7.01, both above their respective guidance midpoints. Gross margin was 61.2%, slightly below the midpoint of the guidance range, as the system's product mix was modestly weaker than expected. Operating expenses were $560 million. Operating expenses were comprised of $322 million in R&D and $238 million in SG&A. Operating margin was 41.5%. Other income and expense debt was a $41 million expense with the downside from guidance attributed to the mark-to-market effect of a strategic supply investment. The quarterly effective tax rate was 13.2%. Quarterly non-GAAP net income was $988 million. GAAP net income was $946 million. Cash flow from operations was $995 million. And free cash flow was $935 million. The breakdown of revenue by reportable segments and in markets, major products and regions can be found within the shareholder letter and slides. Moving to the balance sheet, KLA ended the quarter with $4.6 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 major rating agencies. Our debt levels are expected to decline in the December quarter as the company retires its November 2024 bonds at maturity. Moving to our outlook, in the near term, the industry outlook remains positive for our business. Our quarter-to-quarter performance is also consistent with the views we articulated beginning of the year. For calendar 24, supported by recent customer announcements, our expectation is for the WFE market to increase modestly from the mid to the high $90 billion range for the calendar year, based on our internal analysis of reported results and guidance across our peers and customers. Our perspective on calendar 2025 expectations is mostly unchanged from what we articulated last quarter. While we will not be overly specific on expectations for next calendar year until we report in January, we do continue to expect another year of growth, fueled principally by growth and investment in both leading-edge Foundry logic and memory, mostly DRAM, offset by lower China demand as customers absorb the equipment investments made over the past couple of years. Given KLA's business momentum, market share opportunities, and higher expected process control intensity at the leading edge across all segments, we are confident we can maintain our relative WFP market outperformance in calendar 2025. KLA's December quarter guidance is as follows. Total revenues expected to be $2.95 billion, plus or minus $150 million, Foundry logic revenue from semiconductor customers is forecasted to be approximately 76%, and memory is expected to be approximately 24% of semiprocess control systems revenue to semiconductor customers. Within memory, DRAM is expected to be about 76% of the segment mix, and NAND the remaining 24%. Non-GAG gross margin is forecasted to be 61.5%, plus or minus 1 percentage point. We're up 30 basis points sequentially at the midpoint, on slightly higher revenue and more favorable product mix expectations. Non-GAAP operating expenses are forecasted in the December quarter to be approximately $580 million, as we continue to make important R&D and scaling investments to support expected revenue growth. Looking ahead, we expect approximately $15 million in incremental quarterly spend and operating expenses over the next several quarters, supported by our product development roadmap requirements, revenue growth expectations, and further balanced against our 40% to 50% incremental operating margin leveraged business model over the long run. Other model assumptions for the December quarter include non-GAAP other income and expense net of approximately a $33 million expense. GAAP diluted EPS is expected to be $7.45 plus or minus $0.60, and non-GAAP diluted EPS of $7.75 plus or minus $0.60. EPS guidance is based on a fully diluted share count of approximately 134 million shares. In conclusion, we are guiding to our third consecutive quarter of sequential revenue growth and improving market demand at the leading edge and expect annual growth to continue in calendar 2025. KLA remains focused on delivering a differentiated product portfolio that addresses customers' technology roadmap requirements and drives our longer-term relevancy and growth expectations. ALA's focus on customer success, delivering innovative and differentiated solutions, and operational excellence are what drives industry-leading financial and free cash flow performance and allows us to return capital consistently. The return of semiconductor scaling leads to increasing complexity in new technologies that have strengthened our confidence in the rising importance of process control for enabling new technology advancements. is not just an improving time to results and process integration at fab ramp but also an optimizing yield across high volume manufacturing environment with high semiconductor device design mix in addition our service business continues to increase its relevance as system lifetime increases and customer expectations for increased tool availability and performance is a growing long-term tailwind this bodes well for kla's long-term growth outlook and industry demand trends favoring KLA are continuing to improve. In alignment with this, KLA's business is well positioned, and the long-term secular trends driving semiconductor industry demand and investments in WFE are very promising. That concludes the prepared remarks. Let's begin the Q&A.

Thank you, ladies and gentlemen. Thank you, ladies and gentlemen.

Oh, no, sorry. Go ahead, Rob Reiter. I was just going to say, please provide the instructions.

Certainly. Thank you, Mr. Kessel. Ladies and gentlemen, 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, please 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. We'll go first today to Vivek Arya of Bank of America.

Thanks for taking my question. Vicky, I'm curious. There's a lot of excitement about the leading edge, but how do we square that to the fact that only the leading foundry appears to want to increase spending, but the next two want to cut spending? So is this TSMC spending good enough to drive up leading edge investments by the double-digit personal pace that everyone is looking for? I'm just curious, this excitement, is it broad-based or is it just based on one foundry's desire to increase spending?

Thanks, Vivek, for the question. It's not a foundry question. It's a customer of the foundry's question. I think they would obviously, you know, if there were more suppliers of leading edge, I think that the business would be spread across them. But right now, there's one supplier in the leading edge, and what they're seeing is significant demand above, as they indicated in their call, what they anticipated. And a bit of the, we anticipated two nanometer demand to be strong, but the fact that there's additional demand for three nanometer lead us to some pretty robust forecast through the rest of this year for the bookings and also into 2025. So I don't think it's a function of the number of players. I think it's a demand driver. And as you know, it's across a number of players because it's not just in support. I mean, AI is the fastest growing segment, and that's both for training chips, but also inference chips. And that's really driving this additional demand that we're seeing. In fact, the other thing I would add is we sit very close to our customers, and they all approach process control in different ways. But generally, we want to make sure that we're collaborating and close enough to them that we have a pretty good understanding of the overall demand picture. So we think that in terms of assessing what each customer is doing in terms of the demand that they're going to satisfy, that Rick articulated, we feel good that we have our supply that is supporting that aligned with that demand expectation.

Thanks. Very helpful. And for my follow-up question on your China exposure, about 42% in September. Curious what you are expecting or what's baked in for December. And maybe just a broader question is, can you maybe dissect what the exposure is in China? You know, how much is product services, you know, how much is resilient or how much might be exposed to any potential restrictions or overbid? Just how do you think about China for the next several quarters, whether it's on an absolute basis or whether it's on a percentage of sales basis? Thank you.

Well, Vivek, understanding China right now this year, it's important to keep in context what happened in 22 and 23 and 24, right? So if you go back to 2022, we took a lot of orders for Greenfield projects and had supply constraints and strong demand from our other non-China customers. that effectively limited what we were able to produce in 22. And we focused on our more strategic longstanding customers. And as we moved into 23 and 24, because a lot of that activity was Greenfield, it wasn't necessarily being put in place to react to supply and demand dynamics it was basically new fabs that were starting up and so while there was funding available those customers were able to step in and fill the void in 23 and 24 that came from our other customers pulling back pretty meaningfully so as we look at 20 so it's been at elevated levels for for a couple of years um if we look at the fourth quarter as I've said before I thought we see the percent come down. And it looks like it is coming down to somewhere in the mid-30s for the fourth quarter. And then so if you look at 2024, it's been elevated into the low 40s. as a percent. And so when we look into next year, expecting some digestion next year, I would expect that to drop somewhere down to around 30% plus or minus a couple of points or so moving forward. I'm not going to get into the various aspects of the mix from a service, other than saying just from a service point of view, it's a less mature market. So service is a lower percentage than our corporate average percent as a percent of revenue. So hopefully that's helpful, but that's all I'll say on that front. As it relates to export controls, you would be getting this question for over a year now in terms of when and if and how much. And so I don't want to speculate on the hypotheticals that are out there and how to think about it. So once we have clarity, if something happens, we'll assess the impact and we'll have more to share with you. But for now, I don't want to speculate on anything more than that.

Thank you. Thank you. We go next now to Harlan Sir at J.P. Morgan.

Good afternoon. Good job on the quarterly execution. You know, on your qualitative comments on the 2025 view, right, they're calling out growth for next year. You said not much change relative to your view 90 days ago. I assume that's in terms of maybe total dollar spending. You did call out lower China revenues next year, right, versus your view on stable previously. So should we interpret the downshift in China as being more than offset by incrementally better spending on advanced foundry and logic and memory on the strong demand trends that, Rick, you articulated earlier?

Yeah, I think we started with, just go back to what we said a quarter ago, a view of stability. Maybe it was going to be up a little bit, down a little bit, but not as clear. I think what we said today, I would expect that it'll be down some, and we think it's being offset by the leading edge demand that Rick referred to. So overall, our views on 25 haven't really changed. Yeah, I mean, I would like to think about at the exit rate, that we're talking about for Q4, that isn't, you know, if you keep that rate for 25, that's a higher number. So you could have China be at a similar dollar level, but a lower percentage.

Got it. And then on your process control business, right, if I look at, you know, wafer inspection and Patterning and metrology, right, up 10% year-over-year first nine months versus a year ago. Now, within this, inspection is up 18% year-over-year, so very, very strong, right, for the first nine months of this calendar year. Patterning, metrology, down about 5% right over that same period of time, but Looking into next year, given the patterning and metrology intensity increases on things like gate all around, backside power distribution, advanced memory, would you anticipate your patterning slash metrology business to see an acceleration of growth as we move into next year?

Yeah, that's our current view. Metrology is very closely linked to process tool purchases because you're monitoring the films, you're monitoring overlay and so on. So patterning tends to scale up and down with more capacity investments. I think given expectations for design starts, you're also going to see the reticle part of the business increase next year as well. So I would expect that we'll see growth in metrology and reticle inspection into next year. What's been driving inspection is a lot of this N3 activity, given some of the yield challenges that customers have been facing. Obviously, N2 is starting to pick up here in the fourth quarter. And then, of course, in advanced packaging, what we've seen, an inflection of growth in our inspections offerings for that part of the market as well. So that's been a driver for some of the incremental growth of inspection relative to patterning. Yeah, one other thing, Harlan, I think if you look at capacity constraints, we were more gated on lead times of subsystems such as optics for the inspection business. didn't really have that phenomena in metrology, so those tend to flex as Brent's had more with production. So we still have good backlog when it comes to the PVP platforms and an increasing demand environment for those. So we're also seeing additional capacity coming on to support the growth in 2025 so that that will allow the PVP product lines to grow.

Great insights. Thank you. We'll go next now to Joe Quattrochi at Wells Fargo. Yeah, thanks for taking the question.

I was wondering on 2 nanometers, you think about just the capital intensity process control. Is there any color that you can really share there and how we think about sample rates relative to 3 nanometer? Sure. What we're seeing right now is what we expected on 2 and what we're seeing a little bit on 3 is there's more process The process windows are being squeezed even further, so there are more inspection points being added. So when we think about how many steps and the places that people are inspecting, those are going up. So we have a run part analysis of what it looks like, and the tools is a little take. What happens is, let's say you go from three to two, you might not dramatically increase the number of EUV layers, for example, but there is some increase. And associated with that are more places where you have to sample. Initially, when you're in debug, you have a higher number, but then you see you're looking at different defects. So you might even be looking at higher sensitivity settings, which means you need more capacity to support it. So we haven't fully quantified because when we work with our customers on that, we're actually looking for efficiency. So you debug and then you see what is left that I have to sample at a higher frequency. to be able to ensure process stability during ramp and production. But the initial expectations are, and what we're seeing is that two nanometers will be higher, more sampling at higher levels, with more systems, with more configurations, driving higher process control intensity, and that's the trend that we're seeing. The other thing is, as Bren mentioned, because there are more, if you think about what's coming, there are going to be more designs at these advanced nodes than we maybe a few years ago might have imagined, there's higher variability, so higher mix. And higher mix drives a need for more sampling as well. So, Joe, on architectures, when architectures change, it tends to drive process control higher. We saw that with FinFET. If you go back to the last local high of process control intensity or KLA share of WFE. So, as we transition here to a new architecture, it will create not only are there additional patterning requirements from a metrology point of view, more layers deposited, but And that creates opportunities for us on the film measurement side. You also have new defect mechanisms because of the nature of the structure. So you have these buried defects where there's residue that's left over that's very hard to inspect. And so we've introduced new capability for that very N2 or gate all around specific defect type. And so there's an increment of opportunity there beyond what we would normally expect to see in a no-to-no transition. So there's a lot of opportunity out there. And if we can execute, we feel very encouraged by what's in front of us. Well, that's helpful detail. As a follow-up, I think in the past, you guys have kind of tried to help us how to think about growth half on half, second half versus first half. And I guess as we look into the first half of 2025, should we be thinking about a similar kind of level of half on half growth as we've seen kind of second half versus first half in 2024? How should we think about that? Well, I would say to Rick's earlier point that based on our expectations into Q1, we see a pretty stable environment. from the current run rates as we move forward. So I won't get into the full half at this point. We'll have a lot more to say about our views on 25 when we report out for the December quarter of January. But certainly as we look at the March quarter today, I feel very good about the overall stability and the run rate levels of the business.

Thank you.

We'll go next now to C.J. Mews of Cantor Fitzgerald.

Yeah, good afternoon. Thank you for taking the question. I guess maybe to follow up on that last question in your comment about stability into March, I believe two is moving into HVM and Q1. And you talked about, you know, expected strength from advanced packaging. And when I look at your founding logic business in the current quarter where, you know, Taiwan actually fell sequentially, looks like you're seeing, you know, some good business from Rapidus and at least currently Intel. So can you speak to perhaps the breadth of foundry logic that you're seeing, you know, early 2025? And, you know, I would think that would be a complete offset to slow down in China. We'd love to hear your thoughts.

Yeah, I would expect given the, I'll say this, just given the the normal ramp schedule that our leading foundry customer executes against. Normally, you'd start to see those tools start to shift in volume in the first part of the year.

Okay, great. And then a gross margin question for you. It looks like semi-process control gross margins dropped maybe 150 bits sequentially in September and You know, you attribute that to mix. So, you know, as we look forward, how should we think about those margins kind of normalizing and what kind of run rates should we model into and through 2025?

Yeah, mix is always a factor, CJ, for me. So I would say that normally our incremental margin model suggests about a 60% to 65% incremental. The mix variability can cause a movement across quarters, but if you look at it over longer periods of time, it tends to stick pretty closely to that. The packaging opportunities have been great opportunities from a growth point of view, but currently we're selling some lower end systems into that part of the market, so it is affecting the mix a bit, although we're encouraged about the trend there for the need for more capability moving forward. Those kinds of issues, I would say that we're operating here in this, I'll call it 61.5% range. And at current run rates, as we sort of project out into next year, I think we're likely to be north of that versus south of that as we move forward. That's probably the best I can do.

Very helpful. Thank you.

We'll go next now to Tom O'Malley at Barclays.

Hey, guys. Thanks for taking my question. I just wanted to ask specifically on the NAND market. So you guys are coming off a really low base in September, but there's a bit of a debate right now, if you look out into calendar year 25, about where normal capacity is for historical NAND and where you're moving potentially to technology transitions and what that means from an equipment perspective. So I guess maybe the broader question is, you know, what are you seeing in the man market? Are you seeing intensity kind of pick up there? Are you seeing customers look to expand lines or are you seeing that technology upgrade as well? Just any comments on what is driving that man growth into next year and just your take on the market would be the first one.

Well, it's off a pretty low base. So, you know, as we think about next year, we would expect some incremental investment next year, but again, off of a very low base. Mostly what we're seeing is is utilization rates get better. We're seeing our customers' financial performance improving, inventory levels are improving, things like that. So we think that translates into some investment into next year. But we don't see it really growing a lot on an absolute dollar basis. But it is operating or coming off a very low level. So I think we're optimistic on some incremental business there as we move into next year. Yeah, the one technology trend that'll help process control intensity for NAND is the wafer-to-wafer bonding. But other than that, we're not really pushing the technology compared to DRAM or logic.

Gotcha. Super helpful. And then the second is just on the advanced packaging side. You guys spent a decent amount of time on the last call talking on the topic, and I think increasingly you're seeing the move to hybrid bonding kind of accelerate. So others are kind of saying 2026 timeframe, but are you seeing some opportunities in 2025? And could you just try to shape like the size of that business today and some of the opportunities that you're kind of reaching down? Some of your smaller competitors are kind of talking about seeing you in some of those areas already, but... Any comments there would be helpful as well. Thank you.

Yeah, you have development activity there, but we don't expect any move from a production point of view to the hybrid bonding as it relates to high bandwidth memory until probably at least into the 26, 27 timeframe. So what's really driving that part of the business for us is... you know, mostly on the logic side, although we're encouraged by some of the trends we're seeing in memory in terms of opportunity. HPM devices themselves create higher process control opportunities because not only do you have the silicon trade in terms of bits per wafer, if you will, but you also have higher reliability requirements. You have the logic circuitry that has to be processed You've got a stack to die. So there's a lot of opportunities within that that we are encouraged by as we move forward. So one of the truisms in our business for inspection metrology is what is the cost of the inspection at any step relative to the cost of that step? And what I mean by that is if you go back in time and they were making wafers for solar, we never saw there being much opportunity because the cost of the wafer was just not very high, so it couldn't support much inspection. You go to the other end of that and you have the cost of an EUV reticle is so high, and the cost of failure is so high, there's a lot of money spent on the inspection. The biggest dynamic that changed in advanced packaging is the relative cost of that step and the fact that the cost can support a much higher level and a need for a much higher level of inspection capability. So our view is we did not go down to that market. That market came to us because it got much more challenging. and the need for higher level inspection if you think about HBM and you think about what's at risk for our customers. So they recognize that and they're investing much more heavily to ensure that those steps are clean because the cost of failure there is so high. And that's a big part of what's driving capital intensity and our product portfolio has moved to some of those dynamics and those will play out over the next several years. But we're already seeing early evidence of that. And the earliest indication of that was when our customers started talking to us about bringing in our front end tools into the back end because of these challenges.

Thank you. We'll go next now to Srini Prajuri at Raymond James.

Thank you. Hi, guys. So my question is on N3 versus N2 demand. I know you said both of them were strong. I'm just wondering, in terms of the near-term upside you're seeing, is that more coming from N3? And if so, I'm just curious if N2 is also tracking in line with your original expectations.

Yeah, I would say that what we've seen over the course of the second half of this year, 2024, has been more N3 upside. We're starting to see pilot line investment with some shipments this quarter for N2, and most of what's driving next year is very N2-centric.

Okay, got it. That's helpful. And then maybe you can speak to the visibility, especially as, you know, China comes down next year. I'm just wondering if that has any impact on your bookings and RPO and just in general your level of visibility as you go forward.

Well, so the RPO has flattened out. We'll report and you'll see the specifics on it. But it was, you know, more or less flat quarter on quarter. Expected probably to increase a little bit next quarter or in the December quarter. So I would say that in general, lead times have generally been coming in. Some of that has been, as Rick mentioned earlier, new supply or new supply capability. So we can actually start to ship some tools that we've had some supply constraints relative to the demand. It really, I would say that if you start to see some of the Greenfield projects will cause some of that to pull in, right? As Greenfield gets pulled back as some of the digestion's happening, we're waiting for second rounds on some of those projects, that the need to get into the queue earlier is less urgent. Although when you have new customers, they want to show commitment and so they typically will and want to ensure delivery time. So they'll typically try to give us orders and make sure we're planning for them further ahead. So I would say in general, lead times are generally pulling in. And we've seen the RPO tick down, but now it looks like it's starting to turn around a bit, see how that progresses as we move through the rest of this quarter and into next year.

All right. Thank you. Thank you. We'll go next now to Chris Sankar at TD Cowan.

Thanks for taking my question. First of all, I want to clarify something, Brent. You mentioned that China could go from 40% to 30% of sales next year, but dollar value remains the same. A, is that true? If so, then your overall revenue should still grow pretty strongly compared to what WP is expected to be. I'm just trying to figure out how to think about those two metrics.

Yeah, I think it's a transcendent. We'll see how the year plays out. But but you know, I would expect you know it could be the same. It could be a little bit less. I think you know what we were trying to say earlier is is that investment levels have been pretty stable, so we'll see how it plays out. It's a little bit difficult to see into the second half of the 25 from here, so I was just trying to give you some sense of directionally where where things are moving as we as we see next year from a percent of the overall.

Got it. And then just to clarify one other thing, you kind of mentioned about how the foundry demand is improving on the leading edge, which kind of makes a ton of sense. Also, there's some China. And then on the D-RAM side, I think you mentioned in the past, process control intent is going up from 10% to 11%. Is that helping you next year, or is most of it already baiting this year?

No, I think it's helping. There's a lot of momentum from certain customers, particularly as it relates to advanced DRAM and high bandwidth memory that's creating opportunities for us. So we're encouraged with, and as we said earlier, or I said before, is I'm encouraged by an expectation to see more DRAM investment next year and expect to see stronger relevance of KLA and process control in that RAMP. So if I go back to my comment about the cost of the semiconductor and the value of inspection, if you think about this trend for AI, it's definitely playing out in DRAM and in packaging. HBM is a more expensive technology. It's more critical. It's larger dye. These are wafers that are going to have more EUV. And they also have less redundancy in them. So the combination of those factors is what will drive our customers to increase their intensity around process control. Just EUV is a good example of a pretty significant application we have with our Gen 5 is print check on EUV and that dedication to having using a Gen 5 to verify a reticle as it prints has been part of the driver of the success of BBP. So if you think about the trends overall, we don't quite know how it's going to play out for advanced DRAM, but the trends are very positive at this point.

Got it. Thanks, Rick. Thanks, Brad.

Thank you. Thank you. We go next now to Joseph Moore with Morgan Stanley.

Great. Thank you. On the topic of export controls, you sort of said you don't want to speculate until we hear it. I guess I'm just curious, how do you expect that to get conveyed? Have you had preliminary conversations? You know, it sounds like there might be more of an entity list focus this time around, you know, where you get surprised. And when you, you know, you're giving a framework for next year and has had a much lower framework, you know, is how much of that is informed by what you're hearing that they might do versus just, you know, kind of guesswork at this point?

Well, so if you go back to the 2000, two years ago, there was some notice, but I think for the government itself, they have their own process, which involves multiple number of players. There's not one person or one group that decides. They have to go through a reconciliation across their own agencies, and also when they're trying to do multilateral, they're talking to other places. So I think truly nothing is decided until it's announced, and we don't get much head you know, heads up on when that's actually going to happen. So that's why we keep saying we don't know, we can't speculate. There's plenty that's been written. But if you read all that's been written, this thing would have happened four times in the last nine months, right? So clearly something is causing it to not get decided. And so we're not going to speculate on what it does. When it comes to what our peer companies have said, I think our forecast for 2025 hasn't changed and it's much more in line with where others are now than what it was so our view has not changed nothing about our forecast for next year has really changed in the last several months as we've talked to our customers and we envision what kind of investment environment there's going to be yeah that's very helpful thank you and then within your china business i know you had kind of catch up on the vram side

that was causing DRAM to be elevated. My perception is that's, that's back, is it more driven by foundry at this point?

You started to break up there a little bit, Joe. But, yeah, I think what you were asking about was DRAM memory moving forward versus Foundry Logic. And, yes, there was some catch-up investment that happened. I would expect less memory, memory to be down more in terms of the overall, I think it's going to be down. There's parts of the market we don't have access to. But in general, in terms of our business, I would expect Foundry Logic to – you know, to modestly adjust, but still to be fairly strong. And I think infrastructure more or less, you know, continues, but that's more of a radical statement than a wafer statement.

Okay, thanks so much.

Thank you. We go next now to Charles Shee of Needham.

My first question, I remember a quarter ago you talked about not just a three nanometer for second half this year, but also next year. But we'll look at all the headlines about two out of your three nanometer customers. It doesn't look like there is three nanometer upside from them, but the one last customer, actually the leading one, they did not rule out more of the 5 to 3 nanometer conversion even for next year. So my question really is, are you still seeing the 3 nanometer upside for 2025 given the current visibility here?

So we had this question earlier in the call. But yes, 3 nanometer continues to be strong. And as we said earlier, we would expect 2 nanometer to be a big driver into next year. But there's still 3 nanometer activity that has been stronger than we anticipated six months ago.

The other thing I want to ask you to make a clarification or maybe provide some color. Your reported North America revenue for the September quarter seems like pretty high. I go back probably the last seven, eight years. It looks like it's probably highest the number of revenue you get from North America. Might need to provide some color. What's driving that big uptake in the September quarter?

Yeah, so it was stronger, and it's, you know, more leading edge-centric. I'll say that. Thank you.

We'll go next now to Atif Malik at Citi.

Thank you for taking my questions. First on China, is it possible to understand how big your vapor and reticle inspection business is in China? Because I believe that business is a bit different from your peers that are facing maybe restrictions.

Yeah, it is different. We're exposed to those investments. We haven't disclosed anything. you know, the actual amount, though. But I would say, you know, over the last couple of years, I would say it's been somewhere between 25% and 35% of our China systems business. So it's decent, but it's, you know, the preponderance, obviously, is our semiconductor customers.

I understand. And then, Brent, on the services business, Given the scenario of a China demand coming down like you laid out, will there be an impact on your services growth expectations of 12% to 14% longer term?

Well, we're pretty bullish on service and service opportunity, and we're trending closer to the top end of that range than the bottom end. We're seeing really dynamic trends in terms of useful life and new value offerings that we have within our service model that is driving incremental service demand. And, of course, at the shipment levels, you know, the new tools going out, high conversion rates, ASPs generally are higher, which drives, you know, contract pricing growth. That's part of it, but also the extending useful life. So as we've said before, it's a – it's a high mix high complexity relatively low volume business there's not a lot of redundancy customers have very high time expectations and so they run the tools at very high levels they have matching requirements across the tools so these tools are the eyes and ears in the fab and as a result of that customers uh ensure that that they're operating and so that drives our service model that drives the contract stream which is 75 plus of of revenue And, yes, there are dynamics around FX depending on, you know, some service businesses priced in local currencies that can affect the revenue line. And if you did have control, those controls affect, you know, service opportunities there. But net-net, we still feel very comfortable with our long-term model and feel like we're trending towards the high end of the model versus the low end.

Thank you.

Thank you. We go next now to Timothy Arcuri at UBS.

Timothy Arcuri Thanks a lot. Rick, I just want to be kind of clear about how much handicapping you're doing for the export control. It sounds to me like you're not really handicapping. much at all, and you're just sort of waiting for it to get announced, and once it gets announced, then it'll impact your numbers as it does. Is that fair? Because LAMC was pretty explicit that they are, you know, they have a base assumption as to what it's going to look like, and that's, you know, handicapping their guidance. Is that not the case for you, or are you making a base assumption for the guidance as to what the exports will look like?

Well, so Tim, I'll take the first part. So as it relates to guidance, and how we're thinking about the fourth quarter know we have a guidance range and i would say that as we contemplate all the scenarios and of course we have integer issues in terms of the size of our tools and so on from an asp point of view as we contemplate all the various scenarios we're comfortable with the guidance range that we provided for the quarter as it pertains to long-term impact of something that may or may not happen we'll have to assess you know what it means in terms of you know what we have in backlog what's the forecast How do we look at those customers and their investment plans and so on? So we won't have any detailed information until something happens, if it happens. But as far as it relates to near-term guidance, I think we feel comfortable with the guidance range we've provided.

Okay, Brent, thanks. Now, I guess just the math on next year. So, you grew revenue like mid-30s this year for your China revenue. It's up mid-30s. Of your film peers, one grew 20%. The other one's barely going to be up. And I think China, you know, WP's up about 20% this year. So, you're up a lot more than what you're film's peers are so it doesn't matter what you know i think china wfe is but when you think about how fast you grew china versus your peers do you think there's any pull forward of your china spending maybe because there's no alternative tool that's that's you know available from a domestic chinese uh you know company so you know why not to some degree stockpile your tools and move them around as these new entities can consolidate so i'm just wondering if you think that the hangover for you could be a little more severe uh than your peers

Thanks, Tim. There's different buying patterns in terms of timing. If you look at 2023, I think we probably are trying to business undergrew our peers. So, you know, if you look at any one year in isolation, it might drive you to a conclusion. It's not really accurate. I mean, I think, you know, if you look at 23 and 24, I think the general activity levels of investment have been, I think, relatively consistent across most companies over a broader period of time. Process control tends to, particularly in Greenfield, probably get adopted more heavily early on because customers are monitoring very, very closely, doing a lot of sampling. So it has as wafers start to grow, then less process control tends to diminish a bit. So there's probably some timing in terms of how they buy overall. And in 25, you know, given where we are today, and we'll see what overall WFE, but to the earlier comments, you know, we do expect some digestion in 25.

Okay, Brian, thank you.

We'll go next now to Toshia Hari at Goldman Sachs.

Hi, thank you so much for taking the question. I wanted to get your thoughts on customer mix going into 25 and any implications for margins. You mentioned China's down next year. Within leading edge Foundry and Logic, TSMC obviously is growing share and growing share within WFE as well. Does that or could that potentially pressure gross margins? I know your gross margin profile has been remarkably stable over many, many years, if not many decades. So, I doubt it. But we do get this question quite a bit from investors. So, curious how you're thinking about evolution in customer mix and implications for gross margins.

Yeah, our gross margins are not customer dependent. It's more product specific. So our margins don't vary across different customers. Obviously, customers that buy more tend to get volume related incentives. But beyond obvious volume incentives, there isn't any real difference between between customers or regions in terms of overall margin. Now, they all buy process control differently and have different strategies, and so all of our products carry different margins. They're not all the same. So that's one of the product mix factors that tends to drive some variability there. But, yeah, it's more about products than customers or regions.

Got it. Thank you. And then, as a quick follow-up, another one on China. I was hoping you could give us a little bit more context by application or customer type. I know you service a broader range of customers relative to some of your process tool peers. You know, customer groups like mass shops, wafer suppliers, more on the infrastructure side. I'm curious what percentage of total China those guys account for this year. And as you look forward into 2025, what kind of trends are you expecting? Thank you.

Yeah, early in the call, I mentioned the percentage is probably somewhere in the 25%, maybe as high as 30% a given year. But in general, from an infrastructure point of view, that's about the mix. And I would expect that to be mostly stable, but more radical centric than wafer in 25. So that's there. I think we mentioned memory earlier. I think memory comes down. meaningfully, partly due to the investments that have happened, partly due to just the lack of market access to some memory investment for us. And then I think Foundry and Logic corrects, but doesn't correct all that much.

Helpful. Thank you so much.

Thank you. We'll go next now to Chris Caso at Wolf Research.

Yes, hi. I guess the first question is on DRAM and, you know, kind of what you're thinking about for next year because, you know, it does sound like there's some divergence between, you know, different customer groups there. Most are expecting, you know, the China part of DRAM to be down pretty significantly. You know, can you give us a view of generally what you're seeing with regard to DRAM investment and kind of opinion from your customers as you go into next year and how that may have changed over the last quarter?

I would say it hasn't changed all that much. This year has been much more about our customers' businesses getting better, their financial performance improving, and that some of the investment has been somewhat isolated. We mentioned China earlier as an example. We've seen utilization rates improve, which has been good for our service business. And we would expect, as it relates to high-end DRAM and supporting high bandwidth memory to see some incremental investment next year. We'll have more to say from a quantitative point of view in terms of expectations around how much growth and how that translates back to KLA in the January call. But from just an overall context point of view, we expect to see a decent step up in DRAM investment next year.

Okay, great. My next question is something some investors are starting to ask about. And there are generally implications of what happens if leading edge tends to consolidate more than it has already. And perhaps that could be just because one leading edge customer has just grown so much more quickly than the others. um it's probably early to make that call right now i bet some of your customers would disagree with that but you know thinking about it now what would the implications be if we saw more more consolidation would that provide some pressure because just more suppliers than simply more suppliers and customers uh i i think it would depend on the drivers in other words in a world where there was a single

a driver for the leading edge, say take a microprocessor, and it had been made at multiple places, then you'd argue, sure, consolidation would be more efficient. What's interesting now is because there are so many advanced designs, the efficiency You need scale to have efficiency, and they already have that scale. So I don't think it changes that much. I do think you have some people still making investments to do leading edge, say in Japan, for example, and they're hoping to get part of the market. Our assumption is that it remains at about the efficiency, and the way we measure that and model for it as we think about what is the capital efficiency or the intensity of capital process control for that segment as we go forward and we're not really modeling it to go up significantly because there's a lot of players at the leading edge truthfully there haven't been i mean You know, for years now, we've really had primarily one major player at the leading edge. And so that's for most of the volume. So we're kind of already there. If that were to change, that might drive up intensity beyond what we're modeling more so than go the other way. Does that make sense?

Yep. Yep. That's helpful. Something we're thinking about. Thank you.

Thank you. And ladies and gentlemen, we do have time for one more question today. We'll take that now. from Blaine Curtis of Jefferies.

Hey, thanks for squeezing me in, and I feel bad being the last question and giving you this one, but I'm just kind of curious your perspective. You're one of the few that kind of does give an outlook for the market, so I appreciate that greatly. You know, we have had a handful of companies already report, I think, generally consensus is kind of double digits for everybody, and I don't think people have brought them down below that. I'm just kind of curious as you assess the market. I know, like I said, I appreciate you trying to put something out there, but a low single-digit growth, it just seems low. So I'm just kind of curious. One, I think your numbers are up double digits. It seems like your tone would suggest that that's maybe the right trajectory. So I'm just kind of curious here. you know where that outlook came from and you know i think in in general um you know do people have it wrong i guess i'm sorry what period of time are you talking about for 25 all right i mean the the the wc forecast that you put out i appreciate you putting it out right but you said high 90s no we haven't put one out blaine we we provided uh an update to our 24 view that we actually see 24 in the high 90s versus the mid 90s which is what we

what we said three months ago. So as it relates to 2025, we haven't actually put a number out there. The only thing we talked about is in reference to our own business and our views of current run rates, a reasonable amount of stability here moving forward.

All right. I apologize. That was my mistake. I just want to ask on the other one on the China outlook. So, you know, I thought you were talking about, you know, your kind of perspective in markets and China being down. I just want to make sure I heard you right. I know you had a couple of questions on this, so I apologize for the clarity there as well. But you said December down, I think you said 35% of revenue, so it would be down as a dollar amount. But then you said kind of flat revenue. kind of for the rest of the year. And I thought I heard you say that then it still dropped as a percent of revenue, which is another way you can kind of back into, I guess, what you're saying in growth. So I was just trying to understand if that's the mechanics of what you said. And, you know, I guess that's another way you can kind of back into double-digit growth. I know you're trying to put it out there. I just want to understand what you said.

Yeah, so maybe just, Rick, let me try to clarify our view. We said earlier in the year that we think one of the things we're doing is preparing for growth at the leading edge. that's where we think we are now we think the growth in the next year is going to come from the leading edge and that's both in memory as it pertains to high bandwidth a lot of the work that's going on it has to do with advanced packaging it has to do with advanced logic foundry the other business such as that we've had for example in china we don't know exactly but that's not leading edge that's mature business and we think it's too early to say but when we look to 25 and then look beyond to the The model we had for 26 or even what we'll start talking about 2030, we think we're getting back to the historical levels where the leading edge is what's driving the growth. It's the largest percent of the business, and the legacy will be a smaller percent. When exactly that happens, we don't know, but that's the trend that we're seeing. And what we're seeing is very good indications of strength in the leading edge. based on the design starts and based on the conversations with customers. In the last quarter, for the first time in quite a long time, our leading edge customers have been asking for acceleration, more systems than they'd originally planned for, and they want to make sure we can support them and install them. That's what gives us the confidence that 25 is going to be driven by investment in the leading edge.

Thanks for that.

Thank you, Blaine. And thank you, everybody, for your interest, for your time. I will be following up with many of you in the following days. And with that, I'll turn the call back over to the operator for any concluding instructions.

Thank you, Mr. Kessel. Ladies and gentlemen, that will conclude the KLA Corporation September quarter 2024 earnings call and webcast. Please disconnect your line at this time.