Q2 2022 KLA Corp Earnings Call
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Today.
At this time I would like to welcome everyone to the KLA Corporation December quarter, 2021 earnings conference call and webcast.
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After the Speakers' remarks, there'll be a question and answer session.
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Thank you I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and market analytics. Please go ahead.
Thank you Leo and welcome to KLA is fiscal Q2, 2022 quarterly earnings call to discuss the results of the December quarter and the outlook for the March 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.
December 31, 2021 released this afternoon. After the market close you can find the press release shareholder letter slide deck and info graphic on the KLA IR section of our website.
Dave's discussion is presented on a non-GAAP financial basis, unless otherwise specified and whenever we make references to full year business performance. It can be understood to be a calendar year.
A reconciliation of GAAP to non-GAAP results is in the earnings materials 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 report and quarterly reports on forms 10-K and 10-Q.
Our comments today are subject to risks and uncertainties reflected in the risk factors disclosure in our SEC filings any forward looking statements, including those we make on the call today.
Are also subject to those risks and KLA cannot guarantee those forward looking statements will come true our actual 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 Greg.
Thanks, Kevin before summarizing <unk> results for calendar year, 2021, and for the December quarter I'd like to first acknowledge and thank the global KLA team the dedication and hard work of our teams never waver, despite challenging conditions delivering for customers and managing around our complex <unk>.
The supply chain during a period of unprecedented industry shortages. It was the day to day drive to be better that drove kla's market leadership, resulting in record growth and financial performance across the board for the company in the December quarter and for 2021.
<unk> also delivered record returns to shareholders in 2021 through our dividend and share repurchase programs with returns to shareholders totaling over $2 billion.
Kla's strong results demonstrate our track record of relative strength in revenue growth and superior financial performance compared with semiconductor industry peers and at.
Dynamic and growing wafer fab equipment industry as well as the long term value created by employing and consistently refining our KLA operating model.
Since our founding in 1976 <unk> mission has been focused on using our expertise and innovative thinking to overcome monumental technological challenges KLA is advancing humanity with technologies and ideas that inspire action.
Our results in the December quarter and for 2021 demonstrate ongoing success of these strategies.
So thank you to all our teams for contributing to KLA is enduring success.
121 was another year of record growth profitability and free cash flow for KLA.
We successfully navigated unprecedented challenges in the marketplace responding to record demand across the vast majority of our markets, while adapting to the evolving operational complexities associated with the global pandemic.
Through it all we remain focused on delivering to our customers requirements and driving strong returns to shareholders.
Okay growing industry demand environment in.
In 2021 revenue grew 34% to $8 2 billion.
Marking the sixth consecutive year of revenue growth.
A strong revenue growth in 2021 was driven by 46% growth.
Semiconductor process control systems revenue from the services business grew 14% in the year with over 75% of the revenue generated from recurring subscription like contracts, reflecting the growing value of added process control systems and services and our product portfolio.
<unk> also demonstrated strong operating leverage on our revenue growth in 2021, with non-GAAP operating profit and non-GAAP earnings per share growing 54% and 61% respectively.
Incremental operating margin on the revenue growth in 2021 was 57% consistently above our targeted operating leverage model of 40% to 50% for the second year in a row.
Free cash flow also grew a healthy 43% in 2021 to a record $2 5 billion.
Consistent with our long term strategic objectives KLA delivered on our ongoing commitment to return value to shareholders, including our 12th consecutive dividend increase announced in July 2021, along with an additional $2 billion share repurchase program.
Total returns to shareholders in 2021, including dividend and share repurchases talk just over $2 billion or approximately 79% of free cash flow.
This growth demonstrates success in strengthening our market leadership across our business that we can continue to build upon to drive adoption of <unk> solutions in the critical markets we serve.
And then the electronics packaging and component inspection, our EPC group a specialty semiconductor process segment grew 11% in 2021, and the printed circuit board display and component inspection grew 17% in the year the.
The strong relative performance for KLA reflects our market leadership and diversification and was driven by secular industry growth trends across multiple end markets.
We ended 2021 with an exceptionally strong backlog and began what we anticipate being a seventh consecutive year of growth for KLA. We entered 2022 executing at a high level and operating from a position of strength in our marketplace. Despite persistent supply chain challenges this momentum sets.
Stage for KLA to continue to outperform the market, while demonstrating superior financial performance and maintaining our capital returns.
Turning now to focus on the December quarter results, where we saw diversified strength across our business.
<unk> demand environment continues to demonstrate accelerated adoption of our broad spectrum of semiconductor and electronics industry growth trends technology.
Technology is transforming how we live and work and the data driven economy is fundamentally changing how businesses operate and deliver value.
This digital transformation is enabling secular demand drivers such as high performance computing artificial intelligence growth in new automotive electronics and strong growth in data centers and <unk> communications markets.
Each of these secular trends are driving investment and innovation and advanced memory and logic semiconductor devices.
As well as new and increasingly more complex advanced packaging and PCB technologies with.
With our market leadership and process control and growth and expansion in new markets like specialty semiconductor process equipment PCB and finished die inspection in our EPC group.
KLA is essential to enabling our increasing digital world it.
It makes us happened KLA continues to prioritize and invest in R&D, which totaled $1 billion in calendar 2021 double the level of five years ago and growing at a 15% compound annual growth rate.
With this favorable backdrop and our demonstrated track record of investing heavily in R&D to drive product differentiation and consistently meeting or exceeding our commitments to customers and shareholders are performance enabled <unk> to outperform the 2023 long term financial model targets that we set.
<unk> two years ago, two years ahead of expectations.
Moving along to the top highlights from the December 2021 quarter first we saw continued strength and consistency in foundry logic customer revenue for both leading edge and legacy technologies in the December quarter as expected memory demand also grew in the period calendar 2022 is setting up to be and.
Another year of strong growth for WMC, we see demand momentum throughout 2022 across our major end markets. The strengthened demand were seeing reflects KLA has a central role in supporting our customers' drive to innovate and continue to invest in future technology nodes in foundry and logic simultaneous investor.
That's across multiple nodes and rising capital intensity continues to be a tailwind.
In memory demand remains broad based across multiple customers and we expect another year of double digit growth in 2022 with NAND growing faster than DRAM.
Second <unk> is seeing strong demand across the breadth of our industry, leading optical inspection portfolio.
We have maintained our momentum in one of the fastest growing markets in WMC wafer.
Wafer inspection systems revenues grew 54% in 2021 far outpacing the Wi Fi market, which is estimated to have grown 40%.
We're experiencing strong growth across our wafer inspection portfolio from broadband plasma laser scanning.
On pattern bare wafer inspection macro inspection and E beam products. This quarter, we highlight macro inspection, which is growing at a pace of $1 five ex WMC driven by growth in automotive.
And other specialty markets, where KLA has defensible market leadership with a platform uniquely positioned to address growing technical complexity and tighter design rules.
Third success in KLA strategic growth and market diversification strategies are being demonstrated by growth in EPC.
Systems revenue from KLA, as electronics packaging and components or EPC group grew 20% in 2021.
With EPC KLA is diversifying our market leadership with a portfolio of solutions addressing fast growing new markets in the electronics value chain, including RF specialty semiconductors, automotive PCB advanced packaging and display port.
Service revenue grew 14% in 2021 to $1 8 billion.
<unk> continues to sustain a growth rate above its long term target of 9% to 11% for the quarter services revenue was $457 million or.
Our 19% of total revenue.
Annual services revenue is quickly approaching $2 billion.
And has grown 81% in the past three years. This growth has been driven by the rising installed base.
And increasing adoption of subscription like contracts over 75% of service revenue in the semiconductor process control segment and over 90% of services in the printed circuit board business come from recurring subscription like contracts.
Finally, the December quarter was another exceptional one from a free cash flow perspective.
Capping a year in which KLA generated over $2 5 billion and free cash flow and returned over $2 billion to shareholders.
The December quarter, we generated strong quarterly free cash flow of $746 million.
Which helped drive 43% growth in free cash flow in 2021. We've also maintained focus on returning capital to shareholders via our dividend and share repurchase program, which rose 63% year over year on a combined basis.
Before a brand gets into greater detail on our financial highlights and guidance. Let me briefly summarize despite the persistent disruption and continued challenges associated with the pandemic, particularly around the supply chain and component availability.
<unk> is consistently delivering strong revenue growth financial results and returns to shareholders KLA is well positioned at the forefront of technological innovation with a comprehensive portfolio of products targeting the most demanding inspection and measurement challenges in the marketplace.
I also want to provide a quick update on our ESG activities on December 16, KLA announced setting a goal to use 100% renewable electricity across our global operations by 2030, managing the impacts of our business in terms of ESG stewardship as an integral part of <unk> mission to advance Humana.
<unk>.
This includes contributing to creating a more sustainable future with that I'll pass the call over to Brad to cover our financial highlights outlook and guidance Brian .
Thank you Rick.
Kla's December quarter in 2021 results highlight the continuation of strong execution in a dynamic and challenging market environment.
We continue to demonstrate our ability to meet customer needs and expand our market leadership.
While growing operating profit generating record free cash flow and maintaining our long term strategy of productive capital allocation.
December quarter capped off a year in 2021 that was defined by strong growth and profitability across multiple areas of our business.
Also invested almost $1 billion in R&D to sustain our success in $250 million in capital expenditures to grow our global infrastructure to support our industry growth thesis.
All of this was accomplished while simultaneously continuing to return high levels of capital to shareholders.
Total revenue in the December quarter was 235 billion above the midpoint of the guided range for the quarter of two to two 5 billion to $2 $4 5 billion and up.
13% sequentially versus the September quarter.
non-GAAP gross margin was 63, 1% just above the midpoint of the guided range of 62% to 64% GAAP.
GAAP diluted EPS was $4 71.
And non-GAAP diluted EPS was $5 59.
Each within the guidance range.
Gross margins were 63, 1% and inline with expectations as product mix and factory expenses ended the quarter, mostly as planned.
Daily gross margin reflects the value, we deliver to the marketplace and our competitive differentiation.
To improve on our ability to meet our customer needs. We are also making meaningful investments in our global workforce supply chain and factory infrastructure to position KLA to deliver our products in this growing demand environment.
Total non-GAAP operating expenses were slightly below the midpoint of the guided range of $465 million, including $265 million of R&D expense and $200 million of SG&A non.
non-GAAP operating income as a percentage of revenue was 43, 4% in the December quarter.
<unk> innovation is fundamental to our go to market strategy focused on differentiated solutions.
R&D is at the heart of what we do and remains a key element in driving our portfolio strategy, new product introduction cadence and product differentiation.
This in turn helps sustain our technology and market leadership.
Given the rapid growth of the business over the last couple of years in our revenue expectations going forward. We expect the Companys operating expenses to continue to grow as we invest in global infrastructure and systems to scale. The KLA operating model as well as new product development programs and volume dependent resources to support our business expansion.
Are there more we as most companies are seeing a strong labor market driving cost pressure across our global workforce and within outsource partners.
As a result, we expect operating expenses to grow sequentially to approximately $495 million in the March quarter, and we forecast sequential growth in operating expenses to continue through calendar 2022.
While operating expenses are modeled higher going forward as we will make the necessary investments to scale our business to support our long term structural in the industry growth thesis.
We will 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.
Other interest and expense in the December quarter was $39 million and the non-GAAP effective tax rate was 13, 3%.
So we always have some variability in our tax rate given the timing and impact of discrete items and the geographic distribution of revenue and profit.
We believe it remains prudent to maintain our long term tax planning rate of 13, 5% going forward.
non-GAAP net income was $851 million GAAP net income was $717 million.
Flow from operations was $811 million and free cash flow was $746 million.
This resulted in a free cash flow conversion of 88% and a very.
Healthy free cash flow margin of 32% comp.
The company had approximately 152 million diluted weighted average shares outstanding exiting the quarter.
Revenue for the semiconductor process control segment, including associated service business was $2 5 billion up.
49% compared with the December 2020 quarter and up 15% sequentially.
Semiconductor process control systems and service grew 39% in calendar 'twenty, one versus calendar 2020.
Foundry logic was 71% of the approximate semiconductor process control system customer segment mix in the December quarter, and memory was 29% within.
Within memory business is split roughly 54% DRAM and 46% NAND.
Revenue for our electronics packaging and components group continues to be driven by strength in <unk> mobile and infrastructure as well as continued demand in automotive.
More specifically the specialty semiconductor process segment, which includes associated service business generated record revenue of $113 million up 24% over the prior year and up 10% sequentially.
Specialty semiconductor process systems and service grew 11% for calendar 'twenty one.
PCB display and component inspection revenue was $188 million up 5% year over year, but down 7% sequentially.
On a full calendar year basis, it grew 17%.
Our breakdown of revenue by major products and region can be found in the shareholder letter so I won't cover those here.
Turning to the balance sheet KLA ended the quarter with $2 8 billion in total cash total debt of $3 4 billion and a flexible and attractive bond maturity profile supported by investment grade ratings from all three agencies.
We remain committed to our long term strategy of cash returns to shareholders executing a balanced approach split between dividends and share repurchases.
We're getting long term returns of 70% or more of free cash flow generated.
In 2021, KLA exceeded our long term capital returns target returning over $2 billion to shareholders, including $601 million in dividends paid and $1 4 billion in share repurchases.
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.
KLA has a history of consistent free cash flow generation high free cash flow conversion and strong free cash flow margins across all phases of the business cycle and economic conditions.
During the December quarter, we repurchased $430 million of common stock and paid $160 million in dividends.
As we begin the new year, our view is that the <unk> market will grow in the high teens topping $100 billion off a baseline of approximately 86 billion for 2021.
<unk> demand is still constrained by the industry's ability to supply.
Strong industry growth momentum in 2022 across all end markets is expected to drive growth with the strongest percentage growth coming from foundry logic customers and.
Memory investment will be led by <unk> NAND.
Now wrapping up with our outlook and guidance looking ahead, our backlog remains strong and sales funnel visibility over the near term horizon is good however, rising product lead times driven by increased supply chain constraints is limiting our near term output.
These issues are reducing our revenue expectations by 8% to 10% for the March quarter.
Specifically COVID-19 related disruptions at a number of single source suppliers have exacerbated what has already been a difficult supply situation with these suppliers have been challenged to meet demand while running their production at Max capacity.
These disruptions are causing delays in parts delivery timing across multiple product platforms.
In addition, numerous electronic component sourcing challenges have become more acute over the past month as these are standardized parts and in demand across multiple industries.
We expect that the COVID-19 related impact will begin to abate shortly and new capacity or supply alternatives are expected to become available as we move through the calendar year.
While these issues can be fluid and difficult to predict in the short run we expect the March quarter revenue to represent the low point for calendar 2022, and we remain exceedingly confident in the sustainability of our current demand profile for the year.
Given current expectations for growth in Wi Fi and other electronics markets, we feel confident in our ability to grow throughout the year with total company revenue growth exceeding 20% and semiconductor process control systems revenue to outperform <unk> growth again.
Our confidence is based on current backlog levels competitive positioning strong customer engagement and steps, we continue to take to add capacity to address output constraints and what continues to be a robust demand environment.
Our March quarter 2022 guidance is as follows.
Revenue is expected to be in a range of $2 2 billion plus or minus $100 million.
Foundry logic is forecasted to be about 59% of semiconductor process control systems revenue.
Memory is expected to be approximately 41%.
We forecast non-GAAP gross margin to be in a range of 61, five to <unk> 63, and a half as overall revenue levels declined modestly on a sequential basis and product mix dilutes gross margins by roughly 50 basis points versus the prior quarter.
To provide some color for the calendar year, given higher revenue volume product mix expectations across our various segments offset by expected cost pressures within our supply chain. We are modeling gross margins to be approximately 63% for the year, plus or minus 50 basis points.
Other model assumptions for the March quarter include operating expenses of approximately $495 million interest and other expense of approximately $41 million.
And an effective tax rate of approximately 13, 5%.
Finally, GAAP diluted EPS is expected to be $4, 54, plus or minus <unk> 45 and.
And non-GAAP diluted EPS of $4, 80, plus or minus <unk> 45.
The EPS guidance is based on a fully diluted share count of approximately 151 million shares.
In conclusion, we are exceptionally strong and diversified end market dynamics propelling semiconductors in the central Wi Fi investments required to make them.
Furthermore, we are seeing revenue growth opportunities as more innovation occurs and technology complexity increases in specialty semiconductors advanced packaging and other electronics market.
Finally, our services offerings continue to deliver more value to our customers and our semiconductor process control business and there are evolving opportunities to further expand our value proposition in our acquired businesses.
Our record backlog and supported by solid customer demand across end markets and multiple technology nodes.
2022 is setting up to be the third consecutive year of double digit growth for Wi Fi and the seventh consecutive year of growth for KLA.
<unk> operating model fuels, KLA strategic objectives and positions us to outperform the industry in terms of growth and financial performance.
These objectives fueled our growth operational excellence and differentiation across an increasingly more diverse product and service offering.
They also underpin our sustained technology leadership wide competitive moat and strong record of free cash flow generation and capital returns to shareholders.
That I will now turn the call back over to Kevin to begin the Q&A session Kevin.
Thank you Brian .
Go ahead. Mr. Go ahead with your question sorry about that.
At this time, we 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.
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In the interest of time, we ask that you. Please limit yourself to one question and one follow up.
We will now take our first question from John Pitzer of Credit Suisse.
Yes. Good afternoon, guys. Thanks for letting me ask the question.
Rick as you pointed out in your prepared comments you guys had been dealing in the industry has been dealing with a difficult supply situation all.
All year, but this is the first quarter that you and others have seen it have a meaningful impact on the business.
And I am kind of curious as to what specifically happened in the last 90 days to make things worse and I guess more importantly, as you call March is the bottom what gives you confidence.
That these problems won't persist even longer.
Hey, John Thanks for the question, Yes, we feel pretty good about how we've navigated through the pandemic a couple of factors for KLA specific.
So think about one is we were up in the December quarter, and again huge customer demand so working to work that off.
We've talked in the past about securing critical components critical parts from key suppliers.
It actually continues to be in good shape.
We had some some challenge in the last few weeks and right. Now is we're actually working through them had to do with not necessarily our critical supply, but just generalized.
Supply across the industry I think is most companies are talking about so we're seeing some of that that are not unique as Brian said in his comments to KLA. The reason, we feel more confident is even though the last few days, we've seen some pressure be released in that system.
It won't be in time for what we would have preferred to ship in this quarter. We obviously have the backlog we could have shipped more if we'd had it but it's being resolved. So we feel pretty good about the go forward. After we get through March and I'll, let Brian add some color since he's spending a good part of his time working some of these issues themselves. Yes, John how are you so just to add.
To Rick's comments I think one of the things you have to consider as most of our strategic offer that.
Bill whether we have it in inventory levels at the company, whether it's inventory or a long lead time materials that we procured or suppliers are procured over the last 15 months or so given the strength of demand. We have worked through a fair amount of that and Thats. One of the challenges. We have is we are more dependent today on that.
Predictability.
Timing first of all but also volume.
Quality and.
So I think those are issues that we continue to work through as Rick said in our complex systems, we generally have pretty transparent view of where that demand is although everyone's struggling to meet the demand environment that we're facing today, but it's in our higher volume, but single source type.
<unk>, where where we've seen some of these pressures we did not anticipate COVID-19 variance and what that would do to those factories and in terms of people having to leave either because of contact or or exposure. So you had facilities that we're already running a 100%. Max then all of a sudden had to deal with this.
<unk> in a lot of cases pretty meaningful disruption in the first part of that of the month, we think that that's abating.
And we're getting a sense that thats.
That's improving.
Covid environment, we will have to figure out navigate our way through we don't know what the future holds but at least in terms of the near term.
<unk>, we feel pretty good about that and then trying to source and find all the electrical components, which are deeper in our build of material in within our supply chain, there's less visibility, but there is also alternative either alternative supplies qualifying new.
New parts.
In some cases.
Leveraging third parties, which we've been doing and thats, even becoming more challenged in terms of distributors and others that might be out there that have those parts. So we're managing through this were.
We're escalating where appropriate and as we look at it.
Walk through what we expect to see moving forward. We think the March quarter sets up is the bottom and we expect given the guidance. We gave that we would see growth through the year and expect the company to be somewhere in excess of 20% as we said in the prepared remarks.
Isn't that Theres always some questions or unpredictability here in terms of just where things are but thats.
That's how we see it today.
And then Brian just as my follow up you gave some very specific guidance for opex, even beyond the March quarter.
Growing sequentially throughout the year, but still within the model of 40% to 50% incremental gross operating margin sorry.
Im just kind of curious I have to imagine that this year the supply constraints are causing some excess costs that that might bleed down over time as supply gets better and theres, a bigger mismatch im assuming between revenue collection and investment. This year. So as you start to recapture some of this revenue as supply gets better.
Should we assume that incremental op margins closer to the higher end of that 40% to 50 year or how should we think about that as revenue growth accelerates beyond March.
Yes, yes, I know that Youre thinking about it right as we see revenue growth it should accelerate to the higher end of the range.
Commentary was really about how we look inside the company.
On an annual basis over a longer term horizon.
If you look at 19 to R. 22 planning, we will have had incremental operating margins given the growth we've seen in excess of 50%, 52%. So my point was that we would expect revenue to grow we're also expecting opex to grow but at the end of the day as we're sizing in 2022, we expect to be in our target range.
A 40%.
Thank you.
Thank you.
We'll take our next question from Harlan sur of JP Morgan.
Good afternoon, guys. Thanks for taking my question and great execution by the operations team in calendar 'twenty, one year process control systems business. All grew double EFE by about eight percentage points with strong performance. There. So as we look at your <unk> outlook for this year right up 16% to $100 billion.
Taking into account rising process control intensity or a portfolio of new products.
Should we think about your process control systems growth profile relative.
<unk> this year, it's clearly going to outperform but should we expect a similar type of outperformance like you saw in 'twenty, one or maybe even better.
Given the customer mix and the complexity challenges and is it going to again be led by wafer inspection.
Thanks, Harlan Great question, Yes, 'twenty, one we feel really good about how we performed in 'twenty. One I think we've talked about several times just the strength, especially of optical wafer inspection was.
It was extraordinary in the year and also when we look to our order book, we got tremendous.
Interest in those products. So we're seeing great opportunities in 'twenty two as well.
That's a favorable mix for the year for 'twenty two and.
Based on the success, we've had with some of our new products and the way that they are being received by customers. We anticipate that we will be in a good position to build on our market leadership position as we go forward. So we are anticipating continued growth in share, albeit at the kind of rate that we outlined a few years ago. So I think the combination of those factors.
Plus the continuation of the drive in <unk>.
Design rule are all good indicators and good drivers for KLA to outperform which is what we're forecasting.
We never really know at this point of the year, how it is actually good.
The details of what it's going to look, but we think process controls in a great position for 'twenty, two and we're in a great position within process control, Brian can add some color to that.
Yes, Harlan I think that we'll see in terms of mix I would expect foundry logic grow faster this year than it grew.
Our faster then.
Growth rate in WMC.
And as a result of that that'll be a favorable mix so to Rick's point I think that that will.
Be a driver for us.
From a share point of view, we feel pretty good about where we are certainly wafer inspection as you mentioned has been the biggest driver has been the fastest growing business in the company and we have a very strong position there.
Said, many times I think it might be one of the fastest growing markets in all of WMC I would expect to continue to see momentum in that overall market. So we said in the prepared remarks that we were about we thought we were around 46% for semiconductor systems in 2021, it gets to market of 40 or 41% and then as we look at.
At high teens type growth rates in WSI. This year I would expect we will have a similar.
The improvement over the market or similar outperformed somewhere in that mid single digit range based on how were were looking at it today.
And I appreciate the insights there and then on the gross margin front I understand the supply challenges and other logistics related dynamics are impacting shipments here, but relative to your peers. I mean, your gross margins are holding up extremely well right. I mean, you guys are only guiding for roughly a 50 basis point decline.
<unk> gross margins here in the March quarter, and then actually it looks like Thats more mix and volume related right in the midst of all.
All of these potential cost dynamics.
Youre still guiding full year gross margin to 63% so help us understand the better sustainability of gross margins in this challenging period. I mean are you guys just.
Passing along exercising some pricing power and just passing along some of these cost to your customers.
Okay. That's a great question, Harlan and I'll start and maybe Rick want to add a few comments here, but our pricing model was really based on pricing to value price on the value. We believe that our tools add to our customers and so that's ultimately how we price the products. It isn't a cost based model it's more of a.
Value base Youre right as you look at the March quarter.
What's declining as semiconductor process control revenue quarter to quarter, we're actually expecting some growth in our EPC business every.
Every quarter service growth.
So it is a bit of a mix effect and a volume effect on the March quarter going forward, we are seeing pressure on cost.
We're not implying that we arent and I've been pretty open with the fact that I think there is a 100 basis point headwind related to cost increases.
As we all know everything seems to be costing more labors costs anymore, and certainly the ramp in investments our customers. Our suppliers are having to make is driving incremental cost into the model, but thats factored in so absent that I think given the mixed expectations. We would have moving into 'twenty, two with a growth rate of semi PC consistent.
With what your last question.
With that we would see margins in Peru, but we are feeling a little bit of pressure. So I think we hold 63, plus or minus any given quarter, you'll see a little bit of variability.
But at the end of the day I also think it is just a reflection of.
The value that we're adding I think it also a reflection of the differentiation that we have across the portfolio in the marketplace.
Yes, just one other thing to add Brian .
I think it's really important.
We continue to understand the value, we're creating for our customers.
We share in that value in our pricing I think that's the way to think about it for them. They are very very motivated to get these products and as soon as they can because the payback is extremely quick.
You would probably see in a more normalized if you didn't have an environment that was supply constrained with the increase in volume you would actually see the cost dynamics go the other way so I think what Bryan talked about.
Little bit of headwind that we get is because of some of the pricing increases, but it is not much in our overall business, but in a historical context, if you weren't up as much as our revenues half, we would see volume discounting happening with our suppliers, which would bring down some of the cost and that's not really happening in this environment, but our <unk>.
Turning point is really good and our new products.
Our incredibly well received by our customers. So not only do we like the margin profile, but our customers really want to get the new products. So we're in a pretty good.
<unk> as it stands right now.
Yes. Thank you.
We will take our next question from C J Muse of Evercore.
Yes, good afternoon, and thank you for taking the question.
Another another gross margin question.
Really drill down just a process control you grew gross margins there.
64%, 2020% to 65% in 2021 and.
Cognizant of the fact that there's clearly some.
Challenges near term, but as you think about the mix that you're seeing in the value add that you're bringing.
Where do you think process control gross margins can go in a more normalized environment.
Y J normalizes.
Yes C. J, it's a great question, you're right. We were in the mid 65 range. If you look at the process control segment overall, so as we move into certainly 'twenty two I would expect that to be roughly flat given what we just said, maybe a little bit better but generally in that range.
And just given the things we just talked about.
A lot of it depends overall.
You've got the service mix, which service gross margins have improved over time as that business scales, but it is dilutive. So in the long run if service is growing faster than system. So that does put a little bit of pressure on margin. So I think we're pretty comfortable with the levels that they're at.
See them picking up and we always talk about 60% to 65% type incrementals on our semi process control business. So I would expect to see something consistent with that but if you are you are approaching 65, or maybe a little bit higher at the top end of that you start to hit the ceiling in terms of how high you can go so.
I think we're probably in that mid <unk> range, maybe creeping up a little bit from there, but I don't see it improve.
Improving much more than that.
That's helpful.
As my follow up.
I guess can you comment on whether you expect to be constrained in the June quarter, and as we think about kind of second half total revenues versus first half on a calendar basis should we be thinking kind of low to mid double digit growth half on half.
Yes, I think thats the way to think about it. It's certainly the second half will be stronger than the first half.
And look I think we're all constrained right now in terms of the ability to get parts. What we've provided is.
Our expected probability of all the various issues, we're managing in terms of an overall view, but given that March will be lower I would expect sequential growth as we move through the year in the second half overall for the company, yes, yes, low to mid double digit is a reasonable way to think about it.
Great. Thank you.
We will take our next question from Vivek Arya of Bank of America Securities.
Thanks for taking my question I actually wanted to ask the last question in a slightly different way.
As you go into June so I think you're suggesting about a $200 million impact in the March quarter are you able to recognize the $200 million in June or does that spread into the back half of the year.
Yes, Vivek it will it will show up in the June quarter, So user shipments that slipped out and then are in the June quarter, but when you have suppliers that are running at Max capacity and a lot of cases and they have a disruption I think the making up that lost time, we will take some time through the year right I don't think that there.
You'll be able to make it all up at once so theres a little bit of a cascading that happens whenever you have a disruption in a facility that's already running full out I mean equipment is running at 24 seven people are working.
After legal limits in terms of overtime. So so trying to squeeze more capacity in the short runs a little bit harder, but overtime I would expect that we will see that creep out we also expect capacity to improve.
Or have alternatives to materialize as we move through the year. So it's a combination of those effects, but yes, I would expect it to move into the June quarter. Just one just a little more color to think about what we saw with omicron as more people being impacted and losing workdays, Fortunately not severely impacted but enough that they had to not be it the work for us.
And as Brent said these factors were ramped up so it's hard to make that up but it's also.
They are already coming back so we have a lot of confidence in.
The supply chain returning to two.
More supportive levels for our business going forward.
Alright.
Follow up I realize it's super Super early but I was just hoping if you could give us a flavor of the customer discussions about 2023.
<unk> seen in the past has kind of grown from two to three years and that is a theater that absorption.
This time, we have already had it.
Will be the third year.
Growth do you think it's possible to have a fourth year of growth and what would be the high level.
Puts and takes just to that.
Investors get a sense on it.
Peak year for WMC or are there are still prospects for additional growth next year.
Yes, great question I think ironically, perhaps.
Current slowdown in our ability as an equipment industry to provide will stretch this out into 'twenty three anyway.
So you see that plus a number of high profile projects, which have been discussed recently by our customers don't really order equipment in 'twenty, two or maybe they place, but we certainly don't see deliveries. So if you think about some of the big new Greenfield projects that have been announced.
Those are 23 projects not 'twenty two so I think the combination of those that are related to both support from the.
The regionalization efforts driven by things like the chips Act in the U S should that come to pass, but even the other projects, which aren't dependent on that are really much more about 'twenty three than they are about 22. So as we look at it now we.
We do have pretty good visibility out through the end of the year and even into the first parts of next year for the demand to continue to be very supportive of.
Of our business.
Yes exactly.
The thing I would add to that is that we have very high levels of backlog and a lot of cases, we're booking slots for customers into 2023 now.
And so as a result of that we feel we feel pretty confident in the sustainability of what we're seeing I made some comments earlier about the second half.
And as we model in terms of how we're planning the company and how were planning capacity, we expect to see see that those levels of business sustain as we move forward. So it's a long way out and things can change.
But certainly we don't see anything that.
That shows any slowing down anytime in the horizon, and certainly customers are asking for more and faster.
Very helpful. Thank you.
We will take our next question from Timothy Arcuri of UBS.
Thanks, a lot I had two brand one kind of on the same <unk> as the last question. So it.
It seems like the <unk> in the first half of the year, we're sort of entering March a bit lower than what most of US would have thought just because of some of these constraints.
But the back half is going to be a lot bigger if you just take your number youre going to do like one eight I mean, maybe even 109 in terms of process control shipments.
Bob.
System shipments in the.
Back half of the year and if you basically.
Take your to be sure that as like $110 billion annualized Wip. So my question is.
When you sort of think about that number and you go back and you try to determine what the demand really supports.
<unk> sort of look at the projects and you look at the technology transitions and whatnot, how do you handicap sort of like where you cry uncle on sort of where the.
<unk>.
Run rate becomes too high and do you agree with the <unk>.
Five or somewhere in that range system number for that.
Half of the year.
So Tim on the last part of your question.
Given the guidance.
We gave around second half you are probably not that far off it's probably in that one eight.
Range, plus or minus more or less.
So.
We will have to see how it plays out but we spent a lot of time looking at the various leading indicators.
Yes.
What we're seeing from customers and of course, we look at our customer discussions we have with them theres their profitability levels.
Look at these end markets.
And some of the challenges that exist there. So as we go through if you look at our customers are spending more than they ever have been more profitable than they've ever been so we feel pretty good about where they're at.
The demand is.
So we're going to we'll continue to watch it but right now at this point.
Our customers are continuing to ask for for systems as I said earlier I think Wi Fi is constrained by supply.
And over the long run we believe that WSB, given rising capital intensity will grow faster than semiconductor revenue in terms of a longer long run trend. So.
I think that's how we're modeling the company certainly is how we're planning when you think about supply and investments we need to make.
But that's that's how we're thinking about it right now.
Thanks, Brian and then just maybe a bigger picture Rick I'm sort of curious what your view is I get a lot of questions around <unk>.
As you go to sort of scaling that is a little more vertical lines versus using litho too.
Scale, what are you talking about.
<unk> or <unk> and things like that it doesn't exactly what happened demand, but listen it does become a little bit maybe less of a.
The driver for actually.
To scale going forward can you just talk about how you think about how that affects you either positively or negatively sort of in terms of your ability to keep to keep.
Keep on gaining Wi Fi share and maybe what youre attached to muscle sort of how you think about that bigger picture things.
Yes, Thanks, Tim Good question I think that the.
It's interesting if you use the example of NAND is.
Or are you actually went backwards in lithography and yet the process control intensity. It went down a little bit, but we actually thought it would go down more because what happened was two things and if we would have solutions. It probably wouldn't have gone down at all because there were other integration problems that we were unable to solve at that time, but even there.
It went backwards and there was not a huge change in process control intensity.
Here at lower levels, what we're seeing now already in conversations with customers as we look at new device types.
The process control challenges are going to be enormous and many of them.
Yes, <unk> is a big part of it but you have EV, which is driving additional use cases, you have the registration overlay challenges which has created.
Significant market and we also see the need for more and more inspection layers using different wavelengths. So the gen. Four is being extended I think we mentioned last quarter Gen. Four actually outperform gen. Five in terms of revenue in 2021 and.
And we actually see that continuing because of the usefulness of that product and that wavelength. So we actually think the real question is are there going to be integration challenges that are going to drive our customers. When there is multiple players competing at the leading edge that's always a good thing for KLA.
I think we went through a period, where there was really one main driver and they had one real and device driving that logic.
So long as the case, so we feel pretty good about the architectures that we're seeing where process control team.
They are working with our customers and as far as we can see out through several years, we think we're well positioned with plenty of opportunity and we have a lot of solutions, we're investing in as Bren said.
We're investing at a significant level and R&D to be positioned to support those going forward. So we don't see really a relaxation in process control intensity as we go forward.
Will it continue to rise we're not anticipating that it goes up a lot and so that's not in our models that would be upside to our model as that happens, but that's not.
It's not what we're working off of I'd say two.
Two things first when we move from from Planer to vertical NAND <unk> NAND as a proxy we saw a couple of points improvement overall in process control intensity and it came really in our metrology businesses. Because if you think you are starting to build the structure.
Structures vertically it creates a whole new set of metrology challenges. So we saw an inflection there for metrology and then you also have feedback mechanisms related to high aspect layers.
The aspect ratio structures and so on.
No.
That is if it's a proxy we feel pretty good about.
The opportunities there.
Some of the defect mechanisms metrology challenges change for process control intensity overall was a positive our 2023 plan in terms of process control KLA share of Wip was to see process control intensity improve kayla here at WPZ to grow about 75 to 100 basis points from 2019, and we feel like we're right on that trajectory.
As we go forward here, so as Rick said, we do expect it to grow a lot, but we do expect to see it continuing to grow and that should create opportunities for us to win.
Most of our consistently outgrow the market here over the next few years.
Thank you Beth.
We'll move next to Patrick Ho of Stifel.
Thank you very much Rick maybe just following up on that question by Tim in terms of process control intensity in terms of device architecture.
As we look at gate all around I know you've talked about it from a big picture perspective of some of the opportunities there, but given the materials intensity, how do you see I guess more semiconductor engineering materials type good trends.
Benefiting process control intensity, especially I'm, just thinking gate all around the gate now being surrounded by me.
A lot of materials.
Do you look at it from both an inspection and probably from an overlay metrology perspective, do you see one or the other cool benefiting from these changes on the materials front.
Yes, Patrick Good question I think that again, we've been in conversations with customers about these advanced architectures for some time and the challenges that they face.
Fortunately, we often have more time than we originally thought to get our solutions ready because.
Often take longer to get to market than were originally anticipated. So we're actually in pretty good shape in terms of providing solutions for that specifically the gate all around remember for inspection. They are really a couple of things that we have two problems that we have to solve the most significant one often lost on people is it's a contrast question thats not as much as a.
Elution as contrast, and gate all around with different materials creates a different contrast challenge, which is why the wavelength matters a lot which is why we're extending gen. Four and we're seeing good modeling results from that the other thing that happens of course is the registration every generation I think may be lost on people or the additional.
Challenges and registration and overlay every device technology and the increase in sampling is just dramatic in that business and in films in general again more challenges associated with that we have a good modeling effort that goes on very very strong in the company. So we can model and understand what those devices are going to look like and what theyre going to need it.
A capability. So we're very well positioned to handle that I think that youre going to see increases in both inspection needs, but also in metrology slightly in different ways and in metrology, you're already a sampling at so many levels, it's more about increasing the sampling at those levels in other words more steps.
Or more measurement points per die per wafer.
Inspection and it ends up you add number of inspection steps in the process as opposed to the area inspected which is usually already predetermined and that probably won't change. So I think they will both grow but for different reasons in that and again our customers our relationship with our customers is such that we've been working on these problems for a while because <unk>.
Now they know they need the support of inspection and metrology early in the development phase if they have a chance of ramping these new technologies. So we feel pretty good about our insight into those.
Great that's helpful and as a quick follow up.
The current environment obviously.
Seeing very high utilization across fabs for both leading edge and trailing edge.
Given the supply chain issues and I know not all parts.
And.
Components are the same for both new systems and your spare parts business your installed base business, but how are you balancing some of the procurement initiatives that youre dealing with today in terms of.
Where do I take this component parts go into discrete parts bucket or should it go into a new system.
Are you balancing that today.
Yes, Patrick its a great question and something that we spent a lot of time on internally.
Particularly as Brian Laurie who runs our service business points out to me all the time that don't forget about spares.
So it is it is absolutely a balancing act Fortunately we have.
Pretty good idea.
When things will failed at that around certain components that we can plan for that but in terms of stocking levels, but we're very we have had situations, where we will pull parts off of systems. If we have to support the field, we've made commitment to customers those customers.
Speaker 1: pull parts off of systems if we have to to support the field. We've made commitment to customers. Those customers value these systems, and we've got to keep them up and running. So in a lot of those cases, we're going to generally prioritize service if we can't figure out a way to work around it, which we've, for the most part, been able to do. But it's a constant balancing act, and it's something that we watch very closely.
These systems and we've got to keep them up and running so and a lot of those cases, we're going to generally prioritize service. If we can't figure out a way to work around it which for the most part been able to do but its a constant balancing act and it's something that we watch very closely.
Thank you.
Speaker 2: We have time for one last question, and we'll take Joe Moore of Morgan Stanley . Great, thank you. I wonder if you could talk a little bit more about the supply constraints in terms of, you know, how much planning were you able to do around it? Did you get surprised by these component issues? And are you generally just kind of meeting commitments to your customers, but the lead times are getting pushed out? Or was there kind of a de-commitment because of disruptions in your own supply chain?
We have time for one last question and we'll take Joe Moore of Morgan Stanley .
Great. Thank you I Wonder if you could talk a little bit more about the supply constraints in terms of.
How much planning, where you're able to do around did you get surprised by these component issues and are you generally just kind of meeting commitments to your customers, but the lead times are getting pushed out or was there kind of a day commitment because of disruptions in your own supply chain.
Yes, Joe that's a great question so.
Speaker 1: Yeah, Joe, that's a great question. So I'll say a couple things here. First, yes, there were some surprises, right? We as we were moving through December and into the early part of January , the COVID impact was a surprise in terms of the impact on some of these suppliers.
Ill say a couple of things here first yes, there were some surprises right as we were moving through.
December and into the early part of January .
The Covid impact was a surprise in terms of the impact on some of the suppliers.
So.
We also had some issues that materialize as I said in the prepared remarks around I'll call them more lower value commodity parts that that we also procure and a lot of cases, where those are as we have suppliers suppliers.
Speaker 1: that are trying to acquire those parts to then send them to us, to our direct suppliers for it gets to us. So it's a little bit harder to have visibility down at those levels.
That are that are trying to acquire those parts to then send them to us to our direct suppliers, where it gets to us. So it's a little bit harder to have visibility down at those levels now with enough time, you can typically manage around some of those issues either by finding alternatives qualifying alternatives.
Speaker 1: With enough time, you can typically manage around some of those issues, either by finding alternatives, qualifying alternatives. It does have an impact on on-time delivery, to your point. And so the reason we were able to quantify the impact of 8 to 10% on the results in March was really what we thought we were looking at as we ended the December quarter and where we ended up.
It does have an impact on on time delivery to your point.
So the reason we were able to quantify the impact of 8% to 10% on the results in March was really what we thought we were looking at as we ended the December quarter, and where we ended up.
Speaker 1: So, we had a pretty good visibility to the impact and to be able to quantify it. On-time delivery is what's suffering, though, but we're managing around it to the extent we can. And I think customers, while there's tremendous pressure in the system, there's a reality check of the challenges that I think I can speak for everybody that we're all dealing with here.
Today, So we had a pretty good visibility to the impact and so we are able to quantify on time delivery is what suffering now, but we are managing a rounded to the extent, we can and I think customers. While there is tremendous pressure in the system. There is a reality check of of the challenges that I think I can speak for everybody that we're all dealing with here.
Great. Thank you very much.
Okay.
Alright, Thank you Joe and thank you everybody for joining us we know.
Speaker 3: Great, thank you Joe and thank you everybody for joining us. We know it's a busy week of earnings, a busy day of earnings. We really appreciate everyone's time and attention. I'm sure we'll be catching up with many of you throughout the quarter. With that, I'll pass the call back over to Leo to end the call.
Busy week of earnings a busy day of earnings we really appreciate everyone's time and attention.
I'm sure, we'll be catching up with many of you throughout the quarter.
I'll pass the call back over to lay out too.
<unk>.
This concludes the KLA Corporation December quarter, 2021 earnings call and webcast. Please disconnect. Your lines at this time, if I have a wonderful wonderful day.
Speaker 4: This concludes the KLA Corporation December quarter 2021 earnings call-in webcast. Please disconnect your line at this time. Goodbye. Have a wonderful, wonderful day.
Speaker 5: Music
Okay.
[music].