Q3 2021 KLA Corp Earnings Call
[music] and good afternoon. 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 March quarter, 2021 earnings conference call and webcast. All participant lines have been placed in a listen only mode to prevent any background noise. After the speaker's remark.
And 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.
Limit yourself to one question and one follow up.
Lastly, if you should need operator assistance. Please press star zero and 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 KLA and fiscal Q3, 2020, one quarterly earnings call to discuss the results of our March quarter and the outlook for the June quarter with me today, and as Rick Wallace, Our Chief Executive Officer, and Bren Higgins, our Chief Financial Officer during today's call and we will discuss quarterly results for the period ended March 31 2021.
And we released this afternoon after the market closed.
And the form of a press release shareholder letter and slide deck.
All are available on the KLA IR section of our website.
Today's discussion is presented on a non-GAAP financial basis, unless otherwise specified.
A detailed reconciliation of GAAP to non-GAAP results is on today's earnings materials posted on our website during.
During today's call whenever we make references to a year, we were referring to the calendar year.
Our IR website also contains future investor events as well as presentations corporate governance information and links to our SEC filings, including the most recent annual report and quarterly reports on forms 10-K and 10-Q.
Our comments today are subject to risks and uncertainties reflected and the risk factors disclosed in our SEC filings and.
Forward looking statements, including those that we make on the call. Today are also subject to those risks and Kayla and cannot guarantee those forward looking statements will come true.
Our actual results may differ significantly from those projected and our forward looking statements.
I'd like to now turn the call over to our President and Chief Executive Officer, Rick Wallace Rick.
Thanks, Kevin and thank you for joining KLA is earning call today.
And March quarter results demonstrate continued momentum and our business, we delivered strong 27% year over year revenue growth non.
Non-GAAP gross and operating profit rose, 30% and 48% year over year, respectively, and free cash flow grew 47% to a record level.
Accomplish these by executing our strategic vision amidst a dynamic business environment.
Year to date, we've seen a sharp increase and business levels across each of our major markets.
This is primarily due to secular demand trends driving semiconductor industry growth across a broad range of markets and applications, such as <unk> and cloud computing are.
Customers are increasing their strategic capex investments to address these growth markets, while continuing investment and leading edge R&D efforts.
Against this backdrop of strong demand, we continue to navigate evolving customer requirements and dynamic supply chain challenges still KLA has not missed a beat and continues operating at an exceptionally high level delivering on our commitments and staying focused on creating value for our partners customers and shareholders, we would be <unk>.
And this if we did not mentioned and achieving these results would be impossible without the extraordinary contributions of our talented global teams, who always rise to the challenges of meeting our customers' needs and and increasingly complex global business environment.
Three key things enabled <unk> record results and momentum one successful innovation and market leadership to the resourcefulness and talent of our global workforce and three the strength and resiliency of the KLA operating model.
Before we discuss this further let me begin by touching on how we see the industry demand environment now strong secular demand trends continue to shape multiple markets and are fueled by the increasing digitization of end markets and industries. In addition, there's a heightened focus on the strategic nature of our customers' investments around both leading edge development.
Net optimizing facility utilization and regionalization.
As a result, our WSB forecast has improved even further from January reflecting the strength of demand we're experiencing over the past couple of months with momentum continuing into calendar 2022 and <unk>.
This environment KLA is experiencing a sharp increase and customer demand for systems and support for 2021 deliveries and our expectations for KLA revenue growth have increased from our initial assessment and January.
This momentum and customer investment is happening against the backdrop, where process control intensity maintains its momentum and KLA continues to drive market leadership and levels approximately forex the nearest competitor.
Propelled by the upside we are experiencing and the underlying wip markets L. A market leadership, increasing long term process control intensity, our broader reach and to electronics ecosystem and the contributions of our large and growing service business <unk> is on track to achieve our 2023 financial targets well ahead.
Of our original expectations.
Kla's market leadership results from the ongoing successful execution of the company's customer focused strategy, which is based on investing and high level of R&D to drive differentiation with a unique portfolio of products technologies and strategies that address the most critical process control market challenges.
We're pleased to continue to see the success of our efforts being validated by our customers' purchasing decisions.
And here are some recent success stories to illustrate the point.
And most recently published Gartner data shows that in 2020, the total optical inspection market grew at a rate double that of the growth rate of the overall Wi Fi market.
Two approximately $1 $9 billion with KLA, maintaining our strong market leadership and 83% share of this critical market for process control.
Many already know that KLA is participating in the automotive electronics through our semiconductor packaging and PCB product lines and we're excited by near term plans to launch new versions of our process control products tailored for the automotive industry. This quarter expect to hear more about how KLA is positioned our wafer inspection portfolio to help customers dry.
Higher reliability quality and yield and automotive applications and both 200 millimeter and 300 millimeter production, which will help address some of the reported automotive semiconductor shortages going forward.
Calendar year 2021 positioned to be the sixth consecutive year of revenue growth for KLA, demonstrating strong through cycle growth. The success of our diversification strategies and our market leadership and process control and a large and growing contribution from our services business.
Let's briefly cover the top five highlights from the March quarter results.
First we saw continued strength and breadth and foundry logic demand and the quarter as expected memory demand also grew and as memory customers plan for growth.
Equipment investment in 2021 to meet improving and demand we.
We expect higher business levels across a broader set of customers and the March quarter with the demand momentum continuing throughout 2021 across major end markets. The strength and demand were seeing reflects KLA is essential role in supporting our customers' drive to innovate and continuing to invest and future technology nodes.
Second gardeners and recent market share report for 2020 sized KLA share of process control over 53% per the year.
<unk> market share and process control has maintained a steady growth trajectory over the past 10 years highlights of the 2020 report show KLA continuing to strengthen our core franchise and optical inspection and strong momentum and gains E beam inspection and optical metrology, increasing investment and leading edge foundry logic the accelerated adoption.
Option and <unk> continues to be major factors driving equipment spending.
<unk> market leadership once again demonstrates the success of our portfolio approach.
Solving complex customer requirements at the leading edge.
Third our services revenue was $428 million from the March quarter, or 24% of total sales with over 75% of services revenue and our semiconductor process control segment.
<unk> from recurring contract agreements services is on track for another strong double digit growth year, driven by our growing installed base higher utilization rates and increasing expansion of service opportunities and the trailing edge and the EPC growth.
Our semi process control service Rep business revenue continues to grow faster than the rate of the installed base growing approximately two eight times faster over the last five years.
This was another growth quarter for electronics packaging and components or EPC growth highlighted by record quarterly bookings for the semiconductor specialty semiconductor business growth was driven by automotive <unk> wireless connectivity and advanced packaging applications across various end markets with EPC.
And is now providing a more comprehensive and broader product portfolio across fast growing new markets and the electronics value chain, such as RF automotive semiconductors and advanced packaging and.
As it relates to EPC opportunities and advanced packaging markets hail, a strengthening and our engagement with a top five semiconductor market leaders and packaging and we're expanding our reach without SaaS Kayla is ramping our investment and advanced packaging market to drive adoption of new technologies and this exciting growth market and addition to new inspection products for high.
Level production and assembly.
Finally, and.
And keeping with our commitment to deliver strong and predictable capital returns to our shareholders and the March quarter, we repurchased $273 million of our common stock and paid $139 million and dividends per total capital return of $412 million or <unk>, 71% of free cash flow of $585 million.
Which was also a record.
Last July and <unk> Board of directors authorized the 11th consecutive annual dividend increase to a yearly run rate of $3 60 per share.
Since its inception in 2006, <unk> dividend payout has grown at a CAGR of approximately 15%.
We believe <unk> track record of delivering strong capital returns is a key component of the KLA investment thesis and offers predictable and compelling value creation for our shareholders.
Before Brian and gets into greater details of our financial highlights and then let me recap <unk> March 2020 one results demonstrate the critical nature.
<unk> products and services and enabling the digital transformation of our lives the resiliency of the KLA operating model and our commitment to productive capital allocation.
L. A is exceptionally well positioned at the forefront of technology innovation with a comprehensive portfolio of products to meet demanding customer requirements balancing sensitivity and throughput.
Semiconductor and electronics landscape is constantly changing.
Seeing broadening customer interest driven by more technology innovation and than ever before at the leading edge.
We believe there are multiple secular factors driving industry demand and KLA will continue to benefit from and position us to exceed our 2023 financial targets reached them earlier than anticipated at the same time, our strategy of driving diversified growth strong long term operating leverage should provide robust cash flow generation.
And consistent capital returns to our shareholders and with that I'll pass the call over to Brett.
Thank you Rick.
Results this quarter highlighted and soundness and strength of our ongoing strategies, we continue to demonstrate our ability to meet customer needs and expand our market leadership.
Operating profit generating record free cash flow and maintaining our long term strategy and productive capital allocation.
Total revenue and the March quarter was $1 8 billion at the top of the guided range non-GAAP gross margin was 62, 9% above the midpoint of the guided range of stronger revenue and favorable product mix drove upside in the quarter.
Non-GAAP EPS was $3 85.
At the upper end of the guided range GAAP EPS was $3 66.
Non-GAAP total operating expenses were $407 million, including $239 million of R&D expense and $168 million of SG&A.
L. A technical application support for our customers is included in SG&A and was $42 million and a quarter the.
A combination of R&D expense and technical applications represents about 70% of total operating expenses.
Non-GAAP operating income as a percentage of revenue was very strong at 44%.
Given higher revenue expectations for the remaining three quarters of 2021.
Development requirements, particularly and program supporting next generation radical inspection capabilities range.
Utilization of additional customer engagement resources, and increased investment and our infrastructure globally, particularly and expanding our manufacturing footprint and completing our new HQ, two and Ann Arbor, Michigan.
We expect operating expenses to be approximately $412 million and the June quarter.
We are budgeting quarterly operating expenses to increase sequentially $3 million to $5 million per quarter over the near term horizon.
Given top line and expectations for 2021, and fueled by double digit growth over the past few years, we expect that the business will continue to outperform our target operating model both in terms of overall profitability and operating margin leverage.
Non-GAAP net income was $598 million.
GAAP net income was $567 million cash.
Cash flow from operations was $646 million.
And free cash flow was 585 million.
This resulted in a free cash flow conversion of nearly 100% and.
Very healthy free cash flow margin of over 32%.
Our segment revenue was strong and the quarter driven by growth and our semiconductor process control business day.
<unk> group delivered results, mostly in line with our model heading into the quarter.
Revenue for the semiconductor process control segment, including and its associated service business was 151 billion.
The sequential quarterly increase of 9% and up 28% compared with March of last year.
The approximate semiconductor customer mix was as follows foundry.
Foundry logic was strong as expected at 69% and.
And memory was 31%.
In memory and the business was split roughly 55% net and 45% DRAM.
Revenue for the specialty semiconductor process segment and March was $92 million up one 1% sequentially and up 8% over the prior year.
Demand in this segment was driven by growth and RF power and advanced packaging.
PCB display and component inspection revenue was $205 million up 14% sequentially and up 28% year over year with mobility markets driving strength and advance PCB and finished component inspection.
Revenue by major product category and region are both broken out and the shareholder letter and slides.
From a balance sheet perspective, KLA ended the quarter with $2 4 billion and total cash total debt of $3 4 billion and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three agencies.
In terms of cash flow and capital returns and Rick already covered the highlights we believe our track record of delivering strong capital returns is a key component of the KLA investment thesis and offers predictable and compelling value creation for our shareholders.
While circumstances can change our current expectation is that our capital returns profile for calendar 'twenty, one will exceed 85% of the expected free cash flow.
As it relates to guidance, our overall semiconductor demand and WCS outlook has expanded further from our view and January where we characterize the <unk> market to grow and the low teens plus or minus a few points.
We are revising up our view for the WP market to grow on a percentage basis, and a low to mid twenty's with a bias and the upside in calendar 'twenty one from approximately 61 billion and 2020, reflecting the strengthening of demand we have experienced over the past couple of months across all segments.
Also and earnings in January we provided a high level outlook of business levels being roughly flat quarter to quarter for calendar year 'twenty one.
As we look ahead based on the strength of our current backlog and.
Sales funnel visibility over the next couple of quarters, along with expected 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 continue to improve sequentially quarter to quarter throughout the remainder of the calendar year with the second half growing versus the first half.
More KLA manufacturing capacity comes on line support this robust customer demand environment.
This growth is fueled principally by our semiconductor process flow business.
And this business is positioned well in terms of expected performance in 2021 relative to the overall WSI market.
Our June quarter guidance and this follows.
Total revenue is expected to be and a range of $1 eight by 5 billion plus or minus $100 million.
Foundry logic is forecasted to be about 68% and memory is expected to be approximately 32% of semi process control systems revenue to semiconductor customers.
Within memory DRAM is expected to be about 60% of the segment mix.
Before cash non-GAAP gross margin to be and a range of 61%, 63% as product mix expectations normalize and the June quarter.
Based on increased revenue volume and product mix expectations for 2021, we are now modeling gross margin to be between 60 to 62, 5% for the calendar year.
While in any given quarter the mix of our business will affect our gross margin results. The structural trends both in terms of product cost and product positioning remain compelling and our sustainable tailwind going forward.
Other model assumptions include non-GAAP operating expenses of approximately $412 million.
Interest and other expense of approximately $40 million.
And and effective tax rate of approximately $13 five per cent.
Finally, GAAP diluted EPS is expected to be and a range of $3 20 to $4.08.
And non-GAAP diluted EPS and a range of $3 47 to $4 35.
The EPS guidance is based on a fully diluted share count of approximately 154 5 million shares.
And closing the industry dynamics, driving semiconductors, and investments and WSI remain compelling with solid demand across end markets and multiple technology nodes.
We are encouraged by the strength and leading indicators of our business and our customers' multi year plans for continued investment.
KLA is executing well and we have continued confidence that we are on track to both exceed our 2023 financial targets and achieved and sooner than anticipated on the strength of higher industry demand.
The KLA operating model positions us well to outperform and guides our strategic objectives.
These objectives fueled our growth operational excellence and differentiation across an increasingly diverse product and service offerings.
Also underpinned our sustained technology and leadership deep competitive moat.
On track record of free cash flow generation and capital returns to shareholders.
With that I'll now turn the call back over to Kevin to begin the Q&A and Kevin.
Thanks, Brian pursuant, we're ready to queue for questions.
At this time, if he 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 on mute your line when introduced and if possible to pick up your handset for optimal sound quality and the interest of time, we ask could you please limit yourself to one.
And one follow up we will now take our first question from Krish <unk> with Cowen and company. Your line is open.
Yes, hi, Thanks for taking my question and congrats on the really strong Russo.
The first question and high growth.
Turning to WP, obviously uptake from three months ago, and then in the mid 20 range and kind of curious if I look at from opioid few they're talking about 30% range, but either way from your vantage point, how do you think Kale and Brussels control revenues are going to do relative to your mid twenties.
WP growth from a calendar 'twenty one basis, and then I had a follow up.
Yes, Chris Thanks for the comments and.
I'll start here, but you have to remember that everybody uses a different baseline. So that's why I put the baseline and there. So I said that against the baseline of 2020 of $61 billion. We saw a we see growth from there in the low to mid twenties.
Centile as and with bias to the upside so I think that as we see it you do the math on that that puts you on that sort of 75 billion plus range of Wi Fi and certainly the momentum that we saw over the course of the quarter has has.
Has increased pretty substantially really across all segments. So we feel we feel pretty good not only about the growth of the overall industry, but the positioning of the semi process control.
Segment against that are the.
Industry growth expectation, so I think that it sets up well for us we have to execute over the remainder of the year, but I think it sets up well force in terms of relative performance against the industry.
Got it got it and Super helpful and then as a follow up.
And thanks for the color on the market share data from last year.
I'm just looking more on.
Looking ahead can you talk a little bit of market share dynamics, and obviously a lot of deals company. That's spoken about gaining traction book was controlled and give you the new optical inspection to the EBIT and combo, along with AI and so I'm kind of curious are you seeing that impact should especially in foundry and logic.
How do you kind of cone drive debt, especially given that you're obviously.
Lisa and the space today.
Yes, Chris.
Thanks for the question I think that there is no question that the demand for process control continues to be strong as Brent said and we we view process control and 2021. It is outgrowing the overall market based on those drivers from a competitive standpoint, we also expect to be able to continue.
Plan, we laid out in 2000, 22019, which is to increase our overall position of process control.
We have and the last couple of years and we think that continues.
Based on the strength of our product portfolio and the engagement, we have with our existing customers. There is no question that there is always going to be competition out there, but if you look at the history of the Gartner data as we highlighted.
Overtime KLA has consistently been successful and leveraging our strategies to build on our market positioning and gain share and we don't see anything about the current competitive environment they'll change that we do have some major products to deliver in terms of and areas like reticle inspection and that is happening this year, but we're very.
Pleased with the performance of our optical inspection and we're also very encouraged by the recent success of our E beam offerings that we've really got back in those segments and the last year or so so we feel good about our competitive position and as you might imagine it kind of shows up on our gross margin in terms of the strength of our business and our competitor.
On a position.
They were able to continue to have the kind of margin profile that we have despite the fact that we've added EPC, which overall at a corporate level.
No was dilutive to the margins that <unk> had prior to that so I think that should be evidence of our strength.
Got it very helpful. Thanks, Luke.
And we will move next to John Pitzer with Credit Suisse. Your line is open.
Yeah. Good afternoon, guys. Thanks for let me ask the question, Brian just first on the gross margin in the March quarter, what drove the upside and I guess importantly, as you look at June and full calendar year guide what are the assumptions that youre, making for kind of mix and to what extent are you above target because of cyclical because of mix or should we do.
Start thinking about 62, plusses being kind of a new target.
Yes, John Thanks for the question. So when you look back at the March quarter, most of the growth sequentially in the quarter came from the semi process control business and as Rick just mentioned and that's a that's a richer business force overall, so that combined with the upside and the quarter in terms of incremental revenue is what drove the.
And it's up to where they were a little bit lower as we look at it.
At the June quarter is it still in line with the kind of guidance that we've been providing at 62% plus or minus so were mostly in line with that as we look at quarter to quarter. We do have some sequential growth and in EPC and so that's dilutive from from.
On that standpoint, but in general I think that the margin drivers structurally are all are all pretty solid and we're seeing nice leverage overall and the business from from the activities are the strength of the business and the activities and our factory. So we're seeing good efficiencies there.
And then over the course of the year I think just given the Directionally, where it's moving and I mentioned last quarter I thought it was 61.5% to 62% per the year.
Certainly the stronger outlook in terms of top line, but also just the drivers underneath in terms of what we're expecting from certain products. I think were in line with that sort of 62 to 62 and a half that I talked about our prepared remarks.
And given the strength and the business overall, probably.
More biased to the upper end of that range. So I think that there is sustainable traction in these areas, particularly around certain products, we talked about the inflection and growth and optical inspection.
So anytime you see products like that and selecting and that's going to drive to a richer mix overall for the for the overall business.
That's helpful and then as my follow up going back to kind of the market share question, which I think is one of the key investor concerns out there I think the concern that some investors have is that as we hit this inflection from from optical.
More exotic lake sources like E beam and X Ray.
Sort of review that that the incumbency advantage kind of goes away and perhaps we're all kind of estimating that inflection to happen more quickly than it will be can you help me better understand the forex market share advantage that you have and the optical world.
How does that position you as we start moving to these new technologies.
Yeah, Thanks, Jon I think the.
I'm.
I'm not certain of this but I think the fastest growing product and <unk>.
Petrology and inspection of pretty certain was our gen. Five over the last couple of years and and the strength of that is driven by its ability to satisfy.
The needs that we have for inspection and measurement with AUC and specifically around print down and also the advanced nodes. There is nothing that we're seeing that indicates the percent of inspection and metrology budget is dramatically increasing towards E beam and in fact, if anything it's always been the challenge and to drive that.
Optical at a higher rate because of the price performance and so much higher I'd also say that the people that are closest having a multi beam E beam solution. Our KLA. We're the ones that habit that we are developing and introducing in the radical space, which is I think.
And where it's needed the most so we don't really see any inflection we don't see a change in the market share dynamics and if anything the challenge the brand and the operations team have and satisfying the increased demand around the optical portfolio that we have specifically gen. Five but also gen four which has it slowed down.
I don't buy the thesis that this is the transition.
It hasnt been for years and the reason is because optical keeps getting better and it's really difficult to make a day beam tool that's fast enough to satisfy most of the inspection requirements in terms of pointing E beam appointing optical with E beam that is not a new idea that's been around quite a while and KLA, we introduce that concept.
When we introduced our E beam inspection tool and talked about it at our analyst day that just allows those tools to be functional and continue to provide value. So I don't think that transition is happening.
And I don't want to get added.
Oh, I'm, sorry, and just wanted to thing is that I think just in terms of overall growth rates right. So we talked about the accelerated growth relative to the market and 2020 and I would expect this business to grow faster and the market again in 2021, So I think that debt. The good thing about the complementary nature of our <unk> solutions with our optical and driving higher relevancy.
And use case application across the optical inspection, which is the large market right. That's the market that's $2 billion plus.
In terms of opportunities so that they can give you some perspective on the strategy overall, but but there's an inflection here. That's that's validated and I think the relevancy of optical inspection and a lot of different ways.
And where does the incumbency and vintage you joy and optical transferable as the world starts to move to day evening.
Yeah, John and I again, I don't think the world is going to move large scale. The ebay, we're well positioned if it does but I just don't think that the.
I think theres going to be a mix and match and the percent of <unk>.
<unk> and it could be inspected by E beam is never going to be as high as what could be expected by optical especially since gen. Five is still on the early iterations, we have more capability to add to Gen. Five is we've been adding have for a while at a day I capability of that.
I think in general yes, we have a good evening solution, but our modeling doesn't show that that's going to be the increased percentage of the use case, because optical can satisfy especially gen five and satisfy the needs that are going to be through the 2000, twenty's even past when we get the high and a <unk>.
And remember that's only as a percentage of the layers that are going to be subject to that so I don't think we're going to see this transition to ebay and I think incumbency for KLA has really been based on our ability to keep delivering new capabilities and the market not so much because we've been there, but our newest products, which is why we invest so heavily in RF.
D and the application support for our customers. So I don't think it's going to transition we'd be fine if it did but I think it's a better price performance for our customers to have as many layers be done optically as possible because the throughput capability is just so much better and optical them and it is and any form of people.
Great color. Thank you.
We will take our next question from C. J Muse with Evercore. Your line is open.
Yes, good afternoon, and thank you for taking my question I guess first question Rick I wanted to go back to your earlier comment around process control outgrowing WMC and.
And to me logically when we're adding meaningful capacity I would think process tools would outperform and process control, which would underperform not not any hit to you, but just where you fit in terms of the order of spending.
And you know here, you've outlined mid twenty's kind of growth.
For the industry.
Whereas we've heard 37% growth from and smell, we've got 30 plus percent growth from Lam.
You know, how and that world those process control outperform.
Is it Intel coming back.
Is it a mask inspection spend from China, what are the moving parts that can allow that to happen.
Yeah, I'll give some color and then Brendan can fill on some of the details, but if you. If we assume the market is let's say just pick a number 22% <unk> growth this year.
We're loaded right now and what we're modeling that we need to do just based on the orders and the conversations we're having with customers daily as will significantly outgrow that and I don't know and there'll be 38% and it will probably start with the free in terms of what it is now we don't know what <unk> is going to actually be this year, but.
That's what process control, that's just based on the conversations we're having right now.
Odd Khan, who runs that business is and calls almost.
Three times, a week talking about slots and support for customers across this portfolio I get pulled into them occasionally but that's the conversation is how can we support that and when we model it.
We look at that business and we think it's it's going to be a very strong growth. This year could the <unk> numbers change yes of course.
What's it driven on to your other question C. J. It's of course, it's driven by the increased investment and people have and they they have design rules.
On a secret the TSM has talked about dramatically increasing their capex this year.
And and we know what Intel has said publicly but it's not just that we're seeing increased <unk>.
<unk> been and conversation from the memory manufacturers, who want that capability too. So I think the difference between the process control intensity and foundry logic is still there, but it is narrowing a bit as people push harder on the advanced nodes for specifically for the advanced DRAM work, that's going but also some NAND work too.
And maybe you can fill and yeah. It's C. J I always struggle a little bit with these questions just because everybody uses different baselines and I don't know what the baseline work for the different companies and sometimes they don't even share on so you don't really know when youre thinking about percentages. So I tried to show our work here and let you know how we're thinking about it if you look at 2020 Kla's performance was.
Pretty much in line with the market went from $52 53 billion and 2019 to 2020 at 61 billion.
And that's about 16% overall and if you look at semi PC equipment. It was in that ballpark. So as we look at this year as I as I said earlier, if you're looking at 75 billion plus I think that's where the the industry is against the 61 baseline and you're like in the mid Twenty's to our to our prepared remarks and against that backdrop I would expect process.
Control to do very well and so we'll see how it goes I'm not going to guide the second half certainly we would expect the second half to be stronger and that business overall and I think the drivers are pretty compelling and pretty broad based so we will see how it goes as we move forward here, but that's a I think that's how I see it at this point.
Very helpful very helpful. As my follow up.
You alluded to supply constraints or adding on additional capacity.
I'd Love to hear you guys typically run your business too you know roughly.
And then month backlog.
Has that extended.
And I guess what are the how should we be thinking about.
On the timing and bringing on capacity and.
<unk> to the model either gross margins or Opex, if at all and.
And if your lead times are.
And then beyond that kind of a seven month timeframe you do you have visibility now into the first half of 'twenty two thank you.
Well, we prefer to operating right around six months, where we can now our products do vary some have very long lead times, where youre looking at some of our high and just systems, the the timing to procure and optical components and and Polish and grind optics can take some time. So so for some of those products don't want lead times are significantly longer I'd say.
Today, if you aggregated across the company, we're a little bit longer than we'd like to be so we'd like to target somewhere in that five to six and we're probably somewhere in that seven to eight range as we look at it today and capacities coming online really across the board, we're adding people and all of our factories worldwide. We've been doing that since our since we started to see.
The business inflect in November and a meaningful way, we're adding capacity in terms of space and all of our major factories around the world and we're working very closely with our suppliers and suppliers have been great support and our ramp so far they're adding and investing and we're investing in them and a lot of cases, so I would expect that given the guidance.
The growth, we're expecting and the second half will happen as a result of incremental capacity and we can continue to work that so I think given the expectations around six months in terms of our lead time, we can continue to add too to what we have to support whatever environment. We were facing at the end of the day KLA doesn't lose business.
We can't deliver so we also will move things around as needed to be able to support our customers and we do a lot from a tactical point of view to try to shorten cycle times, adding shifts all the little things you can do to pull in and cut days out of out of our.
Out of the lead time, so all those activities are ongoing and and I think that as we execute against that into the second half.
You know I think it creates opportunities for us to to deliver.
<unk> delivered to the expectations, we have right now, but also to support upside if it presents itself.
Thanks, Brian and I don't see any reason why it is you know it seems to be sustained and even as we move beyond right in terms of I don't see anything fallen off anytime soon.
Thanks C J.
We will take our next question from Harlan sur with J P. Morgan.
Line is open.
Hello, Good afternoon, and great job on the quarterly execution and strong results and.
And foundry.
And then most of the discussion has been focused on leading edge, but there are significant and wafer tightness on lagging edge Cmos technology.
<unk> 28, 40 nanometer and higher I know your sweet spot is advanced technologies, but there is some part of the demand strength and process control coming from these Nike and edge processes.
The city gets built out so what percentage of your business and process control is exposed to mature technology nodes.
And so they fall China, all the business in China, and classify as mature and most of that is pretty foundry weighted this year there is some.
Some wafer investment that's happening and there is some memory investment, but I'd still say, it's probably greater than $60 65 per cent.
Foundry I don't have it in front of me.
And so you've got that plus you've got other activity I would say probably somewhere in the semi process control equipment. If I just look at the equipment part of the business.
It's probably somewhere around 25% of our revenue I would call 28 nanometer and above.
25% to 30 per se.
Yeah, and heartland or things like that.
And just add just add to it and it's not just tied there as you know it's tight everywhere and so you do remember years ago, If you think back to.
When there was one product and that would transition to the next product that people would reuse capabilities, that's really not an option now and.
And so what you get is that the heavily utilization and benefits sales, but also we say that and service. So that's what's part of what's driving dropping and driving the higher levels of our growth and service.
Great. Good insights there and then as a follow on I mean on the EPC business with again with the chip thickness on mature technologies, especially automotive and industrial focused and tightness and advanced packaging and substrate.
And I assume that this would be driving strong demand from epc's portfolio products, because they are focused on specialty processes.
On packaging and PCB and I think last call.
Thank you your view with debt ex display that D. C would grow 15% this year, but just given the strong demand for analog and RF power transistors.
And on substrates and PCB capacity do you guys have on your view EPC growth for this year.
And we do I think you hit it and.
Again, if you take out the display piece, which has its own dynamics as you know.
I'd say that we were being powered by and and we talked about this and pass Charlotte and book by five G. Largely if you think about it and most of 2019, 2020 and early now the thing that we had counted on early.
And in terms of the the deal thesis was automotive and as you know and everybody knows they hit the brakes.
Part last year when the view of the overall economy was tough largely I'd say that and some other factors have contributed to this chip shortage.
And so now they are back on and and you're right. That's definitely driving EPC and <unk> is being driven by that dynamic as well. So now it's really firing on all cylinders and so we're seeing really really strong growth across EPC in terms of supporting both the continuing momentum and five G. But also now on.
On a motive and I mentioned and my comments and we're going to talk more about some of the new offerings, we're having to support our automotive customers, which we hope will not just help in terms of solving some of their problems, but alleviate some of these shortages as we help them with yields which is really the near term the best leverage they have is in terms of providing more.
Output is higher yield.
Yeah, and one of the things that make <unk> pilot with everything that Rick said is H, including display now I would say that debt expectations about for a b C or in the mid teens. So that reflects some of the growth drivers and and and.
And growth that we're seeing and and the businesses that Rick mentioned we.
And we will see how it plays out half to half and I think it'll be reasonably balance, we arent doing a and ERP integration on one of those businesses and so that could drive some revenue across quarters, a little bit as you prepare for that but a pretty consistent level of business and as I said overall for the entire group.
Growth expectations that are.
Or kind of mean 15 for the year. So we feel pretty good about where we're at with those with those businesses and and particularly on that growth I think with all the synergy work, we've been doing across the company and those and that group.
Really pleased with the operating leverage as well.
Great insights thank you.
And we will take our next question from Joe Moore with Morgan Stanley. Your line is open.
Great. Thank you you mentioned, China and that the activities, mostly foundry can you give us an update on how big you see the Chinese sovereign business, how much growth you see coming this year and and and how fragmented it is and how many different customers are you seeing that or kind of.
And it's been on a course that W. P.
I would probably grow mostly in line with the overall market I would think Ah and very fragmented and lots of customers.
Okay, great and and and and also and I alluded and that Joe. Joe also included and that is also some of the wafer activity, that's happening where your T or you're in mask, where there's some investment and infrastructure to support the broader ecosystem.
Yeah that makes sense, Okay, and then as it comes pertains to regulation and whether it's the chips act or <unk>.
You know the export controls reform, that's kind of going through.
I guess to and do you feel like the equipment industry and KLA, specifically has kind of a voice and the government in terms of the direction of these things and you know it is or is it kind of more dictated by the semiconductor customers just how big is the the lobby and kind of government affairs efforts from the equipment companies. These days.
It's true I think what's really happened is there has been and openness in general to understand the dynamics I think that a.
Fear that many of US had was that there might've been unilateral action. If you go back a year or so and and it doesn't feel like there's going to be that now and it's got the multilateral it's gonna be thoughtful.
And you know, we're all in favor of free trade and nobody wants IP or other factors to two.
To be compromised so I do feel like there's a constructive dialogue around that and it's not just that the semiconductor guys. It's also the equipment companies and we feel really good about where that conversation is.
Great. Thank you very much.
Yeah.
Thank you.
And we'll move now to Joe <unk> with Wells Fargo. Your line is open.
Yes, thanks for taking the question on on E. V. I was just curious you know you talked a lot about process control intensity and clearly.
And if any from UV.
But I guess at three nanometer.
Turning to see a big step up and the number of UV layers is that something we should think about it and maybe an incremental driver is for you guys.
And Joe for sure I mean, we're having as you know the development work and.
There's a lot of process control work that goes on early on when were doing R&D and development per customers and there's definitely an increase.
<unk> to the number of players that they have to qualify and that drives multiple markets, but obviously, ensuring the quality of the radicals and when they're printed that the high quality is there now it's across more layers. So that drives adoption of gen. Five and also just more sensitivity to smaller defects. So in general that shifts the.
Dynamic if you thought about a blend between gen four and Gen five which gen. Four is still very active.
Product line this will shift it more and those advanced nodes to a higher percentage of those tools being gen. Five tools and the next generation or iterations on Gen. Five as we move forward I think we mentioned in the past Gen. Five is very early and its product lifecycle and there there are a number of additional capabilities that will be added to it to.
<unk> advanced so those are just two areas.
There'll be others in terms of the metrology challenges, but in general the process control challenges as we move forward.
Especially on advanced design rules will increase and where we're seeing that play out right now and development.
So Joe one other factor to keep in mind that now you have these technical drivers and he's no transfer and it transitions that debt force customers to have to think about incremental capability and those requirements and so the ability to reuse a lot of the capacity they might have purchased and the prior node is harder because you've got stronger and market.
Adoption and it's clearly happening today and particularly at the five nanometer node, but then also the technical drivers up even if they could use the tool doesn't meet the technical requirements. So that's another factor that drives the drives intensity that that's pretty important to our overall business.
That's helpful and then.
Maybe one for Brian on on the capacity increasing for your manufacturing footprint.
How do we think about your planning in terms of you know.
Supporting overall, WMC and because I think in the prepared remarks, you talked about sustained.
Sustained growth looking even into next year.
Yeah look I don't think we're capacity constrained and with within the Windows that we talk about just in general that we think that we there is no upper limit right will continue to work and we continue to invest certainly and there is some time to just some of the lead time on our parts, but whether it's facility.
These you know we'd like to think about people parts and space of KLA are typically our long haul was around parts around some of the components. We talked about so we're going to continue to add capacity and and and and send a strong signals into a supply chain to drive the investments that are required and and will.
Based on customer readiness and customer expectations, we'll do what we need to to continue to support those activities. As we go forward even beyond 2021, so I'm not worried about our ability and I'm worried with debt were challenged and it's not easy and and Theres a lot of work going on here, but at the same time, we know how to do this and and and we will continue to.
And to make the investments that are required to get the capacity to support the day environment. We're in.
Extra perfect. Thank you.
And we will move next to Patrick Ho with Stifel. Your line is open.
Thank you very much and congrats Rick not to make you sound old, but you've been in this industry for a while.
Given that you've seen previous cycles and how they've acted in terms of these kind of burst volumes, where you've had to accelerate capacity Brett and just mentioned that he is not particularly worried about meeting customer demand, but as we get into the secular change in terms of the industry, where we may have sustained and air.
And we've made it spending how do you look at.
And I guess meeting the challenges and the supply as well as.
Meeting customer demand, particularly for both for new tools.
And for their needs, how do you manage potentially and extended period of spending and very elevated levels.
And Patrick Thanks for not making me feel old.
And every cycle.
Sure you've heard is different one of the things that we learned early on though is is to look at the all of the money and figure out how profitable your customers are and what is sustainable and I go back to periods, where I remember companies that were spending to exit their capex was twice the size of their revenues and you just knew that couldn't last.
So when we look at the supply chain now and one of the leading indicators, we always look at it as profitability of our customers and it's universally good I mean, there are some examples where customers are investing and we see this and China, where they don't have a revenue base to support the investments, but those are viewed as strategic investments, but the percent of that.
That's in the industry right now is really low and and so.
It's the growth of the semiconductor industry broadly with all the different drivers the number of players that have maintained their profitability through these cycles and and the fact that that gives us confidence and the sustainability I don't think we're going to see growth rate. That's 25%, 30% you know we're talking about what it might be this year that's on.
I'm going to be the long term growth rate I think there's the step up to get to support these new drivers and I would imagine it resumes its growth better.
More reasonable upper single digit kind of level for the equipment industry and as we kind of model, but the step up is consistent with the multiple drivers and <unk>.
<unk> mentioned, we have a lot of leverage in terms of being able to utilize our facilities, but even that given that we're investing right now and to make sure. We've got additional people parts and space as Bren said, so that we could support the ramps that we're seeing I.
I do think this is a step up I think we've seen it in the past.
And I think the business is sustainable I don't think 30% growth will happen for several years in a row.
But if it did we'd be there to support it. So we feel really good about where we are and more importantly, the investments, we're making and our capability are enabling our customers to achieve their objectives and that's really.
The key to our continued success is to make sure and we're staying relevant with our customers does that answer your question Patrick.
That's very helpful and and to make you feel younger Rick I'll ask you a follow up as well as we look forward and they know process control does get a I guess a good look at a lot of next generation process technology and manufacturing you mentioned about <unk>, increasing layers and the adoption of Gen five.
And look forward to foundry logic, you have the UV increasing layers, but you also have and a few nodes the transition to gate, all around and nano wires nano ribbons.
Wallets and really from a process control standpoint, and I know, it's very early which do you see out of the EV, increasing layers and the transition to two.
Two new transistor structures, which do you see as a larger incremental opportunity for KLA.
And I think it's a great question. Just so you know we do have a group inside of KLA that models out the advanced technology designs. We have some really talented people that we think about that years in advance to think about what are the solutions that'll be necessary gate, all around us and interesting one because there and it's actually.
And adaptation of the Gen four and that's gonna be most relevant to solving some of those problems based on the the contrast that those devices. So we think that it'll be incremental as I mentioned and the earlier question you know and you think about more UV layers that just drives the overall expectation of higher sensitivity across the portfolio the increase for <unk>.
Sure.
More inspection overall and and at a higher level of sensitivity.
And it toward the advance nodes driving more intensity than the new structures, but the new structures can't be discounted because if you can't make them.
Successful, then you're not going to be able to ramp those so there's no. So but I'd say, probably 60 40, maybe even 65 35 debt it'll be the advanced design rules that drive it more and it's not just gonna be and foundry logic, because we're also seeing even though it seems like they're always almost out of gas DRAM and keeps pushing as well.
To drive the next capability improvements so that they can have competitive advantage and I don't think that are based on anytime soon.
Great. That's very helpful. Thank you.
Yeah.
We will move next to Timothy Arcuri from UBS. Your line is open.
Hi, Thanks.
Thanks, a lot I guess I had the first question was on the whole E beam versus optical thing.
You know applied launch day.
And light and tool and March and the idea that you combine optical and E beam and you use and printing to sort of determine what defects matter and you guys talked about that a lot back in the back half between 19 and with the ESL 10, So I guess conceptually, it's not new but they had a pretty strong E. Beam review present, so I guess and theory that could provide kind of a better.
Good day.
And algorithm, but can you sort of talk about just this general idea and maybe sort of whether it can change the impact of the E beam could have on the market and your position.
Yeah, Tim Thank.
Thank you for remembering what we spent in 2019 I could go back even further when we introduce the sums back back years and years ago and the idea. It was appointed for optical back then and that was and the nineties. So so this idea of E beam directing optical as an old idea the idea that.
The problem that it has and general and this is a interesting question is do you have a systemic defects can you you really can you actually point that AI has helped solve some of those problems, but there is still this basic question about coverage and and can you cover enough of the wafers to see enough of the Ers. If you look at a modern wafer and.
A leading fab they don't how many defects I mean, there are very few so you need to cover a lot of area and that's what optical is really good at the E beam ends up being the most valuable and debugging of a new process at the very front and which is why it's mostly been in R&D and that's what we're continuing to see Oh. It is.
Been added to the products, we've been doing that for a number of years whatever your definition is increasing the intelligence. The algorithm that's been KLA sweet spot for years and and we continue to do that so I don't think that I don't think that the announcement of two and a half year old technology earlier this year was.
Really anything revolutionary other than non space.
It's not new.
And I don't think that the relevancy of what we're doing changes as a result, I do think that increasing the capability of the ml and the AI across all the products in this industry.
History will continue to make them more relevant as we go forward for KLA and others as well. So I think that's an area. We're all taking advantage of and that will help increase the capability and the learning that the industry has in general to be able to move forward, but I don't think this is this was not a dislocation. It was not it was not anything new for customers. It might've been new for <unk>.
Other communities, but the disclosures and the conversations are not new to customers.
Thanks, Rick and then I guess just last thing from me. So service, obviously, it's a lower portion of your <unk>.
Total rather than your peers I know that you're never going to be like the film's guys given the nature of their technology some of their tools eat themselves. So obviously, it's sort of like apples and oranges, there, but some of them also what sort of guarantee.
Performance and metrics like that and they're sort of selling that and I'm wondering what sort of new things, you're bringing to bear and service to maybe help your service business start to grow a little faster things.
Okay.
Yeah.
Yeah, Tim I mean, we I think one of the things and service for US is that we have the ability to really customize our offerings for customers. Both in terms of response times and in terms of stocking levels in terms of uptime commitments.
And things like that and and then.
Given that and given the nature of the contract debt.
That we structure and it's pretty important for you and when customers buy process control day, they buy what they need and then they they they have contracts to ensure that the tools are running.
Full out all the time and day and they are willing to invest and our contract structure and ensure that we can keep them up and make sure that they match and all those sorts of things. So it's a little bit different business customers because they don't have as many they have tens instead of hundreds and they went in a process tool. They don't necessarily have the ability to build the capability intern.
And to be able to do self service and so that's a unique aspect of our service business. There's also the complexity of what we offer relative to the process tools, which is far different so for all those reasons. It does drive a different service experience with customers and they are as I said with customized to meet their their operating expense requirements and what they are looking to get out of their fab and it.
Does drive this 75 per cent plus our contract revenue stream.
I think there's always what happens with the new tools in terms of our ability to to sell and support service on new tools, I think where we've seen a lot more engagement with customers is the and the trailing edge, where you're seeing higher reliability and quality requirements, particularly let's say for example, and in areas like automotive where customers weren't as.
Focused on the process control outcomes as much as they are today with the growth that we're seeing and the increase and reliability that's required and given the margin structure and that industry. For example, it's pretty important that you don't underkill right because of the.
The cost of recall and so on but then Theres also overkill too so theres a lot more process control engagement, that's happening through our service business with those customers to support the installed base at a greater level. So you don't see tools falling off you see them staying and service and that's what it's probably the unique growth driver that we're seeing today is as products are living longer and some are.
These other markets are and collecting.
Hi, Brian.
Yeah.
And we have time for one more question, we'll take our final question today from Vivek Arya with Bank of America. Your line is open.
Thanks for taking my question.
B, a pure 2020 two target model. This year basically two years ahead, but that seems to have been driven a lot more by market growth rather than I think and and you're talking model you had sensitive and one to two points of share gains and I know.
You you highlighted a third party survey that had your share kind of slipping a little bit last year I'm. Just curious when do you think we should start yeah I'm expecting share gains for you over the next few years and will that'd be driven by the launch of new products or whether that would be driven by.
Sure and I like to like category, but that would be driven by spending being more foundry logic base. Just how do we think about what you had talked about share gains and at the analyst day versus what you have seen so far and how we should think about the share shift over the next one to two years.
Yeah, I'll take the first part and let Brent talk about model. We actually are ahead of our share projections that we've laid out and the analyst day 2019, we gained three points 333 per cent share and that got a.
Seven down if that's what the survey says but.
Weird model, 2.5% over the four years and we've gained two 3% over two years and we believe that this year will be another strong year. So I mean these things move.
Annually, it's kind of hard because there are puts and takes a.
But competitively we're actually ahead of plan and and largely that's driven by the success mainly of Gen five and and what we're seeing and the optical inspection.
Portfolio, that's been the bigger gains we have new products coming out that will add to that but our expectation of share growth is actually higher than it was.
At the time, when we did the analyst meeting based on the success that we've had to date and then Brian can talk more about yeah from a from a top line point of view you're right. It's been what's driven it mostly has been yes, we had some incremental share improvement relative to the plan. We were on but just stronger industry growth, we talked a lot and and part of our R. R.
Theme was if you will back from our Investor day was to talk a lot about opportunities related to <unk> and increasing memory opportunities to drive incremental adoption of process control and KLA solutions, we talked about radical inspection requirements for for EOD that would affect the reticle inspection tools, but also the wafer inspection tools.
We also talked about new markets like E beam that we were reentering and then.
And finally opportunities and memory metrology. So those in some ways, we're going to create incremental revenue almost irrespective of the wip level. If we look at where we are today most of its been industry growth and the and the I'll call the normal products with a regular products and and share opportunity and it's driven our performance relative to our to.
So the overall plant and the contributions from those products are still to come and we talked a lot about 2020, one being opportunities to engage with customers to see the markets and that we would start to see more steady state contributions in 2023 from those products.
So we're still in that same phase regarding those and and in some cases, you know COVID-19 has made it a little bit harder and engage with customers out in the field to support new products and these and to drive new markets, but I think that's still to come. So we've got a higher industry environment, that's driven us to where we are today, but where those contributions are still to come and over the next couple of years.
And so we're excited about that and then on the leverage part anytime you have revenue that's grown what we saw on 'twenty.
And calendar 'twenty, where we were up 15% as a company and and growth expectations. We now have for 2021, given the industry commentary earlier anytime you drive revenue like that you're going to drive more leverage through through the model. So yeah. We're outperforming our public model by about four points and operating margin today do I think that that's sustainable.
And four points, probably not but do I think theres a couple of points for sure of sustainability. There I do just given the strength of the products and and the expected mix going forward.
Yeah we're.
And I think and a pretty good place relative to the overall model we have to execute of course are over the next year or so and we'll have more to say about the future and in the coming months and quarters.
If I can squeeze and a quick one automotive from your perspective, when do you think the automotive industry is able to address all of these are supply shortages that had seen from the semiconductor index.
And I think we're not the right people to answer that question.
We're going to do everything we can to help them, but it's hard to understand exactly how they got so out of line with the demand.
But I know that there have been contributing factors and you've heard of some of them projects that werent started fires that happened.
And the reluctance to invest earlier then.
And retrospect with needed plus a strong demand and so we're gonna do everything we can to help them but.
And they were the best people to ask for that.
Thanks for that.
So that's true.
Sorry for solar and I was just going on.
Yes, sorry, I'm, just trying to kind of clean and a and turn the call back to you Kevin.
Yeah, sorry about that and.
Again, we appreciate everybody's time, we know it's been a very busy week for earnings very busy day for earnings wont be busy. This summer here with a lot of investor event and look forward to seeing you again.
Take care.
This concludes the KLA Corporation March quarter, 2021 earnings call and webcast. Please disconnect. Your line at this time and have a wonderful day.
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