Q3 2023 KLA Tencor Corp Earnings Call

April 26, 2023

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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.

Thank you Jonathan and thank you for joining us for our earnings call to discuss the results of the March 2023 quarter in our June quarter outlook. Joining me is Rick Wallace, our Chief Executive Officer, and Brian Higgins, Our Chief Financial Officer. During this call. We will discuss our results released today after the market closed.

All materials can be IR website, today's discussion is being presented on a non-GAAP financial basis, unless otherwise specified a number within full year references for calendar years.

A detailed 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.

Putting our most recent annual and quarterly reports on Form 10-K and 10-Q.

Our commentary are subject to risks and uncertainties reflected in the risk factor disclosure in our SEC filings.

Any forward looking statements, including those we make on the call. Today are also subject to those risks and KLA cannot guarantee those forward looking statements will come true are.

Actual results may differ significantly from those projected in our forward looking statements.

Our CEO Rick will also begin the call with some comments quarterly highlights Brian Haines, our CFO will conclude with our financial highlights, including our guidance and our outlook I will now turn the call over to our CEO Rick Wallace Rick.

Kevin let's start with a summary of <unk> performance in the quarter, along with a few highlights further color and detail on my comments and the semiconductor demand environment can be found in our shareholder letter released earlier today.

Speaker 1: So your line is open. Thanks a bit. I would often never run and I call my comments on on this historic moment. I just wanted to begin to be the intramural contracts with Schneider and I took one more. My understanding is your line, single line between tax max.

<unk> March quarter results again demonstrate the companys consistency in delivering on long term strategic objectives and financial targets, specifically revenue of $2 $43 billion was above the midpoint of the guidance range.

This represented 6% growth on a year over year basis, although down 18% sequentially GAAP EPS was $5 three.

Speaker 1: changes in the way you operate your strength and that and that route.

non-GAAP EPS was $5 49.

Speaker 2: I think it just kind of boils down to the way we execute versus the alternative. And again, we're not surprised that our combination surprised trigger competition. We set from the very beginning this combination we create new competition. It's going to create new options for shippers.

With each finishing above the midpoint of their respective guidance ranges.

From a customer perspective demand in the quarter was slightly ahead of expectations near term headwinds related to the global macro economy and supply chain remain but we also see positive assets emerging as automotive demand in other markets served by legacy notes remain strong. Additionally, the silicon wafer industry continues to IND.

Speaker 2: And that's exactly what this is. So that announcement that was made this Falcon Express or premium service that I heard about yesterday, you know, I'll put my friends in Montreal, they finally validated our case for consolidation. We knew it.

Best to support long term wafer demand growth.

Customers are adjusting capacity plans across both foundry logic and memory due to changing demand expectations. However, we see R&D investments remain a top priority and this is important for KLA is our products are consistently relied upon during the R&D process as well as the early ramp phase and faster time to yields.

Speaker 2: From the beginning, the facts were supported. I think history is going to show the STB got this right because of this very specific issue. But then you get to Saaronic. I was sitting in the same seat two years ago and I made a comment that the facts matter. So let me explain to you just because it might be...

Critical.

A number of additional business highlights in the quarter.

And our recently released their latest industry market share analysis and process control was the fastest growing market in 2022 growing 30% year to $13 5 billion.

Speaker 2: a shorter distance if you don't convert it as it really make the difference. So speaking to facts.

Speaker 2: Getting from Chicago to Selenius Victoria, which is the CPKC ramp that serves the Monterey Market. Yes, it's true that the Falcon Service is 194 miles shorter.

The main process control KLA increased market leadership in most segments, resulting in an overall market share gain of approximately 300 basis points in 2022 to over 57% greater than the <unk> competitor.

Speaker 2: longer versus their advertised 5.9. So we're beating them two days to the market. Now let's go closer to Mexico City. Interporto which is our CPKC terminal versus the FXC Salayo terminal that's advertised with the Falcon service. And actually there it's 76 miles shorter.

KLA sustained market leadership is underpinned by our innovation and commitment to high levels of R&D investment.

Additionally, the successful execution of KLA strategies for market diversification are demonstrated by the rapid growth in <unk> automotive focused businesses.

Automotive semiconductor demand is growing and applications.

Speaker 2: the CPK scene network because what happens in US where UP enjoys as a crow flies?

Defect mentality is required to achieve superior standards of quality and reliability.

Speaker 2: a shorter length of haul, it's the reverse to these same markets when you get across the border of Mexico. CPKC calls that back. But from a service standard, from what we deliver to the customer, it's 4.6 days on the CPKC 180-181 service versus this premium service that I heard yesterday aspirationally was un-

KLA has been working with the entire automotive ecosystem to standardize our in line <unk> screening methodology called iPad to augment existing liability test methods.

As electrification proliferates the industry is facing an additional opportunity with the integration of introduction of new compound semiconductor materials, such as silicon carbide that.

Speaker 2: Touchable at 7.9 so perhaps it is today, but only the 11 it's going to be touched with a much superior service

Offer a significant improvement in power efficiency over silicon.

In this category <unk> revenue has grown to buybacks since 2019.

Speaker 2: So again, the facts matter, rhetoric's thin. We're just people of fact here and people of truth. We're about to launch a train service that's unparalleled in this industry. And those that partner with us are gonna be winners in this game of service reliability. They're gonna be winners in the game of serving.

Approaching $700 million in annual revenue.

In calendar, 2022, and including five X growth in Silicon carbide related businesses, which account for almost half of total automotive sales. We expect this growth to continue in calendar 2023.

Speaker 2: our environment, taking trucks off the road, and making everything we said to be true about this perfect combination fact-based truth. Not rhetoric, not spin. History is going to show that. So we're ready to compete.

Services, our business grew to $529 million in the quarter up 8% year over year and 2% sequentially.

<unk> strength was driven by our growing installed base.

Speaker 2: Ready to get after it.

Kris and customer adoption of long term service agreements expanding service opportunities in legacy notes and emerging long term opportunities and acquired businesses.

Speaker 1: That was a great call. Thank you so much.

Speaker 2: I'll let you know tomorrow what we're going to name it. It won't be felt and we're going to come up with something that truly exemplifies the superior services that this is.

And finally, our March quarter was another excellent period from a cash flow and capital returns perspective quarterly free cash flow was $926 million, which drove the latest 12 months free cash flow up 20% to $3 2 billion.

Speaker 3: Thank you.

Speaker 1: Our next question comes from Chris Weatherby with City Group. Your line is open.

Total capital returns over the past 12 months was $5 1 billion.

Speaker 1: I understand that you guys have obviously had oversight of KCS for a while now, but with operational control, I guess, just kind of curious how you're thinking about in sort of sequencing the next few or a couple of days, weeks, months, however you think about it, in terms of things you can kind of get going operationally or from a cost perspective or otherwise.

160% of free cash flow dividends and share repurchases in the March quarter were $659 million composed of $478 million in share repurchases and $181 million in dividends.

Our consistent execution despite challenges in the marketplace continuing to prove the resiliency of the KLA operating model and the dedication of our global teams I will now hand, the call over to brand go through our financial highlights.

Speaker 1: kind of right out of the gate, it would seem that there could be some changes now that will pass that April 14th. They just kind of curious how you're thinking about that.

Speaker 2: Now, let me say this, Chris, there was a lot of thought in planning ahead of time and the guide that's responsible for executing that are our CEO , Mark Reds here, and I'm going to let him speak to that.

Thank you Rick.

Daily delivered on our quarter guidance and commitments demonstrating consistent execution in a challenging marketplace.

Speaker 2: Yeah, let's keep that in mind. Chris, thanks for the question. Drillie mulls around Mexico, US operations on KCS. And what we're doing is pretty much aligned. We've got a leadership in place. The metrics in Mexico are starting to stabilize a bit now. We're building on the improvements that the team had in place, just prior to control.

Our continued focus on meeting customer needs, while expanding market leadership growing revenue sustained industry, leading gross and operating margins generating strong free cash flow and maintaining our long term strategy of assertive capital allocation is what makes us successful.

Quarterly revenue was $2 43 billion above the midpoint of the guided range of $2 2 billion to $2 5 million.

Speaker 2: And what we'll focus on is really just back to basics. You'll look at our PSR metrics. We'll make sure that our car fleets are leaned out in both areas, both railroads. We'll look at focus around dwell, speed, yard speed, locomotive optimization in the yards, and also just inventory reviews.

non-GAAP diluted EPS was $5 49.

Above the midpoint of the guided range of $4 <unk> to.

$5 92.

GAAP diluted EPS was $5.

non-GAAP gross margin was 68% at the lower end of the guidance range.

Speaker 1: So we'll just get the number two pencil out and just start railroading and stay focused on just the metrics themselves, but also just getting into the details of how we railroad on MCP.

While volume and product mix were stronger than expected persistent end market weakness continues to impact the PCB and displaying component of inspection businesses to a greater degree than expected and drove incremental inventory reserve requirements.

Speaker 2: I think Chris, the other point that I commend Mark on is, you know, from right out of the gate, Dave, one, it's about cross-pollinating. It's about best practices as well. We've got some of KCS's, his talent in Livingston has moved to St. Paul's, so he's on the former CP network. We've got Tracy Miller, who is in St. Paul's standing tree port. We've got Mark Garlasco, who is a very talented.

Andrew absorption also remains a factor across the company as we adjust our capacity down to reflect the current business environment.

These issues combined diluted gross margins by approximately 100 basis points and offset the volume and product mix benefits mentioned earlier.

non-GAAP operating expenses were $534 million below our expectation of $545 million.

Speaker 2: operating officer, it's in Canadian Pacific, it's in three port as well. So Mark went through a very methodical well thought out plan to make sure that we've got an opportunity to drive change on both networks to create a better outcome for CPKC. So they're well into it. I'm encouraged with the progress they hit the ground running.

Reflecting the impact of modest headcount reductions implemented in the quarter and prudent cost management across the company.

Total operating expenses comprised $322 million in R&D and $212 million in SG&A.

non-GAAP operating margin was 38, 8% other income and expense net was $60 million and the quarterly effective tax rate was 14%.

Speaker 2: and we're going to accelerate.

Speaker 1: That's helpful. Thanks very much. Appreciate it.

Speaker 4: Our next question comes from John Chappell with Evercore ISI. Your line is open.

The guided tax rate of 13, 5% non-GAAP EPS would have been <unk> <unk> higher or $5.

Speaker 1: Thank you for that afternoon. Keith, I want to tie a couple of things together from a little bit earlier. I mean, on the integration, it's very clear you don't want to take on more than you can chew as to maybe bottleneck things in the early stages, but it does sound anecdotally like there's a ton of business, maybe more than you're ready to take.

Quarterly non-GAAP net income was $761 million GAAP net income was 698.

Cash flow from operations of $1 1 billion.

And free cash flow was $926 million.

As a result free cash flow conversion was 122% and free cash flow margin was 38%.

Speaker 1: that wants to come to you on day one or day 60. So how do you manage what you're taking in the early stages of the integration and knowing that there's probably more demand than you have capacity for today? How do you think about pricing for that?

The company had approximately 139 million diluted weighted average shares outstanding at the end of the quarter.

The breakdown of revenue by reportable segments, and end markets and major products and regions can be found within the shareholder letter and slides.

Speaker 2: Well the reality is the way we manage it is the way we've managed our business as far as the CP for the last

Switching to the balance sheet KLA ended the quarter with $2 9 billion in total cash cash equivalents in marketable securities.

Speaker 2: 5-6 years. You know, my form is key to that relative to our modeling. We've got...

Net of $5 95 billion and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three agencies.

Speaker 2: John , on the marketing side of the opportunities we got Mark on the operating side for the execution and they've got to deal with me in the middle.

Over the last 12 months KLA has returned $5 1 billion to shareholders, including $4 4 billion in share repurchases and $711 million and dividends paid the total capital returns amounting to 160% of free cash flow.

Speaker 2: So we are very well, all of us connected to help assess in these opportunities, sequencing this business. I'm not going to allow this network to get oversold. So as much as, you know, if we could, we would take it all tomorrow, we can't, and we will not. The last thing I'm going to do is disappoint the customers that have an obligation to today, be they former.

Turning to our outlook now we continue to estimate WSB to decline approximately 20% to $75 billion in calendar 'twenty three from approximately $95 billion in 'twenty two.

Speaker 2: be they former KCS, and especially those that we're starting to partner with. So we've got a commitment and obligation tonight, Swift as well as to Schneider, to bring them on the right way. We're going to launch this train each way. It's going to be a seven-day-a-week service. That's where we're going to start. And then we're going to see what's next.

Our customers' capacity planning remains fluid and indications of end market improvement have limited visibility today.

While the timing of the meaningful resumption in wip investment growth remains unclear we do.

Do you see overall demand stabilizing around current business levels for our semiconductor process control systems business. We expect this demand profile to continue through the second half of the calendar year.

Speaker 2: And all the while, we're doing our infrastructure work. We're continuing to build out our sidings. We're continuing to execute the merger plan that we gave the SDB again so that we could be men and women of our word. And every bit of that was thought out in sequence in line with these business opportunities.

In particular, we are seeing higher than initially expected investment from legacy customers globally, including in China.

We have also received clarification from the U S government on the export rules issued last October and can now resumed some shipments that we had previously excluded.

Speaker 2: So we're not going to get ahead of our skis. We're going to be methodical about this. I think our customers, as much as they would love the benefits of this network tomorrow, I think they would much rather appreciate our honesty and say, not yet. We're not ready yet. Then we just bring them on and we fail them. We're going to get one kick at the can. We're going to make this thing right. We're going to make this thing right.

Furthermore, we see additional wafer and radical infrastructure spending worldwide.

Our <unk> estimate reflects our current tops down estimate of industry demand has followed.

We expect wip investment to decline by 35% to 40% as memory customers continue to respond to lower consumer demand by adjusting production to bring device supply and demand.

We expect foundry logic to decline by about 10% overall, the legacy investment declining less than the segment overall due principally to automotive and continued demand for legacy design dose to China.

Speaker 2: revenue over subscribe our ability to execute that's just not what true PSR is about we've got to make sure the network can handle the business to be able to execute our operating model and that's exactly what we're gonna do. John I might add just a little more color to that this John Brooks.

Our June quarter guidance is as follows total revenue is expected to be $2 25 billion, plus or minus a $125 million.

Speaker 1: You know day one in Kansas City. I got the entire sales and marketing team in a room together and it's been a full two hours plus just talking around expectations and and how we want to grow this network and I can tell you the excitement to just sell sell sell

Foundry logic is forecasted to be approximately 77% and memory is expected to be around 23% of semi PC systems revenue.

And then memory DRAM is expected to be about 85% of the segment mix and NAND approximately 15%.

The forecast non-GAAP gross margin to be 67, 5% plus or minus one percentage point.

Speaker 1: was impressive. It made me excited. But to Keith's point, there was also a lot of temperament around we're going to sell to the right customers. We're going to look at those opportunities that can really value our capacity and our service. We're going to work closely with the right customers.

Due primarily to the expected product and segment mix.

The view of a stabilizing demand environment for the remainder of the year non-GAAP gross margin should remain in this range with the expectation of gross margins to be between 60% and 61% for calendar 'twenty three with product mix being the largest factor in quarter to quarter variability.

Speaker 1: with Mark and the operating team. And I can tell you, we have a very distinct process that we've used at CP with my foreign, that any sort of incremental business that we consider to bring on the network. We make sure it fits our trains and ultimately what we sell. We can deliver to the customer and we layered that to progress.

Looking ahead, we will continue to manage costs carefully.

The June quarter always represents the first full quarter of our annual salary adjustments.

As a result operating expenses will tick up slightly to approximately $540 million.

We continue to see operating expenses trended that trending down for the remainder of calendar 'twenty three eggs.

Sitting in the calendar year, and the $530 million to $535 million range.

Other model assumptions for the June quarter include other income and expense net.

We have approximately $58 million and an effective tax rate of approximately 13, 5%.

Speaker 1: But nonetheless, we're not going to oversell this network as keeps that.

Speaker 1: But nonetheless, we're not going to oversell this network as Keith said. I appreciate that. Thanks, John . Thanks, Keith.

Finally, GAAP diluted EPS is expected to be $404 47.

Plus or minus 60.

And non-GAAP diluted EPS of $4 83.

Speaker 2: Thank you. The next question comes from Scott Group with Wolf Research. Your line is open. Thanks afternoon, guys. I know we'll get the longer-term guidance in June , so I'll stick a little bit shorter term this quarter. Any thoughts, color on how to think about Q2 from a –

Plus or minus 60.

EPS guidance is based on a fully diluted share count of approximately 137 5 million shares.

In conclusion after three years of strong industry growth our view of total WP demand remains unchanged at down approximately 20% in calendar 'twenty three.

Speaker 2: RGM, revenue, operating ratio standpoint, and then either core, CP or now Consale, however you want to think about it. And then John , any car on price mix of plus 1% and some of the puts and takes there? Thank you, guys. It's got just a couple more months of patience we ask for news and we'll give you.

Against this backdrop KLA is well positioned to continue to outperform the industry building on the increased market relevancy delivered in calendar 'twenty two.

Looking ahead, we remain confident that the secular trends driving long term semiconductor industry demand and investments in WMC on tax.

Frightening semiconductor demand increasing strategic roles to make conductors play in influencing national industrial policy.

Simultaneous investments supporting growing semiconductor content across technology nodes remain catalysts for growth.

Technology investment and node transitions reflect the value that semiconductors, and our industry had in lowering costs for our customers and enabling a broader application universe for semiconductor based technology across multiple end markets.

Speaker 1: and we've been reporting our April RTM. So let me just leave it at that one. Scott.

Speaker 1: Yeah, Scott, I mean, I think a lot of the challenges and April that the other roads have identified were not completely immune to those, but by no means, but I can tell you, you look at the numbers, we have ferret a little better. And again, I do think we've got some upside as we'll continue to layer on.

For KLA, while the global economy, and semiconductor industry faced headwinds in 2023.

We are well positioned to deliver strong financial performance driven by the relative strength of our <unk> businesses and <unk>.

<unk> growth in services.

We will continue to focus on innovation as we execute our portfolio strategy to support our customers' technology, Roadmaps and multiyear investment plans.

But the KLA operating model guiding our execution, we will execute our strategic objectives and drive outperformance.

These objectives drive our growth consistent operational excellence and differentiation across the diverse products and services portfolio.

Speaker 1: Mix has shifted a little bit negative on us as we've seen a bigger part of our bulk franchise move. And naturally with that, for a longer haul business, you begin to see a little bit of mix shift negative. I don't see that being that alarming of.

They are also the foundation that sustained our technology leadership and competitive differentiation.

This has enabled us to achieve industry, leading financial and free cash flow performance and deliver consistent and growing capital returns to shareholders.

And with that I'll now turn the call back over to Kevin to begin the Q&A session Kevin.

Speaker 1: of an issue as I look forward. You know, a little bit of headwind and other freight on the accessorials, but again, I would say smaller relative to the others in the industry, and we actually view that as a benefit of CP as we begin to see.

Thank you Brian Chelsea can you. Please provide instructions for queuing and then begin the Q&A.

No Sir.

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Speaker 1: operating upside in our terminals at the result of some of that lack of congestion related to the ethosorials.

We remind you to please amit Uruguayan intricate.

Speaker 1: operating upside in our terminals as a result of some of that lack of congestion related to the app's sorials. That's it. Thank you guys.

Possible to pick up your handset for optimal sound quality.

In the interest of time, we ask that you. Please limit yourself to one question and one follow up.

Speaker 4: October 21st, tra Druid. Yeah. you

Our first question will come from Harlan sur with Jpmorgan. Your line is open.

Good afternoon, and great to see it another year of strong share gain from between last year.

Speaker 5: Yeah, good afternoon and congratulations on the skill and persistence in giving this deal done and approved.

You reiterated your full year <unk> outlook of down 20% you also talked about your process control business remaining stable at the June quarter levels through the remainder of this year.

Speaker 5: What I wanted to ask you is just thinking about operating changes and some things that have been done in the past. It's probably not a good analogy, but I think 10 years ago, C.P. was doing something called whiteboarding and the idea that you were just reconfiguring the flow of traffic on the system. Is there an exercise like that? Is there a process like that? That?

I'm wondering if the stable outlook also reflects the stabilization of cancellations and pushout activity from what I assume has been a pretty volatile bookings environment over the past six months.

Hey, Harlan thanks for the compliment.

On an overall from a.

Speaker 5: that eventually will take place for CPKFU and what might be the timing. I guess if not, should we better think about it as you're really just adding train starts as you bring on new business. Thank you.

From a bookings point of view look there customers are still moving things around in terms of backlog at slide eight.

Some scrubbing in the quarter of some adjustments fairly minor and our overall backlog in our RVO number, which youll see which the remaining performance obligations, you'll see in our 10-Q filing that we'll do in the next day or so.

Came down about $600 million, so that implies that.

Book to Bill was a little bit less than one and that there were some some adjustments overall, but.

So validity and scheduling but.

Consistent with the prepared remarks, we do see a stabilization around these levels as we look out over the next few quarters.

Perfect. Thanks for that and then on your EPS.

C franchise.

Still going pretty strong growth rate tends to 11%.

Over the past three years, that's including services with even grew 7% last year right.

The slower consumer environment coming into this as though you guys are already driving an EPC systems profile are down about 20% year over year do you still anticipate the EPC business.

Growth has slowed to outperform wf food growth in sort of at a high level, how you're thinking about EPC profile second half versus first half.

Yes, it's a great question Harlan and certainly over the last few months you've seen a shift in.

Our expectations for that business it tends to be short lead time, and very consumer sensitive if you will and so as the consumer markets.

And yet to really recover we were expecting to see a bounce back in the second half and while I expect the second half to be a little bit stronger than the first half and this is really regarding the PCB business by panel business and the icos component inspection business.

<unk> has a different profile second but in those businesses, we expect it to increase and improve modestly into the second half, but that we're likely to.

That segment that will.

It'll be a decline year over year, that's more than what we expect out of the Adobe IP centric businesses Sps on the other hand has had a nice growth trajectory. We had a strong year last year and would expect to see that business be somewhat flat maybe modestly up this year is very.

Exposed to the automotive market, specifically around power semiconductors, and some of the new.

Specialty substrates and so there are opportunities for us there were pretty pleased with how we're how that business is progressing here despite the.

The weakness overall.

Perfect. Thank you.

Thank you.

Our next question will come from.

With Evercore your line is open.

Yes, good afternoon, and thank you for taking my question I.

I guess first question surprised you haven't changed your foundry wip outlook for 2020 three at all many of your peers discussed modest adjustments there so would love to hear your thoughts.

What's offsetting that.

And as.

Part of that can you speak to <unk>.

Lead times for optical inspection, which I still think are will be around 12 months. So is that the kind of the key to the story for <unk>.

Youre finding this a sustainable level.

Well, what we can take the second half.

Yes, C J and the overall business, we're seeing more strength than we had expected originally in the legacy.

Parts of the market, so greater than 28 nanometer and that's a global statement. China's also stronger in terms of expectations there.

From a legacy point of view, so while we've seen some adjustments in the leading edge expectations. We've seen some strengthening overall legacy. So obviously there is there are some error bars around these percentages as we look out from the March quarter, but thats really whats driving our our outlook here.

Great and maybe just to follow up on the legacy part you talked about native China being 25% of process control how much of that is silicon wafer versus just traditional front end equipment.

So over the course of the.

Let me just take an annual perspective and think about it I would say the silicon wafer part is probably.

And this is.

An estimate probably about.

20% to 25% of it.

So the other thing I appreciate your time.

Drone optical inspection.

You asked about lead times have gotten optical inspection I am sorry about that on a year.

First part of your question. So lead times are on optical inspection are still pretty long there hasnt really been a change there as we are.

Adding new capacity to support demand customers are still investing in their technology, roadmaps and that product is pretty essential to to that.

And so we continue to see an environment, where demand is outpacing supply.

Supply so in a down WP market I expect the high end optical inspection to.

To grow this year.

Given those dynamics.

Very helpful. Thank you.

Okay.

Thank you.

Our next question will come from Vivek Arya with Bank of America Securities. Your line is open.

Thank you for taking my question I'm curious what is giving you the confidence that sales that button. When many of your memory customers still appear to have a lot of inventory and unclear vendor utilization.

Pick up so specifically how is your visibility to the memory demand for the back half of this commentary or do you think it will be about this level it'll be lower above because I noted that in June the implied memory sales seem to be picking up.

Small numbers so.

Any comments on how youre thinking about memory demand.

Recovery from here as it pertains to what do you think about utilization.

With key memory customers.

Sure. It's a good question and if you look at the March quarter, It was pretty low at 14% so.

And I look back and you go back into any of our recent history hasnt been that low really ever so.

And even if you see it progressed through the year into the into the guidance and sort of the 23% that we talked about in June and <unk>.

Even as it sort of stays in that range as you move through the second half of it for the year is steel while second half I'd be a little bit stronger than the first half given how low the first half was.

It's still pretty low overall in terms of our forecast and expectations and theres. Some wildcards around how customers ultimately spend we tend to be more technology centric and so theres still roadmap investment that's happening.

That we are participating in there is also some opportunities related to the clarification of some of the export controls.

And what that means in terms of some incremental opportunities to support some of the older generation memory devices in China, and so that clarification that we received from.

From the government will enable second half second half shipments and so thats in our outlook as well.

Just add to that if you look at the business that we have that's more tied to capacity in memory.

That's not really showing up what's showing up as Brent said, it's more on technology. So even as those customers are not or even have low utilization not adding capacity. They are very motivated to continue to work on technology development that place to.

Brent that's a relatively small number but there is some.

There is some stability in that.

And so my follow up I realize it's early but I thought that given that you have long lead times.

You are engaged in the technology side, but many customers youll probably have.

Decent view of how put kind of into 'twenty four.

Looked like so I'm not asking for no medical guidance, but what's your.

Right now that is <unk> likely to grow next year does it supposed to be flat or down, but like what could be just the kind.

Qualitative puts and takes as you start thinking about <unk> next year.

Yes, obviously just to start off with the obvious we we don't have a lot of visibility in next year, but we can tell you about the conversations we're having with customers.

That's not really showing up but showing up as Brent said, it's more on technology. So even as those customers are not are even having low utilization not adding capacity. They are very motivated to continue to work on technology development at place too.

Which have to do a lot with their view that things are kind of stabilizing at this level for the most part and in some cases, it's because things are down quite a bit but theres a lot of activity still in for example.

Advanced logic nodes advanced foundry node of design starts and a lot of work going on there.

It's a relatively small number but there's some.

There is some stability in that.

And we're still having conversations about supported supporting projects that are due to happen at the end of this year early into next year. So if you had to kind of down on it I think we're kind of at these kind of levels plus or minus for a while and hopeful that during calendar 'twenty, we'll see some recovery.

And so my follow up I realize it's early but I thought that given that you have long lead times and you are engaged in the technology side, but many customers youll probably have.

Decent view of how the calendar 'twenty four might look like so im not asking for new medical guidance, but what's your.

But it's obviously too soon to know that but I think that that's the general way, we are thinking about it going forward.

Thank you.

Okay.

Thank you.

Our next question will come from Christopher <unk> with Cowen Your line is open.

Yes, hi, Thanks for taking my question. The first one Rick or Bren, you spoke about getting from shipping to China.

Can you quantify in terms of millions of dollars.

To recoup in second half.

Is that baked into your view that revenue stays around these levels into the kind of the second half and along the same thought.

Serena.

Hickman dysfunction, despite demand logging as memory and I'm kind of curious what exactly you mean, the lagging as memory because I said memory is always at the leading edge and then I'll follow up.

So we expect to be somewhere greater than $200 million in terms of the opportunity in the second half and we're working with the customer to make sure that we have what we need to be able to support that activity, but that's how we're sizing it right now overall.

So look I think on the technology question is that.

Not everyone is at the leading edge and so there is.

There is activity thats happening in legacy markets and Theres, some theres some market opportunities out there from an end market point of view.

To support.

Some of these investments so.

That's what's driving that investment and.

Like I said, we see somewhere in that couple of hundred million range.

Got it got it Super helpful. And then a quick follow up.

Should we still expect those revenues to grow to scale and how to think about the equivalence between the semi and the EPC portion.

Yes. This is Rick yes.

Yes, we should see growth in service.

I think this is one of the Differentiators for KLA is how our service behaves and slow down.

We're seeing a lot of interest from our customers to keep that capability. So even when capacity might go off what customers want to focus on is yield and making sure that they're continuing to develop new technology. So that plays to our strength.

Obviously, we talked about some of the slowdown we've seen an EPC. So this is much more about semi process control, but yes, we're still modeling the growth that we've talked about in the past for service and Thats, a big part of our <unk>.

That will provide for our customers. So we feel good about where we are there.

For the <unk> part of the business given the reduction of the softening industry environment, some idling of capacity the dynamics around that.

The memory business that people have already asked about I would expect service to grow in line with the long run target of 12% to 14% as we said last quarter, we see it somewhere in the mid to high single digit growth rate. This year, obviously, some headwinds from from the export controls as a factor in that.

But still growth.

To Rick's point and on the EPC side, EPC side, probably flat, maybe modestly up a little bit service business behaves a little bit differently. There are some long term opportunities for us to try to drive that business over time, given our global footprint. That's obviously a longer term play but that service business generally.

<unk> is not declining but not growing a lot this year.

But it sounds like things.

Thank you.

Our next question will come from Joe <unk> with Wells Fargo. Your line is open.

Yes, thanks for taking the questions just the first is a quick clarification.

The clarification on export restrictions that you received that $200 million and thinking about for the second half of this year, but that re interior backlog or RPM this quarter.

Never came out.

There was a clarification issue. So we were as I've said in prior quarters until we have certainty.

We weren't going to scrub out anything out of our backlog in this case, we required a clarification and so until we have certainty. So no no change from that point of view.

Got it thanks, and then as a follow up.

On the gross margin side, how should we think about inventory reserves. So the rest of this year and then can you just remind us how do we think about the timing of those new vessels.

Yes, I think the last couple of quarters, we've had some meaningful adjustments from what we were driving the company to the current demand levels and if you recall back in 'twenty, one and 'twenty two given the supply chain shortages that were out there we were making fairly significant commitments in our supply chain that.

And in a lot of ways drove the performance that we saw in <unk>.

One in 'twenty two from a from a growth point of view and particularly from a relative growth point of view.

So as we've had to adjust down to different.

Demand levels.

It's fairly quick pace. It has driven some incremental reserves related to just excess supply. So what I would expect will end up happening is is over time as we see a meaningful resumption in demand given the extended ability and lifetime of our platforms. The strength of our service business will ultimately.

Consume those parts, it's not like you throw the parts away. It's just you have more than you need for the demand window in terms of how you see the assessment. So on a go forward basis, I expect it to normalize and not a issue for us.

<unk> was a bit of a surprise as I mentioned in the prepared remarks, this quarter and that was really driven by just this weakening overall expectation into the second half that we previously thought we would see stronger demand, but we think that we've adjusted now and so the impact moving forward assuming the outlook that we provided normalizes.

And a lot of ways drove the performance that we saw in <unk>.

Is it an incremental factor one way or the other.

One in 'twenty two from a from a growth point of view and particularly from a relative growth point of view.

Perfect. Thank you.

So as we've had to adjust down to different.

Thank you.

Our next question will come from Keith <unk> with Citi. Your line is open.

Demand levels in a fairly quick pace it has driven.

The incremental reserves related to just excess supply. So what I would expect will end up happening is is over time as we see a meaningful resumption in demand given the extended ability and lifetime of our platforms. The strength of our service business will ultimately.

Hi, Thank you for taking my questions I have two questions on China.

As the number of <unk>.

Customers, you're engaged domestically in China on trailing edge higher.

Higher this year versus last year a year before.

Assume those parts, it's not like you throw the parts away. It's just you have more than you need for the demand window in terms of how you see the assessment. So on a go forward basis, I expect it to normalize and not be a <unk>.

When you say higher so there's a lot of projects.

Rigs right I Wouldnt say higher.

Okay and then on.

The multinational companies in China, Rick in your.

<unk> for us.

<unk> that these companies how are they looking at.

Their future capacity expansion given that the license period for the export restrictions.

We think that we've adjusted now and so the impact moving forward, assuming the outlook that we provided normalizes and isn't an incremental factor one way or the other.

<unk>.

Are you in September October I mean, how are they looking strategically.

On the investment in China.

Well.

It's hard enough for us to get the clarification I think for them that they are working on the same thing as getting clarification on exactly what they will be able to do so I think there.

Perfect. Thank you.

Thank you.

Our next question will come from Keith <unk> with Citi. Your line is open.

They have conversations with us, but frankly discussions they are having that matter. The most of them are not with us we're able to support them no matter, which way that goes but I think that's something they're all working through in.

Hi, Thank you for taking my questions I have two questions on China.

Is the number of.

Customers, you're engaged domestically in China on trailing edge.

There's some stuff in the press about it but you can imagine that there's a fair amount of.

Higher this year versus last year a year before.

Anxiousness around that.

I, Wouldnt say higher but theres a lot of projects.

Understand thank you.

Thank you.

Rigs right I Wouldnt say higher.

Our next question will come from Timothy Arcuri with UBS. Your line is open.

Okay and then on.

The multi national companies in.

Thanks, a lot Brian I had two so first I'm just trying to tie your process control system. This commentary to wip and it sounds like older Tech system, I mean, youre not explicitly saying this engine, but it sounds kind of like they are pretty flattish. So process control systems have to be about $15 50.

<unk>.

Rick in your discussions with these companies how are they looking at there.

There are few.

Two capacity expansion given that the license period for the export restrictions.

<unk>.

September October I mean, how are they looking strategically.

Down maybe $175 million from March and then in the shareholder letter you are saying that it's going to sort of remain flat into the back half of the year at that level. So if I just take the $17 20, you did in March and then I take the $15 50 in June and I kind of flatline that Niu $75 billion. This year in wip that implies you are like.

On the investments in China.

Well.

It's hard enough for us to get the clarification I think for them that they are working on the same thing as getting clarification on exactly what they'll be able to do so I think there.

Eight 5% this year for WMC sure. That's I mean, that's a record high so.

So I guess the question is is there something structural going on that you think there is staying power to where your Wi Fi share could stay that high usually I think six of the trough and eight in the peak, but youre sort of.

There's some stuff in the press about it but you can imagine that there's a fair amount of.

Anxiousness around that.

$8 five or maybe is it that you're $75 billion numbers too well.

Understand thank you.

Thank you.

So again, we do this every quarter I am not going to guide.

Our next question will come from Timothy Arcuri with UBS. Your line is open.

The individual segments, but your math is reasonable and again with our comments were around stabilizing its plus or minus.

Thanks, a lot Brian I had two so first I'm just trying to tie your process control system. This commentary to W. P.

Relative to the current business levels.

It sounds like or protect systems, I mean, youre not explicitly saying this in June but it sounds kind of like they are pretty flattish. So process control systems have to be about $15 50.

But thats, how we see things going forward now.

In terms of.

We talked about this a little bit over over the last number of months is as debt.

Down maybe $175 million from March and then in the shareholder letter you are saying that it's going to sort of remain flat into the back half of the year at that level. So if I just take the $17 20, you did in March and then I take the $50 50 in June and I kind of flatline that and are you $75 billion. This year in Wi Fi that implies you are like.

Felt pretty confident about our ability to maintain our share of WSB that there were.

There were drivers in terms of as we look at 'twenty, three and you see customers continuing to invest in their Roadmaps particular.

Particular product lines that are reflecting some of the fastest growing product lines and overall.

It would be factors for growth for us our exposure to the to the bare silicon or silicon wafer industry.

Eight 5% this year for WMC sure. That's I mean, that's a record high so.

As a driver of that USD debt that we're exposed to that others aren't.

The.

The infrastructure investment that's happening in China.

Wafer medical point of view is also an inflection point.

I think what's exposed to <unk>.

We do this every quarter I am not going to guide.

Export controls overall as a percent of the total for us is a little bit lower than some of the other peers and then finally, we're seeing a very strong share performance overall as we talked about in the prepared remarks. So when you when you add all that up and share is also important because in a downturn when budgets are limited customers tend to buy best of breed and that tends to play to calix favor as well.

The individual segments, but your math is reasonable and again with our comments were around stabilizing its plus or minus.

Relative to the current business levels.

But thats, how we see things going forward now.

In terms of.

When we talked about this a little bit over over the last number of months is as debt.

So when you add all that up as I've been saying for a number of months I feel pretty confident that despite all the adjustments out there that folks were making in deferred revenue and partial shipments and all those kinds of dynamics that we are adding some confusion overall that we felt pretty comfortable about our ability to maintain our share of the overall market process control intensity stronger in our foundry logic.

So I'm pretty confident about our ability to maintain our share of WSB that there were.

There were drivers in terms of as we look at 'twenty, three and you see customers continuing to invest in their roadmaps.

Their product lines that are reflecting some of the fastest growing product lines and overall.

Would be factors for growth for us.

<unk> certainly more of the Wip spend is there and so that's that's always a factor for us in any downturn.

Our exposure to the to the bare silicon or silicon wafer industry.

<unk> typically in down Wip years KLA is.

As a driver of that USD debt that we're exposed to that others aren't.

I think if I go back decades, we've always outperform the market and down here. So I think there's a number of factors that's contributing to it yes, just to build on it Tim.

Sure.

The infrastructure investment that's happening in China from a.

A rug wafer medical point of view is also an inflection point.

I think as Brent mentioned process control intensity is up some but I think the share story is maybe even more significant and and then where it's really shown up its been optical inspection.

What's exposed to <unk>.

It's more controls overall as a percentage of the total for us is a little bit lower than some of the other peers and then finally, we're seeing a very strong share performance overall as we talked about in the prepared remarks. So when you when you add all that up and share is also important because in a downturn when budgets are limited customers tend to buy best of breed in that sense.

And a lot of that is around relevancy of our optical inspection to some of the new notes that people are dealing with and it took a while for some of our customers to really fully appreciate the capability of both the Gen. Four Gen five platforms.

Elyse favor as well so when you add all that up as I've been saying for a number of months I feel pretty confident that despite all the adjustments out there that folks were making in deferred revenue and partial shipments and all those kinds of dynamics that we are adding some confusion overall that we felt pretty comfortable about our ability to maintain our share of the overall market process control intensity strong.

And those two I mean, frankly, we're still constrained we're capacity constrained on notice those would grow more if we had more capacity and the reason for that is I think we are demonstrating to our customers value and when we bought originally it would be mostly logic and foundry even there we're seeing some strength.

On the foundry logic environment, certainly more of the Wip spend is there and so that's that's always a factor for us in any downturn.

Memory is very low but were seeing adoption of advanced inspection. So I think thats another way to look at it when you look at the performance last year overall for process control I don't think it was an accident its relevancy of our solutions.

And why typically in down WMC years KLA is.

I think if I go back even decades, we've always outperform the market and down here. So I think theres a number of factors that's contributing to it yes, just to build on it Tim.

Thanks, a lot and then I guess I had a question also on.

There'll be a fee and so people are trying to get at this I think but so Wi Fi is still sort of flat in the 75 range I think Brent you said that.

I think as Brent mentioned process control intensity is up some but I think the share story is maybe even more significant and and then where it's really shown up its been optical inspection.

That there's $200 million for you that can ship, that's sort of an add back of <unk>.

And a lot of that is around relevancy of our optical inspection to some of the new notes that people are dealing with.

Stuff that was banned in the past. So if you are less than 10% of wip Thats, probably like a few billion dollars add back from just from China. There then there's all the lagging edge stuff happening in China. So is it not the lagging edge China stuff like it's not helping this year, it's more helping next year, because I guess I'm a little surprised that the $75 billion number is not higher just given the massive.

It took a while for some of our customers to really fully appreciate the capability of both the Gen. Four Gen five platforms and those two I mean, frankly, we're still constrained we're capacity constrained on notice those would grow more if we had more capacity and the reason for that is I think we are demonstrating to our customers.

Increasing.

Bookings that we're seeing from lagging edge kind of thanks.

Yes.

Value and when we bought originally it would be mostly logic and foundry even there we're seeing some strength.

We are in April .

And estimate an approximation at plus or minus around 77, or <unk> 75 billion as a way to think about it.

At this point, so we don't put a lot of extra effort, we focus a lot on running our own business and executing this one.

Just try to do what we can do.

Testament of the overall market and we'll share that with you, but but there are a lot of moving parts right, we will get some clarity.

Thanks, a lot and then I guess I had a question also on.

In terms of ultimately what that that that impact is.

There'll be a fee and some people are trying to get at this I think but so Wi Fi is still sort of flat in the 75 range I think Brent you said that.

Is it could it be more going to be less perhaps but just overall and I think the other factor that could impact. This year is just some of the construction dynamics facilities are being built and when customers actually receive tools. If you have delays in construction schedules that could affect what shows up land and there's a number of greenfield projects that are out there.

That there's $200 million for you that can ship, that's sort of an add back.

Stuff that was banned in the past. So if you are less than 10% of wip Thats, probably like a few billion dollars add back from just from China. There then there's all this lagging edge stuff happening in China. So is it not the lagging edge China stuff like it's not helping this year, it's more helping next year, because I guess I'm a little surprised that the $75 billion number is not higher just given the massive.

So a lot of moving parts in it but we're comfortable with.

Or minus 75 million and will permit up as we go here.

So Brian Thanks, so much.

Thank you. Thank you. Thank you.

Increasing.

Bookings that we're seeing from lagging edge China. Thanks.

Our next question will come from Sidney Ho with Deutsche Bank. Your line is open.

Yes.

We are in April .

Great. Thanks for taking the question.

And estimate an approximation at plus or minus around 77, or 75 billion as a way to think about it.

I wanted to follow up with the previous question about you talk about the stabilizing demand and maybe a similar profile for the rest of the year are you expecting your revenue for the back half of the year to be roughly flat quarter over quarter inclusive of that $200 million of recoup revenue or are there other factors to consider when there were some.

At this point, so we don't put a lot of extra effort and we focus a lot on running our own business and executing this one we just try to do what we can do.

<unk> of the overall market and we will share that with you, but but there are a lot of moving parts right, we will get some clarity.

The service business on the EPC side of things.

And in terms of ultimately what that that that impact is.

Yes, I mean, we just.

Is it could it be more going to be less perhaps but just overall and I think the other factor that could impact. This year is just some of the construction dynamics or facilities are being built and when customers actually receive tools. If you have delays in construction schedules that could affect what shows up land and there's a number of greenfield projects that are out there.

Did 2.432, right and or <unk> in the March quarter, and so the commentary was focused on current business levels at 225, so it might put a little bit of pressure on the second half from a half to half point of view, but we are talking about at a low single digit low to mid single digit given given that guidance and again.

So a lot of moving parts in it but we're comfortable with.

We're not guiding the second half will just given a view of this stabilization here so.

Plus or minus 75 million and will permit up as we go here.

It's possible it.

Awesome. Thanks, so much.

It will be close, but I think just given the strength of the March quarter.

Thank you.

Our next question will come from Sidney Ho with Deutsche Bank. Your line is open.

<unk>.

If you end up with roughly the same numbers in the second half he might be half to half down modestly.

Great. Thanks for taking the question.

Okay. That's helpful. My follow up question is one of your largest customer in Taiwan talked about higher levels of tool reuse between the five nanometers and at three nanometers. How is this factored into your second half outlook and maybe even the longer term outlook and do you think thats anything incremental to what the industry's current level of capacity.

Use between notes thanks.

On the service business on the EPC side of things.

It's a good question Sidney I think that those are always conversations customers have had in terms of when they look at their utilization then they look at the differences from node to node I think it is something that is always being evaluated there are always trying to optimize the portfolio.

Yes.

Just did 2432, right and or three three in the March quarter and so the commentary was focused on current business levels at 225, so it might put a little bit of pressure on the second half from a half to half point of view, but we are talking about at a low single digit low to mid single digit given given that guidance.

The work that we've done in modeling our 2026 plan and the work that we do even looking through the rest of the year and next year as contemplated all of that so there's nothing really in there that's new from our perspective.

We're not guiding the second half we're just given our view of this stabilization here so it's possible right.

<unk>.

It'll be close, but I think just given the strength of the March quarter.

The amount of consumption of process control and process control intensity. It does highlight the need for us to continue to invest in R&D and bring out new capabilities and continue to support our customers. So nothing really new in what we see in those statements.

Got it.

If you end up with roughly the same numbers in the second half you might be half to half down modestly.

Okay. That's helpful. My follow up question is one of your largest customer in Taiwan talked about higher levels of tool reuse between the five nanometers and three nanometers, how is that factored into your second half outlook and maybe even the longer term outlook and do you think thats anything incremental to what the industry as current levels.

Okay. Thank you.

Thank you.

Our next question will come from Toshi Hari with Goldman Sachs. Your line is open.

Yes. Thank you so much for taking the question I had a follow up question to <unk> question.

Absolutely use between nodes. Thanks.

Given given the depth and breadth of.

Design start activity Youre seeing the leading edge foundry space what are your expectations for process control intensity into 2024, thereby potentially some upside from where you were in 2023.

We will look at it.

The work that we've done in modeling our 2026 plan and the work that we do even looking through the rest of the year and next year have contemplated all of that so there is nothing really in there that's new from our perspective about.

<unk>.

Process control intensity has been very strong for the reasons you talked about if you think about the number of design starts and what that means in terms of our customers managing.

A number of different design test design rules in different ways, and then having to deliver yielded wafers.

And fairly tight market windows that all drives a higher level of inspection and metrology. Due also in different process flows and process flows that are expected to so those are all have been drivers for process control design starts at the previous node also factor in then to Teck right <unk> with the introduction of more EV to drive.

Okay. Thank you.

Okay.

Thank you.

Our next question will come from <unk> Hari with Goldman Sachs. Your line is open.

Scaling, but also more with more layers here moving forward.

Yes. Thank you so much for taking the question I had a follow up question to <unk> question.

So those are all positives for US also depending on the mix of the revenue die size is also a factor. So if you end up with.

Given given the depth and breadth of design start activity Youre seeing in the leading edge foundry space. What are your expectations for process control intensity into 2024, thereby potentially some of the upside from where you are in 2023.

Exposure to markets with larger die.

You put more at risk with the same defect density so that that creates as a driver for process control as well. So there are a number of factors.

We feel probably if you just back up and look at the overall share of the market as it relates to foundry logic, we've seen an inflection here and we think that we can sustain that inflection as we move forward.

We will look at it.

<unk>.

Process control intensity has been very strong for the reasons you talked about if you think about the number of design starts and what that means in terms of our customers managing.

Got it that's helpful. And then as my follow up I think you commented specifically on China as it pertains to your business with wafer suppliers and critical.

A number of different design test design rules in different ways, and then having to deliver yielded wafers.

The suppliers as well, but curious on a global basis.

And fairly tight market windows that all drives a higher level of inspection and metrology. You also have different process flows and process flows that are expected to so those are all have been drivers for process control design started the previous note also factor and then you tack right tact with the introduction of more EV to dry.

How big are those businesses today, and how should we think about sustainability.

Over the next 12 months 12 months or so.

Then on the wafer side as well as both merchant and captive critical customers. Thank you.

And most of the radical infrastructure, new infrastructures being added in China to support legacy activity and Thats.

Scaling, but also move with more layers here moving forward.

So those are all positives for US also depending on the mix of the revenue die size is also a factor. So if you end up with.

Probably a driver of an incremental couple of hundred million dollars or so of revenue for us overall wafer and I'm separating it this way I don't want to double count overall wafer should grow meaningfully this year compared to last year.

Exposure to markets with larger die.

You put more risk with the same defect density so that creates a driver for process control as well. So there are a number of factors.

It's a pretty sizable business for KLA, So I don't want to we haven't broken it out before but.

We feel for you just back up and look at the overall share of the market as it relates to foundry logic, we've seen an inflection here and we think that we can sustain that inflection as we move forward.

We are an expensive or a big part of the Capex for wafer suppliers.

And we would expect to see that growing this year.

Got it that's helpful and then as my follow up thank.

Thank you.

Thank you commented specifically on China as it pertains to your business with wafer suppliers and critical.

Our next question will come from Joe Moore with Morgan Stanley . Your line is open.

Suppliers as well, but curious on a global basis.

Great. Thank you.

You talked about kind of qualitatively about services.

How big are those businesses.

That being down this year, maybe up a little bit. This year can you talk about the utilization impact on that and as you see utilizations coming down in both.

And how should we think about sustainability.

Over the next 12 months 12 months or so again on the wafer side as well as both merchant and captive critical customers. Thank you.

Foundry and memory I guess I would think that has less impact on you than it does for some of the other guys. But can you just talk to how utilization might weigh on that number.

And most of the radical infrastructure, new infrastructures being added in China to support legacy activity and that's <unk>.

The utilization rates have clearly come down, particularly in the memory space. It seems like they are fairly stable at this point, we don't see them continuing to decline from where they are.

A driver of an incremental couple of hundred million dollars or so of revenue for us overall wafer and I'm separating it this way I don't want to double count overall wafer should grow meaningfully this year compared to last year.

So and Thats why we see the overall revenue because customers are not running the tools start or in some cases idling capacity. So you don't have the the opportunities the service opportunities. They would have in a higher utilization environment. So that's what's driving the overall growth rate down from what a normalized.

It's a pretty sizable business for KLA, So I don't want to we haven't broken it out before but.

We are an expensive or a big part of the Capex for wafer suppliers.

And we would expect to see that growing this year.

Thank you.

Our trend line expectation.

Yes.

But we're not seeing it really getting worse at this point in their pockets from time to time of improvement. So I think it's stabilization is the right word is why we chose to use it but it feels like that's really what we're seeing today.

Our next question will come from Joe Moore with Morgan Stanley . Your line is open.

Great. Thank you.

Can you talk about kind of qualitatively about services.

That's helpful. Thank you and then separately on.

That being down this year, maybe up a little bit. This year can you talk about the utilization impact on that and as you see utilizations coming down in both.

China, you guys have talked to the sort of China trailing edge logic opportunity a couple of different times here.

Foundry and memory I guess I would think that has less impact on you than it does for some of the other guys. But can you just talk to how utilization might weigh on that number.

You have a sense for whether there is building ahead, there I mean I would assume you have customers there that have anxiety about future export controls.

Could they be putting in capacity I guess, I guess, maybe a different way of asking the question do you see utilization that kind of.

Utilization rates have clearly come down, particularly in the memory space. It seems like they are fairly stable at this point, we don't see them continuing to decline from where they are.

Validates the requirement of the spending or do you worry that it could be.

Building ahead of demand of supply.

So and that's why we see the overall revenue because customers are not running the dual start or in some cases idling capacity. So you don't have the opportunities. The service opportunities you would have in higher utilization of environment. So that's what's driving the overall growth rate down from what a normalized.

Yes.

It's possible I mean, we don't have great clarity on all of it but it does seem unlikely given the recent history of win.

You have lost support.

The equipment provider the tools aren't very useful so I think the.

Our trend line expectation yet.

The expectation is the controls will remain on the leading edge and there'll be able to continue to develop some of these mature technologies.

Not seeing it really getting worse at this point in their pockets from time to time of improvement. So I think stabilization is the right word is why we chose to use it but it feels like that's really what we're seeing today.

Very active EV market in China. So there's a lot of need for some of that more mature technology as it applies to some of those markets. So it does seem to be based on.

That's helpful. Thank you and then separately on China, you guys have talked to this sort of China trailing edge logic opportunity a couple of different times here.

Some real demand around things that are not leading edge and that's really what we're seeing in and have for quite a while in China. So it doesn't feel like it's necessarily that there are companies that are ramping up and in that sense. They might not have won the markets that they hope to win yet, but we've kind of factored that into our overall forecasting for.

Your sense for whether there is building ahead, there I mean I would assume you have customers there that have anxiety about future export controls.

Could they be putting in capacity I guess, I guess, maybe a different way of asking the question do you see utilization that kind of.

China anyway.

Validates the requirement of the spending or do you worry that it could be.

Very helpful. Thank you.

Building ahead of demand.

Thank you.

Hi.

Our next question will come from Blayne Curtis with Barclays. Your line is open hey, Thanks for taking my question I was curious I mean, you talked about in the outlook.

Yes.

It's possible I mean, we don't have great color.

Early on all of it but it does seem unlikely given the recent history.

Legacy growing faster than than leading edge. Just curious if you can give us the perspective, where that mix is within foundry logic today than maybe a perspective with where it's come from.

<unk>.

You have lost support.

The equipment provider tools aren't very useful so I think the.

The expectation is as the controls will remain on the leading edge and there'll be able to continue to develop some of these mature technologies cover theirs.

Well, so it's declining less Scott, it's not growing it's really just declining less in terms of the overall outlook for KLA. If you just thought about whats.

Very active EV market in China. So there's a lot of need for some of that more mature technology as it applies to some of those markets. So it does seem to be based on.

Less than 28 nanometers versus what's above.

Mixed profile.

You have about 40 or 60% of our revenues will call less than 28 nanometer and so about 40% of it is above.

Normally it's closer to 75% leading 25%.

Lagging so gives you a sense of it being a bigger part of our mix.

China anyway.

This quarter.

Okay helpful. Thank you.

And it is broad based and certainly China is a pretty big factor in at all but you also have a fair amount of it happening from the analog guys.

Thank you.

Our next question will come from Blayne Curtis with Barclays. Your line is open.

Supporting some of the automotive markets sensor investment.

Thanks for taking my question I was curious I mean, you talked about in the outlook.

The industrial markets and so on so that's.

Legacy growing faster than than leading edge. Just curious if you can give us the perspective, where that mix is within foundry logic today than maybe a perspective of where it's come from.

There is steady investment and these are in markets, where semiconductor content is rising and so youre seeing more investment in those areas that.

Well, so it's declining less Scott, it's not growing versus declining less in terms of the overall outlook for KLA. If you just thought about what's.

That we frankly didn't ship a lot into over the last couple of years, given the strength of demand at the leading edge.

And our largest customers given the supply demand imbalance taking.

Less than 28 nanometers, which is what's above.

Taking most of the slots so in some ways as we've seen the leading edge adjust and this is our logic and memory statement between some adjustments.

Mixed profile.

You have about 40 <unk>.

And our largest customers.

60% of our revenue is we'll call it less than 28 nanometer and so about 40% of it is above.

<unk>.

Over the last.

Six months or so and into this year some of that capacity is getting consumed by folks that.

And thats normally it's closer to 75% leading 25%.

Wanted earlier slots or we weren't able to deliver to them.

Thanks, and then I wanted to ask you on the on the inventories on the balance sheet I think it is.

Lagging so gives you a sense of it being a bigger part of our mix.

Record level near record and data as well so I guess, you've kind of everybody has this phenomenon going on how are you thinking about managing that with the top line kind of flat to down I'm kind of curious if inventory will still grow and any impacts on gross margin as you work it down.

This quarter.

And in broad based certainly China is a pretty big factor in at all but you also have a fair amount of it happening.

The analog guys and supporting some of the automotive markets sensor investment in the industrial markets and so on so that's.

Yes, and I've said this many times, but we're not the company that you look to four asset velocity as it relates to inventory and there's a reason for that is gain is it starts with the business model of the KLA has around driving innovation and differentiation and that drives a fair amount of custom componentry.

There is steady investment in eastern markets, where semiconductor content is rising and so youre seeing more investment in those areas.

We frankly didn't ship a lot into over the last couple of years, given the strength of demand at the leading edge and our largest customers given the supply demand imbalance.

Into our systems, and very unique supply relationships, where our suppliers or our trusted partners more than transat.

Taking most of the slots so in some ways as we've seen the leading edge adjust and this is our logic and memory statement between some adjustments.

Transactional supply chain as a result of that we optimize for as we optimize for that differentiation and while we accept as we accept that we're going to need to make commitments lead times are long, we're going to take parts. When we when we put orders out to take them and in the long run we believe that economically we're in a pretty good place that given the strength of <unk>.

Our largest customers.

Over the last.

Six months or so and into this year some of that capacity is getting consumed by folks that.

Wanted earlier slots and we weren't able to deliver to them.

Thanks, and then I wanted to ask you on the on the inventories on the balance sheet I think its record level near record in days as well. So I guess it kind of everybody has this phenomenon going on and how you think about managing that with the top line kind of flat to down I'm kind of curious if inventory will still grow and any impacts on gross margin as you work with.

Service extend ability of the platforms that will consume the parks that were buying against our our our volume products. So we've seen it trend up but its trending up I would expect it to start to flatten out maybe drift a little bit, but I'm already starting to buy parts for new products that are coming out for.

Now.

For things that will have some unique parts for new products that'll be coming out over the next 12 months to 18 months or so so I don't expect it to turn very much that's why even in these very strong upturn environments.

Yes, and I've said this many times, but we're not the company that you look to four asset velocity as it relates to inventory and there's a reason for that is is it starts with the business model of the KLA has.

We've rarely gotten above much above two times from an inventory point of view.

Around driving innovation and differentiation and that drives a fair amount of custom componentry into our systems and very unique supply relationships, where our suppliers or our trusted partners more than true.

So we will continue to manage it but its sort of fundamental to our supply chain strategy.

And as a result of that when youre buying parts to support products better they are living for 20 to 30 years.

A lot to Dubai to support that and we carry it.

Thank you.

Okay. Thanks.

Yes.

Okay.

Our next question will come from Brian Chin with Stifel. Your line is open.

Hi, there good afternoon, and thanks for letting us ask a question.

Service extend ability of the platforms that will consume the parts that we're buying against our our our volume products. So we've seen it trend up but its trending up I would expect it to start to flatten out maybe drift a little bit, but I'm already starting to buy parts for new products that are coming out for.

Maybe for Rick.

Trailing edge.

Clearly its part of it.

At West process control intensity, but I guess to what extent was the immaturity of these production lines, particularly in China. There's a lot of Greenfield situations I don't think the desire for faster time to market.

For things that will have some unique parts for new products that'll be coming out over the next 12 to 18 months or so so I don't expect it to turn very much that's why even in these very strong upturn environments.

These factors kind of counteract that.

Typical kind of lower intensity for trailing edge.

Well I think that a couple of ways one is.

We've rarely gotten above much above two times from an inventory point of view so.

It depends on the applications for.

For the fab, so if you're an automotive fab you actually have a different kind of need for process control than you do if you're just to.

So we will continue to manage it but its sort of fundamental to our supply chain strategy.

And as a result of that when you are buying parts to support products better they are living for 20 to 30 years.

Traditional legacy fab, so thats, one thing that that actually.

Lots of Dubai to support that and we carry it.

Essentially it could be a little bit higher.

And then depending on the scale and the size of the fab on a relative basis, it's harder to have.

Thank you.

Okay. Thanks.

Thank you.

Okay.

You get more efficiency on a large.

Our next question will come from Brian Chin with Stifel. Your line is open.

And so these fabs tend not to be as Mega Fabs, then you actually get a little bit of.

Hi, there good afternoon, and thanks for letting me ask a question.

As a result, they are also looking for solutions that have been proven in the market and so for US those are established product lines that we've been courting for a long time that might not need as much advanced applications per course, so those are all factors that make it I.

Maybe for Rick trailing.

Trailing edge.

Currently it's thought of.

West process control intensive, but I guess to what extent was the immaturity of these production lines, particularly in China, There's a lot of greenfield situations.

I think both good for our customers, but also a good business for KLA. So, yes, it's not as intensive as a leading edge fab, but.

Situations I don't think the desire for faster time to market.

These factors kind of counteract.

We still have a ways to go to catch up and there is always value in getting higher yields and whenever they change process nodes, we see interest in upgrading their process control.

That typical kind of lower intensity for trailing edge.

Well I think that a couple of ways one is.

It depends on the applications for <unk>.

Great. Thank you and then maybe just a quick follow up in terms of the percent of memory, increasing in the June quarter.

For the fab, so if you're an automotive fab you actually have a different kind of need for process control than you do if you're just.

Looks like also on a dollar basis as well.

Traditional legacy fab, so thats, one thing that that actually controlling potentially it could be a little bit higher.

You suggested its pretty focused towards DRAM can you characterize the nature of that uptick.

Or is it just more of a kind of a classic case of coming off. This was March that it was really more of a bouncing along a bottom kind of situations.

And then depending on the scale and the size of the fab on a relative basis, it's harder to have you.

You get more efficiency on our large cabin. So these fabs tend not to be as Mega Fabs.

Yes, I think it's more of the latter I wouldn't characterize it as anything other than just.

You actually get a little bit of.

Some some investments and some timing of tool deliveries with our customer base.

As a result, Theyre also looking for solutions that have been proven in the market and so for US those are established product lines.

<unk>.

Waiting for a long time that might not need as much advanced application support. So those are all factors that they get.

It's very technology centric side.

I wouldn't characterize it as given the level of it.

I think both good for our customers, but also a good business for KLA.

Been a while somewhat low even with the uptick quarter to quarter.

<unk> Technology Center.

It's not it isn't.

As a as a leading edge fab, but.

Okay, great. Thanks for the exception of the China opportunity necessarily.

They still have a ways to go to catch up and there's always value in getting a higher yield.

Okay.

Remember the change process nodes, we see interest in upgrading their process control.

Thank you Brian .

Operator, we have time for one last question.

Great. Thank you and then maybe just a quick follow up.

Our last question will come from Matt <unk> with.

In terms of percent of memory, increasing in the June quarter.

Your line is open.

And it looks like also on a dollar basis as well.

Yes, Thanks for taking my question just.

Two follow ups for me if I just take your commentary regarding the revenue.

Hey, Jeff it's pretty focus towards DRAM can you characterize the nature of that uptick.

This is more of a kind of a classic case of coming off such a low margin or if it was really more of a bouncing along a bottom kind of situations.

Trend first half second half of the calendar it seems to me that the peak to trough.

Decline in revenues in the 25% to 30% range and I'm not asking you for guidance, but what I wanted to better understand is.

Yes, I think it's more of the latter I wouldn't characterize it as anything other than just.

You did close to $3 billion in December of 'twenty two.

Some some investments.

And some timing of expenses.

W. A feat in the 90 to 95 billion can go and hit those.

Mint tool deliveries with our customer base.

And.

Revenue.

It is very technology centric side I wouldn't characterize it as given the level of it.

Run rate without double you'll see click with your ability to see having to go to $90 billion does your diversification looking forward, especially with row semiconductor.

It's been a while somewhat low even with the uptick quarter to quarter.

Pretty technology Center.

Material and others will enable you to hit.

Okay, great. Thanks for the exception of the China opportunity clearly.

33 billion.

Okay got it.

Without having WPZ go to <unk> plus in the wholesaler.

Thank you Brian .

Operator, we have time for one last question.

Yes, maybe I mean, one of the things and this ties back to the rising share of WSB that we've seen.

Our last question will come from Matt is Guinea with <unk>.

Your line is open.

Over the last couple of years is that.

Yes, Thanks for taking my question just.

We're gaining share in the overall market. So we should be able to do more revenue with lower debt levels.

Two follow ups for me if I just take your commentary regarding the revenue.

Has that sustained now there are mixed dynamics and other factors that affect it.

Trends first half second half of the calendar it seems to me that the peak to trough.

Given the dynamics that have driven it we believe theres a fair amount of sustainability to it there are new products that we believe can continue to solve problems for customers.

Decline in revenues in the 25% to 30%.

Asking you for guidance, but what I wanted to better understand is you.

We have exposure to markets that are that are inflicting and are pretty critical to the scaling roadmap out there. So.

You did close to $3 billion in December of 'twenty, two with a W. A feat in the 90 to 95 billion can you go and hit those.

And our share was improved share by almost 300 basis points.

The revenue.

Run rate without double you will see or you see having to go to 90 billion does your diversification looking forward, especially with row semiconductor.

That's a lot in one year, we talked a lot about a half a point to a point a year in terms of our objectives.

But we do think that.

<unk> is a clear indicator of the differentiation that we have and if we're able to be successful with some of the new products that are coming.

Material and others will enable you to hit.

33 billion.

Without having WPZ go to binding business plus the wholesaler.

And in the mix generally stays as we talked about in our.

At our Investor day of 60 ish percent foundry logic in terms of overall mix at WMD.

Yes, many of you in one of the things and this ties back to the rising share of WSB that we've seen.

There is an opportunity for us to continue to grow our share opportunity.

Over the last couple of years is that.

We're gaining share in the overall market. So we should be able to do more revenue with lower debt levels.

Okay and then just.

Quick follow up.

If any of your customers were to reuse some of the equipment, how should we think about it.

And that sustained now there are mixed dynamics and other factors that affect it.

Process diagnostics.

But given the dynamics that have driven and we believe theres a fair amount of sustainability to it theyre new products that we believe can continue to solve problems for customers.

Two.

For the application.

So as Rick said earlier. This is nothing new that customers are always looking to optimize their capacity given what this equipment cost and the amount of the investment they're making they're always looking to do that and there are certain product types, where there are there's more opportunities than others. It was easy for customers to.

We have exposure to markets better than are inflicting and are pretty critical to the scaling roadmaps out there. So.

Sure, we improved share by almost 300 basis points and.

That's a lot in one year, we talked a lot about a half a point to point a year in terms of our objectives.

A reuse capacity when they only had.

But we do think that that that is a clear indicator.

A very limited number of designs and no major technology drivers, but as you look out going forward, given scaling dynamics and increase in easy layers.

The differentiation that we have and if we're able to be successful with some of the new products that are coming.

Think that there is a technology element that will drive our customers to continue to.

And in the mix generally stays as we talked about in our.

At our Investor day of 60 ish percent foundry logic in terms of overall mix at W. E T.

To upgrade their capabilities, but I am sure. They will look for opportunities if in the long run they believe that there's a sustainable drop in the wafer start requirement.

But there is an opportunity for us to continue to grow our share opportunity.

Okay, and then just one.

Try to relocate that capacity or try to reuse it and you can't move overnight right it, particularly if you're moving it to a different facility.

Quick follow up.

If any of your customers were to reuse some of the equipment, how should we think about it.

These tools have to be this assemble that has to be shipped and reassembled and then and then calibrated and brought up so those tend to be longer term decisions. So structurally they have to feel pretty good about the longer term setup for that fab or at that node to move the equipment, but they typically do in the short run as the idle capacity if they don't need it for a period of time, but with an expectation.

Princess diagnostic.

Tim.

For the application.

And that will come back online and given the design start environment at seven and $5 three there's still a fair amount of designs out there that this is volumes are low so we'll see how it plays out but nothing new and as Rick said, it's modeled in our view.

For customers to reuse capacity when they only had.

A very limited number of designs and no major technology drivers, but as you look out going forward, given scaling dynamics and increasingly easy layers.

Growth in KLA.

Opportunity moving forward.

Thank you.

Thank you Manny.

That there is a technology element that will drive our customers to continue to.

Thank you everyone for your for your time today for.

The earning season.

Upgrade their capabilities, but I am sure. They will look for opportunities in the long run. They believe that there is a sustainable drop in the wafer start requirement to try to relocate that capacity or try to reuse it and you can't move it overnight right and particularly if you're moving it to a different facility.

<unk> will be seeing many of you at some of the upcoming comp consistent with that I'll turn the call back over to Chelsea. So she can provide any final instructions.

Thank you ladies and gentlemen, this does conclude the KLA Corporation.

2023 earnings call and webcast.

Please disconnect. Your line at this time have any one.

These tools have to be disassembled SP shift and reassembled and then and then calibrated and brought up so those tend to be longer term decisions.

Actually they have to feel pretty good about the longer term setup for that fab or at that node to move the equipment, but they typically do in the short run as the idle capacity if they don't need it for a period of time, but with an expectation that will come back online and given the design start environment at seven and $5. Three there is still a fair amount of designs out there that this is volumes are low so well.

See how it plays out, but it's nothing new and as Rick said, it's modeled in our view.

Growth in KLA.

Opportunity moving forward.

Okay. Thank you.

Thank you Manny.

Thank you everyone for your for your time today for.

The earning season.

<unk> will be seeing many of you at some of the upcoming comp consistent with that I'll turn the call back over to Chelsea. So she cannot provide any final instructions.

Thank you ladies and gentlemen, this does conclude the KLA Corporation.

2023 earnings call and webcast.

Please disconnect. Your line at this time and have a wonderful day.

Yeah.

[music].

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