Q1 2021 KLA Corp Earnings Call
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My name is Purcell and I will be your conference operator today at this time I would like to welcome everyone to the K.L.A. Corporation first quarter fiscal year 2021, <unk> earnings conference call and webcast.
All participant lines have been placed in a listen only mode to prevent any background noise.
After the speakers remarks, there will be a question and answer session. If you would like to ask a question at that time. Please press star one on your telephone keypad.
If you wish to remove yourself from the queue. Please press the pound key.
Lastly, if you should need operator assistance. Please press star zero. Thank you I will now turn the call over to Kevin Kessel, Vice President of Investor Relations. Please go ahead.
Thank you Priscilla and welcome to kill a fiscal Q1 2021 quarterly earnings call to discuss the results of the September quarter, and our outlook for the December quarter. Joining me today is Rick Wallace, our Chief Executive Officer, and Brian Higgins, Our Chief Financial Officer. During today's call, we will discuss quarterly results.
For the period ending September Thirtyth 2020.
We released today after the market closed in the form of a press release shareholder letter and slide deck. All of these documents can be found on the IR section of our website today's discussion of our financial results and outlook is presented on a non-GAAP financial basis, unless otherwise specified.
Detailed reconciliation of GAAP to non-GAAP results in today's earnings material posted on the Calite IR website.
Our IR website also contains a calendar of future virtual investor events, as well as presentations corporate governance information, including our quite period and links to Kelly's SEC filings, including our most recent annual report and quarterly reports on forms 10-K and 10-Q.
Our comments today are subject to risks and uncertainties reflected in the risk factors disclosure in our SEC filings any forward looking statements, including those we make on the call. Today are also subject to those risks and Kaylee cannot guarantee those forward looking statements will come true.
Our actual results may differ significantly from those projected in our forward looking statements.
We changed the format of these calls last quarter to include pre provisioning a shareholder letter that provide deeper insights into our business. We will also start by providing some streamline highlights from our full prepared remarks, while still providing more time overall for your questions and answers with that I'd like to turn the call over to our President and Chief Executive Officer.
Mr., Rick Lawless Rick.
Thanks, Kevin and welcome to everyone joining us today.
Rapidly approach the end of the calendar year amazing when I start to think how much has changed over the last 12 months.
Thank you and your families are safe and they didn't help I. Appreciate your continued interest in and support for our company.
Want to make sure I begin my remarks today by conveying my appreciation for the worldwide Calite team.
Your perseverance guys to be better and determination that exemplify talese core values and enable us once again to meet our commitments and to deliver exceptionally strong financial performance in the September quarter.
On behalf of the entire Taylor executive team I want to thank you.
In this quarter to shareholders letter that was published today, we highlighted how our results demonstrate the resourcefulness of our global workforce, the resiliency of our business model.
And our continued commitment to returning value to our shareholders.
As many of you may have already seen.
Our September quarter revenue and non-GAAP EPS. Both finished at the upper end of our guidance. The result of continued strong demand from customers exceptional execution by our global teams.
And the enduring strength and resiliency of the Kaylee operating model in guiding our strategic objectives.
I'm pleased to say that we are continuing this momentum into the December quarter and nearing the end of what truly has been an unprecedented year in calendar 2020.
Most importantly, we're executing at a high level operating from a position of strength in our marketplace and are solidly on track to meet or exceed our 2023 financial targets.
In terms of the resourcefulness of our global workforce, we just completed the third quarter of operating to a pandemic.
So the 19 has presented unexpected opportunity to showcase Taylor's Brazilians and resourcefulness in these unprecedented times.
We have began proactively taking steps to mitigate disruption in our business and remain vigilant.
Of the risk posed by the virus to our people. We've done this by adopting strict safety protocols to protect our workforce, while innovating new ways to collaborate with customers and partners as.
As demonstrated by our strong performance throughout 2020, we are successfully meeting customer needs executing our R&D roadmap and.
And operating our worldwide manufacturing facilities efficiently.
We continue to evaluate and adapt at various facilities in accordance with local regulation.
Prioritizing employee health and safety.
Our worldwide teams deserve praise for never losing sight of what our customers want and need to improve their businesses.
And to drive better yield management.
We benefited from them being exceptionally resourceful and as always.
We remain committed to customer satisfaction and meeting our commitments.
While we consider the challenges our worldwide teams are facing today, we recognize that they extend well beyond the workplace.
Which makes us intently focused on ensuring that we're supporting our teams and our people in every possible way.
Lastly, investment and long term remains an important priority for us we're confident that our R&D programs will help strengthen our technology and market leadership.
We are gratified by the effectiveness of our business continuity actions, which have allowed R&D activities to adapt although not without challenges and to continue through this pandemic.
Now turning to the industry demand environment.
September quarter, we saw broad diversified strength across each of our segments semiconductor process control revenue was solidly above plan and our services business delivered strong operating leverage is on track to deliver double digit growth in 2020.
We also ended the quarter with strong backlog, reflecting the enabling role clearly plays and our customers technology roadmap and investment.
Driven by the secular industry trends and the ongoing commitment by our customers to invest in R&D for next generation technology. The stage is set for calix to outgrow our market in calendar 2020.
Today's environment continues to accelerate the adoption of several industry growth drivers that we originally outlined in our 2019 Investor day.
The integration of digital technology into our lives is transforming the way, we live and work resulting.
Resulting in fundamentally change to how businesses operate and deliver value to customers.
This digital transformation is fueling secular demand drivers such as high performance computing artificial intelligence and accelerated migration to the cloud from on Prem applications as well as Fiveg communication, driving investments and innovation and advanced memory and logic device technologies.
Process control is on the critical path of enabling this digital transformation driving our growth and long term revenue and profitability.
And the addition of the Orbotech in 2019 and to our business portfolio has expanded our exposure to the compelling industry trends.
We're all driving this all important digital transformation in our own business as well, including adopting new productivity tools to improve collaboration with our global teams and customers for example, our customer survey.
Service oriented organization has been working closely with customers to expand remote service technologies will augment our in country service and installation engineers.
We also recently adopted an integrated a new cloud based platform.
Platform for managing our global HR management systems that should continue to benefit benefit us as we scale.
Finally, we're also integrating cloud based manufacturing and service planning tools to increase the visibility of our parts demand to our suppliers.
And to allow us to more proactively respond to customer service requirements.
These are just a few examples of the accelerated digital transformation that we ourselves are experiencing inside of tail light as we adapt to this new environment.
There are five top highlights from our most recent quarter first as expected we saw continued strength and breadth in foundry and logic demand in the September quarter Easter.
These customers are benefit benefiting from investment in digital transformation to support the secular growth drivers that we mentioned earlier.
We expect this demand to remain healthy in 2021.
In memory tool utilization is high and memory customers continue to drive down device inventories and plan for higher bit growth in 2021 to meet expected improvement in end demand.
We expect higher business levels across a broader range of customers in December quarter with momentum continuing into 2021.
Second we ended the quarter with strong backlog demonstrating momentum in the marketplace across multiple product platforms in both the semiconductor process control and DPC groups.
Fueled by new applications in our optical inspection portfolio, such as the print shack for Gen five and the success of our new offerings, including the DSL 10 E beam inspection platform.
We're seeing strong adoption of our patter wafer inspection product suite.
Given our market leadership, and what we expect will be a year of growth for process control.
Third our service business continues to perform well and is positioned for double digit growth double digit growth in 2020.
Daily service revenues, 25% of the total quarterly revenue and is delivering long term growth at a rate that's double the underlying industry WSE growth rate.
Fourth it was another strong quarter for electronics packaging and components group or MPC highly.
Highlighted by the record demand of our PCB division the strong growth in PCB was driven by EGPC is high exposure to the fiveg infrastructure and smartphone market.
Yes, Bts and Nikos divisions are also benefiting from the transition to Fiveg, along with increasingly more complex advanced semiconductor packaging.
Finally in keeping with our commitment to deliver strong and predictable capital returns to our shareholders, We announced back in July that our board of directors approved our 11th consecutive annual dividend increase.
During the September quarter, we returned $329 million to investors via dividends and buybacks over.
Over the past 12 months, we returned $1.3 billion to shareholders or 82% of free cash flow.
We believe our track record of delivering strong capital returns as a key component of the Kayla investment thesis and offers predictable and compelling value creation for our shareholders.
Before I hand, it over to brand to get into greater detail on our financial highlights let me briefly summarize.
Despite the disruption and unforeseen challenges in the year associated with the pandemic Kayla has benefited from the resourcefulness of our global workforce, we've adapted well and we're very well positioned for a strong finish to 2020.
This demonstrates the critical nature of our products and services and enabling the digital transformation of our lives the resiliency of our business model and return value to our shareholders.
We believe the secular factors driving our industry demand that we identified at last years Investor day are as relevant now as they were them and they'll help us enable us to achieve our 2023 financial targets. The same time, our strategy of driving diversified growth with strong long term operating leverage should feel consistent returns for our share.
Holders.
With that I'll turn it over to Brad.
Thanks, Rick and good afternoon, everyone.
Early September quarter results once again demonstrated both the soundness and strength of our ongoing strategy. We continue to exhibit our ability to meet customer needs and expand our market leadership, while growing for operating profits generating strong free cash flow and maintaining robust capital return strategies.
Total revenue was 1.54 billion non-GAAP gross margin was 62.1%.
At the upper end of the guided range for the quarter of 60.5% to 62.5%.
Non-GAAP EPS was $3.03 at the high end of the guided range of $2.42 to $3.06.
GAAP EPS was $2.69.
Gross margin of 62.1% to 60 basis points above the midpoint of guidance as higher process semiconductor process control product mix lower inventory reserve requirements due to strengthening demand and services leverage drove the upside realized in the quarter.
Revenue for the semiconductor process controls segment, including the associated service business was $1.27 billion.
In terms of approximate customer segment mix of process control systems revenue to semiconductor customers foundry was strong as expected at 59%.
Logic was 10% and.
And memory was 31% in the September quarter.
Within memory business was split roughly two thirds DRAM and one third NAND.
Revenue for the specialty semiconductor process segment was $89 million down, 11% sequentially, but up 29% year over year demand.
Demand in this segment is driven by growth in RF, Mems and advanced packaging.
PCB display and component inspection revenue was $181 million down, 10% sequentially, but up 1% year over year.
In terms of balance sheet highlights kaylee ended the quarter with $2.04 billion in total cash total debt of 3.45 billion after retiring $50 million outstanding on our revolving line of credit.
And a flexible and attractive bond maturity profile supported by investment grade ratings from all three agencies.
From a cash flow and capital returns perspective.
Free cash flow was $456 million in the September quarter free cash flow conversion was 96.1% and free cash flow margin was 29.7%.
For capital returns over the past 12 months, we have returned 1.3 billion to shareholders or 82% of free cash flow, including 542 million in dividends paid and $789 million in share repurchases.
During the September quarter, we repurchased 188 million of common stock and paid 141 million in dividends.
As it relates to guidance our view for WSE growth. This year is approximately 10% growth.
Growing off a baseline of $52 billion to $53 billion in 2019.
Given this and our outlook for revenue growth in the calendar fourth quarter Kayla is in position once again to outgrow our industry.
Looking forward, though early based on our current backlog and sales funnel visibility over the next couple of quarters.
We are encouraged by the sustainability of our current demand profile for the first half of calendar 2001.
We will have more to say about our views at 21 WFP in our January earnings report.
Before turning to our specific December quarter guidance, we'd like to comment on the current trade situation regarding the United States in China.
As you all know in the September quarter. The US Department of Commerce stated debt SM IC or SMIC may pose an unacceptable risk of diversion to a military end use in China.
So we must obtain an export license prior to shifting certain systems and spare parts.
To SMIC and certain related parties that are subject to the us export administration regulations.
This new license requirement did not have any effect on any shipments in the September quarter.
We are complying with the new rules and have already applied for licenses for expected shipments in the December quarter.
Given the expected level of business in the quarter subject to license requirements. The result of the license requirements will not have a material impact on revenue and as a result, we have made no adjustments for this situation to our plans our guidance ranges.
The trade situation remains fluid and we've done our best to give you our perspective on the impact to our business and we'll refrain from speculating on the situation further.
Our December quarter guidance is as follows.
Total revenue is expected to be in a range of 1.55 billion plus or minus $75 million.
Foundry is forecasted to be about 52% of semiconductor process control systems revenue to semiconductor customers depicting the strength, we continue to see amongst the foundry customer base.
Memory is expected to grow to be approximately 37%.
Logic is expected to be about 11%.
We forecast non-GAAP gross margin to be in a range of 61% to 63% as we expect similar product mix and services leverage as in the September quarter.
The market reception to product offerings, and our semiconductor process control business has been strong and as outlined at our Investor Day last year. The company has made solid progress on our plan to driving cost inefficiencies on new product platforms, and leveraging scale derived by our worldwide service infrastructure.
In addition, better than model gross margin improvement in acquired businesses is a tailwind to our gross margins overall.
Other model assumptions include operating expense of approximately $380 million.
Interest and other expense of approximately $42 million.
And an effective tax rate of approximately 13%.
Finally, GAAP diluted EPS is expected to be in a range of $2.59 to $3.23.
Non-GAAP diluted EPS in a range of $2.82 to $3.46 or $3.14 at the midpoint.
Dps guidance is based on a fully diluted share count of approximately 155 million shares.
In closing Kaylee is executing well with increasing confidence that we are on track to meet or exceed our 2023 target model both in terms of topline growth and profitability.
Growth in semiconductor revenue looks compelling over the long run with solid demand across end markets and at multiple technology nodes.
We are encouraged by the strength and resiliency of the Kaylee operating model, which guides our strategic objectives. These.
These objectives fuel our growth operational excellence and differentiation across an increasingly more diverse product and service offering they.
They also underpinned our sustained technology leadership deep competitive moat and strong track record of free cash flow generation and capital returns to shareholders.
With that I.
Ill now turn the call back over to Kevin to begin to queuing day Kevin.
Thanks, Brian for so I think were ready for you to queue for questions. Please provide instructions.
At this time, if you would like to ask a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue. You may do so by pressing the pound key lever.
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We request everyone limit themselves to one question in order to get in as many as possible given.
Given the limited amount of time, we have for today's call.
Well now take our first question from John Pitzer with Credit Suisse. Your line is open.
Yeah. Good afternoon, Rick credit congratulations on the solid results I just wanted to follow up Brian on your commentary.
Around China, you said the results of licenses will not have a material impact on the December quarter revenue.
Is that because you've already adjusted for it in your guidance or you just don't think that shipments most of your ship assess some IC require license and then in that same vein just given that China continues to be extremely strong I think one of the key investor concerns out there is that the fear of bands are causing customers to pull forward I'm wondering if you just talk a little bit about.
The mix of your China business between domestic and multinational than kind of that concern of pull forward.
Thanks, John.
So on the on the SMC situation as we said in the prepared remarks, we've applied for licenses for the December quarter.
Where we think we need them and if you look at just overall, let me just remind you just for some background EBITDA.
As an important customer, but not a particularly large ones in over the last.
Six months or so we've been discussing a broadening of investment and certainly they participated in that.
Probably timing factors that are involved in terms of how others or are seeing this business come in over the course of over the year, but as we look at what we revenued in the September quarter, and where there was no effect and then we look at the December quarter, we've applied for licenses as I said were where we need them and.
At the end of the day, when we look at the overall expectation of revenue on our business for the quarter, but we just don't see it having a material impact so.
We didnt have to adjust anything frankly, so our plans are are consistent overall, so there's no change there on your second question.
Well, that's a really difficult our business I mean, certainly demand overall has been very strong and so when you have a customer try to pull into deliveries and that they are taking us off from another customer and given the overall demand profile that is most of the customers are sticking with their with their slots. So we haven't really seen a change.
Hi.
I think fairly consistent in our view of shipments for the year about $800 million, it's been second half loaded it's what we as.
As what we are seeing today, so I haven't seen much of a change overall in terms of the meetings for customers at least.
Perfect. Thank you guys.
Thank you.
And we will take our next question today is from Harlan sur with Jpmorgan. Your line is open.
Good afternoon, guys good job on the coding execution and strong results.
On the innovation and new products banking I think a good correlation in use where the team rolls out new tools and platforms and then before the revenue momentum for the next few years last year you guys. I think launched about 10, new tools or platforms second generation of your Gen. Five Union Exjade in the trial.
Platform E beam inspection platform and also your multi column eating inspected for mask inspection just to kind of NIM with few or these platforms contributing to the incremental upside in revenue performance. This year and how many new platforms do you guys have been development and and and or we will be introducing over the.
The next 12 months.
Thanks, Harlan as you might imagine these programs are at different points in their lifecycle. So yes. We have seen contribution for example, we talked about print checkfree you'd be with the BBC platform and Thats been.
A continuation and a broadening of that demand.
In other cases, we've talked recently about where we are in terms of the X ray metrology product or the multi beam radical tool those are not contributing.
In a material way to the revenue in the near term, but those are products that we do expect to fuel our growth and 21 and beyond and supported the 2023 plan in terms of how many programs. We have under development, we have a number as as always.
Significant investments going on but as you might imagine they're at various phases of introduction, but when we laid out our 2023 plan.
We're pretty confident that the programs that we've got in place and the ones that are under development are where they need to be and in order to support the 2023 plan. The challenges of some of those as you might imagine there have been some profit challenges.
Which maybe hit us harder early in Kobe.
And then we in terms of program execution, but we feel like we've made great progress in terms of navigating that and we feel good about where we are which is why we say we are on track to meet or exceed the 23 plans that we laid out.
Do you want to add to that yes, Harlan I think one of the things that we're we're pretty excited about is that over the last year or so weve introduced platforms and a lot of our core businesses and those platforms have had really strong market reception. We think you mentioned gen. Five but also new iterations of the Gen four product lines and customers mix and matching across both toolsets.
And supporting a wide variety of designs and different process flows, which has been great for the business, but new laser scattering offerings. You mentioned you gain we added a new E beam inspection product and.
And the portfolio strategy of the company as we as we connect those tools and we leverage comedy interfaces in common Algos common software, it's been able to I think provide a pretty competitive offering out there in the marketplace and so we've been able to maintain our share. We grew share in 2019, we think we're going to maintain that 20, maybe improve it a little bit.
And been able to do it at at very strong margins. So certainly growth of the overall business is a factor there, but also the product positioning as a factor.
Factor, So we're pretty pleased with what's out in the marketplace and to Rick's point, we've got some new things coming down the pipe that hopefully will drive our our performance against our 23 targets.
Yes, thanks for the insights.
Bye.
We will go next to CJ Muse with Evercore. Your line is open.
Yes, good afternoon, and thank you for taking the question.
I guess was hoping perhaps you could speak a little bit about.
The confidence that you have on sustainable spending in the first half the 21 in particular would love to hear your thoughts around foundry and logic.
Contributions.
As part of that if you could touch on what impact at all if at all.
You might see it if we see greater spend on five nanometer versus three nanometer at TSMC. Thank you.
This is Jeff I'll take the first part as it's been.
We've got as we as we said in the prepared remarks, we had very strong backlog coming into the quarter. We had a positive book to build this quarter.
And if we look at the funnel of expectations into the December quarter.
Just the overall order outlook as we look into December and into March and in the backlog position. We believe will take ended year gives us some confidence of sustainability of these business levels and so while it's early for us to spend a lot of time sizing 21, and we'll have more to say about 21 at the end.
In the next earnings call in January.
That overall position gives us confidence that that will see some sustainability here from.
From a foundry logic point of view when you look at the overall market and there are puts and takes there, but but we are pretty confident in the fact that foundry logic looks like that it adds sustainability.
As we move into.
The first half of the year I don't see it changing obviously quarter to quarter, there's always fluctuation, but in general I feel very good about.
The profile of that business as we move into the first half.
Yes, and just one thing to add CJ I think one of the beliefs and our investment thesis on some of our new capabilities. For example, you'd be print check was that we were going to be highly relevant in the advanced nodes.
Of course people really hadn't hit much volume. So we've really seen proof of that concept and we're getting a lot of customer pull for capacity and capability to support those ramp so.
And it's not just a one customer so we feel very good about the process control intensity expectations that we had going into these notes were seeing them being realized so we view that as another positive indicator not just on the overall foundry spend but on the process control related spend.
So net across multiple customers and five.
We would expect in five to have some growth next year and wafer starts and we would also expect to see some what we call mini line risk.
Production type investment on in three more towards the middle of the year.
Second.
Thank you and we will move to Krish Sankar with Cowen and company. Your line is open.
Hi, Thanks for taking the question congrats on the great results.
As you will recall brand you guys mentioned in your prepared comments.
Membership fee growth next year, I understand you're going to give more color than January but within that context, how would you expect kaylee revenues to trend.
The reason I'm asking is this agenda and view that within the memory vertical clearly has more exposure to none been de then I'm kind of curious to hear your thoughts from 21 memory and clearly performing.
But really just the middle of 2018, or so weve seen very disciplined spending by our customers and so we've seen that continue.
Through after a strong down year in 2019 to a flattish year at year end 2020, we see some modest recovery here in the December quarter as you see from from the disclosures to gain for the quarter.
And we see that continuing as we move into next year I don't see just if you look at the overall pricing environment and certainly the smartphone and timing of data center recovery will have an impact on the overall memory environment, you've got the introduction into DRAM, which could be a factor as well as we move into the second half of the year that we would expect.
See memory is it as an improving.
Business for us as we move into 21.
As I said I think that the discipline has been there and as we start to see price recovery I think you'll see more investment there, but I wouldn't say, it's a it's a huge expectation in terms of of growth, but I think a lot of it will be dependent on on some of the end market dynamics that I mentioned.
From a process control intensity point of view, it's a little bit higher today in threed flash than than DRAM, although the introduction of easy in DRAM as an opportunity for us to to drive process control intensity.
So I think we're optimistic about that and start to see that play out.
And then also as stacks layer counts increase in in flash that we will see.
More opportunities for for our metrology product lines, we've got some new product offerings.
We also have.
You mean inspection tool and we talked about where things that we believe will ultimately create some opportunities for us are either.
Any improvement or share so I think we're pretty optimistic about.
About those opportunities.
Thanks, Ben Thank you.
And we will move next to Joe Moore with Morgan Stanley. Your line is open.
Great. Thank you.
Sorry to go.
Go back to the states want make sure I understand the SMC situation. So you didnt have exposure in the September quarter, and then I guess as you look at these rules is there sort of an equal impact whether you ship out of the U.S. or whether you ship out of Israel or Singapore.
In the September quarter, the change of the notification from the government came at the very end of September So there's no impact in the September quarter.
And so as you look at the December quarter.
As I said earlier, when we have to apply for licenses we've applied for those and we don't think that the.
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The granting of those licenses within the fact that we're talking about or not we'll add that material impact on the business.
Okay.
And is there a difference as to where you ship out if you need a different is it different licensing process, whether you should kind of us are from from a foreign location.
But you have to do the licensing requirement is there isn't a licensing requirements that comes from a form factor.
Got it all right. Thank you so much.
Yes.
Thank you and we will go next to Patrick Ho with Stifel. Your line is open.
Thank you very much.
Record brand in terms of your PCB business, which actually had a few strong quarters and you mentioned that Fiveg has been a big driver.
You've given us the road map and a lot of the development on the process control area can you just talk about I guess, the product road map on that business and because they see cycle tools typically have a longer life span when do you feel the need to call refresh and upgrade it for this next wave of.
Find that thats being driven by Fiveg.
All right Thats, a great question and the answer is.
We're relatively new to this business about a year and a half very impressed with what the Orbotech team had been doing and I think in conjunction with them.
We're really working hard to make sure we have the right amount of investment to continue new products meeting customer needs and I would say that they have great engagement and we've added that and as a result, we're investing heavily in that business to make sure that we're meeting some of the emerging demand the flex PCB and all the new substrates. All thanks. This is the.
Beginning as you know the Fiveg and we think Theres a continued opportunity for sustained growth over time. So we're very bullish on what that team has done an in combination. We think it's it's been a tremendous success, so far and a lot of upside as we go forward, but like Okay line businesses that requires continued investment in new capabilities.
And we're doing that right now.
Great. Thank you.
And we will move next to Timothy Arcuri with CBS. Your line is open.
Hi, Thanks, Brad I had a question about your 70 systems business.
If I sort of take your prior comments about the PCB in the display business where calendar half on half you said it would be down half on half. So that would imply that that segment is sort of at best flat for December and that's the biggest piece other than sending system, So which will it seems like sending systems have to be up about 5% to like 935 to 40 for December so.
I guess, a is that right and b assuming it is then your systems.
For the year up about 10%, which is about in line with what we think can be abused you say that you're outgrowing the market. So I just wanted to see if you can fit those comments because.
It doesn't seem like it really gaining w. If you share. This year you Didnt gaming last year, either in a period, where we've seen pretty big mix shift towards foundry logic. So I guess can you sort of speak to that thanks.
A few questions in there Tim and I'll try to try to answer this for you.
Yes. Your conclusion around December sequential semi systems is right mid single digits, obviously, we run the business at at at a total company level, but in terms of our expectations it looks like sequentially a bit.
Digit growth here and so when you take in aggregate you add all that up it puts our semi systems, probably somewhere in the neighborhood of about 50% growth year over year.
Against a market environment that 10%, so thats and outperform and if you look at last year Debbie.
Down about 7% and our semi business was up 1%. So that's an outperform two in 2019. So we can spend some time with you on the map on all of this but.
But thats how to think about the.
A question.
Okay, yet will ultimately be.
Yes, hi, thanks.
Thank you we will go next to a T. Smith leak with Citi. Your line is open.
Thank you for taking my question, Rick if I look at inspection and measurement industry sales attached rate he will probably be sales historically.
Make the new high as industry due to new Eribulin. The as you look at E. The now since introduction at seven nanometer growing two pennies that step that 20 nanometer in some production at one Oclock DRAM do you think the defect challenges associated with the remainder appeal when fully across the central business out of leveling off.
So I think it's a good question, what we've seen so far.
Yes, as you know were relatively conservative, but we have had indications and we believe are in earlier and you see that we would see increased.
Penetration of our advanced optical tools as well as in the mash up.
Thats really playing out so we do model process control intensity going up as a result of increased you'd be adoption and part of why that's working for us as I mentioned, the print check thats essentially kind of a new category, where we're able to deploy.
Additional BBP tools to support.
The ramp of you.
And as you might imagine those wafers are incredibly expensive. So there is a.
Real focus by our customers to make sure that there.
Obviously, optimizing their yields and catching excursions at the same time the size of the defect is becoming more relevant as smaller defects. So our tools end up having to run in modes, where they capture smaller defects.
With increased algorithms, which also means that the capacity needs increase as the design rules go down in order to cover and detect so yes, I would say that those are those are both tailwinds and our customers tell us that because they're very ambitious about ramping the advanced nodes and wanting to make sure we're in a position to.
Support them.
That answer your question.
Yes.
Thank you we will go next to Quinn Bolton with Needham and company. Your line is open.
Thanks, guys for taking the question wanted to first ask just the paddling business of 21% sequentially. It looks like it had a pretty strong quarter wondering if you could highlight sort of what areas within pattern. It really drove that growth and then I've got a follow up.
The patterning overall, we had a strong quarter in reticle inspection, so quarter to quarter that that was the biggest driver.
Do you expect that to continue or is that it's fairly lumpy business.
Well as big a ASP needs and so its low integers and big data speeds.
And so depending on timing it does tend to be lumpy overall reticle inspection because of the number of design starts and advanced foundry has been a really strong business for us.
So I think that when we look at it overall it was a very strong year 1920 is down a little bit from 19 in that business, but still pretty strong. So I think those drivers will continue.
As we move into next year, and we start to move into.
Some of our offerings to support additional you'd be activities.
We should see some contribution from there as well, but but but reticle inspection was a driver but to your point. It does is lumpy quarter to quarter.
Just one follow up question just the ASML on its call talked about some modulation in its easy.
System deliveries, giving node transition timing it cements customers wondering as you look into next year do you see continued growth in easy Clincheck or do you expect that to perhaps.
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Softened quarter for some period of time thanks.
I Wouldnt say softened I mean, the challenge that we that customers have with easy print check is it's a new application their new algorithms.
Theres, new dig feedbacks that they've got to run down and do so worse and so there's a huge appetite to get that in fact, we're getting a lot of pressure to get systems that were forecast delivered to support that so.
So I would add there are additional algorithms as I said, we are developing so all the indications we see our an expanding opportunity for you be print check and I think that will go on for some time based on the early indications that we're getting.
Great. Thank you.
Thank you we will go next to Vic ARIA with Bank of America. Your line is open.
Hi, Thanks for taking my question.
I wanted to dig into the gross margins and your operating margin is both right above your longer term.
Planned for September and I believe the midpoint of your guidance says that they can sustain at these habits.
It is how should we think about the trajectory of these margins going into the next several quarters and they sustain at these levels or do you think that.
It was anything abnormal that at fiscal that makes the later that help you and that's kind of part b of that.
It was good to see you restart the share buybacks, but the levels are still somewhat below I think what you have done and some prior.
Quarter, so any color around just the sustainability of margins and how you can re accelerate share repurchase would be very helpful. Thank you.
So back on gross margin as I said earlier, we are very pleased overall with with the product positioning overall in and.
In the pricing related that positioning so thats been a good thing for our four business I mentioned, the operating leverage in service and so with the growth of the service business the utilization rates in the installed base at one thing with the consolidation in the industry allows you to really drive good utilization across your resources and we.
We invested in a lot of infrastructure over the last few years and we're starting to see the benefits of that now.
We are getting the tailwind to and argued BG group related to acquisitions.
The acquired businesses are are doing better from a margin point of view. So theres a number of factors that are driving it you look at our long term plan, we talked about 60% to 61% at these revenue level type gross margin.
Performance and I would expect us now to be somewhere between 61, and 62% you do at mix factors in any given quarter, but I do think theres, probably a good point here of sustainability.
Versus the model that we had if you take it down to operating margins I think were under spending our normalized spend levels just because of some of the coated constraints around travel, but also how quickly we can hire people and so on so I do think that the spend levels, probably understated a bit and.
Eric what normalized would look like but.
But I do think that there is a point here that that drops through that that.
That has sustainability to it mix issues notwithstanding.
On the buyback as we backup and just look at it we start with a principal in terms of how we look at the overall capital structure of the company and then how we allocate the capital and so we start with a cash target of one and a half to 2 billion. So we're operating within our target range.
Today and.
And so most of our buybacks or returns generally are funded through ongoing cash flow. So it was a little bit lower in this quarter compared to the March quarter, I guess I can't recall exactly that number was I think March in December, but I think as you look at that and we look at our go forward expectations around cash flow, we would expect it will be roughly around.
These levels on an ongoing basis, so somewhere it was $188 million I'd say somewhere around 200 million plus or minus and.
And it's a systematic approach because again it starts with a sort of a process that we that we that was run through so we have some opportunistic opera.
Possibility around that that we can we can work around it but at the same time it tends to be much more principle base than than anything else. So I think thats, how you'll see it play out at the end of the day, we are going to return at least 70%. We retired 82% in the last 12 months.
We're going to return at least 70% of the of the cash flow, we're going to generate through the share repurchases and dividends and pretty balanced across the two.
Thank you.
As a reminder, if you would like to ask a question today. Please press star one on your Touchtone telephone.
From his next to Blayne Curtis with Barclays. Your line is open.
Hi, good afternoon. Thanks for that question sort of revisit prior questions on memory. You mentioned your letter customers, who are looking for at higher bit growth to meet demand just any more color that demand coming from in any I know you'd want to guide for memory next year, but just any color on what kind of magnitude up but you're saying.
Like I said, we're optimistic we see some improvement in the December quarter, and I think that continues as we move into next year.
So most of it coming from customers supporting.
Fiveg and handsets, we think thats, probably the biggest driver.
But it's pretty modest growth at these levels sprague's, given where the industry has been but but we're optimistic that that will see growth as we move into next year.
Again.
And I'm showing that we have no further questions at this time I'll turn the call back to Kevin Kessel for any closing or additional remarks.
Thank you very much for Soi. Thank you everybody for your questions and your interest.
So I think shortly during the quarter during our virtual investor event.
Nicole.
This concludes today's KMG first quarter 2021 earnings call and webcast. Please disconnect. Your line at this time.
Yeah.
Okay.
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Hmm.
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