Q2 2021 KLA Corp Earnings Call
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Since during your conference today, Please press Star zero.
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The day my name is Priscilla and I will be your conference operator today at this time I would like to welcome everyone to the KLA Corporation December quarter of 2020 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 quest.
And the 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 please limit yourself to one question and one follow up lastly, if you should need operator assistance. Please press star zero. Thank you I will now turn the call.
All over to Kevin Kessel, Vice President of Investor Relations. Please go ahead.
Thank you and welcome to <unk> fiscal Q2, 'twenty 'twenty, one quarterly earnings call to discuss the results of the December quarter and the outlook for the March quarter with me today is Rick Wallace, our Chief Executive Officer, and Bren Higgins, our Chief Financial Officer. During today's call. We will discuss quarterly results for the period ended December 31 2020.
So we released today after the market close in the form of of a press release shareholder letter and slide deck.
All of our available on the KLA IR section of our website. Today's discussion is presented on a non-GAAP financial basis, unless otherwise specified.
Detailed reconciliation of GAAP to non-GAAP results is in today's earnings material posted on our website.
Today's call also represents the end of the calendar year, we will make references to both 'twenty and 'twenty and 'twenty 'twenty. One. Please note all references are for the calendar year.
Our IR website also contains future virtual investor conferences, as well as presentations corporate governance information and links to our 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 factor disclosure in our SEC filings any forward looking statements, including those we make on the call today are subject to those risks and KLA cannot guarantee of those forward looking statements will come true.
Our actual results may differ significantly from those projected in our forward looking statements.
As many of you now know we changed the format of our earnings two quarters ago to include pre publishing of detailed shareholder letter.
That provides updates on our business performance the.
The pre publishing of allows this call to be efficient by providing more streamlined comments, while also freeing up more time for your questions and answers with that I'd like to turn the call over to our President and Chief Executive Officer, Rick Wallace.
Thanks, Kevin and thank you for joining us today and for your interest in KLA.
As we reflect on the accomplishments of 2020, it's important for me the first appreciate and acknowledge the global KLA team.
Your perseverance drive to be better and determination enabled KLA to rise to the challenge and deliver for our customers.
'twenty 'twenty was like no other year, we have seen and while our teams have not been physically together for the most part our company continues to demonstrate the great Kelly culture of collaboration and innovation in this emerging stronger than ever in the process. We delivered exceptionally strong financial results from the December quarter closing of strong year for the company.
In our shareholder letter published today, we articulate how kla's record results are driven by success on multiple fronts, including the resourcefulness of our global work force the resiliency of our business model and our commitment to returning value to our shareholders.
As most of you have already seen from our results 2020 was an impressive year for KLA on multiple fronts, we delivered strong growth profitability and free cash flow, while continuously adjusting to the changing work environments driven by Covid true. It all we remain focused on meeting customer demand and delivering strong returns to shareholders.
In the rapidly growing semiconductor market.
Brendan will have much more to highlight on the financials for both the quarter and the year, but I'd like to hit on a few of the annual milestones for the year KLA revenue grew 15% to $6 1 billion, marking the fifth consecutive year of growth. We also delivered notable profitability growth with non-GAAP operating profit.
And non-GAAP earnings per share, increasing 28 per cent and 32% respectively year over year.
Our free cash flow grew 44% to $1 $8 billion, and we returned $1 $2 billion to shareholders through share repurchases and dividends.
In the December quarter, we saw diversified strength across each of our segments semiconductor process control revenue was once again above plan the electronics packaging and components group met its target and our services business continued and delivered another quarter of growth and strong operating leverage.
We ended the year with strong backlog.
Seeing the stage for double digit growth in 'twenty and 'twenty, one as we continue to execute at a high level, we're operating from a position of strength of our marketplace and given the accelerated growth of our served markets. We remain solidly on track to meet and likely exceed our 2023 financial targets. All of this reflects the dedication of our global.
Teams and the enabling role KLA plays in our customers' technology, Roadmaps and enhancing the return on capital investment.
Moving to today's demand environment, which continues to demonstrate accelerated adoption of several several semiconductor and electronics industry growth drivers that we've been highlighting for the past few years technology continues to transform how we live and work and the data driven economy is fundamentally changing how businesses operate and deliver.
Value.
This digital transformation is enabling secular demand drivers such as high performance computing artificial intelligence and rapid growth in new automotive electronics <unk> communications markets.
Each of the secular trends are driving investment and innovation and advanced memory and logic semiconductor devices as well as new and increasingly more complex advanced packaging and PCB technologies with our market leadership and process control and growth and expansion to new markets like specialty semiconductor process equipment.
P C b and finish die inspection and our EPC group KLA is essential to enabling our increasingly digital world.
As much as things have changed over the past year. One thing that's remained a constant is our KLA operating model.
Daily operating model is the enduring framework that we rely on to guide the execution of our long term strategic objectives, we deploy the KLA operating model to align the company on a consistent strategy tie accountability of the results drive product development execution respond to changing market conditions.
And facilitate continuous improvement while ensuring the company operates with strong fiscal discipline as we pursue our long term performance and profitability objectives.
Let's turn now to five top highlights for <unk> and our results for the quarter. The in for 2021st we saw continued strength and breadth and foundry logic demand in the quarter.
As expected memory demand also grew as memory customers plan for growth and equipment of Destiny in 2021 to meet improving end demand.
We expect higher business levels across a broader set of customers in the March quarter with demand momentum continuing throughout 2021 across our major end markets. The.
The strength in demand were seeing reflects KLA is the central role in supporting our customers' drive to innovate and continue to invest in future technology nodes.
Second we're seeing strong momentum in the marketplace from new products driving market growth and share opportunities in both the semiconductor process control and EPC groups.
Fueled by expanded customer investment in easy of lithography. The semiconductor process control business is driving adoption with new applications and optical inspection portfolio such as EU. The print check for Gen five and expanding our share of new markets for KLA, including the ESL 10 E beam inspection platform.
And the nascent use of X Ray technologies for metrology applications.
Third our services revenue grew to 1.5 dollars 6 billion for 25% of total sales in 2020.
This is driven by growth in our installed base higher utilization rate and increasing expansion of service opportunities in the trailing edge and in the EPC group.
The strong results delivered in 2020 shall have the services team continues to do a fantastic job leveraging the KLA operating model to deliver at a high level.
Working in close collaboration with customers and partners the services business innovated and drove new initiatives against the unprecedented challenges of Covid not.
Not only did our services business received praise from our customers and also grew share of wallet and we've seen our contact penetration steadily increase in 2020 from 70% to 75% plus which feels recurring revenue streams and generate strong operating leverage and cash flows for.
This was a very encouraging year for the newly established EPC group demonstrating success in <unk> growth strategies, and highlighting how execution of the KLA operating model drives market leadership and improved operating leverage and acquired businesses revenue growth was strong and we believe that on the net basis will exceed our $50 million.
Annual acquisition cost synergy target by at least another additional $30 million with EPC KLA is now providing a more comprehensive and broader product portfolio and addressing fast growing new markets from the electronics value chain, such as RF automotive automotive 50 wireless connectivity and display.
Relative to the adoption of five G. KLA has exposure to many key components and the electronics value chain as well the EPC group ended the year with record backwards backlog setting the stage for double digit growth in 2021 and for incremental operating margins on that growth in line with the total company.
Model.
Finally in keeping with our commitment to deliver strong and predictable capital returns to our shareholders in the December quarter, we repurchased $177 million of common stock and paid $140 million in dividends back in July Kla's Board of directors authorized for the 11th consecutive annual dividend increase to a year.
The run rate of $3 60 per share.
Since inception in 2006, <unk> dividend payout has grown at a CAGR of approximately 15% in 2020, KLA returned one point to $3 billion to shareholders or 70% of free cash flow.
Before of brand gets into the greater detail of our financial highlights. Let me briefly summarize despite the disruption and unforeseen challenges that persisted throughout the year associated with Covid KLA has benefited from the resourcefulness of its global workforce, we've adapted well and we ended 2020 in a position of strength, while delivering record results.
And set the stage for the sixth consecutive year of growth.
KLA is exceptionally well positioned at the forefront of technology innovation with a comprehensive portfolio of products to meet the demanding customer requirements, which balance sensitivity and throughput the.
The semiconductor and electronics landscape is constantly changing and we're seeing broadening customer interest, which would be being applied to more technology innovation than ever before at leading edge.
We believe the secular factors driving industry demand, we identified at our last Investor day are even more relevant now than they were of that and this will help us to meet and likely exceed our 2023 financial targets at the same time, our strategy of driving diversified growth with strong long term operating leverage.
Should provide consistent capital returns to our shareholders.
And with that I'll pass the call over to Brad.
Thanks, Rick and good afternoon, everyone.
<unk> December quarter in 2020 results highlight the soundness of the strength of our ongoing strategy. We continue to demonstrate our ability to meet customer needs and expand our market leadership, while growing operating profit generating record free cash flow and maintaining our long term strategy of productive capital allocation.
2020 was the year of strong growth and profitability across multiple areas of our business. All of this was accomplished while simultaneously continuing to return high levels of capital to shareholders.
Total revenue in the December quarter was $1 six 5 billion at the very top of the guided range for the quarter of $1 five one to $1 66 billion non-GAAP gross margin was 61, 8% slightly below the midpoint of the guided range for the quarter of 61% to 63% non-GAAP EPS was $3 24.
So all the above the midpoint of the guided range of $2 82 to $3 46.
GAAP EPS was $2 94.
At the guided tax rate of 13% non-GAAP EPS would've been <unk>, <unk> higher or $3 27.
Total operating expenses were above the guided range of $393 million, including $228 million of R&D expense and $165 million of SG&A.
Non-GAAP operating income as a percentage of revenue was strong at 38% and inline with expectations.
The higher operating expenses in the quarter were due in part to adjustments and variable compensation programs as well as the timing of prototype material purchases for product development programs.
Based on revenue expectations for 2021 product development requirements, particularly in program supporting the next generation reticle inspection capabilities and the regionalization of additional customer engagement resources, we expect the operating expenses to be approximately $400 million in the March quarter, and we were budgeting quarterly operating expenses roughly.
Within the range of $400 million to $405 million over the near term horizon.
Given top line expectations for 2021, we expect that the business will continue to outperform its target operating model in terms of overall profitability and operating margin leverage.
Other interest and expense in the December quarter was $43 million and the effective tax rate was 13, 8%.
Though we always have some variability in our tax rate given the timing and impact of discrete items and the geographic distribution of revenue and profit. We believe it is prudent to adjust our long term tax planning rate up slightly to 13, 5% going forward.
Of course, we are monitoring the corporate tax discussions in the United States and will provide updates on how those will effect or would affect KLA as appropriate in the future.
Non-GAAP net income was 504 million GAAP.
GAAP net income was $457 million cash.
Cash flow from operations was $561 million and free cash flow was a record at $502 million.
This resulted in the free cash flow conversion of nearly 100%.
And a very healthy free cash flow margin of just over 30%.
Our segment revenue was strong in the quarter driven by growth in our semiconductor process control business.
The EPC group delivered results in line with our model heading into the quarter.
Revenue for the semiconductor process control segment, including its associated service business was one of three 8 billion of sequential quarterly increase of 9% and up 15% for 2020.
Approximate customer segment mix is as follows.
<unk> was strong as expected at 49%.
<unk> was 10% and memory grew to 41% from 32% in the December quarter.
Within memory of the business was roughly 60% NAND and 40% DRAM.
Going forward, we will be combining the foundry and logic segments into one category to remove some of the noise as to whether customers in one category of another given the various markets they serve and to better align with industry reporting practices.
Revenue for the specialty semiconductor process segment in December was $91 million up 2% sequentially and up 24% in 2020.
Demand in this segment was driven by growth in RF, Mems and advanced packaging.
PCB display and component inspection revenue was $179 million down 1% sequentially, but up 12% for 2020 as strength in PCB and component of inspection offset a weaker business environment in the display business.
In terms of the balance sheet highlights KLA ended the quarter with $2 $3 billion in total cash total debt of $3 46 billion and of flexible and attractive bond maturity profile supported by investment grade ratings from all three agencies.
From a cash flow and capital returns perspective during the December quarter, we repurchased $177 million of common stock and paid $140 million in dividends.
In 2020, KLA returned $1 2 billion to shareholders or 70% of free cash flow, including $547 million of dividends paid and $681 million in share repurchases.
We believe our track record for delivering strong capital returns is a key component of the KLA investment thesis and offers predictable and compelling value creation for our shareholders.
As it relates to guidance as we begin the new year. Our view is that the fact wafer fab equipment or Wi Fi market will grow in the mid teens, plus or minus a couple of percentage points in 2021 off of a baseline of 59% to $60 billion.
<unk> 2021 is expected to be a year of strong demand and growth across our major end markets with the strongest percentage growth coming in memory led by DRAM investment from a foundry logic delivering another year of solid growth.
Looking ahead based on our current backlog sales funnel visibility over the next couple of quarters and product lead times. We are encouraged by the sustainability of our current demand profile for the year.
As a result, we would expect the company revenue to be roughly consistent quarter to quarter across the year.
Our March quarter guidance is as follows total.
Total revenue is expected to be in a range of $1 74 billion plus or minus $75 million.
Foundry logic is forecasted to be about 68% of semi process control systems revenue.
<unk> is expected to be approximately 32%.
We forecast non-GAAP gross margin to be in a range of 60, 125% to 63, 5% as we expect a richer product mix continued service leverage and higher volume lead to improved gross margins compared to the December quarter.
Based on revenue and product mix expectations for 2021, we are modeling gross margin between 61, 5% and 62% in 2021.
Given the structure of trends in our business in both cost and product positioning my bias today is the the high end of this range.
Other model assumptions include operating expense of approximately 400 million.
Interest and other expenses of approximately $43 million and an effective tax rate of approximately 13, 5%.
Finally, GAAP diluted EPS is expected to be in the range of $2 98 to $3 66.
And non-GAAP diluted EPS in a range of $3 23 to $3 91.
The EPS guidance is based on a fully diluted share count of approximately of 155 million shares.
In closing the end market dynamics, driving semiconductors and investments in wip remain compelling.
The solid demand across end markets and in multiple technology nodes.
21 of setting up to be a second consecutive year of double digit growth for both <unk> and KLA.
KLA is executing well with continued confidence that we are on track to meet and likely exceed our 2023 financial targets.
The KLA operating model positions us well to outperform and also guide the strategic objectives.
These objectives fueled our growth operational excellence and differentiation across an increasingly more diverse product and service offering.
They also underpin our sustained technology leadership deep competitive moat and strong track record of free cash flow generation and.
And capital returns to shareholders.
With that I'll turn the call over to Kevin to begin the Q&A Kevin.
Thanks, Brian.
So if you could provide the instructions for <unk>.
Good day.
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.
We remind you to please UN mute your line when introduced and the possible pickup your handset for optimal sound quality and the interest of time, we ask that you. Please limit yourself to one question and one follow up we'll now take our first question from Patrick Ho with Stifel. Please go ahead.
Thank you very much and of the Lady of happy New year, and congrats to you guys.
Rick maybe first off in terms of process control intensity, we've seen.
The logic continued to grow as we go through the node migrations and NAND Flash has obviously seen intensity rise with the increasing layer counts as we look at DRAM and the projected pickup that you mentioned in your prepared remarks, what types of process control intensity increases are you seeing.
In that marketplace.
Maybe even excluding some of the EV.
The options that are out there of what other types of process control intensity trends are increasing in DRAM.
Sure I think that there if you think about DRAM what they are.
<unk> been pushing on and it's very difficult as you know to do it is to continue scaling and we do think that there is going to be some of UV that comes in but Theres. No question that there is scaling happening and of course that drives more process control intensity of the other thing that's pretty clear and DRAM is the overlay of requirements continue to.
Get more and more challenging so we're seeing increased.
Trying to understand.
How to how to squeeze more capability out of those.
<unk> says that they've got and then we do see some as I said <unk> of the adoption. So we think there'll be incrementally more focus on our more advanced optical inspection tools to be able to support that so that's what we're seeing is the trend does not necessarily obviously SUV heavy as what we'd see in foundry logic.
There is some element of the UV and there does that answer your question Patrick.
It does the Rick Thank you Glen.
Glenn as of.
Follow up.
To that question you guys as Youre seeing demand pickup in revenues grow working capital metrics of actually also improve what changes have you made particularly given that you've added or of a tech over the last few years BCD inventory turns while actually improving even.
As demand picks up what are some of the dynamics there.
Hey, Patrick it's of Great question.
And certainly adding more of a tech and I think we've done a pretty good job of improving overall asset velocity in that business. So far I think there is room for us to improve it going forward, but on the KLA side, one of the the areas where you could argue that we are I.
I think.
We do something in our business to support and I think we get paid for it in terms of of profitability, but to support our model both in terms of the.
The component of differentiation, we have that drives our differentiation of our products, but also that enables our service business. So we've always tended to carry a lot of inventory because we are supporting these tools that last a long time in the field and we also have a very exclusive relationships and a lot of our key supplier relationships that debt.
That helps us as I said protect differentiation. So as a result of all of that it does drive higher inventory commitments and we carry that risk. If you will although we never get stuck with extra systems and given the strength of the service business, we tend to move the parts. So we think it's a.
A good sacrifice to make we think we get paid for it in terms of the profitability of the structure of our business and the volume we've seen has allowed us to improve it a little bit.
This is not a turns business for the most part so I think it's probably an upper limit to it but we have.
Do focus on and I think we have improved it a little bit over time.
Thank you very much.
We will take our next question from Joe QUADRA Archie with Wells Fargo. Please go ahead.
Yes, thanks for taking the question I wanted to go back to your comment about revenue should be relatively consistent quarter to quarter. In 2021 is that of process control tool comment as well I guess, what I'm trying to understand is what youre seeing relative to maybe peers talking about Wi Fi being a little bit more first half weighted.
Yes, Joe So it's a good question. So what we were trying to do the first of all of its really for both groups of our business in the debt.
<unk> group.
And as well as the process control equipment part of the business I was really trying to do a few things first obviously, we're guiding margin. We've got a nice sequential increase to the March quarter. We wanted to provide our view of of wip growth for 'twenty, one and expectations for KLA in the year and the third thing was to provide just some cause.
Text on the demand profile as we move through the year and as I said in the prepared remarks, it looks relatively consistent now I'm not guiding the June quarter I'm not guiding September not guiding December but what I wanted to do is provide a little bit more context now.
We do have tools that cost from $10 million to $20 million, sometimes even more than that so there is the usual variability that you have related to the timing of of shipment of the customer acceptance of consignment buyout and so on but when we look across our business. It looks relatively consistent from a demand profile point of view and I think starting with the.
The backlog we have the visibility we have in the funnel and then just the general lead time dynamics of our products.
It gives me some comfort with the with that statement.
Okay. That's helpful.
And then you talked about the investments you're making on the product development side and clearly you guys are strongly outperforming our long term profitability targets I was curious how do you think about opportunities to maybe even spend a little bit more of an accelerate some of the product development projects, you've got going on.
It sounds like you've been talking to some of our guys inside the bank.
Sometimes it's Rick and I are the only two people of the company I think we got to spend less but any way to to answer. Your question look we have a rigorous process, where we look at the portfolio of the business and look at how we get returns on that portfolio. So we've ramped up our investments in R&D and product development.
Over the last few years, we think that there are opportunities one of the biggest drivers thats driving the uptick that I articulated here as we look at 'twenty one.
His investment of multiple programs supporting reticle inspection.
Paul.
Critical inspection qualification and so on so so I think that thats been.
An area of focus for us, but we feel pretty comfortable with our process around R&D and the timing of.
Of our roadmap relative to our customer requirements.
Its worked pretty well for Kelly I think what's driving more of our model of upside as more of a gross margin dynamic than that of cost dynamic and so I think the gross margin is reflective of the differentiation that we have with our products in the field and.
I think the value, we're adding to our customers. So.
Hopefully that answers your question.
Perfect. Thank you.
We will take our next question from C. J Muse with Evercore. Please go ahead. Your line is open.
Yes, Thank you for taking the question.
Two questions, if I could put them together.
The first one would be.
Around the shortages at ASML is that impacting gen. Five optical demand at all and then I guess, secondly, I'm, a little bit surprised that you're guiding or protect businesses flat half on half typically theres, a seasonal uplift into the back half I'm curious.
Curious.
If that's a conservative outlook, whether it's seasonality has changed or there's something that we should be kind of thinking about thank you.
C J.
Dan those are not related at all.
Two questions as you know, but I will take them. The first one no we don't see any slowdown in the EU the impact the delays that were outlined by by ASML in terms of the.
The demand for Gen five.
Anything it's kind of gone the other way what's happened in the last few months is I think the realization that some of the yield challenges associated with the <unk>.
Our best of best addressed by having more gen five capacity and so we're actually maxed out and trying to ramp that in order to support. It. So we have very strong gen. Five we don't see any delay in that.
We have a lot of conversations with customers about about our ability to fit.
To support that in terms of orbital in terms of that let's say, it's a complicated business overall.
The aggregate and so we don't really see anything.
Any signs of concern we do see continued growth in that business, we feel good about where we set out our plans for 2023 in terms of the original model that we outlaid to the Investor day, and we're on track to meet or exceed those so we feel good about it.
We'll have to see this is a little bit newer for us to to understand the dynamics of the architect business, but we feel good about the signs that we're seeing and as we said we ended with the strong backlog coming out of 2020. So we feel really good about this year.
The C. J the only thing I would add to that is we were guiding the right Theres still has the same variability you see.
Quarter to quarter is at a different obviously order of magnitude in our semiconductor process control equipment business, but if you look at what's driving the business overall between <unk> infrastructure mobile and fight the handsets some of the dynamics within the specialty.
And then just all of the overall PCB dynamics and how it's changing relative to two two.
Integration of packaging and high performance computing, it's all of that is driving some nice growth in those businesses. So while the display business is I expect the down year in 'twenty, one versus 'twenty of the other businesses are more than making up for it. So I think that overall it looks at the.
Looks pretty consistent more or less as we move through the year.
Great. Thank you.
We'll take our next question from John Pitzer with Credit Suisse. Your line is open.
Yes. Good afternoon. Thanks for let me ask the question first one is for brand, but I'm wondering if you're just getting a little bit more detail around what happened to mix in the December quarter.
That drove gross margins, a little bit light relative to revenue as being at the high end of the range and as we look out beyond March are there any other mix considerations, we should think about as we think about gross margins.
Yeah, John it's the usual quarter to quarter variability. So it was a little bit weaker in the December quarter, and you see a bit of a bounce back into the March quarter. So we were 20 basis points below and we just got it.
Five basis points over over the midpoint of all of that 62 level.
As I look at the next.
Several quarters and why put the comments in the prepared remarks that I feel like we're operating in the 61, 5% to 62 range. So it was really just a function of the the products that actually revenue in the quarter. It is the customer acceptance timing dynamic and non.
Any other reason.
That's helpful and then Rick as my follow up maybe I'll go back to the memory question that Patrick Task force, but ask it a little bit differently for doing the math right December quarter memory was was a new record you have to go back to kind of tune of 18 to see memory of this high and as you know we in the investment community always thinking about that space is being.
Kind of hyper cyclical.
We're willing to underwrite some of the structural drivers in logic foundry, but maybe not as much in memory. When you look at the level of memory business today, how do you kind of parse out where we are in the quote unquote capex cycle for memory versus some of the structural drivers you outlined and Patrick to answer.
Yeah, John I think as you know since we're a little more dependent on technology transition than we are of the volume our answers are little different because it has more to do with the the law.
Gration and the yield challenges associated with advanced nodes and what we see that as a pretty steady commitment toward additional capability to drive next generation and we're seeing that for multiple players. So I think like a lot of things in this industry <unk> exposure is there's less various.
<unk> and it based on that fact, and so that the.
The volume considerations associated with Capex impact us less than that and maybe Brendan can give some color on how that looks for the as we go out through the year. So John It was fairly weak for most of 2020 and we saw this.
The increase in the December quarter, which had some breadth to it.
We expected to see that so we weren't surprised by it.
And then as we look at 'twenty, one we expect to see growth the growth overall.
Articulated our view earlier about just you know we think the DRAM market overall, probably grows at a higher percentage of level than in the flash market, but we would expect to see growth in the business and into 'twenty, one, but it's kind of pretty disciplined so seeing it bounce back in the December quarter, and some sustainability here at these.
As we move through the the.
The first part of at least here of 'twenty wanted it's encouraging.
Thank you.
We'll take our next question from Krish Shankar with Cowen <unk> Company. Your line is open.
Yes, hi, Thanks for taking my question I have two of them to Rick just to follow along the thought process on memory the keys.
Like Kelly the way. It is today is relatively more exposed to NAND and data do you think that explosion of process control intensity increases in DRAM as DRAM growth more of <unk>.
And if so how should we think of world can is the revenue mix than other quick follow up.
Yes, I think that the the differences are pretty slight.
Terms of what the drivers are it's actually different products that are getting impacted.
If you think about DRAM were more.
Obviously scaling is more of a factor there and so youll see more of what we're doing in terms of weather.
Whether it's Gen. Five you don't really see that and what's going on in NAND, but you do have some of the new products, we talked about the X Ray technology is really more of applicable for that some of.
Of the challenges associated with metrology and even how it impacts our bare wafer business our share scam business, because the flatness requirements and the cleanliness for wafers for NAND.
Really get exacerbated when you think about the kind of for.
<unk> those dimensions are going through in the.
The stress it puts on the semiconductor producer for them to be able to manage the yield. So there are different I think the intensity at this point is slightly higher in the NAND than in the DRAM, but they are both kind of increasing at similar amounts.
Got it got it so the only thing I would add on DRAM is is with the introduction of <unk> and we'll have to see how that plays out it does drive some infrastructure now.
That's one level of investment and is that sustainable over time as I think of challenge for our teams, but as customers start to deploy.
It will require <unk> related infrastructure too.
To help manage that so that's a factor that's out there.
Also it may be a change moving forward.
Turning of Bryan and then a follow up for you on the bonuses. The shareholder letter you spoke about how the.
Services attach rate grew from 70% of over 75% through the course of last year.
Curious how high can it realistically get I'll put it another way service who's running the 25% of total team can it get to over 30%. Thank you.
Well of course, it will as two separate questions. It will because it's growing faster than than the underlying systems business. If you look at our service model.
911% growth rate, which is what we articulated at Investor day, and I would argue that certainly the increase in demand we've seen on the system side gives us a tailwind to that growth rate moving forward.
There is clearly customers are valuing of the service offerings, particularly as youre seeing more and more demand at the trailing edge and the need for those customers to keep those tools up a lot of those customers, particularly around the automotive are facing increasing reliability requirements and thats driving more investment in process control and the inform.
That comes off the tools so those of all been good drivers for us.
So I keep thinking of look a 80%, 85% I think that's probably a reasonable to think that we can aspire to get there. There is always dynamics for certain customers that prefer billable model and so we'll have to deal with that resistance to try to move to a contract structure at the end of the day contract structures allow us to optimize the cost structure underneath and we can see.
Two an entitlement level that drives higher through cycle profitability. So that's what we aspire to so I think I think there's opportunities, but I think there's always going to be some limit to it where customers are going to some customers for preferred global structure of certain parts of their installed base just to add so that would be the one other factor is the tools that are being shipped.
A day the complexity is such that if.
If you think about of car analogy.
Service or on the car today.
10 years ago, it might've been different and so.
You think about over time, the complexity and the associated.
More and more of our systems ended up having more and more custom designed parks throughout the system and it just becomes more economical to rely on US and then there's no question that the service model the customer benefits from having a contract over the long term they take the risk out of.
<unk> events and they have more reliability of uptime. So I agree with Brian I think it goes up over time, but nothing moves, particularly fast and the services world given the size of the installed base. So it takes a little time for for the number to keep creeping up but we're firmly convinced and committed to driving it.
Very helpful. Thanks for thanks Brent.
Thank you.
We will take our next question from Vivek Arya with Bank of America. Your line is open.
Thanks for taking my question I have the two is the first is.
If I take your March quarter outlook, and kind of annualize. It suggest this calendar year of growth in line with the WMC growth, but when I look at some of the investments that are being made in five and three nanometer on the foundry side and then the.
The DRAM, which is more of kind of logic like I'm curious what are the prospects of outgrowing the tabular fee I guess, that's the process control intensity.
Just ask in a different way like what would help you grow above or below Wi Fi this year.
But when I look at it Vivek I think that there's I mean.
I have a little bit more memory investment. This year, then then in 'twenty and so that puts downward pressure on process control intensity, but youre right about the opportunities in foundry logic and.
Some of the product offerings that we expect to have.
Over the course of 2021, so when I look at it and I think.
I think that we will at least perform in line with the market I would expect that we'll probably do a little bit better.
There are some headwinds and some tailwind as we look at 'twenty, one, but overall I think that that's where process control intensity kind of plays out and then and then from a share if we execute I think there's probably some opportunities for some modest share improvement as well so everything <unk>.
Share of Wip is probably flat to slightly up as we as we look at 'twenty, one from where we sit today.
Alright, and a follow up.
A question on cash.
Cash returns to shareholders. Your profitability is very analog semi like credit almost 37, 38% operating margins, but the free cash flow returns.
Or do you leave a lot more room for improvement even when I look at the buybacks that you had in December there was somewhat lower than the average for Ya.
We have seen in the last two years. So I'm curious how are you looking at cash returns going forward, if youre going to have such strong growth the CRM and.
The longer term trends out there.
Why not look at one one.
Per cent free cash flow returns and looking at <unk>.
Boosting dividend or the buyback.
Well so you could go back to Investor day, and I think even though we're overtime. It every time, we get the question we've been very explicit about how we think about the about capital allocation in the company and our belief that debt and generally cash doesn't get valued unless it's part of it.
The deployed productively and so when you look at what we're doing going forward, we expect debt at a minimum would be able to return, 70% and investors can model.
Model that as they think about the.
The returns profile over time, we're right around that this year, but this was a little bit of a unique year with some of the COVID-19 dynamics at the beginning of the year.
We did build our cash balance of little bit, but you are right given the growth of the business I would expect that debt.
We can deploy more we do an exhaustive exercise here to understand the.
The liquidity of the company and how much cash we need to run it and we're operating at that level today and so we.
We have to juxtapose the.
Those alternatives against opportunities for growth in the company and I think we've done a pretty good job of that but generally.
I think the 70% tends to be of floor and given the uptick in the business that we're describing I would expect our quarter to quarter share repurchasing to increase as we go forward here now on the dividend side.
Raised at 11 years in a row, 35% or so payout ratio target.
Through cycle to enable us to continue to raise at year end the year out and have a payout ratio that gives us the ability to do that and even raise it and in difficult years, we're going to grow it in line with the growth rate in free cash flow and so over time, you can expect that the dividend payout ratio will grow roughly in line with.
With the growth in free cash flow. So that's our model and we do our exercise here in each year and we will continue to do it that way I don't think anything's changed.
Okay. Thank you.
Thank you.
We'll take our next question from Sidney Ho with Deutsche Bank. Your line is open.
Great. Thank you for taking my question. My first question is on China, I think China was the if my math is right. The China revenue was down about 20% quarter over quarter. After a pretty good third quarter, but still a very solidly for us for the year by 20% what are your expectations for your opportunity in <unk>.
Kind of this year.
So I would expect WSB in China to be flat to up I'm looking at our business levels and they think that they match that so.
I would say, it's very consistent with the profile of 'twenty, maybe a little bit better.
And it's a different customer.
That are investing but in general that's how we see it.
Okay, Great maybe my follow up questions related to your target model.
Printing operating margin of 38% guiding up to 39 plus.
Well ahead of the target model of it sounds like you are comfortable with that you will continue to exceed that of our.
Our debt thinks that we should be aware of all of that may bring down the operating margin as total revenue continue to grow in the next few years in terms of either cost of goods sold side of the things gross margin, obviously offerings. The expenses side that may try to normalize the little bit over the next few years. Thanks.
Well, there's always quarter to quarter fluctuations, but.
When you look at our long term plan of growing our top line at least in the 7% of 9% range and dropping one and a half tie.
<unk> net revenue growth rate in terms of EPS growth, but that drives effectively an incremental operating margin.
Between 40, and 50% and that's how we're going to run the company over time. So you always have the drivers that influence margin gross margin, whether it's the product mix. Obviously service has a dilutive element at the gross margin line, but we factored that into how we think about the model when we put out there. So yes, we're outperforming the the public model I think the.
The strength in the speed of the growth that we've seen in the last couple of years has helped drive a fair amount of leverage in the business.
And I think that a lot of as I said earlier instead of the prepared remarks of lot of it sustainable so.
That's our model and we are outperforming it and expect to.
And over the next number of quarters as I outlined.
Great. Thank you.
Okay.
We'll take our next question from Timothy Arcuri with UBS. Your line is open.
Hi, guys. Thanks, a lot Brian I'm, sorry, you might have already talked about this but I jumped on late so it seems like if youre going to hold WP share pretty flat, which I think is pretty reasonable in the six or six for a range the.
It seems like process control shipments are going to be.
Revenue is going to be in the one five range for March and then it's going to sort of stay in that range throughout the rest of the year. So youre not going to see this pronounce the half on half the decline that maybe some others will is that sort of the right way to think about the some of these process piece.
So timna you missed it I covered it earlier and there were some prepared remarks that debt.
I had that were about a sustained or consistent demand profile over the next number of quarters. So that isn't guidance, but that was just to give some context on on how we how we see the year shaping up.
Notwithstanding the issue that we have around just general.
The asps of our tools that can cause some variability quarter to quarter. If you look at the the March quarter.
And again, we run the we guide one revenue number but my expectations around the semi process control business are somewhere between 143, five and the one for 505, including service for somewhere in that ballpark.
Including service Okay. Okay got it got it. Thank you and then and then.
I had a question on the NAND. So I know you don't have a ton of visibility of their but but your commentary.
And it's going to be sort of the weakest in terms of the relative end markets out of it year over year basis. This year is kind of interesting I think some others are beginning to try to try and say the same thing it sounds like about flat as the growing consensus.
There was a pretty big budget flush from one of the big customers in the fourth quarter. So that was higher but I guess my question is is your view on that is it because things had been cut so because of the procurement has been cut later on in the year as to why it's flat or is it because of the numbers of the same interest is off of the bigger base in 2020.
Yes, I think there is some growth in NAND it's.
It's the lowest percentage growth rate of the three segments that we articulated so I think it's probably a mid single digit type growth rate.
And that's obviously off of a bigger base.
As we look at 'twenty one.
But it's not because of things have been cod brand, that's the I guess.
Yeah.
No.
Now I'd matches for I understand the question, but.
I think it's been fairly.
It's been fairly consistent I think here I think it hit uptick the little bit in the second half of to your point and I think that there is some growth next year off of them off of.
<unk>.
Cool Okay. Thanks, Mike.
We will take our next question from Harlan sur with Jpmorgan. Your line is open.
Good afternoon, and great job on the quarterly execution and strong results in 2019 and semiconductor process control you guys gained about 300 basis points of share of.
On the systems side revenue Wise, you are about five times larger than your nearest competitor it looks like your of process control systems business grew about 17% in 2020 do you guys think you sustained or gain the overall process control market share in 2020.
I mean is do you think you drove the most share gains than on your view of double digits percentage of revenue growth in 2021, what are you going to be the fastest growing segments within process control.
Harlan I think it kind of.
You know theres kind of two ways to answer of what where the hand drivers for it and what were the products and I say that because he is really drove a lot of our pvp performance, but it isn't necessarily the only thing Pvp is used for so we feel good about how we finished up the year as you said, we gained share and we feel.
We held it we'll see what the final numbers come out.
But you remember Investor day, we are modeling a slower growth and share of than what we're actually seeing so we feel really good about where we are in terms of the BBT adoption and had a very strong year in optical inspection in calendar 'twenty as you.
We shipped the 'twenty one we feel like we're well positioned to continue to build on the share gains of process control adoption gains that we had again based as much on the end demand as some products that are coming to market that will continue to build that plus continued adoption of the optical inspection strength is really remarkable and we feel good of.
Howard position there.
I think that Youre right, we gained more than 19 than in 2020, we held our gains may be built on it a little and I think we are positioned to continue that.
The trajectory as we go towards our 'twenty three plan, but certainly for 'twenty. One that's the way the year is lining up that's the way our build plans look right now the other product families for all of them of showing growth I would think that that Rick talked a lot about the broadband plasma and the strength there.
Because of the the memory uptake, we're seeing in and after a couple of years now of digestion, we're seeing more pattern inspection are on pattern inspection.
Investment and so that's the that's a good indicator of both to support the wafer output, but also which in memory tends to drive wafer so that drives that business and then.
The the tool monitoring that debt is done with an pattern inspectors for any monitor wafers in memory.
And then of radical inspection I would expect to see growth year over year.
Above market kind of growth levels in that business as well.
Great. Thanks for the insight there.
On the EPC side, but very good diversification to the business going back for the 2019 analyst day. The teams the outlook for EPC was kind of like the 9% to 10% CAGR of one for $1 5 billion net revenues in 2023 based on the results the.
Did you put up in 2020, it looks like you guys grew that business about 10, 11%. If you included the full quarter of or protecting your March of 2019 quarter. So we can see the team tracking towards slightly ahead of those targets what type of growth are you guys expecting for EPC. This year would it be more in line with the.
At 9% to 10% CAGR that you've been targeting or could it be more in line with the overall top line growth of sort of mid teens and what segments are going to be driving the largest growth in any segments that will lag the growth.
For Heartland Great question.
We do feel good about where we're positioned in the <unk>.
As you know I think we're fully integrated now and feel really good about the message we have for our customers I mentioned in prepared remarks, we feel good about the progress we've made on the synergies.
You know we have seen the target that we laid out in 2023, we're on track, but to your point and Brent mentioned, the MPD will be down in calendar 'twenty, one which means the end we think overall the rest of the business. If you take out <unk>, probably be up closer to 15%. So an MPD was relatively weak and.
<unk> 'twenty so the parts of the business that were I think the most levered to in terms of advanced packaging and a lot of the work that's going on where we have overlap with some of our existing front end customers.
Really a lot of good progress and.
As you know rest of the is running that Ah I think he is confident that we can build on our success as we go forward based on the interactions that we're having with customers. We feel good about special the PCB has been great and we've been really happy with the work that's going on in the packaging inspection the the iqos businesses. So the.
Those three are really hitting it and feel really good about it I also mentioned, we're seeing the same operating margin leverage obviously those are lower profitability businesses, but they have of the same leverage in the operating model as the rest of KLA. So we feel good about that as well.
Great. Thank you.
Thanks, Charlie.
So it looks like we're coming up all the time here I think we have time for one last question.
We'll take our final question today from Quinn Bolton with Needham <unk> Company. Your line is open.
Hey, guys.
Some of the adjusted in answering Heartlands question, there, but yeah. It was looking at the wafer inspection.
Section business up 32% just wondering if you could give a little bit more detail on what's the what's driving that strength is it mostly gen. Five is it sort of scan and in the script. I think you also mentioned the new applications in optical inspection. So I was just looking for some more color there.
Yeah, it's really related to the the optical inspection and Jen for Gen. Five so it's not just what we're seeing in Gen. Five for Gen. Five is certainly where we're seeing.
The increased application around specifically supporting <unk> and in there.
We laid out that that thesis at Investor day, we haven't really seen it at that time that we thought the print check so when customers of all print down the <unk> and the validate that image that was going to be an application. We believed there was a big market requirement for it that's proving to be true and that's driving a lot of the business success going for.
For the other thing that's happening of course is <unk> is becoming more prevalent than just in general scaling matters more smaller defects and that pushes the mix toward more of Gen. Five then perhaps would've been Jen for so we're benefiting from both of those trends new applications additional scaling.
Got it thank you.
Alright.
We appreciate everybody's time and interest and I'll pass the call back over to per solid so.
Alright.
This concludes the KLA Corporation December quarter, 2020 earnings call and webcast. Please disconnect. Your line at this time the wonderful day.
Yeah.