Q1 2022 KLA Corp Earnings Call
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<unk> HD audio.
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Yes.
Good afternoon. My name is Ashley and I will be your conference operator today at this time I would like to welcome everyone to the KLA Corporation September 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 Speakers' remarks, there will be a question and answer session.
He 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 and I will now turn the call over to Kevin Kessel.
Vice President of Investor Relations and market analytics. Please go ahead.
Thank you and welcome to KLA is fiscal Q1, 2022 quarterly earnings call to discuss the results of the September quarter and the outlook for the December quarter with me on today's call is Rick Wallace, Our Chief Executive Officer, and Bren Higgins, our Chief Financial Officer. During this call. We will discuss quarterly results for the period ended September 32021, released this afternoon. After me.
Close you can find the press release shareholder letter.
Hi Tech and infographic on the KLA IR section of our website. Today's discussion is presented on a non-GAAP financial basis, unless otherwise specified and whenever we make references to a year, we are referring to calendar years.
Detailed reconciliations of GAAP to non-GAAP results in the earnings material posted on our website.
Our IR website also contains future investor events as well as presentations corporate governance information and links to our SEC filings, including our most recent annual 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.
Also subject to those risks and KLA cannot guarantee those forward looking statements will come true are actually.
Results may differ significantly from those projected in our forward looking statements.
Let me now turn the call over to our Chief Executive Officer, Rick Wallace Rick.
Hello, and thank you for joining us today.
<unk> September 2021 quarter continued our track record of consistent execution and commitment to outperformance the company's focus on delivering on top and bottom line goals remained at the forefront of how we run our business.
During the quarter revenue grew 8% sequentially and 35% year over year to $2 8 billion.
Non-GAAP earnings per share was $4.64 representing.
Representing 5% sequential growth and up 53% compared to the prior year.
These results demonstrate growth momentum in our core markets and the operating leverage and the KLA financial model.
Demand across <unk> major product groups continues as secular trends to drive growth across a broad range of markets and applications in the industry. This growth is putting pressure on the semiconductor industry supply across multiple technology nodes.
Parallel leading edge customers are increasing their strategic capex investments to improve their ability to address market demanding new semiconductor capabilities.
I guess against this intense demand backdrop, we are navigating evolving customer needs and supply chain challenges still KLA continues to outperform expectations by operating with purpose and precision and keeping our focus on creating value for our customers partners and shareholders now turning to the industry.
Demand environment KLA remains in excellent position when we look at the industry demand landscape.
Strong secular growth drivers are creating important tailwind the translate into momentum for our business.
As a result, we are increasing our outlook for the wafer fab equipment or WMC industry.
Last quarter, we estimated wip growth would be in the mid 30% range.
We now estimate the Wi Fi will grow approximately 40% in 2021.
With sustained demand trends, we expect positive industry dynamics to continue into calendar 2022 and fuel another year of growth.
Along with increased demand due to digitization across multiple categories Kla's business is benefiting from customers increasing their focus on investment in leading edge development optimization of fab utilization works established production nodes and regionalization for future future fab construction.
To address this growth we continue to invest high levels of R&D to ensure we're constantly improving and remaining indispensable to our customers.
For example, we're prioritizing investment in R&D for software that enhances the value customers extract from KLA systems.
<unk> analytics advanced simulation and machine learning technologies are driving adoption of process control KLA is data analytics perform platforms connect.
Normalized and analyze the data.
<unk> by our systems in the field. This creates a network effect and enhances performance across our product portfolio for customers.
Kla's breath of products is uniquely positioned to speed time to results for our customers.
We're making investments in these critical technologies as process control intensity increases.
Kla's market leadership, and the process control markets remain an impressive level and an impressive level of four times the nearest competitor.
Thanks to focus on execution and the industry demand backdrop, we remain on track to achieve our 2023 financial targets well ahead of expectations.
Let's now move along to the top highlights for the quarter.
First we continue to benefit from strength across all major end markets with overall company revenue expected to be up mid <unk> on a percentage basis year over year based on the midpoint of our guidance for the December quarter.
While we're not immune to the unprecedented supply chain challenges affecting the electronics industry.
Industry, we are navigating them as well as can be expected in foundry logic simultaneous investments across multiple nodes and rising capital intensity continues to be a tailwind in memory demand remains broad based across multiple customers with growth in 2021 led by derail and 2022 setting up.
To be a relatively strong year for NAFTA.
Our optical metrology business continues to stand out <unk> metrology revenues on track to grow meaningfully faster than the WSB market from 2021 after experiencing similar levels of absolute growth in 2020, the optical metrology market strongly leveraged <unk> and its critical next generation arc.
Detectors, including gate, all around and multi stacked three D NAND.
<unk>.
<unk> leadership, and the largest and fastest growing segments of the process control market is fueling strong relative growth in our semiconductor process control segment.
Optical pattern wafer inspection is forecasted to be among the fastest growing segments of WMC in 2021 for products segments over $1 billion in revenue.
<unk> cadence of innovation and new product introduction continues to outpace the competition.
Just last month, we introduced our new Voyager 10, 35 laser scanning patterned wafer inspectors.
Latest and an extensive portfolio of inline defect inspection tools for critical process monitoring applications and advanced chip manufacturing.
Coupled with the Gen four and Gen five broadband plasma portfolio Kla's laser scanning systems help comprised most comprehensive optical pattern wafer inspection portfolio in the marketplace today.
Fourth our services revenue was $454 million in the September quarter up 15% year over year for the quarter. It was 22% of revenue more than 75% of service revenue semiconductor process control segment and over 90% of services in the PCB business comes from recurring.
Subscription like contracts services is on track for another year of strong double digit growth in 2021. This is driven.
By our growing installed base higher utilization rates and increasing expansion of service opportunities in the trailing edge.
Finally, the September quarter was exceptional from a free cash flow perspective, we.
We generated record quarterly free cash flow of $795 million, which helped drive last 12 months free cash flow up 42% year over year to $2 two 9 billion.
We also have remained focused on returning capital to shareholders via our dividend and stock repurchase program, both of which are up materially year over year, including $563 million in share repurchases and dividends in the quarter.
In addition to executing against our strategic objectives and disciplined capital management.
<unk> deliveries during value through corporate stewardship, kla's values are reflected and efforts to reduce our environmental footprint provide for a safe and healthy workplace for our employees advance inclusion and diversity and make positive contributions to the communities, where we live and work.
We published our latest global impact report in August 2021.
Highlights how KLA deliveries lasting values through corporate citizenship. Our journey on this path began when we opened our doors 1976.
We are now expanding our efforts to be more holistic across environmental social and governance topics most relevant to our business.
We've also broadened our tracking and reporting to be inclusive of a full global footprint and acquired companies. We continue to build our long term ESG strategy to focus on reducing climate impact.
<unk> disclosure and deepening the positive impact, we deliver through our business and community engagement.
With that I'll pass.
I will pass the call over to Brent to cover our financial highlights and outlook and guidance.
Thank you Rick.
<unk> quarterly results highlight the soundness and strength of our ongoing strategy we continue.
To demonstrate our ability to meet customer needs in a robust demand environment, while expanding market leadership growing operating profits generating strong free cash flow and maintaining our long term strategy of productive capital allocation.
Total quarterly revenue was $2 8 billion non-GAAP gross margin was 62, 9% as the various components performed mostly as expected with upside coming from the higher than expected semiconductor process control systems revenue, which enhance the product mix for the quarter.
Non-GAAP diluted EPS was $4 64, our performance reflected the mark to market of an equity position in a strategic supplier that negatively impacted non-GAAP earnings per share by <unk> <unk> without this adjustment, which is reflected in other income and expense on the income statement non-GAAP earnings would have been $4 70.
Yes.
GAAP diluted EPS was $6 96.
Primarily to a onetime tax benefit of $395 million, resulting from changes made to our international structure to better align ownership of certain intellectual property rights with how our business operates.
Non-GAAP operating expenses were 432 million and included $252 million of R&D expense and $180 million of SG&A.
Technical applications as a competitive advantage for KLA and drives demand for our products by helping our customers develop solutions that address their complex process challenges.
Technical applications is included in SG&A and was $47 million in the quarter, a combination of R&D and technical applications represented approximately 70% of total operating expenses.
Given the rapid growth of the business over the last couple of years and our revenue expectations for the business going forward. We expect the Companys operating expenses to continue to grow as we invest in global infrastructure systems to scale. The KLA operating model, new product development programs and volume dependent resources to support our business expansion.
Furthermore, we as most companies are seeing a strong labor market driving cost pressure across our global workforce.
As a result, we expect operating expenses to grow sequentially to approximately $470 million in the December quarter, and we forecast sequential growth in operating expenses to continue through calendar 2022.
While operating expenses are trending higher going forward, we will make the necessary investments to scale our business. While we continue to size the company based on our target operating model, which delivers 40% to 50% incremental operating margin leverage on revenue growth over a normalized time horizon.
Non-GAAP operating income as a percentage of revenue was strong at 42, 2% in September quarter.
Other income and expense net was $52 million compared with guidance of $43 million with the variance from guidance, reflecting the impact of the mark to market of the investment discussed earlier.
For December we forecast other income and expense net at approximately $44 million.
The quarterly effective tax rate was 13, 9% just above our guided tax rate of 13, 5%.
Non-GAAP net income of $712 million.
GAAP net income was $1 7 billion.
Cash flow from operations was $864 million and free cash flow was a record $795 million, resulting in a free cash flow conversion of 112%.
Turning to our reportable segment in end markets revenue for the semiconductor process control segment, including its associated service business was $1 78 billion up 40% year over year and up 13% sequentially.
Approximate semiconductor process control system customer segment mix was tilted slightly more towards foundry logic than we forecasted at 61% above our 59% estimate.
Memory was 39% and within memory the business was split roughly 61% DRAM and 39% of that.
Revenue for our EPC group continues to be driven by strengthened <unk> mobile and infrastructure as well as continued demand in automotive.
More specifically, especially semiconductor process segment, which includes associated service business generated record revenue of $102 million up 15% over the prior year and up 4% sequentially.
PCB display and component inspection revenue was $203 million up 12% year over year, but down 18% sequentially. After a record quarter in the PCB and the component inspection businesses in June.
For a breakdown of revenue by major products and regions. Please see our shareholder letter or the earnings slides.
Moving forward to our balance sheet, we ended the quarter with $2 six 3 billion in cash bonds outstanding of 345 billion with no maturities until 2024, and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three agencies.
Over the last 12 months, KLA returned $173 billion to shareholders, including $581 million in dividends paid and $1, one 5 billion in share repurchases.
While circumstances can change current expectations or the capital returns for calendar 2021 will exceed 85% of expected free cash flow generated in the calendar year.
Yes.
For the quarter, we generated a record $795 million in free cash flow and repurchased $400 million of common stock, while also paying down $163 million in dividends.
Moving to our outlook and guidance, our overall semiconductor demand at Wi Fi outlook continues to increase for from our views earlier in the year.
At the start of this year, we characterize the expected growth of the Wi Fi market to be in the low teens, plus or minus a few percentage points.
In April we revised that view to the low to mid twenties on a percentage basis with a bias to the upside.
In July we revised our WSI outlook upward again to the mid <unk>.
Today, we see continued strengthening and expect the <unk> market to grow approximately 40% to the mid $80 billion range in 2021.
Going from approximately 61 billion in calendar 2020.
This reflects the broad based strength in demand across all customer segments.
KLA is in position to deliver strong relative growth this year with the semiconductor process control systems business now expected to grow in the mid Forty's on a percentage basis over calendar year 2020.
This growth profile is driven by our market leadership and strong momentum in the marketplace across multiple product platforms.
Looking ahead, we remain encouraged by the strength and sustainability of our current demand profile across all customer segments.
For the total company, we expect that the first half of 2022 will grow in the high single digits versus the second half of 2021.
It is abundantly clear today that demand is constrained by the industry's ability to supply.
This pent up demand should enable another year of solid growth in 2022.
While it's too early to put a fine point on our growth expectations for next calendar year early indications point towards the Wi Fi industry, maintaining its growth momentum.
Our bookings momentum and strong backlog, we believe KLA is well positioned to outperform WSB.
As in calendar 2021, we are adding capacity strategically across our global manufacturing footprint to drive this outlook and to enable us to support our customers' process control requirements.
Our December quarter guidance is as follows total revenue is expected to be in a range of $2 325 billion plus or minus $100 million.
Foundry logic is forecasted to be approximately 74% and memory is expected to be approximately 26% of semiconductor process control systems revenue to semiconductor customers.
Within memory DRAM is expected to be about 53% of the segment mix in NAND is forecasted to be 47%.
We forecast non-GAAP gross margins be in a range of 62% to 64%.
At the midpoint gross margin is roughly flat sequentially as revenue volume and product mix improvement is offset by higher expected service and manufacturing costs.
Other model assumptions for December include.
Non-GAAP operating expenses of approximately $470 million.
Other income and expense net of net of approximately $44 million and an effective tax rate of approximately 13, 5%.
Finally, GAAP diluted EPS is expected to be in a range of $4 69.
$5 59.
And non-GAAP diluted EPS in a range of $4 95 to $5 85.
DBS EPS guidance is based on a fully diluted share count of approximately 152 million shares.
In conclusion, the tailwind is driving semiconductor growth and investments in WMC continued to remain compelling.
Broad based customer demand and simultaneous investments across multiple technology nodes are strong and resilient trends.
I have confidence in the leading indicators of our business, including our backlog and sales funnel visibility, which is spurring us to invest in expanding our business infrastructure and the required capabilities to support our outlook.
Our customers' multiyear investment plans provide an element of stability in the demand outlook for the future.
KLA continues to execute exceptionally well and is on track to exceed our 2023 financial targets well ahead of expectations.
The KLA operating model positions us well to outperform our industry and guides our important strategic objectives. These.
These objectives to fuel our growth operational excellence and differentiation across an increasingly diverse product and service offerings.
We're also the foundation of our sustained technology leadership wide competitive moat, leading financial performance long standing track record of strong free cash flow generation and capital returns to shareholders.
That I will turn the call back over to Kevin to begin the Q&A.
Thank you Brian.
Ashley can you please queue up for questions.
Certainly at this time, if you would like to ask a question. Please press star one on your telephone keypad.
Thank you Mr. Waldman yourself from the queue you may do so by pressing the pound key.
And you that please on mute your line when introduced in this path will pick up your handset for optimal sound quality.
In the interest of time, we do ask that you. Please limit yourself to one question and one follow up we will take our first question from John Pitzer with Credit Suisse. Please go ahead, yes.
Good afternoon, guys. Thanks for letting me ask the question and congratulations.
On the solid results and outlook Rick I'm wondering if you can talk a little bit about your optimism around the NAND market, whether it's the December guide, specifically, where it is moving up as a mix or are you in your prepared comments you said that next calendar year is setting up for a strong year in NAND.
What extent is that just being driven by technology transitions that might be a little bit more insulated from the overall market conditions in the NAND market overall.
Hey, John Yes. Thanks.
Is for US it is more driven by technology transitions than overall capacity as you know, mostly that's what drives to the early adoption of our leading technologies and what we're seeing with NAND <unk> NAND is as the design rules or the complexity continues we're seeing a larger adoption of process control.
As you know the design rules aren't as advanced <unk> NAND as they are as DRAM, but they get they're getting more challenging and so that's driving a larger amount of inspection requirement, but also quite a bit in metrology as well so it's really both.
Hey, John its Brian I mean, it is picking up off of.
Off of pretty low levels, right and I think overall, if you look at the growth of the year for the market the NAND market grew.
Grew considerably it was growing but considerably slower than the overall market.
So theres some optimism there in terms of we are seeing some tick up although.
The percentage is.
As I said, the absolute values not a lot and I think as we move into the first part of 'twenty.
'twenty two I think we'll see we'll see a little bit more investment there.
That's helpful and then as my follow up Brian just going back to your commentary around Opex. It.
Makes sense given the opportunity ahead of you that you guys are making the investments I was wondering if you can just put some guardrails on growing sequentially every quarter from that $4 70 level.
There might be exit trajectory be next year, and I guess is there any flexibility around a revenue environment that that might become a little bit more volatile in the second half of the year.
That's a great question, John and we're in the middle of our strategic planning process right now.
Assessing not just our topline expectations, but how to size the company relative to program demands, but also some of the volume dependency that we've seen we're also making significant investments in infrastructure. So as you've got the world coming back from travel He's got programs you've got infrastructure investments.
Those are all driving what we're seeing we're certainly feeling pressure as most companies are as we said in the prepared remarks around compensation. So that's also a big part of it.
I'm not going to guide 22, because we're going through that process, but what I would say is that based on how we size. The company we're going to size, we do expect growth in the company and we'll size the company based on our our incremental margin model, which is 40% to 50% incremental operating margin leverage on revenue growth and so that will be a dry.
Ever for US certainly some of this investment is as a catch up if you will in terms of the revenue growing so fast over the last couple of years.
And it's been hard for us to catch up in terms of just being able to support the business and the way that we'd like we're also encouraged by that the growth opportunities over time I'll call. It the through cycle or normalized long term growth and we want to make sure. The companys position right for that so I'll have more to say about how to size. It I would say that we're going to be consistent with our long term model.
We've been way ahead of the model over 50% of the last couple of years I would expect us to be.
And in the in the target range as we think about 'twenty two.
That helps it does thank you.
And we'll take our next question from C. J Muse with Evercore. Please go ahead. Your line is open.
Yeah. Good afternoon. Thank you for taking the question.
I guess a similar question on the gross margin side as you think about the investments that you're making now.
How should we think about the trajectory.
For gross margins into calendar 'twenty, two and I guess as part of that.
Would love to know mix wise, what would enable you to hit the higher end or 64% of the December quarter.
As well thank you.
Yeah C J.
One of the challenges all of the things I mentioned that there is a cost component to it and I think one of the other challenges. We're facing is as pressure on cost in the in the supply chain as I think about 'twenty two I do see an impact from incremental cost probably somewhere in the 75 to 100 basis point level I do think.
That's implied in the guidance that we provided all have a firmer point on it as I think about 'twenty two.
In the next call as we start to just lay out a more comprehensive plan around the year, but I do think we're operating in the 63% range and I'll put a little bit wider range than I normally would today it may be plus or minus 75 basis points on that based on our early expectations for next year apps.
Absent those pressures are I think we'd be very consistent with the kind of trajectory. We've seen certainly the mix is more process control centric given expectations for next year right now but.
But I do think we'll continue to operate within our longer term expectations are to try to drive somewhere between 60, and 65% incremental but certainly these cost pressures are real out there and we're trying to navigate our way through it but I don't think it'll change much from current levels and terms, but I don't think its going to go up much either so I think we're going to be.
<unk> and hovering sort of in this area with mix affecting performance in any given quarter.
That's very helpful.
And as a follow up on the revenue guide for first half of calendar 'twenty, two that implies roughly I think $50 million higher each quarter and so curious.
Is there any seasonal impacts we should be thinking about a little bit lower in the March quarter.
And otherwise should we be thinking about really process control.
Key driver of that uplift.
Yeah. It's a good question right now and again things could change, but I don't see any seasonal impact into the first quarter I think process control will will be above obviously.
The high single digit commentary, so I think we'll see process control systems higher than that.
In terms of the first half expectations.
Thank you.
Thank you.
And we will take our next question from Vivek Arya with Bank of America. Please go ahead.
Thank you for taking my questions on the first one the industry is about to start making this transition to three nanometer and I was hoping you could contrast, what that move mean for process control intensity alright, the move from five to see versus the.
The change you saw when the industry moved from seven.
And can this transition from 5% to <unk> change the competitive landscape in any way.
Well I think.
Yes, I think the.
It's a more similar change I think that as traditional ones because <unk> already been introduced so what you're saying is.
And increase its less of a revolutionary one in the sense that EOG is in five and so youre going to see expansion of the UV layers as part of three.
So in that way I think the mix phenomenon will change toward some of the higher end.
Tools. So for example, gen four for us.
Significantly outselling Gen. Five in this calendar year, because the bulk of the layers that can be done on a on a gen. Four systems. So as you move to three youre going to have more.
Leverage toward a gen five and <unk>.
It turns out will also be improving the capabilities, our jets for but I think you'll see it slightly shift remember customers are always looking at the most cost effective inspection strategy that they can have so youre going to see it there it'll show up in metrology as well because they'll just be more points that'll have to be sampled and that'll drive utilization.
The throughput requirements are tools, so process control intensity at the advanced nodes does get pushed harder and we're definitely getting that feedback from our leading edge customers the need for more capability and capacity.
To support that so I think if anything youre going to see a shift towards some of the higher ASP.
Capability at the same time, we're improving it but in terms of a KLA market share perspective, we think it's actually positive for our market share because most of the time when we have competitive situations, we tend to be in price competition at the lower end of most of the competition and this will put.
<unk> things toward higher end, which are the tools that we're really well positioned in and that will allow us to continue to march towards higher market share over time.
Hey, Vivek I'd also say that it in five youre going to have a lineup.
High number of design starts so youre going to see customers, adding capacity. It is high which means much harder for them to try to migrate any of that capacity and three so they're going to be investing in and then three but also adding capacity in five so the technical drivers make that harder already.
Based on a lot of the.
Things that Rick just talked about but also the design start activity.
We will also be a factor in that so it's there's a lot of new capacity that comes in to support that note.
Yeah.
Okay.
And then for my follow up the risk of pushing you a little more on the calendar 'twenty two because you were so.
Nice to give us what youre seeing in the first half usually the second half of the year calendar year tends to be better than the first half so to the extent that you have visibility right today based on bookings and whatnot is there any factor that could prevent that from happening next year. Thank you.
Look I'm not going to guide the second half, it's pretty far out yes, we have seen that phenomenon over the last couple of years.
Play out I wouldn't say and part of why we felt comfortable with the first half guidance is is that we do have very high levels of backlog in and given the fact that that the.
That'd be a fee number this year is clearly a supply number and not a demand number there certainly are evidence of an up visibility.
Through our customers and how they're lining up for tools into the first half of the year. So we feel pretty comfortable about what we see there hence the guidance, we provided and are driving the business and in particular the capacity we have to be able to support.
Long term growth in the in the industry, So I'm not going to give you the second half but.
I don't see any.
Any reason why things would fall off given the nature of what we're seeing in the demand and conversations we have from customers.
Perfect. Thank you so much.
And we'll take our next question from Christian Carr with Cowen and company. Please go ahead. Your line is open.
Hi, Thanks for taking my question I have two of them first one.
Rick or Bren looks like your China sales has been really strong.
And when I look at the industry. It looks like both you and your peers at all either getting demand from a long tail of smaller customers with even more focus and things like Iot component curious what is the split between MMC and domestic and how durable do you think the China business will be smaller customers, who seem to cropped up recently and maybe you don't.
The scale, how durable do you think it is something that I had a follow up.
Well just in terms of overall percentages I would say our semi process control is pretty consistent with the overall this quarter for the company, sometimes EPC tends to be heavier weighted to China and does pull the overall company up a little bit but this quarter. It's it's pretty close it does tend to be lumpier. So so it.
I think overall, if you look at the business, we would probably expect overall, China to be somewhere around in the low twenties as a percent for calendar year 'twenty one of that I would say, 15% or so maybe 20% is multinationals so 80% of that would be would.
It would be a native.
Got it and then the second part of that when it comes to sustainability.
These are to your point, they're smaller scale, but theyre also a lagging in terms of when people were think about leading edge technologies theyre not leading edge there supporting domestic demand and if you think about the EV industry. For example, the park are theirs.
Quite a bit of activity in China around that so they're trying to have more control over their own supply chain for those trailing edge parts. So it's actually quite sustainable when you look at the amount of demand there is for specialty semiconductors in the China market. So I think that that's something that you'll continue to see and it's a long.
Way away from some of the concerns people have about leading edge in China.
Okay and the final point on that also is that when you think about our business. We do have exposure to wafer into mask and so if you look at what's going on in terms of domestic capacity for for our infrastructure to support the semiconductor business. We do have some exposure to to that overall.
Got it Super helpful. Rick and then a quick follow up I just wanted to see what is the status on the E beam tool. So I remember last quarter was about 15 or so tools in the field can you give us a status update on that and where do you think your market share is today on E beam.
Thank you.
Well I don't know if things have changed all that much I mean, certainly we're confident in the product roadmap that we have for E beam and I think it's complementary with our optical tools now when we say E beam is a broad term. It covers not just our metrology, but also inspection and review so theres a lot of efforts that are <unk>.
And across the company, including in radical inspection, but.
We our strategy around E. B I wish that I think you're referring to inspection is really to try to leverage and use the <unk> technology and the machine learning that we have to drive.
Inspectors and and.
And add more value, we're more relevancy to the inspection tool. So it's more of a portfolio strategy than a point product strategy.
And I think it's going pretty consistent with the with our overall expectations. Today. Yeah. Just adds about I think the team has done an outstanding job of developing this capability and delivering it we're getting very positive feedback from our customers. They really like the idea of some of the capabilities. They also like the leverage that we have.
Between some of the algorithms that we've developed in our other systems that they're familiar with being able to apply those to E beam and also as Bren said the interoperability. So we're where we are anticipating a plan from a revenue standpoint on these there are really multiple applications, which were serving with E. Beam. So we feel very good but just as a.
Overall, cautionary reminder, E beam as a percent of optical wafer inspection continues to be right about where it's been for the last 20 years and we know that we're providing this capability because there are some special applications, where customers need it and they're actually some expansion opportunities in things like some of the increased demand.
Men's of overlay that require or people are looking at for E beam in order to control the very advanced design rules.
It's meeting what we planned we're happy with our execution.
And the market share is climbing, but it's a long haul to gain share in many of these markets and we know that.
Very helpful. Thank you.
Yeah.
We'll take our next question from Joe Moore with Morgan Stanley. Please go ahead.
Yes. Thank you I Wonder if you could just talk about the mix. This year in foundry logic seems to have shifted more to the legacy knows a little bit.
Or at least those are stronger than they've been can you talk about maybe where that mix is I know you've given that it's sort of qualitative color on that in the past and what does that do for KLA does that sort of a headwind for you relative to W. A fee or do you know.
And if that rolls off could it help you the other direction.
Yeah, it's interesting this year.
Yeah, I think last year was a little bit more heavy.
Trailing edge in 'twenty, one it's been very leading edge centric for our business and I think 22, probably expands a little bit more in terms of the trailing edge, so, but it's about 20% to 25% of our of our foundry revenue I'd classify as below 28 nanometer.
And so I'd call that leading edge. It so 28 and above is about.
You know, 25% or so so 75% is is a bit below 28, and I think as we go into next year I think we will see a see a little bit more of the trailing edge active.
Yeah, one of the things that it's done for US I mean versus I think if you go back long enough.
You know we have a gen five in June where we talked about in detail. We also have different variance of.
B B P, which are even more suitable to some of the lower end and those customers often are familiar with the <unk>.
Iran tools and they want some of that capability. So we're seeing that these products actually run quite a bit longer than they ever have and so we have another product called the <unk> hundred five which is targeted for the auto industry and we're able to sell that and we're seeing that it really leverages a lot of the R&D that we've done for years. So.
Lot form even we're talking about a portfolio of products, but the truth is we have a portfolio of pvp products and it is not just across the different technologies. It's one technology across the different generations and were really leveraging that so what's really surprising when we look at it as the gen five well it's doing.
Quite well, it's actually one of the smaller relative to the Gen. Four it's significantly smaller in dollar volume this year and that will grow over time, which makes us feel really good about the sustainability and the overall potential for us to continue to be able to <unk>.
Invest and provide capability for our customers across all notes, so it's pretty exciting to see.
That's very helpful. Thank you very much.
And we will take our next question from Joe <unk> with Wells Fargo. Please go ahead.
Yeah. Thanks for taking the question you talked about increasing your manufacturing capacity, but how do we think about the ability of your supplier partners our capacity to grow in order to support your growth given some of your components I know or several months for lead times.
Yeah, It's a great question, Joe when I say capacity I need people parts in space. So I'm covering all of those things certainly supply chain tends to be the longest pole in the tent. If you will in terms of our ability to to add capability.
We've been doing that or for for a long period of time, it going back to the middle or towards the end of 2020.
So we have around the key.
Components and sub systems, where there are long lead times, we have very very strong partnerships with those suppliers and we've been working with them, we've been investing where appropriate to ensure that our that theyre able to increase their capacity. So that capacity comes online over time in our volumes are lower around a lot of those parts and so.
Getting you know single digit upticks sequentially quarter to quarter in terms of units can have a pretty big impact on the company's overall revenue. So we continue to make those investments and work with those suppliers. Obviously you never know what the future is but we do have this belief that with semiconductor revenue growing the way it is capital intensity rising that that.
This will be a.
Demand for the company going forward and so whether it's near term or longer term I'm willing to make the investments to ensure that our that we can be as flexible and responsive to customers as we need to be we're also keeping carrying more inventory and that provides a little bit of extra buffer as well around some of these component because of our volumes are where they are at some of the more.
Fungible or more commodity like parts that are out there are challenges are probably a little less than some of the other folks out there just because they don't need as many of them I need them, but I don't need as many of them.
Just because of the level of volume we have so I think it's across all of those things are and we feel pretty good that ultimately our customers are like things sooner. If we can deliver to them, but we are managing our way through it and.
I feel pretty good about the guidance that we provided here today, yeah, and let me just add one perspective, where I think actually it differentiates Taylor in a positive light relative to our peers in the industry, because we've always been high mix low volume.
And we have several strategic relationships with key suppliers as Brent we've actually always been working the supply chain and making sure we invested in and our suppliers. So that we had capability because in many cases.
We have been for years inextricably linked to them. So when this thing hit I think we were able to navigate it better because the brands like we don't need as many we don't need the biggest volume and with the critical ones. We've had historically strong relationships, which we maintained through the different cycles. So that's why I think again, it's another example of.
KLA being less volatile in a dynamic market. So that is part of it. It comes with a lot of work a lot of hard work with our supply chain, but I think we have the trust and relationships with them that when we make commitments we could follow through on them. So it has taken work to do but I think thats part of why we've been able to scale it.
Went through the whole period, we didn't stop guiding we hit our numbers, we haven't missed our performance expectations and I think largely it's because of those things.
Got it that's really helpful. And then just as a follow up in the prepared remarks, you talked about increasing expansion of service opportunities in the trailing edge I was curious if you could you could double click on that and maybe also how do we think about that from a margin profile just given it seems like maybe some of those opportunities or maybe a little bit more hands on.
Yeah.
Well I'll take the first part and then Brian can speak to the margin opportunity I think that as you well know a lot of these fabs are running a lot longer than historically some of them had relied on some version of third party or their own service as those factories have been upgraded with more <unk>.
<unk> KLA technology, it's really been falling on us to support that so I gave you. The example of the CTO of five product line, that's not something that they're going to be able to readily get a third party to service or do it themselves or just wait so we're engaging when we sell some of the newer capability into these more.
More I guess traditional or trailing edge fabs.
We provide more services and capability and that's been part of the value proposition. The other factor of course that is.
That is helpful as they're all quite profitable enterprises for our customers. So they are willing to make that investment to secure their capabilities. I don't think the margins are any different than in other parts of the service business that we have and look we serve two an entitlement we serve.
What our customers purchase a certain service level and and optimize the organization to be able to support that certainly the utilization rates are higher and so that's creating a revenue stream also the demands on that capacity in terms of not just incremental volume, but also demands in terms of reliability.
Is also increasing and so that's creating opportunities for us to sell more capability, but also to.
To introduce some of our newer products.
As you know have roadmaps and had the ability to pravin upgrade strength to it.
Thank you.
And well take our next question from Timothy Arcuri with UBS. Please go ahead.
Hi, Thanks, a lot.
I guess, Brent you gave guidance you know first half versus the second half of this year for the whole company.
But it seems like process control systems could be up like low teens first half of next year versus the second half of this year is that a reasonable number.
So I said high single digits, and I would think that process control systems based on what we see today will be higher than the.
Company average.
Higher than the company average okay got it yes.
Yes.
Eight ish percent I expect it to be higher.
Yes, okay.
High single digits right, 89% whatever that is so yeah, yeah, Okay got it.
And then on EPC so.
Know that the long term outlook is for EPC to grow double digits, but youre growing.
More than 20% this year and that's kind of even before the big packaging stuff from the Big Big Guy who has this huge project has even really.
So you hit your <unk>.
Orders yet so.
Can you just talk about the timing of that and do you think that you can grow double digit next year, even off this elevated level and maybe when do you expect that big project to start to positively impact your UPC business.
But we would expect growth next year, and if you see I am not going to get into specific sizing.
Overall, but we are encouraged by by what we're seeing here for next year.
And I don't want to get into the specific timing of our customers are pretty optimistic about the opportunities that exist there and some of the product offerings that we have so we'll have to see it play through but I, but I I I am encouraged I think it's another year of growth I think ABC will have a will have solid growth into next year.
Yes, Tim just to give a little more color on that I do think if you thought about these big programs. There are pretty early stages. So I think by the time.
That it will result in significant.
Accelerant to our growth where in 2023, so it's not really a 2022 I think rises with some of the industry and programs and partnerships that we already have 23 as a result of some of the newer things that are being worked on now and and I've mentioned before we've talked we are very excited about what we're hearing and seeing in terms of both the opportunity.
And the desire for these bigger players to engage with with KLA, so, but that's not as much a 'twenty two as it is in 'twenty three.
Awesome. Thank you so much.
Okay.
And we will take our next question from Patrick Ho with Stifel. Please go ahead. Your line is open.
Thank you very much and congrats on a nice quarter, Rick maybe first off on a big picture basis, Youre seeing a lot of changes in the DRAM industry right now from a process technology standpoint, as you go to 1018 from a process control intensity standpoint, it's likely to increase what are the biggest.
<unk> challenges.
That you're helping customers address is materials.
You know the deeper V. As it maybe if you could give a little color on the application is a drug that are driving increasing intensity in DRAM.
I think the biggest thing for what we're seeing in DRAM and this was a question I think for quite a while was UV you're going to be simply for advanced.
<unk> devices, Mems foundry and now we're seeing it as you know starting to happen in the EV and everything that comes with that all the infrastructure that goes with that all the work that's going to go on to make sure that you.
You can qualify for radicals, even though they have redundancy there is still a huge fear of throwing away. This is a very expensive infrastructure. So theres a lot of work going on already with Gen. Five to make sure that we can help qualify.
And of course, you mentioned the high aspect ratio devices, you're going to see more.
They've been in a honeymoon period for actually several years I would say that some of the drams historically and you didn't see the process control intensity grow. This is a real chance for it to increase as a result of the new capabilities that are bringing just to U V. What that brings on we also have a lot of metrology applications as well so.
We do see it broadly I don't think it will ever get to the levels of process control intensity, we see in leading edge foundry logic, but it will increase probably at a faster rate.
In terms of growth of process control as we go forward, assuming the successful deployment of <unk>, which right now is certainly what they're working on just one example of that.
That is.
And what we're hearing now is for DRAM is that there seems to be no pellicle is going to be used in the lithography. That's the belief right now and if so that puts a lot of pressure on print check which is a very high intensity application for gen. Five so there would be an example of a new application.
I can't remember I can vaguely remember, but it wasn't in any.
Decades, since we've been doing a lot of print check of DRAM. So this would be a whole new application for those customers and as you know some of them have experience in advanced logic. So they know what that means and so at least one of them does so theres going to be.
Some crossover from that so we're feeling pretty good about.
Where that's coming in in terms of shaping up for yet another driver for intensity.
Great and just as a quick follow up maybe for Brian.
You guys had been posting really strong services revenues, which is not a surprise do you believe any of this incremental pick up in services is related to.
I guess the supply.
The shortage situation with shifts, it's driving probably higher utilization rates and probably the need to keep these tools. Ronnie do you feel like any of this incremental pick up in services related to the current market situation involved with semiconductors.
Sure sure that's driving the higher utilization rates. So that's certainly a factor one of the also the a large factor as you're starting to see tools that were shipped in 'twenty.
As we've seen that the systems business grow and ramp that those tools are coming out of warranty now as we move into the second half of 'twenty, one and so that that is also a driver of incremental service revenue.
Contract penetration has been good in this environment, you know customers rely on us to keep their capacity up and so we've also seen some incremental benefit from.
From a contract renewal point of view, so I think theres a number of factors that are driving it.
Great. Thank you.
Yeah.
And we'll take our next question from Mehdi Hosseini with <unk>. Please go ahead. Your line is open.
Yes, most of my questions have been.
And so just a quick follow up for the team.
December quarter revenue employs a wide range up 7% to 16% I would like to hear what are the key variables that would drive the low end versus the high end.
Hey, Manny its brand. So we started to a typical revenue guidance range is plus or minus $100 million.
And typically for that it turns for us to be more about look we have very large energy tools. We can have systems that can cost upwards of $40 million a piece and so at times, depending on dynamics around supply chain denying <unk> dynamics around customer readiness and in some cases, you have to go to customer accepting that customer acceptance.
So there are always those factors that that could that influence our.
Or we could land in a certain range. So our range has been very consistent over the last several.
Several quarters I don't think anything's really changed on that front and it really gets down to to our assessment of where we're at some cases, we have evaluation consignments that have to be bought out so theres always a some fluidity to our expectations and our revenue plan is to build it up but I wouldn't say that there's any one issue or another that debt is is driving.
You know.
How we're thinking about the overall range got it.
And then one quick follow up on <unk>, given your view on the first half of calendar year 'twenty two.
It seems to me that your share gain.
Be in the 50 to 100 basis point.
And you are not providing absolute dollar value of different people, but if I just take your commentary it seems like it's a minimum of 50 basis point share gain is it is.
Actually the very conservative or do you have anything you can share with me.
But we feel very good about the relative performance this year and into our prepared remarks also next year. When we were at our Investor Day in New York back in 2019, we laid out a plan that we thought that would drive KLA share of Ws. He up 75 to 100 basis points between 2019 and 2023.
Part of that was market share gain part of it we saw where intensity opportunities related to the introduction of some new products. So we feel pretty good about the about the trajectory we're on.
I want to provide a specific number there, but but our our goal is to hit our plan and I feel pretty good about where we are relative to that plan.
Thank you.
Thank you Mehdi operator, we have time it looks like for one last question.
Our final question will come from Harlan sur with Jpmorgan. Please go ahead.
Hi, Good afternoon, guys, great job on the quarterly execution and strong results easy.
Easy adoption continues at a pretty aggressive pace and using mask layer counts continue to expand with every new technology nodes.
And then additionally, you have the one large logic customer that is now back on an aggressive technology cadence leveraging E. So how are you guys thinking about the growth of your reticle inspection business relative to overall process control for this year and how are you thinking about reticle inspection growth into next year.
Yeah, when I look at reticle inspection I think it's a market growth kind of number this year, probably will be a record for us. This this year.
And but I think on a go forward basis Youre right. The introduction of easy and increasing layer counts are driving.
Growth in that overall market as you know, we support that market with multiple products that help optimize for our customers to optimize around some of the technology challenges, but also the economic objectives that they have so I do think that there's an inflection in that market. We've seen a nice performance this year and we expect to see it.
Continue to grow over the next few years.
Yes, I appreciate that and then.
One of the big growth drivers for next year in terms of W. P. As more of these mature and specialty nodes and you guys talked a bit about it but I think we absolutely did recently introduced four five new tools, which are primarily focused on mature and specialty inspection and metrology like the tool five broadband plasma inspection platform Hey, guys.
Just give us a sense of early adoption curve, what's the differentiation of these tools versus <unk>.
Customers, just buying like refurbished older generation Kelly tools.
Sure Harlan I mean, I think that.
There was I think historically, our view of trying to leverage the older technology, but as you can imagine those tools are quite aged at this point. So we definitely saw a step up but it was harder for us to service. It. So we're seeing a lot more capability. We can offer now and some of these and I'd say the <unk> hundred five is like a derivative.
Tool of the BBB tool. So that's one where you get a lot of capability and.
Certainly take advantage of all the work we've done and the algorithm area and so we can offer to a lower cost because of the configuration and all that but has a lot of capabilities. So we're seeing a much.
Much more interest in newer capability and remember these guys are getting pushed very hard by their supply chain, especially in automotive because there's such a focus on.
Preventing some of the defects liability issues as you know those are incredibly expensive. If theyre caught later, so we're seeing pretty good adoption and growth and it's kind of a little bit countered overall Wi Fi cyclicality.
So we think that is the steady area of investments what we laid out at the investment day.
Years ago. It feels like 2019, we're still on track actually ahead of plan for that in terms of automotive and we anticipated bringing on some of these products at that time.
And I assume that youre getting what higher dollar capture value for these new tools relative to let's say purchasing a refurbished tool.
Oh, much higher and I think it's just it's a better deal frankly for everybody I mean that the the capability that's offer they can do more with them.
We can service them more effectively they have a longer life I think a lot of upside for them to do that in fact in many of these older Fabs this might be the one area, where they are bringing a new capability.
Great. Thank you.
Thanks Harlan.
Thank you. Thank you Harlan and thank you everybody for your time.
This will conclude the call I'll pass it back to the operator for any final instructions.
This concludes the KLA Corporation September quarter, 2021 earnings call and webcast. Please disconnect. Your line at this time and have a wonderful day goodbye.
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