Q3 2022 KLA Corp Earnings Call
[music].
Good afternoon. My name is David and I will be your conference operator today at this time I would like to welcome everyone to the KLA Corporation March quarter, 2022 earnings conference call and webcast. All participant lines have been placed in a listen only mode to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time. Please press the star and one on your telephone keypad.
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I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and market analytics. Please go ahead. Thank.
Thank you and welcome to <unk> fiscal Q3, 2022 quarterly earnings call to discuss the results of the March quarter and the outlook for the June quarter.
Joining me today is Rick Wallace, our Chief Executive Officer, and Brian Higgins, Our Chief Financial Officer.
During this call we will discuss the results released today after the market close you can find the press release and shareholder letter slide deck and info graphic on our IR website.
Today's discussion is presented on a non-GAAP financial basis, unless otherwise specified and whenever references are made to full year business performance. They are on a calendar year basis.
A detailed reconciliation of GAAP to non-GAAP results 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.
I would also like to take this opportunity to remind investors and analysts to sign up for our June 16th Investor Day, taking place in New York, If you Didnt receive an email invitation please reach out to the KLA IR team and we will get you one.
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.
Actual results may differ significantly from those projected in our forward looking statements I'd like to now turn the call over to our CEO Rick Wallace Rick.
Thanks, Kevin before getting into <unk> results in more detail I wanted to acknowledge and thank the global KLA team.
Your perseverance and drive to be better remains at the center of our consistent execution and outperformance.
Have remained focus despite challenging background supply chain conditions are.
Our high performing teams that drove kla's indispensability to customers, resulting in additional process control market share growth for the recently ended year.
March quarter results demonstrate strong execution across multiple areas of our business and a persistently challenging supply chain environment.
Living delivering revenue GAAP and non-GAAP earnings per share above the midpoint of the guidance ranges for the quarter. We once again displayed strong execution across multiple areas of our business.
Our focus on consistently meeting commitments and delivering on our long term strategic objectives and financial targets is the hallmark for which KLA is known in the standard by which we measure our success.
Customer demand across our major product groups continues to bill a secular trends drive broad based growth across a range of markets and applications served by the semiconductor industry.
This robust demand has been putting pressure on the industry's ability to supply semiconductors simultaneously, our leading edge customers are increasing their strategic capex investments to improve their competitive positioning while addressing growth in markets that demand, new leading edge semiconductor capabilities.
Against this rising demand backdrop KLA has remained focused on responding to evolving customer needs and navigating supply chain challenges.
Very important that KLA continues to operate with purpose and precision. So we can create value for our customers partners and shareholders by outperforming expectations our.
Our talented global teams, both Ron and improve the KLA operating model and use it as a critical guide to rise to the challenges and opportunities of the evolving marketplace.
The market leader in process control one of the fastest growing segments of the overall Wi Fi market KLA remains in a position of strength when we look at the industry demand landscape.
The conductor industry has evolved to be more significantly strategic and has an increasingly less cyclical end market mix.
With many fundamental drivers advancing the critical nature of semiconductors throughout the global economy fat.
Factors, such as the continuing advancement of technology at the leading edge, increasing investment in legacy nodes and innovation and growth new enabling technologies such as advanced packaging are fueling long term growth for the semiconductor industry.
And for equipment and capabilities that make it possible.
Despite persistent supply challenges macro headwinds our outlook for the Wi Fi industry. This year remains intact.
Be it with an expectation for a stronger sockets second half than anticipated in January .
We expect <unk> demand to top $100 billion this calendar year, making it the third consecutive year of double digit growth.
KLA is expected growth in calendar 2022 will mark the seventh consecutive year of growth.
This sustained strength in customer demand is happening in an environment of increasing momentum for process control, where kla's market leadership is strengthened further and our market share results remain forex our nearest competitor.
Kla's expanding Lee. This is the result of a number one market position in some of the fastest growing segments of WSB that have a market size greater than $1 billion in terms of annual revenue.
We attribute KLA strengthening market leadership to our ongoing successful execution of the companys customer focused strategies.
<unk> invest in me at a high level to drive differentiation with a unique portfolio of products and technologies that address the most critical process control challenges in the marketplace.
And help our customers drive their growth strategy.
We're pleased to see the success of our strategy is validated by our customers' purchasing decisions and reflected in the April 2022, Gartner market share report showing kla's market leadership advancement.
This emphasizes the power the portfolio strategy, we employ.
The recently published Gartner market share report shows process control was one of the fastest growing segments of WMC at 2021 growing 43% in the year to $10 4 billion.
<unk> share of process control grew approximately one percentage point to over 54%.
Has increased over three percentage points since 2018 and remains greater than four times, our nearest competitor across all regions within process control. The optical inspection market grew to approximately $2 $5 billion in annual sales.
Outpace in WSI by 40% and our share of this market remained above 80% other highlights demonstrate power of <unk> portfolio strategy and delivering strong growth in other critical process control markets, including metrology macro inspection and very strong growth in E beam review.
Turning now to the top five highlights for the March 2022 quarter first Kla's market leadership in some of the most critical and fastest growing markets at WMD continues to fuel growth, we remain nimble and innovative in addressing global supply challenges to meet customer requirements and our financial targets.
Foundry and logic simultaneous investments across multiple nodes and rising capital intensity remains a tailwind and memory demand is broad based across multiple customers.
Our optical metrology business stood out in the March quarter, driven by KLA, <unk> market leadership, and increasing customer adoption of market applications with leading edge technology development and capacity monitoring.
Optical metrology market strongly leveraged to EEP and critical next generation architectures, including gate, all around and multi stack of 160 plus layer <unk> NAND.
This was further illustrated new Gartner market share report, which showed 50% growth in 2021.
Third tailings intensifying our efforts in advanced packaging and automotive electronics, leveraging the combined portfolio of both the SPC and EPC groups KLA is broadening our product portfolio and delivering a comprehensive suite of products and technologies that include wafer level packaging and final Assembly and test.
Products for advanced packaging market.
And a portfolio of inspection systems and process tool designed to help customers.
<unk> achieved there is zero defect goals.
These collaborations continue to grow with KLA recording our highest ever customer engagement in terms of wafer inspection revenue for automotive applications in the March quarter.
Services revenue was $488 million up 14% year over year.
The company tallied a record 349 installs in the March quarter, well above the previous high of 293. This was a remarkable achievement given travel restrictions in Asia Lockdowns related to COVID-19, and complexity views related to the supply current supply environment.
MS revenues consistently outperforming the 9% to 11% long term growth target driven by growing installed base, increasing customer adoption of long term service agreements higher utilization rates and expansion of service opportunities in the legacy networks.
Finally, the March quarter was another exceptional period from the free cash flow perspective, we generated quarterly free cash flow of $719 million for 23% year over year growth. We've also remained focused on returning capital to shareholders via our dividend and stock repurchase programs both of them.
Which are up materially year over year, including a $565 million quarterly share repurchases and an additional 159 million in dividends in the March quarter.
Before passing the call over to Brent to review the financial highlights and guidance, let me summarize briefly.
March quarter demonstrates sustained outperformance highlighting the critical nature of <unk> products and services and enabling the digital transformation of our lives are consistent strong execution against significant challenges in the marketplace. Both in terms of meeting rising demand.
And addressing persistent supply issues highlights the resiliency of the KLA operating model and our commitment to productive capital allocation.
He is exceptionally positioned at the forefront of technology in a patient with a comprehensive portfolio of products to meet demanding customer requirements.
<unk> balancing sensitivity and throughput.
Semiconductor and electronics landscape are constantly changing and we continue to see more customer inventory, that's driven by technology change than ever before at the leading edge.
Simultaneously the need for increasing performance and reliability requirements for legacy notes to support the evolving markets like automotive and <unk> are also important to help deliver new capabilities. We believe KLA will continue to benefit from numerous secular growth factors that drive long term industry demand.
Same time, our strategy of driving diversified growth.
Strong long term operating leverage provide durable free cash flow generation.
Distant capital returns to our shareholders with that I will turn the call over to Brad.
Thanks, Rick.
Our results reinforce the success of our execution and strong market position.
Continue to focus on meeting customer needs in a robust demand environment, while expanding market leadership growing revenue, increasing gross and operating profit generating strong free cash flow and maintaining our long term strategy of productive capital allocation.
Quarterly revenue was $2 $2 89 billion at the upper end of the guided range of $2 one to $2 3 billion.
non-GAAP gross margin was above the midpoint of guidance 62, 9% as the various components performed mostly as expected with upside coming from the higher than expected semiconductor process control systems revenue, which enhanced the product mix for the quarter.
non-GAAP diluted EPS was $5 13.
Also towards the upper end of the guided range of $4 35 to $5 25.
GAAP diluted EPS was $4 83.
non-GAAP operating expenses were $484 million.
So our expectation of $495 million, mostly due to the pace of new hiring which is slower than originally planned.
Total operating expenses were comprised of $285 million in R&D and $199 million in SG&A.
Given the strong demand backdrop rapid expansion of our business over the last couple of years and our revenue expectations for the business going forward, we expect to continue to invest in our global infrastructure and systems to scale. The KLA operating model to facilitate growth.
This includes investing in new product development programs and volume dependent resources to support our business expansion as we position the company to execute against our long term structural growth thesis.
Furthermore, we as most companies are seeing a strong labor market driving cost pressure across our global workforce and adjustments related to our annual merit process that went into effect during March.
As a result, we expect operating expenses to grow to approximately $525 million in the June quarter, and we forecast quarterly operating expenses to trend higher over the balance of 2022, along with our sequential revenue growth expectations.
We continue to size the company based on our target operating model, which delivers 40% to 50% incremental operating margin leverage on revenue growth of a normalized time horizon.
non-GAAP operating income as a percentage of revenue was once again strong at 41, 7% in the March quarter.
Other income and expense net was $46 million compared with guidance of $41 million with the variance from guidance, reflecting the mark to market impact of a strategic supply investment.
For the June quarter, we forecast other income and expense net at approximately $43 million.
The quarterly effective tax rate was 14, 6% above our guided tax rate of 13, 5% <unk>.
non-GAAP earnings per share at the guided tax rate would have been $5 20.
non-GAAP net income was $776 million GAAP net income was $731 million.
Cash flow from operations was $819 million and free cash flow was $719 million, resulting in free cash flow conversion of 93% and free cash flow margin of 31, 4%.
Looking at revenue by reportable segments and end markets revenue for the semiconductor process control segment, including and its associated service business was $1 98 billion up 31% year over year and down 4% sequentially as expected.
The approximate semiconductor process control system customer segment mix for foundry logic customers was approximately 63%.
Memory was approximately 37% for the further breakdown comprised of 26% from DRAM customers and 11% for NAND.
Revenue for our EPC group continues to be driven by strength in automotive <unk> and advanced packaging.
Within MPC the specialty semiconductor process segment, which includes associated service business generated revenue of $117 million up 28% over the prior year and up 4% sequentially.
PCB display and component inspection revenue was $193 million down 6% year over year and up 2% on a sequential basis.
For an additional breakdown of revenue by major products and regions. Please see the shareholder letter in slides.
In terms of the balance sheet KLA ended the quarter with $2 $6 billion in total cash debt of $3 7 billion and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three agencies.
We have growing confidence in our business over the long run and are committed to a consistent strategy of cash returns to shareholders that enables growing dividends and increased share repurchases.
Over the long term, we target returning at least 70% of free cash flow generated.
Our capital return strategy underscores our strong record of predictable and productive capital deployment and remains an important differentiating element of the KLA investment thesis.
Over the last 12 months KLA has returned $2 $3 billion to shareholders, including $1 7 billion in share repurchases and $620 million in dividends paid.
KLA has an impressive history of consistent free cash flow generation by free cash flow conversion and our strong free cash flow margin across all phases of the business cycle and economic conditions.
Turning to the outlook.
Our overall semiconductor demand and Wi Fi outlook for calendar 'twenty two remains unchanged we.
We expect the Wi Fi market to grow in the mid teens to over $100 billion in 2022 off a higher base of approximately 87 billion in calendar 'twenty. One after assessing reported results for the December quarter.
Although based on peer company March reported it appears that the industry supply issues will increase the loading in the second half of the year.
This reflects the continued broad based strength of demand across all customer segments.
While we add capacity and.
And with our suppliers.
Supply chain shortages continue to constrain our ability to meet customer demand.
In addition, the duration and potential expansion of COVID-19 related Lockdowns in China are unknown and could adversely impact some suppliers with operations in the affected areas.
Furthermore, these lockdowns could delay systems installation and customer acceptance processes.
Resource mobility restrictions in the country in short the situation is fluid and we will be monitored closely.
Supplier visibility remains challenging and has not improved over the past three months.
Don't expect to see quarterly sequential revenue growth throughout calendar 2022, and overall revenue growth for the calendar year to exceed 20%.
In addition, we believe that demand will continue to exceed supply through the remainder of the calendar year.
<unk> is in position to deliver another year of sustainable outperformance in our semiconductor process control business and strong relative growth overall.
Looking ahead, we remain encouraged by the strength and sustainability of our current demand profile.
Bookings momentum and strong backlog positions us to outperform WSB as.
As in calendar 2021, we are strategically adding capacity across our global manufacturing footprint to support this outlook and our customers' growing process control requirements.
Our June quarter guidance is as follows total revenue is expected to be in a range of 242 5 billion plus or minus $125 million.
Foundry logic is forecasted to be approximately 56% and memory is expected to be approximately 44% of semiconductor process control systems revenue.
Within memory.
Ram is expected to be about 66% of the segment mix in NAND is forecasted to be about 34%.
We forecast non-GAAP gross margin to be in a range of 61, 5% to 63, 5% as we expect sequential growth in EPC revenue in the quarter and a slightly weaker product mix within semi process control to dilute margins modestly versus the March quarter.
Longer term infrastructure investments labor cost inflation supply chain strain and rising global logistics costs are surpassing the benefits of economies of scale normally seen in a rising revenue environment.
Given expectations for revenue for the year, we continue to expect the calendar 'twenty two gross margins will be in a range of 63% plus or minus 50 basis points.
Other model assumptions for the June quarter include non-GAAP operating expenses of approximately $525 million.
Other income and expense net of approximately $43 million.
And then effective tax rate of approximately 13, 5%.
Finally, GAAP diluted EPS is expected to be in a range of $4 60 to $5 70.
non-GAAP diluted EPS in a range of $4 93 to $6 <unk>.
EPS guidance is based on a fully diluted share count of approximately 150 million shares.
In closing the secular trends driving semiconductor growth and investments in Wi Fi or compelling despite the current macroeconomic headwinds.
Broad based customer demand and simultaneous investments across technology nodes are strong and resilient trends.
We have confidence in our leading indicators for our business, including our backlog and bookings visibility, which motivates us to invest in expanding our business infrastructure and a required capabilities to support our outlook.
Our customers' multiyear investment plans.
<unk> an element of stability in the demand outlook for the future.
Daily operating model positions us well to outperform our industry and guides our important strategic objectives.
His objectives fueled our growth reliable operational excellence and differentiation across an increasingly diverse product and service offerings.
They are 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 consistent capital returns to shareholders.
And with that I'll turn the call back over to Kevin to begin the Q&A session Kevin.
Thank you Brian David please queue for questions.
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We will now take our first question from Harlan sur with J P. Morgan. Please go ahead. Your line is open.
Good afternoon, guys. Thanks for taking my question and great job on the solid execution.
As pointed out the market share numbers for last year, you grew your plus of control market share at almost 55% or.
Well over four times larger than the nearest competitor I was looking at the data. So in the seven major categories in their process control you have the number one market share position in five of the seven categories and.
In the categories, where you guys actually grew 50 more than 50%.
Pattern wafer inspection overlay metrology macro inspection and review on Constitution. Obviously all of these are very critical solutions for next generation manufacturing technologies.
So on a strong growth outlook for this year, what areas or segments do you anticipate driving the outperformance and maybe even further share gains and your process control franchise for this year.
Yes, Harlan I'll go ahead and start and let Rick add if he needs to air but it was a it was a very strong year, obviously for the company and we're really pleased with the share results.
One of the things as we look at just our expectation. This year is as we expect to see continued momentum in a lot of the markets that you referenced.
Theres certainly strength that's expected there.
We're expecting greater than market growth out of our reticle inspection business, which was a little slower than market last year and it tends to be a lumpier business.
But as we move into this year should be a little bit stronger. So overall, we feel pretty good about the roadmap across our products as we said in the prepared remarks, our biggest challenge is just getting the parts we need to to meet the very strong customer demand thats out there, but we're encouraged by the momentum we have in our internal plan is to continue to gain share we think theres more.
More opportunity for us given what you said in terms of where we are.
Please go linearly, but at the same time.
We've had a nice trajectory over the last few years and would expect to see it grow as we move forward.
Just to add a couple of things Harlan one.
As of course gardeners data as revenue and the bookings picture is even stronger. So we're we're in really good shape in terms of that.
We've talked about that.
Backlog at the demand that we have so we'll continue to see share gain in terms of or strength of share in the segments that you outlined also the new technologies that are coming offer more process control intensity opportunities for example high K metal gate.
If you look at that if you look at all around that.
Metrology bigger die size all of those things are going to allow there'd be more opportunity and we have products in the Q as well as in the field that are going to take advantage of that so we feel very well positioned the biggest challenges we've talked about is satisfying demand.
Related to we think we've done a really good job with supply chain, but there's more work to do there to to continue to support our customers.
Yes, I appreciate the insights there and then on UPC franchise.
Specialty semiconductor manufacturing packaging PCB display franchises.
It's been a great diversification for the KLA business and I know going back. When you guys are probably update us like going back to the last analyst day, the team's outlook for EPC was to grow that business at a 9% to 10% CAGR.
You grew that business and this includes services you grew that business about 15% last year. The two year CAGR up to last year, it's been about 12%. So tracking ahead of your targets.
What type of growth do you guys expect for EPC. This calendar year, just given the strong focus by your semi customers.
Our RF sensors advanced packaging, and new PCB architectures, and maybe thats being slightly offset by smartphone display weakness, but wanted to get your views on EPC growth for this year.
Yes, Harlan so in terms of the systems part of EPC, we're somewhere close to 20% is our expectation for the year. Obviously, we will have to see how that plays out that tends to be a little bit of a shorter lead time business.
And it has some parts of its markets that are a little bit more sensitive to some of the consumer dynamics, but in general we expect to see about a 20% growth there not be blended with its service business.
It'd be in the high teens that service business tends to grow a little bit slower than that but you are right over the last couple of years on the system side, we've been in that 20% range and it Hasnt got as much of a play as given the strength of our semi process control business, but we're pleased with where we're going directionally there and we'll have more to say about the longer term view.
At our Investor day in mid June .
Great. Thank you very much.
Thank you.
We'll take our next question from C. J Muse with Evercore. Please go ahead. Your line is open.
Thank you for taking my question I guess first question can you.
Speak to your backlog.
What your blended kind of lead times look like today, and what kind of visibility that provide you into 2023.
Yes C J, it's a great question.
Now blended lead times and they are blended across brake products and the revenue value of the composition of the backlog, but it's it's well over a year now in terms of.
Where lead times are obviously certain product lines or longer than that we're slotting certain product lines now today out into 2024. So there is there's quite a bit of demand for for some of the products and given the constraints we have around key components and the lead time for those components. It just pushes that.
Those lead times out so overall, we've seen it trend up here and as I said in the prepared remarks as we go through the year I continue to expect to see demand exceeding supply. So I would expect lead times to probably increase a little bit as we move over the course of the year.
Very helpful. As my follow up curious on the China Lockdowns.
Any impact or feature impact in your view, particularly around kind of the PCB and display area I would I would imagine that might be.
A downstream potential risk.
Terms of taking deliveries.
Well our guidance implies a risk adjusted assessment of where we're at obviously, there's always some unknowns about that both from a supply point of view, which we feel pretty good about but also more so from a just can we get access to customers can we get tools installed can we get acceptance is done and so on we've contemplated that in the guidance.
Given we do have an expectation of seeing some opening began.
Well I'll call it sort of the middle of May if things drift out further than that or are there is a significant expansion of lockdown activity. It could have more of an impact, but we I think we've we've risk adjusted it as best as we can there is certainly some unknowns, but we feel pretty good about the guidance we provided.
Thank you.
We'll take our next question from Timothy Arcuri with UBS. Please go ahead. Your line is open.
Thanks, a lot Bryan I wanted to try to probe a little bit on that question around backlog because backlog really doesn't mean, a whole lot. When your lead times are sitting beyond that 12 month window for backlog. So I guess the question is more on purchase obligations. I think you report that in the Q and it was greater than 8 billion I think exiting December and so I guess the first question is sort of.
Where does that stand now.
Just trying to get a sense of sort of how long book to Bill is going to stay above one then and maybe if you could give us backlog.
A number yes, so so Tim Youll see the exact number in the 10-Q that we file and it's the performance obligations not purchase commitments, but anyway.
<unk> obligations, where youre right were over $8 billion last quarter and will be in excess of $10 billion.
This quarter.
And to my earlier comment I think we will see book to bills above above one through the year.
I guess I had a question also on.
Process control systems. So March came in like almost $100 million better than what I had in what I think youre sort of guidance was implying June is about in line I think before you were talking about the second half of the year process control systems being up sort of low to mid teens and I guess I guess the question within that is that still the right number.
Even though march came in a bit better.
Part of that is a question really on timing because.
The films.
Films, guys as you said, they're having problems shipping tools and so that is tending to push some W. A fee from the first half into the back half and I guess the question is since you guys are sort of upside in shipments and they're sort of downsizing shipments does it become a problem for you where you have like timing mismatches and maybe because they can't get films tools.
Maybe they start to push out your tools.
Timna, usually that doesn't impact us all that much because we tend to see process control tools go in early also given the demand environment customers will deal with timing issues in terms of taking tools.
Storing them.
To align with the <unk>.
Expectations around the other tool sets.
I'm less concerned about that given the strength of demand our customers are beating honest everyday to ship sooner. So I'm not I'm not concerned about delays and other types of tools impacting our products.
And you're right.
Did have Q1 was stronger and certainly the execution by the teams in the last month as we dealt with.
A lot of delays in parts, particularly around automation for our systems. The execution was really solid and we're really pleased with the upside we saw in Q1, so as I think about the second half the second half I'm still in the same range low to mid teens in terms of semi semiconductor process control system sort of half to half versus the first half.
Brian Thank you very much.
Thank you.
We will take our next question from Joe quicker T with Wells Fargo. Please go ahead. Your line is open.
Yes. Thanks for taking the question I was curious how should we think about the you mentioned slower than planned or hiring a difficult labor environment I assume.
Thats more maybe geared towards 2023 or how do we think about that in terms of.
Your ability to have enough.
Labor to meet demand for this year.
Yes, Joe it's Rick it wasn't really.
It was much more about the impact to cost about when theyre higher we actually did quite well of hiring in Q1 is just if they're not hired at the beginning of the quarter and we factored in the payroll for the whole quarter. We're on track for hiring this year.
And most of that had to do frankly more with some of the engineering work than it does the work that's associated with both operations and service, where you could potentially if you didn't have the resources.
A shortfall for the year, but even then it would just right now we're trying to alleviate the teams who are doing a lot of overtime and trying to provide them. Some backfill so none of our hiring challenges are affecting.
Our ability to support the revenue for this year or next year, but we do want to get people in and we've had good success, but it's more we're talking months as opposed to.
Quarters or years behind.
Got it that's helpful. And then just as a quick follow up.
Was wondering if you could talk about the strength you saw in DRAM during the quarter and I think even implied in the guide.
Were at record levels for <unk>.
Process control systems.
Just kind of curious what drove that if it's.
Architectural changes anything like that would be helpful.
Yes, Joe it's mostly technology transitions this year and certainly the introduction of the <unk> and DRAM has been a driver for for investment from our customers.
It's pretty broad as I look at the DRAM investment.
It's pretty broad based across our across our customer set.
Thank you.
We will take our next question from Patrick Ho with Stifel. Please go ahead. Your line is open.
Thank you very much.
Maybe first one for you Rick in terms of the advanced packaging market.
Done a great job in terms of getting the value proposition for front end chipmakers with your process control solutions and some of these customers are the same ones on the advanced packaging side. Some of them, obviously are all SaaS customers.
Customers like that as advanced packaging becomes a much more complex problem, how do you get the customer mindset change to get that same value proposition.
For those type of processes, given the complex means that if I'm correct.
Yes, good question.
And one that obviously, we're excited about the EPC acquisition for exactly this.
This so I would say really for EPC, even an earlier question, we had about how we're doing and how we think about it I really think of it in three stages.
First stage for EPC for KLA was to employ the operating model on how we run the businesses and that was really what we did initially the second stage was customer engagement.
Because as you say some of these customers are bigger customers more complex problems and they know KLA. They wanted to engage with us. So that's actually been going quite well and we've been having a lot of discussions but of course, then you get to the third part of that which is technology leverage from the rest of KLA at the EPC and where.
In phase two and phase three now where we've been having those meetings.
There are a lot of clear opportunities for us and we're developing those solutions and rolling those out so I think that youll see the leverage the revenue synergy associated with from the address additional channel access and the needs and then the benefit of our technology as we go forward, that's really that's coming and we're going to talk more about that at the.
Analyst day in June as we roll that out, but right now huge opportunities and we feel like we're just a time with that acquisition to be in a position to support them.
Great and as my follow up maybe for Brent.
Given WMC the outlook looks like it's going to be a much more second half weighted year, particularly in terms of revenues and win.
The equipment companies receive cash.
<unk> been executing well getting tools on time, but we've heard from other companies where there.
Shifting incomplete tools, where they will finish the install and get the revenue recognition later on so to not expect a huge shipment ramp where a huge production ramp in the second half of the year. How are you balancing those dynamics are you shipping any incomplete tool at the customer site, where you can then go back later.
Ron So it doesn't.
Overly imbalance.
Both shipments as well as your revenue recognition.
Patrick Thats, a great question and when you're talking about process tools, you have modular systems and so they.
They kind of come together at the customer site and a lot of cases between the automation and then the gas boxes.
The process chambers, and so if youre missing parts, sometimes you know you'd have that issue with our systems.
And we internally source the handlers for our systems, but our system ship completely and so they don't com for the most part I mean, we might have an issue here or there on the FPGA business, where you'll have a similar dynamic and in some cases, there isn't a reasonable carve out based on the substance of the transaction, where you differ some of the revenue.
But it's a very.
Very small part of KLA, so in our semi process control part of the business.
We're shipping complete systems, and so you wouldn't see a big correction in a in a deferred revenue then all of a sudden comes together as you can.
Moving forward. So what we're shipping is complete systems and Thats whats.
Revenue in as we go forward.
Great. Thank you.
Yes.
We will take our next question from Dead body show Dream with Jefferies. Please go ahead. Your line is open.
Hi, good afternoon.
Thanks for taking my question I think my first question I wanted to understand if you have a sense what the.
The reefer capacity is expected.
The CRA for the next two years.
Wi Fi is expected to be mid teens.
Good luck for this year, how does that need to.
Increased capacity, if you can provide any color.
And if we don't have any industry deal maybe you could talk to a subset of your customers that would be helpful.
Yes so.
At least $100 billion in WC, it's translating and I don't have the exact numbers, but we are seeing new wafer starts per month being added across all production nodes and youre seeing it in memory at a limited level certainly this year compared to prior years less because it's more of a technology transition focused year.
But certainly on the foundry logic side.
Youre seeing increases at the three nanometer five nanometer seven and 10 nanometer is probably flattish, but then you get 28 and 40% above the sort of those notes.
You've got the legacy investment that's happening there so you're really seeing wafer start additions across just about all production notes.
In fact in line with WEP code that's what.
What I was trying to get.
Oh, okay.
Jenny please.
So what kind of capacity.
Yeah, I don't think I can help you with that right now.
By node capacity capital intensity changes.
And so it's not dollar for dollar in.
In terms of how it applies to wafer starts at a given node.
Got it okay.
For my follow up.
Baidu four to five years ago, most of the customers used to talk about could you again about 70% to 80% okay.
Holiday <unk>.
Majority of Wip spend on capacity additions.
How has that changed.
Great.
At this time.
Yeah.
That's a interesting change in the dynamics of the industry and that was.
Really more isolated to one period of time than if you look at the overall history at the industry and that was <unk>.
Largely because there were not very many new starts on advanced nodes that were primarily.
Just a handful of customers a handful of devices and so that reuse was something that happened when Moore's law was scaling we're seeing very little reuse now and there's a couple of reasons for that one of the primary reasons is the number of starts the broad based number of devices, that's being run on these nodes.
And the ability of more and more customers to support that that means that our customers are running flat out those technology nodes as they are introducing new ones. So we're actually seeing kind of the opposite effect. If you will we're seeing some capacity some of our sales are actually into ramps that historically, we would have considered to be.
Done and they're actually buying tools for example for seven nanometer right now theres still some of that going on in spite of the new investments being advance. So reuse is significantly down in terms of the amount and thats a trend that our customers believe is going to continue.
Continue is that it's going to be a focus on supporting that and if you look at the overall semiconductor shortage in the world you can imagine that that's not something that they can really afford to do because theyre running those old line's flat out and we see that in our service business and the overall fab utilization around the world.
That's helpful.
And as a reminder, if you'd like to ask a question today. Please press the star and <unk> on your telephone keypad.
Our next question from Krish Shankar with Cowen. Please go ahead. Your line is open.
Hi, This is Robert Mertens on behalf of Krish. Thanks for taking my question I guess looking into the services.
<unk> been grown the business nicely and you mentioned a strong installed base component in the quarter and just in general but.
Looking at the attach rate opportunity.
You've mentioned, maybe over 75% and process control systems, and maybe 90% and PCB is there is that a fair assessment and is there further room to growth.
In terms of that side of the service business.
Yes look certainly as the tools, increasing complexity and the demand on an uptime increases it does create opportunities for us to drive.
Our contract model, a subscription like model with those customers and.
So we do think there's some upside potential over time, and we'll talk a little bit about some of the longer term drivers of our service business and its trajectory going forward at our Investor day in June , but obviously PCB at that closer to 90%, it's hard to improve much on that but I think that theres still some opportunity on the semi.
PC side, given the dynamics I mentioned one of the other opportunities we have in our acquired businesses is to try to drive more and higher attach on those tools in terms of service and certainly smaller players have a harder time, having the infrastructure to be able to engage with customers.
<unk> to try to monetize that service business and so there's opportunities for us in our specialty semiconductor business, a flat panel business as some other smaller acquisitions, we've done to to drive more service opportunity.
And a lot more to say about it in June , but hopefully that helps for now.
Great.
And then just as a follow up in terms of WSB view, you gave and sort of peers are indicating.
Assume that supply issues are going to sort of ease in the second half.
Incremental challenges have you seen within the industry over the past couple of months are there any sort of specifics.
Shortages.
Key components or is it sort of ongoing.
Rowling issue, where things crop up and are dealt with other things pop up.
Yes, I think that the whack a mole analogy is applicable here.
It seems that as we work certain issues other issues materialize the.
The dynamic in China with the Covid Lockdowns does have some potential impact on some suppliers, although we think we've.
We've dealt with it in the guidance we've given in terms of just our assessment of the risk profile of that but I would say, they're all the same issues and we just continue to work on the teams have done a really good job with it.
Great. Thank you.
We will take our next question from <unk> Malik with Citi. Please go ahead. Your line is open.
Thank you for taking my questions.
Just one for you Rick if you can update us on your single beam ESL 10 platform in terms of.
Design wins and sales expectations. This year and the reason I ask that question because we would of Spi conference. This year and it appears that the multi E beam platform Thats showing limited flexibility in gaps to HCM manufacturing at logic makers like internal and then I have a follow up.
Hi.
Yes, I guess the <unk>.
<unk>, let me just generalize and I would say the E beam inspection landscape has not really dramatically shifted we've had some success as we indicated with the ESL 10, but.
If you back up and look more about the overall balance between optical and E beam for inspection.
Continuing remarkably to be at about that 80 20.
Split from optical to E beam that it's been true for over the years. So they're more E beam applications I think that are showing up.
The one for inspection for example, that's showing up that we're participating in a uniquely as for reticle inspection and that's what we're doing with our new <unk> two.
To address the some of the opportunities in <unk>, but not really a lot has changed I mean, we'll go back and forth with the latest introductions from E beam inspection, but by and large.
We've had some success, but the market is on a relative basis overall, the EV market is about 20% to the 80% that is optical inspection, Brian how do you think.
Yes, I think there are complementary technologies and scaling into production is the challenges you mentioned.
And even as you increase the beans, it doesn't necessarily equate to a lot of throughput it doesn't quite to some but but there is there is still a challenge in the throughput disparity quite significant relative to optical solutions. So it's relegated to defect discovery and engineering analysis type cases, and doesn't isn't all that applicable to.
<unk> production environment and that's yes.
It's been very well validated I think with the strength that we've seen in optical pattern inspection over the last the last few years. Just one more example, I think this is important to understand if you look at calendar 2021, our gen. Four optical actually outsold our gen five optical in terms of amount of revenue.
And that split of the 80% of the market and then the rest was divided in the E beam among the different players. So this idea that the latest technologies would require E beam inspection.
Has it been proven in fact, if anything it shows the extend ability of optical as we.
Even in 2021 and what we're seeing in 2022, we expect the Gen. Four to continue to have significant success in terms of serving the overall inspection needs. So the view is it will be complementary E beam will primarily be a tool that will be used for engineering analysis, but not for inline inspection.
Great.
Follow up then is it possible to breakout at the leading edge sales looked at 10 nanometer or below but didn't your foundry logic.
Sue.
Yes, it's about 80% is leading edge.
Thank you.
Yes that might include <unk> 16, but thats only a few percent. So is it safe to say that you know pretty much 80% or so is.
As 10 nanometer and below.
Right.
We will take our next question from Weston Twigg with Piper Sandler. Please go ahead. Your line is open.
Hey, Thanks, Thanks for taking my question.
I just wanted to follow up on your comments about radical outgrowing. The market. This year can you just help us understand why under <unk>, a little bit last year with the customer mix or is it just lumpiness and what makes you confident that you get.
Faster than market growth this year.
Last year. It was it was a very strong 2020, and then 2021.
Was.
Below market growth it was still an up year for the business, but below the market and so we do have more strength. This year it tends to be lumpy, if youre thinking about mash ups systems, So our pteron systems.
We sell into the mass shop, those are very high dollar revenue dollars tools. So the asps is quite high so they tend to skew the numbers a bit in that market given given that but.
Certainly we're seeing strength both in terms of.
Of EV and <unk>.
New layers, given the strength of foundry and logic and that drives more radical sets and you've got obviously a lot of new designs, but you have re spends of.
The older designs. So that's driving a lot of reticle demand that's probably the biggest driver you have also applications that are in the wafer fab for contamination monitoring and we would also expect to see some revenue. This year from the E beam system that Rick mentioned as we get to the end of the year. So.
It's I think it's those factors that are that are driving it.
I would add one thing to it also.
We're talking about the radical inspector, but if you look at the.
The application itself with qualifying radicals a lot of the success. We had in 2021 and continue to have now is use of gen five to qualify radicals.
Radicals so.
It may not be the rapid systems, we're selling it's the application and supported those largely because that is the most effective way to determine the quality of those radicals as actually inspect them and finally, we have capability to do it on the wafers with Gen. Five and so we saw a huge push from customers multiple customers.
Everyone Who's essentially doing <unk> to utilize gen five to qualify those those radicals.
Okay. That's helpful. And then actually leads to a follow on question just as high end <unk> comes down the pipeline over the next two or three years.
Do you have a solution ready for that maybe leveraging your optical inspection platform or or do you have to develop something novel.
We have continued evolution of the platform to support it.
And we continue to work on additional radical capabilities to support it. So I think the answer is a little bit of both I mean, the advantage of the on wafer with the Gen. Five is that those tools already exist and so right now, though they could they could inspect those albeit at a slower throughput but of course, we're working on.
On continuing to improve that capability, both with increases in hardware, but also a lot of the work we've been doing with machine learning and AI and the algorithm front to support those applications and then at the same time, we have the <unk>, which will continue to support as well as <unk> and as I think you know we also are working on next generation.
<unk> reticle inspection as well, so we got quite a bit.
I think our two biggest investment programs inside the company are both dealing with the challenges of reticle inspection over the next several years.
Perfect very helpful. Thank you.
Thank you Wes and it looks like that brings us to the end of the call I wanted just to again remind everyone that we're hoping we can see you in person in New York June 16th you don't have an invitation place to reach out to KLA IR team and we will get you one.
That I will turn the call back over to David for any final statements.
Okay.
This does conclude the KLA Corporation first quarter 2022 earnings call and webcast. Please disconnect. Your line at this time and have a wonderful day.
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