Q3 2020 Earnings Call
[music].
Ladies and gentlemen, thank for standby and welcome to the Kaylee Corporation third quarter fiscal 2020 earnings conference call. At this time all participants are in listen only mode. After the speaker's remarks, there will be question answer session to ask the question during the session you'll need to press star one on.
Your telephone keypad, if you report any pretty assistance. Please press star Zero Oh, no like many conference over to Mr., Kevin Castle, Vice President of Investor Relations with Kaylee Corporation. Thank you Sir Please go ahead.
Thank you Charlie and welcome to care lays earnings conference call to discuss the results of the March 2020 quarter and the outlook for the June quarter.
Joining me today as Rick Wallace, our Chief Executive Officer, and Bren Higgins, our Chief Financial Officer.
During today's conference call, we will discuss quarterly results for the period ended March 30, Onest 2020 that we released today after the market close them can be found on the Investor Relations section of our web site.
Today's discussion in our financial results and outlook is presented on non-GAAP financial basis, unless otherwise specified.
A detailed reconciliation of GAAP to non-GAAP results as in todays earnings press release, and the earnings Slide presentation posted on the Kaylee IR website, along with our newly published shareholder letter.
Our IR website also contains a calendar of future virtual investor events, and presentations corporate governance information, including our quiet period policy as well as links to kill <unk> SEC filings, including our most recent annual report and quarterly reports on forms 10-K and Q.
Our comments today are subject to risks and uncertainties reflected in the risk factors closure in our SEC filings any forward looking statements, including those we make on the call today.
Our also subject to those risks and kill a cannot guarantee those.
Forward looking.
These statements will come true our actual results may differ significantly from those projected in our forward looking statements I'd like to now turn the call over to our President and Chief Executive Officer, Rick Wallace.
Thank you all for joining us today and these extraordinary times I Hope you and your families are safe and healthy.
Kelly delivered strong results in the March 2020 quarter revenue finished at the midpoint of our guidance and non-GAAP EPS was above the midpoint of the guidance range, demonstrating strong demand from our customers and exceptional execution.
Across our global K. lay operations Calite performance in the March quarter highlights, how the company's operating model and long term strategic objectives provide a strong and resilient framework to guide our execution and consistently deliver on our commitments even during a.
The challenges.
In our prepared remarks today, we'll discuss how kayla is unique and sustainable competitive advantages helped us consistently deliver strong relative results, while showcasing the enduring strength of the Calite investment thesis. We were also discuss how kayla is positioned to confidently navigate to these periods of us.
Certainty to lead off I want to highlight calix priority.
Ladies and actions in addressing the coded 19 crisis, please turn to slide four.
First and foremost we are probably talk prioritizing the health and safety of our employees their families and our partners. We began taking proactive measures for our teams as soon as we saw the outbreak begin in China, including immediately eliminating non essential travel.
Canceling our annual sales conference, our global Engineering conference as well as the cash outlay lithography users warm add SPE.
A large percentage of our workforce is in China in the Pacific region, and we initiated a global crisis management team to ensure we had insight into needs and activities with the local levels to provide assistance as needed.
As information and shelter in place orders began to rollout across the globe, we prioritize Ralph.
Communications to our employees and we immediately instituted guidelines and policies to ensure that are essential workforce could operate in a safe conditions and we remain focused on that daily.
Specifically as our teams worldwide have largely had to shift to working from home, we worked hard to maintain our ability to support our customer.
Fares and this unique scenario and our manufacturing facilities, we have focused on creating a significantly reduced employee footprint.
We have rigorous social distancing, including guidelines, Dan health checks to allow our teams to be safe, while staying on track with shipping installing and delivering the essential services, we provide to our customers I'd like to personally commend our global team for their resourcefulness and commitment to executing under these challenging circumstances.
Our customer feedback has been outstanding on our businesses.
Is healthy and performing well under unprecedented conditions I'm really proud of the way we as a company have responded to these challenges.
Really refracts reflects the extraordinary strength of our teams doubted guided by the Calite core values of perseverance drive to be better high performing teams and indispensable to date.
For our global employee base, we recognize that this crisis also extends well beyond the disruption to their work life and we're focusing on continuing to ensure that we can support them in any way that we can.
I'd also like to note, we took action to support our communities by creating a Kaylee Foundation Global relief fund, where we committed $2 million in global relief efforts to benefit local nonprofit or.
Organizations, which are working in areas identified as having a high number of affected individuals.
And with those who are with high risk populations in Asia Europe, Israel in the United States above all we remain advocates for the holistic.
Health and safety of our employees as well as the communities they work and 11.
Turning now to slide five for some comments on the industry demand.
Environment.
No we were encouraged to see many of our customers in China returned to full production late in the quarter Cobot 19 has already impacted global economic growth the question.
Remains whether over as a result in a short term push out and global demand supported by substantial levels of monetary and fiscal stimulus from government.
Vince or whether it leads to long term demand decline followed by an elongated recovery.
Many economic Prognosticators.
It is now expected global recession as the effects of business disruption rising unemployment and reduction in consumer spending our felt across the globe global economy. So clearly, we're not predicting the depth or duration.
None of this impact until we have more evidence about the evolution of the crisis, but if there's one thing we do know it's the situation is rapidly evolving and it at this stage the full impact of cover 19 on consumer demand and the global economy remains unclear.
But from our point of view, although the semiconductor equipment industry is currently supply constrained customer demand remains strong in the first.
First half of 2020 into underscore that point Kaylee delivered record shipments of our semiconductor process control systems during the quarter.
In total backlog finished at record levels exiting March.
It's also important to point out that Kayla is most levered to our customers strategic R&D investments and their product roadmaps for leading edge technologies across downdraft logic and memory.
Okay.
Customers view these investments as critical to their long term growth strategies and their competitive positioning and therefore, they tend to be more resilient.
In the near and medium term, we see increase semiconductor device demands for enterprise and cloud applications in response to the surge and work from home in a pickup in gaming.
Now this is somewhat offset by a decline in some consumer facing end markets.
We also see strong results in our specialty semiconductor markets with demand driven by Fiveg infrastructure investment, particularly in China, we're fulfilling urgent request to supply products essential in Mems manufacturing and power technologies focused on.
A medical applications, such as smart thermometers, and ventilators, which are directly addressing the crisis.
It's clear healthcare will be one of the many industries, which will be profoundly impacted.
With the acceleration of technology implementation virtual capabilities in automation.
We know the Kayla is not immune to the impact. This crisis may have on customers capital investment plans over the next several months. However, we do draw some confidence from the history.
As control business grew at 1%.
Taking a step back even further it's worth highlighting the calite business has always declined less than the industry in periods of general contraction.
Also kaylee service business, which accounts for roughly one quarter of our total revenues today, and how strong and growing profitability also tends to demonstrate exceptional resilience throughout the business cycle.
Given the unique nature of our service model was 70% to 75% of the revenue being subscription like contracts.
Given the continued focus on innovation and execution combined with our market leadership and strong balance sheet Kayla isn't a very strong position to navigate this period of uncertainty NAND to capitalize on opportunities to drive long term growth for our industry once the conditions eventually normalized.
Even though we couldn't have anticipated what we're experiencing today, we believe that secular factors driving the industry demand in our 2023 revenue and EPS targets remains largely intact and they'll drive diversified growth.
With operating leverage over the long term.
Finally in many ways. The global response to covert 19 is accelerating secular drivers of the industry growth that we outlined in our 2019 Investor day and that gives us strong optimism that we and our industry will emerge from this crisis.
Stronger than before.
We always knew we had compelling secular growth trends a year ago, but if anything these trends will be stronger and more important going forward.
Whether it's the move to industry Ford auto or factory automation, the rising semiconductor content in automobiles remote medical diagnostics and care Fiveg.
The ubiquitous connectivity supported by continued datacenter build outs or new more capable hands that offerings. The new work from home reality or the overall acceleration of Digitization and move to the data era everything will depend on advancing semiconductor technology, the kaylee helps to make possible.
Please turn to slide six and seven for a review of the Kaylee operating model and our strategic objectives.
As in prior industry downturns, one thing that remains a constant serving as our guidance as we manage through this uncertainty is the kaylee operating model. This codified as our corporate values and management principles and defines the critical core competencies that drive our performance and represents us.
Solid and enduring framework for the execution of our long term strategic objectives.
The Kaylee operating model is essential to aligning the company on a consistent strategy. It ties accountability to results ensures product development execution and facilitates continuous improvement while ensuring the company always operates with strong strong financial discipline, while driving locked while driving long term performance.
And profitability objectives.
As we indeed.
During our September 2019 Investor day.
We're also leveraging the Kaylee operating model to strengthen the performance of new businesses. We have recently reorganized the former Orbotech units under the leadership of long term Kayla executive Vice President arrested Anzelmo, creating the new electronics, cocking and components or SC group. This new.
Organization.
Yes.
In closing I'd like to mentioned for highlights that stood out this quarter first as I mentioned at the outset Kaylee achieved record company wide shipments driven by record shipments in our semiconductor process control segment, and we ended March with record backlog.
This illustrates the overall momentum we are having in the marketplace.
Plays across various product platforms with particular strength in mask inspection pattern optical inspection and films metrology and it further shores up our confidence in the long term future growth position for the company.
Secondly.
We're really pleased to see Kayla as customer success being further validated by third party market share analysis from Gartner.
Taillight market leadership is the result of ongoing successful execution of the company's customer focus strategy, which is based on investing.
Hi level of R&D to drive differentiated products in a portfolio of products and solutions that address the most critical.
Well process control market challenges and we're pleased once again to see the success of our strategy being validated by our customers purchasing decisions.
The report shows the process control group is approved so overall Wi Fi and Kaylee strengthen this process control market leadership by gaining two and a half points of market share.
The past year marked a record or a new record demand and kill as core franchises, such as optical wafer inspection overlay metrology and mask inspection.
This data also shows Kayla his first meaningful revenue and E beam inspection since 2015.
We expect the process control intensity will continue to stay at a similar level in calendar 2020, or better and the Kayla, we'll maintain our market leadership.
Driven by an expanding the investment advice.
Merriment as well as advanced technology development, and memory and continued semiconductor industry expansion in China.
Third we saw continued strength in both foundry and logic foundry and logic revenue grew sequentially as customers accelerated the ramp both seven and five nanometer nodes and continue to prioritize their leading edge technology Roadmaps and finally, our services business continues.
Perform well remains on track for growth and steady free cash flow in calendar 2020. Despite all the uncertainty total Calite service revenue rose to $373 million thanks to the.
Continued growth of our semiconductor process control installed base as well as the expanding service businesses from recent acquisitions.
Please turn to slide nine for my concluding thoughts.
To summarize before I turn the call over to Brian We're an extraordinary times and in that we're facing both unprecedented uncertainties as well as opportunities.
Amidst this background one thing thats not changing as Kaylee strong fund.
Fundamentals and we're confident that our strategies in the actions. We're taking today, we will continue to lead us in the right direction and position us to route.
Our emerge even stronger and more resilient.
Kayla March quarter indicates the soundness and strength of our ongoing strategy, we expect to be able to continue to meet customer needs and expand our market leadership.
Well over to our CFO brand to discuss our financial results and guidance Brian.
Thank you Rick please.
Please turn to slide 11 per quarterly financial highlights.
Kaylee delivered a solid quarter in March as revenue at the midpoint and non Gabby.
He has finishing at the upper end of the company guidance ranges.
Total revenue was 1.4 to 4 billion non-GAAP gross margin was 61.2% at the upper end of the guided range for the quarter, 59.5% to 61.5% driven by richer product mix them was modeled at the beginning of the quarter.
Non-GAAP operating margin was 34.6%.
GAAP EPS was 50 cents and non-GAAP EPS was $2.47.
At the guided tax planning rate.
If 13% EPS would have been $2.52.
A reconciliation between GAAP and non-GAAP EPS includes an impairment of goodwill of 257 million and a 22.5.
The million dollar loss related to these extinguishment of our November 21 notes that we refinanced and a new bond offerings in February.
Let me briefly provide more context on the goodwill impairment.
During the March quarter, and consistent with our policy Kaylee conducted its annual goodwill impairment assessment based on the discounted cash flows for each reporting unit.
Given the uncertainty of the current environment and the associated unknown long run trajectory of economic growth.
Recorded a noncash impairment charge of 257 million in that they are included in the third quarter to write down a portion of the carrying value of the goodwill associated with the Orbotech acquisition.
Before going into further detail on quarterly results I want to Echo Rick's comment and say that while the cobot 19 situation is unprecedented.
Presents new Gen.
Dancing means that we are in great position and don't have any bond maturities until late 2024.
To further expand on that point I want to highlight that in February Kaylee issued 750 million and 3.3% 30 year bonds to redeem 500 million in aggregate principal amount, 4.1% to 5% senior notes due in November of 2021.
And as it S&P upgraded our credit rating one notch earlier in the quarter to Triple B plus.
Given our solid balance sheet and consistently robust free cash flow that our business generates we believe kaylee as enough cash and liquidity to respond to any operating condition, while still being able to execute our long term strategies invested a high level and new capabilities across our product portfolio and maintain our well articulated capital returns approach.
Which includes our current $3.40 annual per share dividend.
Regarding capital management and deployment as you would expect we review we are reviewing all operating expenses and capital expenditure plans to prioritize and optimize them given the current business conditions in economic environment.
One thing is certain we remain committed to returning 70% or more free cash flow to shareholders over the long term balance between dividend payments and share repurchases.
In March we were consistent with our longstanding capital return framework, returning 113% of quarterly free cash flow to investors consisting of 133 million in quarterly dividend distributions and $316 million and repurchases of common stock.
Daily currently has approximately $1 billion remaining under our share repurchase authorization.
Please turn to slide 12, and 13 for the breakdown of revenue by segments end markets product and regions.
Revenue for the semiconductor process control segment, which includes associated service business was healthy at 1.18 billion.
Foundry was once again very strong in March at approximately 55% of semi process control revenue.
From 52% last quarter.
Memory with 31% in March down from 40%.
Logic was 14% versus 8% last quarter.
Revenue for the specialty semiconductor process segment was 85 million up 13% sequentially driven by strength in RF Mems and advanced packaging.
PCB displaying component inspection revenue was 160 million down 14% sequentially slightly below our internal plans as these businesses, which are closer to consumer markets softened somewhat as we move through the quarter.
Now for the breakdown of revenue by major products in regions, starting with the distribution of revenue by major product category.
Wafer inspection was 38%.
Patterning, which includes reticle inspection was 21%.
Wafer inspection and patterning are part of the semiconductor process control segment.
Specialty semiconductor process was 5%.
PCB displaying component inspection revenue was 7%.
Service was 26% of revenue in the quarter and other was 3%.
The regional split of revenue was as follows China was 25%.
Taiwan was 24% Korea was 21%.
The U.S. in Japan were 11%, each Europe, including Israel was 5% and the rest of Asia with 3%.
Please turn to slide 14 for other income statement highlights.
Total operating expenses were 378 million, including 215 million of R&D expense.
Operating expenses were modestly below our targets for the quarter with the largest delta the plan coming from lower travel and entertainment expenses and a slower hiring pace than was originally planned.
Operating margin was 34.6%.
Other income and expense in the March quarter was 38 million.
The non-GAAP tax rate was 14.6% and above the company's long term tax planning rate of 13%.
Due to negative capital market impact on expense deductions in the company's employee deferred compensation program.
Going forward based on the company's expectations for geographic distribution of profit you should continue to use 13% has a long term tax planning rate.
Non-GAAP net income of 389 million and the company had approximately 157 million diluted weighted average shares outstanding.
Turning now to review of our balance sheet and free cash flow on slides 15 and 16.
Kaylee ended the quarter with 1.6 billion in cash total debt of 3.4 billion and a flexible and attractive bond maturity profile supported by investment grade ratings from all three agencies.
Kayla has a history of consistent free cash flow generation and high free cash flow conversion.
Our innovation and differentiation in the marketplace or what drives our industry, leading gross and operating margins and ultimately our free cash flow conversion.
Cash from operations in free cash flow or both strong coming in at 442, and 399 million respectively.
Free cash flow margin was 28% and the annualized free cash flow yield was above 6%.
For frame of reference over the last 10 years Kaylee free cash flow margin averaged 25%.
Daily business model generates strong free cash flow and it's very resilient across the various phases of the business cycle and economic conditions.
Over the past five years, the company has averaged 98% free cash flow conversion.
Please turn to slide 17 for a snapshot of our capital return activities.
Kaylee continues to execute on its commitment to return capital to shareholders in the form of both dividends and share repurchases. The dividend payout has increased at a CAGR of approximately 15% since inception 13 years ago.
Share repurchases have also increased over the years with the average price paid to repurchase shares being roughly $73 with approximately $4.1 billion deployed for repurchases since 2010.
Now for our June 2020 guidance on slide 18.
I will start by saying, we have mitigated the supply chain issues related to cobot 19 never rose over the past quarter, but fluidity related to the situation makes it a daily challenge to manage.
As countries around the world handled the respective grown a virus responses.
The uncertainties and added complexity associated with global social distancing policies, such as travel restrictions and mandated quarantine periods continue to pose challenges to our ability to install and support Kaylee systems.
Accordingly, we have taken extrameasures to maintain flexibility and continuity of supply for critical components in our supply chain.
Somewhat unique decarlis business model or longer materials lead times and volume hedging strategy that to enable flexibility with key components in our products, which slows inventory velocity, but allows us to weather short term disruptions and supply.
For short lead time parts, we maintain dual supplier strategies, mostly with suppliers in different countries to optimize capital commitments and ensure we can ship supply to maintain flexibility to meet fluid customer delivery schedules.
In addition, our customers rely on clay to enable the long term technology development programs, which tend to be sustained and protected in periods of short term demand uncertainty and disruption such as we are currently experiencing.
We continue to maintain close ongoing communication with our suppliers to ensure continuity and identify supply chain pressure points and we remain confident today and our ability to meet our demand and to be able to continue to service and support our customers in the field.
Okay as managing this situation with both the termination and Tivity.
We have fully mobilized our teams and are taking action to minimize disruption in our operations meet essential customer needs and maintain the resilience of our supply chain to limit the overall impact of cobot 19 across our business.
Given the scale of our worldwide service and support infrastructure, we are supporting our customers with local resources and are executing well. However, it is taking longer in some cases to complete rigorous acceptance criteria for certain products without the support of our factory centric teams.
In all cases, we've done our best to contemplate these factors in our guidance, including the broader range of guidance and our June quarter outlook, which is as follows.
Total revenue for the June quarter is expected to be in a range of 1.26 billion to 1.54 billion.
Foundry is forecasted to be about 51% of semi process control system revenue depicting the strength, we continue to see amongst our foundry customer base.
Memory is expected to be approximately 39%.
Logic is expected to be about 10% of semiconductor process control system revenue.
We forecast gross margin to be in a range of 59% to 61% is product mix is modestly less favorable and slightly higher costs are expected in our service business and in the March quarter.
Other model assumptions include operating expense of approximately 380 million.
Interest and other expense of approximately 40 million in a non-GAAP tax rate of approximately 13%.
Finally, GAAP diluted EPS is expected to be in a range of dollar 58 to $2.64 and non-GAAP diluted EPS in a range of $1.81 to $2.87 EPS guidance is based on a fully diluted share count of approximately 156 million shares.
For my financial conclusion, please turn to slide 19.
I'd like to share our perspective on the demand environment for the balance of the year 2020.
First I'd like to address the new export rules published by the US Department of Commerce on April 28, which will go into effect on June 29 2020.
Those rules will expand export license requirements for us companies to sell certain items to companies in China that have operations that could support military and uses.
Even if the items sold by the US companies are used for civilian purposes only.
On this issue I would note that the new rules do not impact the majority of our business as most of our products are manufactured in assembled outside of the United States.
I would also like to point out that rerouting routinely ensure that our products are not used for prohibited military and uses in China.
However, the question remains today, whether these new rules went enacted would make it more difficult to ship to certain customers in China that might be deemed military in users under the new rules as a result of their potential activities supporting military and uses.
We are still assessing the new rules and working the trade associations and others to obtain additional guidance from the U.S. government regarding the scope and practical application of these new rules.
Once we have clarity on how these rules will be implemented we can better determine the impact on our business if any in the second half of the calendar year.
Notwithstanding this recent trade issue our outlook for customer demand in the semiconductor process control business is virtually unchanged today from what we expected in February.
As I mentioned earlier, we continue to drive our supply chain in our factories to meet current customer expectations for deliveries.
However, we do expect that the overall macroeconomic environment will put pressure at some point on some of our customers demand for products in certain segments and ultimately could affect their capacity investment plans, both in magnitude and timing.
Obviously, the depth and duration of this impact is unknown today. So we will continue to run our business to maintain the flexibility to respond to any demand scenario.
We do expect our customers to continue to progress there technology roadmaps across all segments and Kaylee products are critical to those transitions.
We expect investments to continue in this area at a normalized pace independent of the macro environment.
For our more consumer centric businesses, we've seen some weakness over the course of the March quarter, and while we are well positioned we would expect some impacted these businesses compared to what we thought in early February.
Finally collaboration across global teams and partners on large scale product development programs without direct in person engagement is creating some execution challenges and while early could put pressure on release dates for new products expected over the next 12 months.
To summarize as we look ahead to the balance of the year Kaylee continues to be well positioned to navigate the uncharted territory, we find ourselves them.
We derive our strength from our strong balance sheet and liquidity in comfort from not having any bond maturities until late in 2024.
Our strong operating performance helps us prioritize critical investments across our technology portfolio and protects our margins, while simultaneously generating strong and consistent free cash flow.
Our market position has never been stronger despite the usual competitive noise, our share gain and improving process control intensity serve as validation that our products of our portfolio of products and solutions are adding critical value to our customers technology roadmap differentiation and their ability to yield these new technologies that production volumes.
How we allocate capital has never been more important you can be assured we will continue to make smart capital allocation decisions continue continue to invest in the important R&D to study to support our customers and new product launches.
Well, our long term growth strategy maintain our ongoing dividend strategy and preserve our ability to be opportunistic buyback program to fully deployed the free cash flow the company.
Lastly, predictability and business model resiliency matter more now than ever our growing diversification significantly significant exposure to our customers critical process technology transitions, our subscription like service revenue stream and our focus on driving operating leverage our key attributes of our business model.
We are confident we can continue to excel and managing these areas and physician Kayla for a brighter future.
Before we begin the queuing just a reminder, that Kayla will participate in many in virtual investor Webcasted conferences this quarter.
Please keep an eye out for notice of future events scheduling and we look forward to seen some of you virtually later in the quarter.
With that I'll turn the call over to Kevin Castle to begin to keep today.
Thank you Brad.
Once again, we would ask that everyone limit themselves to one question and one follow up question.
In order to getting as many questions as possible.
Okay, Charlie we are ready for the first question.
Thank you, Sir ladies and gentlemen, if you would like you asked a question. Please press star one on your telephone keypad and weak for Union could be announced again that's star one to ask a question. Your first question comes from the line Harlan sur with JP Morgan Your line is Hamilton.
Good afternoon, guys and solid job on the quarterly execution.
On the increased revenue guidance range for June 280 million range versus 200 million for last quarter, you called out the closer to 19 related impacts it sounds like it's still more operational logistics personnel support but wondered if theres. Some part of that that is demand related potential pushing out of the business by customers either.
And your pest control or overlooked orbotech businesses on the potential for maybe some second half macro demand weakness I'm, just trying to figure out where the bias is skewed towards the larger range.
Hey, Marlin Brian.
You are doing well so the bias is more around just the operational constraints as I mentioned in the prepared remarks, we are having to support the tools with our local teams, particularly around installations and that can take a little bit longer and as a result of that and the ability to handle escalations faster and so on we've.
We've essentially put in some incremental.
Risk or trying to account for some incremental risk in our overall execution.
Clearly the environments very fluid by country, and so we have to be sensitive to to navigate through that.
There is a component that supply chain, but as I said in the prepared remarks, we feel very good about our supply chain positioning so it's mostly more about the general uncertainty.
And what we're having to do operationally to deal with it.
Okay, great things with the insights there and then.
Congrats on the 200 basis points of share gain in pest control last year I think now you're about five times larger than your nearest competitor and your commentary on the sustainability of pest control intensity for this year, where are you seeing the biggest sustainable increases of this intensity is it China and NAND or is it.
Just across all of the sectors given rising complexity and then it also looks like your large logic customer is executing and finally getting back to sort of this two two and a half year cadence on node migrations. After a long pause in which we use how does this also change your longer term view on intensity for that.
Team.
Yes, great questions Harlan I think the biggest.
Difference, we see right now I think in the process control intensity is the realization that each of the in those in support of it really need more capability and specifically we've talked about gen. Five in the past being used for freight shack in that definitely driving adoption. In addition, we believe the sustainability is there based on new.
Products that we introduced that we outlined in our Investor day, and so it's really not one particular customer. It's really now we have gen. Five is really coming at every major customer and is growing and adoption and maybe in the last couple of years, we went from being in the development phase to people actually expanding their footprint with that but we also.
Saw strength and laser scanning and so.
Even optical metrology, we mentioned in there, it's really pretty broad based across the portfolio and I do think in times like this even if customers are going to back off capacity, which could happen later in the year, they're going to continue to invest in capabilities allow them to bringing out new technologies, which is all of this favorable for process control.
Yes, thanks for the insights.
Thank you.
Your next question concerns the line yet John Pitzer with Credit Suisse. Your line is now open.
Yeah. Good afternoon, guys glad to hear that everyone is doing well. Thanks, Let me ask the question I guess brand I want to go back to just the covered 19 impact and whether or not you have a number that quantify.
The March quarter impact and wasn't it impacted shipments and Rev Rec or just Rev. Rec and I guess is the broader range for June just just realization that you expect from the impact to be larger in the June quarter than the March quarter.
So John on March when we will go back to when we gave guidance. We certainly felt that they would be some potential risk a push out related to tools that were going into the affected areas in China, particularly who they product.
And so we tried to account for that in our guidance and expected that independent of the cobot effect is that our guidance would have been higher.
As the quarter went along our issues were more we were able to ship a little bit into that area, which was which was positive for us and we have some other puts and takes across the business. The challenge. We had is with quarantine period and travel restrictions is taking at some time to line up resources and if you don't have.
The resources for installations customers will.
We'll want to readjust some of those delivery dates. So so we did have some of those issues in the quarter.
And it was more shipment base then it than it was revenues. So as we look at the gym quarter, though I mean, it's it's a pretty challenging situation out there and as I said on the demand or in the.
Prepared remarks, I mean demand from customers has been pretty consistent we think that carries forward in June and so we widened the risk to be prudent or the range to be prudent just given that the circumstances. We think we're now facing but we did the same exercise tool by tool and we feel pretty comfortable with the guidance, but just overall.
We're learning things everyday about what's going on and so we wanted to add to account for some of this this uncertainty that's out there.
And then just as my follow up despite the wider range for June I think we all appreciate the fact that you're trying to give us a guidance number out there with all the put puts and takes even more so Brian your commentary about the full year, but but I'm kind of curious I think 90 days ago, you would have characterized calendar year 20, as sort of an above try.
End year for growth for you guys trend being sort of the 7% to 9% that underpins your 2023 target model relative to the puts and takes you talked about in your prepared comments should we think about 2020 is being more of a trend growth year or is there not enough visibility to even say that.
Hi, good visibility questions challenging.
We appear companies that Couldnt, even guide the quarter given some of the challenges. So when we look at it I mean, it's hard to believe that we wouldn't see some some impact into the second half from from the environment. We're now operating in.
We do expect based on our current view that it'll be a growth year for for the company, but and I look at it today again, a lot of moving parts, but I would say that probably likely be below that trend.
Not much below but I think it'd be below.
Your next question comes from the line Krish Sankar with Cowen and company. Your line is now open.
Hi, Thanks for taking my question I had two of them first one eight of Brenda Rick can you give us a little bit color on the sale into China that you saw in March.
What are the split between domestic and multinational and split between foundry and memory and any kind of call. It into the June quarter on geography would be helpful and at Apollo.
Yeah, Chris I don't think I have it by broken down that way as we said revenue mix for China was.
Was 25%.
I don't.
Yeah. It was something we'll have to get back to you at this point for the March quarter.
Got it got its that's fine.
And then the second question I had was you know when they look into your June guidance, we look at the numbers it looks like.
Laundries quality slowing a bit and memories coming back.
I understand no one has a crystal ball at this point, but would you expect the trend to continue into the causes the second half or is that more a function of just customer capex spending in Q2.
Yes, I mean, I think our base assumption is that we'll see stronger memory environment in the second half obviously thats.
Part that might be part of the business that might be more impacted by by what will happen in the overall economy, but but our base assumptions that we would see memory recover in the second half or be stronger the second half.
Now foundry seems to foundry logic seems to be pretty consistent over the course of the year at least at this point.
So I wouldn't say, it's weighted to one half of the other right now.
Your next question comes from the line CJ Muse with Evercore. Your line is now.
Yes. Thanks for taking the question I guess first question Brent to go back to John's earlier question.
Good.
The impact there.
Can you share with us what kind of.
I guess impact revenues your baby in the guide or or should we take the midpoint.
Indicative of what you do with or without indicated no dose will supply chain issues and then as part of.
The challenges around supply chain management in logistics.
Can you share with us what impact that might have on all your cost structure as well.
So CJ at some point it becomes a little challenging to be to speculate on with and without given the environment. We're operating in today in any adjustments we've had to make.
If I just go back a few months I mean, I would think that our revenue would be.
$100 million higher at the midpoint from a guidance perspective.
For the quarter and a normalized environment now we're far from normalized environment don't know when we'll get back there. So.
Most of our adjustments there were related to just our ability to cadence our resources to be able to support customers as we said in his prepared remarks.
For the year demand is virtually unchanged we have seen some impact in some of the the with customers that are closer to some consumer markets, but generally our customers, particularly our largest customers are can.
Still very focused on on executing their plans and we're we're maintaining the flexibility to be as flexible as we can to respond to them. So I don't feel like I have significant supply issues to be able to make that happen and we're running the factories to be able to respond to that so they want to be in the right positioned to respond to their customers and.
We are managing our supply chain and our factory resources out of the flexibility to do that.
If it if the business where to fall off in a meaningful way of course, we're carrying a lot more resources than the that business level would suggest and so there would be some some adjustment required in terms of just the overall cost impact of that but right now that said thats how were running the business and we'll adjust as we go.
We've done this before.
Okay very helpful.
It's all about regarding your department store was really good and I know, it's still very early and I'm sure you're waiting clarity.
On how broader now the rules will be pursued but.
If you think about what's been written to date.
The major ruling is for manufacturing in the U.S. and we are considering you do make tools and assemble tools offshore is your first interpretation that you will not be impacted in terms of shipping into China.
Based on kind of what you read today. Thank you.
Sure CJ I think that.
To your point is relatively new and we're still unpacking it and as we said we're working.
Just to gain clarity, but our understanding at this point is this will impact the tools that are manufactured in the U.S., which are manufactured for us in California, We have three major manufacturing sites, Israel, Singapore and here. So there's there's a potential impact depending on the customer and our final our understanding of the ruling.
And that that will impact tools that come out of California.
But even that based on the words, we had in the.
Comments, we made its still unclear and we're getting guidance on that and actually working through it. So.
We haven't been able to to come up with more than that at this point, but.
We still as we look to the year, we feel as Brian said, we understand that risk and.
Potential risk and we feel good about the year.
Your next question comes from the line yet is that are you with bank of America Security. Your line is now open.
Thanks for taking my question, so sticking with this China export control and again I appreciate that it's somewhat earlier in the process, but I think you mentioned you already restrict shipments for military end use so I'm curious what else do you need to do to satisfy these new.
Requirement tried whether or not you ship the end product from the us or from overseas. If according to you you are not shipping something for military and use what more do you need to do like what what does the mechanical process I mean going and asking for license. If you are not shipping anything for a mandatory Andy was already.
So so there there's a couple aspect of this as we understand it but one of them is a rigorous process, we're going through to to make sure we understand the intent and the how to execute on this role and we're working with key outside counsel inside council to do that and as we said we already.
Some of the constraints. This was a bride policy not simply about semiconductor equipment and semiconductor equipment just happens to be included in this.
And we will work through that process, but that is why we say that we've already we already take steps to handle some of the questions that are being put forward and we will continue to work through it when we have more clarity and frankly the rule is still.
There is still a period, where further definition is happening until the end of June. So once we have more clarity of course, we're going to share that.
All right and so my follow up I'm curious what have you seen from a demand perspective, and just from any supply chain.
Issues in the first a few weeks off the quarter because just from the outside looking into it seems as if right their expectations that second half would get better that macro conditions could improve that people are slowly starting to get back. That's I'm curious that is it fair to say that.
As soon as the trough for the just.
What how would you characterize what do you have seen for the first few weeks off the quarter from a demand and supply perspective. Thank you.
So I think Brian This is Rick Brad talked about the demand, but I'll give some color to that I've had a number of conversations with customers and I would say that everyone is continuing with their plan.
The notable exception as Brent mentioned consumer facing and anybody that's dealing directly for example of automobile I think that's an area, where there's been constrained, but it's been compensated for by some of our other customers, who actually see increase the demand driven by some of the work from home trends. So I think that in balance we're seeing that.
The supply chain actually gotten better in terms of some of the supply that we had in Asia, especially specifically, China, where coming out of Chinese new year part of what we weren't sure about was the supply chain that we had in China, how effective they were going to be in how efficient that's fully recovered and we're back actually above the level of.
Supply for some of those parts and Weve pretty definitely move through the different opportunities for supply we feel very good about our ability to navigate that as Brent that's not easy, but we're confident of our ability to do it. So we don't really see a reason to change. It. So then what we're backing up too is what are the.
Macro implications of.
You know that the economic downturn in subsequent recovery and since we don't have a way to really understand that.
Long term because I don't think anybody really knows we just model different scenarios for what that might look like but we have no leading indicators right now of any real change in behavior.
Yes.
An additional point here is the internal forecast was you suggested the second half is stronger I think the challenge we have two to Rick's point is what ultimately happens with with our customers demand profile on what that means to supply now there are lead times went in and so on and those those issues are things that customers have to contemplated.
I think about how they're managing their their capacity, but but that's essentially where we're at so we'll have to see how that plays out what that ultimately means to them and then ultimately what that means to their demand for our products.
We do have a certain amount of investment that happens and supporting technology Roadmaps. Those are continuing on a normalized pace and so we would expect that for products that are particularly focused on enabling technology transitions that those products would be more resilient then more capacity centric products, depending on what environment, but I'm not ready to to call a trough.
Here.
In the June quarter, and until we get better visibility about what what ultimately think how things will look in the in the September quarter is I think one of the challenges.
We are facing here, we don't talk about it very much but I think that the way we manage the supply chain as a competitive advantage for Kayla, we have op. We talk about our operating model in a lot of that has to do with how we manage supply chain, how we run our factories, we work with suppliers that provide very high and capability for us and we engaged.
Closely with them, we buy parts earlier, we commit earlier, so we're able to navigate through certainly for key components in it.
Potential disruptions and working with them to make sure there in a place to be able to support us and whatever environment, we might end up in.
We have the service business, it's very contract base the products live a long time, so having an extra parts from time to time is the least of my concern is generally as a CFO running this company so.
I think that that situation works for us and with the extension of demand.
And in terms of how it's affecting how long products are living we tend to work our way through.
The parts that we do have so it slows down inventory turns but it is fundamental to the operating model the company and I think the margin profile reflects reflects that.
Your next question comes from the line yet in the key on QB, Yes. Your line is now.
Thanks, a lot right I also wanted to ask on the E Commerce changes.
It certainly looks like you on can cover on the direct product cool from stopped being made outside the U.S. When you sort of looks really CCL exton at the CCN categorization.
The language around and use in end user seems to be very ambiguous, yet and I guess, we obviously hope to get clear in trip occasion from Commerce before June 29, but the extra could I talk to indicate that it sort of purposely ambiguous. So I guess the question is if if you have to apply when in doubt would you agree that the risk.
Might be more on the foundry logic side and less from the memory side.
Tim I think it's too early to speculate.
I mean I.
Yes, it's too early to speculate.
Okay.
And then Brad I guess a follow up.
On the impairment.
So.
15% of the acquired goodwill was written down.
So can you just quantify did that has any impact on those sort of long term growth prospect for the will detect businesses or you think that even though that that was written down that the long term numbers that were put into the model at analyst day still hold.
Yes as you know these are these are asset light businesses and so there's a fair amount of purchase consideration that shows up in goodwill and what that reflects really is when you do valuations as we all know when you do a discounted cash flow that as cash flows push out and what discount rate to use having effect on ultimate value certainly in the new.
Near term and some of those businesses. If you look at the specialty semiconductor business being impacted by trade last year and some of the automotive dynamics into this year that did affect some of our near term focus forecast. So over the long run and then and I think the second part is around flat panel, where we saw we expected to see more recovery and flat panel.
Capex into 20, and we're not seeing that so there were some modest adjustments related to co bid and in some of these issues that I mentioned and then just in general uncertainty in terms of how that affects and ultimate discount rate that you use but but to be clear when we do feel very comfortable with the growth rate trajectory that we presented and.
Yesterday back in September and it's really a function of of the things I talked about just given the uncertainty of the current environment that we're operating.
Your next question concerns the line that Quinn Bolton with Needham and company. Your line is down again.
Hey, guys. Thanks for taking my question Brent just wanted to ask on the gross margin gadgets 59 to 61 wondering if there's any impact from spacing requirements and social distance seen on the manufacturing capacity year your cycle times within your own facilities.
Yes, that's a good question I mean in our facilities most of our bills are day builds and so we're able to comply with some of the social distancing challenges they're pretty effectively.
So it's not really related to that I think on from a cycle time point of view, where we're executing generally inline with our plans.
Quarter to quarter, it's really more around just some of the mix of products that we expect to see this quarter versus last quarter and.
The service profitability levels were particularly strong last quarter I think is with some of the the delays.
And just activity out there and so how that affected our cost structure. So I would expect some of those costs to come back as we move into.
Into this quarter so.
Overall.
It was a little bit richer than we expected in the March quarter, and we're seeing some adjustment.
Into the June quarter, but the long term view it if the current sort of expected revenue levels is to see gross margins between 16, and 61% with the biggest factor being mostly around the mix of products.
Great and then a follow up question you mentioned that three main manufacturing sites, Israel's Singapore and U.S. wondering if you have redundant capacity to build that same tool at multiple sites that you don't have that capacity today is does the export control action and just the cold and outbreak make.
Rethink.
Whether having a redundant manufacturing capacity as you would be part of a long term.
Three to five year plan.
Yes, it's a great question, we have definitely the ability that similarity in what we do in these different sites allows some flexibility.
Which over time has caused us actually to transition more to the sites out of the U.S. in both the case of Israel and also in Singapore. So that's something that we're always evaluating in terms of our ability and flexibility to manufacture a different products in different locations based on customer needs.
Supply chain and our and our staffing so of course, that's a that's a lever and on option that we have as we look out and think about where the best place to be positioned us.
Operator, we have sorry, operator, we have time for one more question. Please.
Your next question comes from the London, Joe quit talking with Wells Fargo. Your line is now.
Yeah. Thanks for squeezing me in.
Let's say you're thinking about a nice sequential increase in implied memory revenue for the June quarter. I was wondering can you help us understand.
The drivers of that is it more of a market recovery or they're also some kind of embedded.
Assumptions around new product shipments that Youve launched recently.
You know, it's funny I went back and I looked as if you look to the March quarter revenue levels from memory and is probably our lowest since about 2016. So in some ways. There was a bit of a trough. There in terms of just the overall business level from memory. So we do see a pickup or the pickup is is pretty balanced across the.
You know, it's about 50 50 overall of what we expect in the quarter from.
Flash and DRAM, So I wouldn't say, it's related to a to anything in particular other than just.
Yeah, we're seeing a stronger revenue profile this quarter versus a.
Very low one last quarter.
Okay, and then just on the record backlog when we think about your your your comments around you know the long term target for growth rate for 2020.
How do we think about the backlog covering that relative to prior years.
Well, we had record backlog today. So so we had a very strong order quarter record backlog. This quarter. So that certainly gives us some comfort I mean customer demand is there we have the backlog we have the parts. So as I said, we're in a position where we can deliver too.
To any scenario, so we feel pretty confident about that but we really just have to have to see where our customers are ultimately in what they do but certainly the backlog does give us confidence really across the businesses to with a certain expectation, but but again, depending on what happens with their business and then sometimes you know they.
If you push days and things like that but given the lead time for our products on the backlog gives us some comfort about what we see in front of us over the next six months or so.
I think Joe if you think about the longer term. The 2023 plan. That's the biggest variable in that from our standpoint is really what happens in the macro economy, because when we look at the all the trends that we said the new products the market share a secular dynamics everything is really working the way we had envisioned and we're executing and.
We feel really great about that what we can't forecast at this point is how deep and how long any kind of economic disruption is so that's the thing that will really ultimately determine the pace of the overall industry I do think that there are aspects of the semiconductor and semiconductor equipment industry that are actually.
Going to do quite well so unlike general recessions, we had where the o. eight or nine theres aspect of what we do that are enabling people to actually continue to function through this time period, but ultimately if there's macroeconomic shock that's going to depending on how long. It goes it will all through those plans and turn.
As of though the length of time, it'll take to come out of this and that's the thing where no position to forecast.
Okay.
Ladies and gentlemen that competes kinase session for today I'll now turn to call that back to the person.
Thank you very much and we appreciate everybody tuning and today, we look forward to chatting with you going forward. This ends the call.
Ladies and gentlemen, this concludes todays conference call. Thank you for freight to spin you may now disconnect.
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