Q1 2024 KLA Tencor Corp Earnings Call

Yeah.

Okay.

Sure.

[music].

That's fair.

[music].

Good afternoon, My name is Chelsea and I will be your conference operator today.

At this time I would like to bulk of everyone to the KLA Corporation at Kimco Corridor Q fell from 23 earnings conference call and webcast.

All participant lines have been placed in a listen only mode to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session.

If you would like to ask a question at that time. Please press star one on your telephone keypad.

If you wish to remove yourself from the queue. Please press star two.

Please also limit yourself to one question and one follow up.

Lastly, if you should need operator assistance, Please press star zero.

Thank you I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and market analytics. Please go ahead.

Thank you for joining us for our earnings call to discuss the results of the September 2023 quarter in our December quarter.

I'm joined by our CEO, Mike Walsh, our CFO, Brian Higgins to discuss our results released today after the market calls which are available on our IR website, along with supplemental materials.

Today's discussion is presented on a non-GAAP financial basis, unless otherwise specified all year references.

Calendar years.

A detailed reconciliation of GAAP to non-GAAP results in the earnings materials posted on our website.

IR website also contains future investor events as well as presentation corporate governance information and links to our SEC filings, including our most recent annual report and quarterly reports on forms 10-K and 10-Q.

Our comments today are subject to risks and uncertainties reflected in the risk factor disclosures in our SEC filings.

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

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

Frank will begin the call with some comments on quarterly highlights and I'll conclude.

Concurrent with our financial highlights, including our guidance and outlook I will now turn the call over to our CEO, Rick Pauls Gregg Thanks, Kevin.

Before we cover KLA September quarter outlook, I would like to address the situation in Israel as it pertains to KLA we.

We have many KLA in place based in Israel, we are deeply saddened by the unspeakable acts of terrorism.

And the resulting war underway.

Our heartfelt condolences with all the victims and their families friends and loved ones.

We're focused on employee safety and wellbeing.

And are making efforts to assist our teams to be terrible circumstances, including.

Including resources and support for our employees.

And broader humanitarian support to the KLA Foundation.

We all hope for a peaceful solution set.

Yeah.

Moving on to our September quarter results, which exceeded expectations, specifically revenue of $2 $4 billion finished at the upper end guidance range.

EPS was $5 41.

non-GAAP EPS was $5 74.

Both also finishing at the upper end with respective guidance ranges.

These results were driven by the strength and relevance.

Oreste Donzella: Donzella, Good afternoon.

This control portfolio.

Additionally, focused execution enabled continued free cash flow generation and capital returns.

Chelsea: My name is Chelsea, and I will be your conference operator today.

I'm proud of how the KLA teams continue to outperform in the marketplace and deliver on customer commitments.

Chelsea: At this time, I would like to welcome everyone to the KLA Corporation, September quarter, 2023, Erning's Conference Call and Webcast. Operative deadlines have been placed to may listen only mode to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star one on your telephone keypad. If you wish to remove yourself from the queue, please press star two. Please also limit yourself to one question and one follow-up. Lastly, if you should need operator assistance, please press star zero.

The overall business environment remains relatively stable for KLA.

Continue to see strength in markets served by legacy notes, despite softness in memory, and leading edge logic and foundry investments.

As the industry continues to navigate the slowdown in electronics market. We are closely monitoring any adjusting results that affect our customers' capacity.

KLA continues to outperform the industry on a relative basis, because customer investment in R&D for technology advancement and transition has proven to be mortgage market pressures.

When you look at some specific highlights in the quarter revenue was driven by strength in legacy note investment globally.

And industry infrastructure investment.

<unk> market leadership and product success and pattern Zafer optical macro inspection.

It demonstrates the power of the KLA portfolio.

Chelsea: Thank you.

Rapid growth with AI, those enables kla's differentiation and helps drive industry growth.

Kevin Kessel: I will now turn the call over to Kevin Kessel, vice president of investor relations and market analytics. Please go ahead. Thank you for joining us for our Erning's call to discuss the results of the September 2023 quarter and our December quarter outlook. I'm joined by our CEO Rick Wallace and our CEO, Brian Higgins, to discuss our results released today after the market closed, which are available on our IR website, along with the supplemental materials.

As a pioneer in adopting AI to improve the performance of our systems and create differentiation.

KLA has a long track record of in flight the plane and physics based algorithms in our core technologies.

Kevin Kessel: Today's discussion is presented on that non-gap financial basis, unless otherwise specified, our full-year references all relate to calendar years. A detailed reconciliation of gap to non-gap results is in the Erning's materials posted on our website. Our IR website also contains future investor events as well as presentation, corporate governance information and links to our FAC filings, including our most recent annual report and quarterly reports on forms 10K and 10Q. Our comments today are subject to risks and uncertainties reflected in the respective explorers in our FAC filings.

As the cost of compute has declined we are now able to deploy this capability more broadly across our product portfolio.

Leveraging our AI expertise <unk> inspection metrology and data analytics systems help customers solve challenges associated with current process technologies.

And critical industry inflections, including gate all around three D memory do you feel about the Fogarty and advanced packaging.

A service business grew both sequentially and year over year, ending at $560 million in the September quarter remains on track for high single digit percent year over year growth in 2023.

Kevin Kessel: Any forward-looking statements, including those we make on the call today, are also subject to those risks. And KLA cannot guarantee those forward-looking statements will come true, our actual results may differ significantly from those projected in our forward-looking statements.

Finally, the September quarter was another excellent period of cash flow and capital turns perspective.

Kevin Kessel: Rick will begin the call with some comments and quarterly highlights.

Rick Wallace: I will now turn the call over to our CEO, Rick Walls. Thanks, Kevin.

Clearly free cash flow was $816 million, which drove the last 12 months free cash flow up 3% year over year to $3 2 billion.

Rick Wallace: Before we cover KLA September quarter in Outlook, I'd like to address the situation in Israel as it pertains to KLA. We have many KLA employees based in Israel, and we're deeply saddened by the unspeakable acts of terrorism in the Middle East and the resulting war underway. Our heartfelt condolences are with all the victims and their families, friends, and loved ones. The KLA were focused on play safety and well-being, and our making efforts to assist our teams through terrible circumstances, including resources and support for our employees and broader humanitarian support to the KLA Foundation. We all hope for a peaceful solution soon.

Total capital returns over the past 12 months, a $2 4 billion.

In summary, KLA September quarter results demonstrate our continued process control leadership and the success of our portfolio strategy.

Consistent execution despite challenges in the marketplace highlights the resiliency of the KLA operating model driven by the dedication of our global teams now.

I'll now hand, it over to Brad to cover more details on our financial performance and our outlook.

Right.

Thank you Rick KLA delivered a strong September quarter, demonstrating consistent execution, despite a challenging marketplace.

Revenue was $2 4 billion non-GAAP diluted EPS was $5 74.

Rick Wallace: Moving on to our September quarter results which exceeded expectations. Specifically, revenue of $2.4 billion finished at the upper end of the guidance range. Gap EPS was $5.41 and non-gap EPS was $5.74, both also finishing at the upper end of the respective guidance ranges. These results were driven by the strength and relevance of KLA's process control portfolio. Additionally, focus execution enabled continues free cash flow generation and capital returns. We're proud of how the KLA teams continue to offer form in the marketplace and deliver on customer commitments.

GAAP diluted EPS was $5 41.

But all three coming in at the upper end of the guided ranges.

non-GAAP gross margin was 62, 4% 40 basis points above the guidance range due to benefits from a richer product mix and better service cost performance that model.

non-GAAP operating expenses were $534 million in line with guidance total non-GAAP operating expenses comprised.

$311 million of R&D and $223 million in SG&A.

non-GAAP operating margin was 42% non-GAAP other income and expense net was $47 million and the quarterly effective tax rate was 14%.

Rick Wallace: The overall business environment remains relatively stable for KLA. We continue to see strengths and markets served by legacy nodes, despite softness and memory and leading edge logic and boundary investments. As the industry continues to navigate the slowdown in the electronics markets, we're closely monitoring any adjusting results that affect our customers capacity. KLA continues to outperform the industry on a well-in-a-faces because customer investment, and R&D for technology advancement and transition has proven to be more resilient to market pressures.

The guided tax rate of 13, 5% non-GAAP EPS would've been <unk> <unk> higher or $5.77.

Quarterly non-GAAP net income was $786 million GAAP net income was $741 million cash flow from operations was $884 million and free cash flow was $816 million.

As a result free cash flow conversion was a strong 104% free cash flow margin was 34%.

Rick Wallace: If we look at some specific highlights in the quarter, revenue was driven by strength and legacy node investment globally and industry infrastructure investments. KLA's market leadership and product success and unparalleled labor, optical and macro inspection also demonstrates the powers of the KLA portfolio. Rapid growth of AI, those enabled KLA's differentiation and helps drive industry growth. KLA is a pioneer in adopting the AI to improve the performance of our systems and create differentiation.

Company had approximately 137 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.

Turning to the balance sheet KLA ended the quarter with $335 billion in total cash cash equivalents in marketable securities and principal outstanding of $5 95 billion and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three agencies.

Rick Wallace: And KLA has a long track record that will display people playing and physics-based algorithms and core technologies. As the cost of compute has declined, we are now able to deploy this capability more broadly across our product portfolio. Leveraging our AI expertise, KLA's inspection, metrology, and data analytics systems, help customers solve challenges associated with current process technologies, and critical industry inflections, including gate all around 3D memory, UV lampography, and advanced packaging.

KLA has an impressive history of consistent free cash flow generation high free cash flow conversion and strong free cash flow margins across all phases of the business cycle and economic conditions.

Over the last 12 months KLA has returned $2 $4 million to shareholders, including $1 7 billion in share repurchases and $726 million in dividends paid.

I also wanted to highlight that on September 5th KLA announced an increase in our quarterly dividend level to $1 45 per share from $1 30, the 14th consecutive annual dividend increase.

Rick Wallace: KLA's service business grew both sequentially and year-over-year, ending at $560 million in the September quarter. It remains on track, providing a limited percent year-over-year growth in 2023.

<unk>.

Consumption in 2006, KLA has grown our quarterly dividend level and approximately 15% compound annual growth rate.

Additionally, Amit <unk>, Kalia announced an incremental $2 billion share repurchase authorization.

Rick Wallace: Finally, the September quarter was another excellent period from the cash flow and capital turns perspective. Quarterly free cash flow was $816 million, which drove the last 12 months free cash flow up 3% year-over-year to $2.2 billion. Total capital returns over the past 12 months are $2.4 billion.

These capital return actions reflect confidence in our business model and growth strategy as we progress along the path to our 2026 financial targets moved.

Moving to our outlook as.

As we review the market and assess relative performance of our peers across the industry there.

We're adjusting our wafer fab equipment outlook for 2023 up to approximately $80 billion.

Rick Wallace: In summary, KLA's September quarter results demonstrated continued process control leadership and the success of our portfolio strategy.

Second a decline of approximately 16% from the 95 billion level in calendar 2022.

Brent Higgins: A consistent execution, despite challenges in the marketplace, highlights the resiliency of the KLA operating model driven by the dedication of the global teams. And now, candid over to Brent to cover more details on our financial performance and our outlook. Good. Thank you, Rick. KLA delivered a strong September quarter demonstrating consistent execution despite a challenging work. Remaining with $2.4 billion, Non-Gap Delugio DPS was $5.74, and Gap Delugio DPS was $5.41, with all three coming in at the upper end of the guided ranges.

While the timing of a meaningful resumption in WP investment growth remains unclear as most underlying end markets remained soft.

Continue to see Kla's overall demand stabilizing around current business models and we expect this demand profile to continue into the first half of calendar 2024.

<unk> primary value proposition is focused on enabling innovation through technology advancements and transitions, which our customers continue to prioritize across all business environments.

While capacity plans are often adjusted due to changing demand expectations technology roadmap investments are more resilient.

This adds additional confidence to our business expectations as customers align human spots with roadmap requirements.

Brent Higgins: Non-Gap risk margin was 62.4%, 40 basis points above the guidance range due to benefits from a richer product mix and better service cost performance than model. Non-Gap operating expenses were $534 million in line with guidance. Total non-Gap operating expenses comprised $311 million of R&D and $223 million in SG&A. Non-Gap operating margin was 40.2%, non-Gap other income and expense net was $47 million, and the quarterly affected tax rate was 14%. At the guided tax rate of 13.5%, non-Gap EPS would have been 3 cents higher or $5.77.

In this environment, we will continue to focus on meeting customer requirements, maintaining our high level of investment in R&D to advance our product roadmap.

Kla's market leadership, and delivering strong relative revenue growth and financial performance.

As for guidance our December quarter guidance is as follows total revenue is expected to be $2 45 billion, plus or minus a $125 million.

Foundry logic is forecasted to be approximately 68% and <unk>.

Do you expect it to be around 32% of semiconductor process control systems revenue to semiconductor customers.

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

Brent Higgins: Quarterly non-Gap net income was $786 million, Gap net income was $741 million, cash flow from operations was $884 million, and free cash flow was $816 million. As a result, free cash flow conversion was a strong 104% and free cash flow margin was 34%. Company had approximately $137 million diluted weighted average share of doubt standing 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.

The forecast non-GAAP gross margin to be 61, 5% plus or minus one percentage point as product mix expectations are modestly weaker versus the September quarter and service period cost benefit realized in the September quarter normalizes.

<unk> does this guidance calendar 2023 gross margins are expected to end up in the mid 61% range.

non-GAAP operating expenses are expected to be approximately $540 million.

Other modeling assumptions for the December quarter include non-GAAP, other income and expense net of approximately $45 million.

Brent Higgins: Turning to the balance sheet, KLA ended the quarter with $3.35 billion in total cash, cash equivalence and marketable securities. That principle outstanding of $5.95 billion and a flexible and interactive bond maturity profile supported by strong investment-grade ratings from all free agencies. KLA has an impressive history of consistent free cash flow generation, high free cash flow conversion, and strong free cash flow margins across all phases of the business cycle and economic conditions.

An effective tax rate of approximately 13, 5%.

Finally, GAAP diluted EPS is expected to be $5, 54, plus or minus 60.

And non-GAAP diluted EPS of $5 86, plus.

Brent Higgins: Over the last 12 months, KLA has returned 2.4 billion to shareholders, including 1.7 billion to share repurchases and 726 million in dividends paid.

Plus or minus 60 cents.

EPS guidance is based on a fully diluted share count of approximately 136 million shares.

Yeah.

In conclusion, we remain focused on driving differentiation through innovation as we execute our successful portfolio strategy that supports our customers' technology roadmaps.

The industry is correcting in calendar 2023, and sustainable demand recovery still remains unclear.

Brent Higgins: I also wanted to highlight that on September 5, KLA announced an increase in the quarterly dividend level to a $1.45 per share from $1.30. The 14th consecutive annual dividend increase. Since its inception in 2006, KLA has grown the quarterly dividend level in approximately 15% compound annual growth rate.

<unk> in our business to ensure that we deliver a differentiated product portfolio that meets our customer technology roadmap requirements and then we have the capacity to execute our business in line with our long term growth expectations.

But the KLA operating model guiding our best in class execution, we continue to implement our strategic objectives, which are geared to drive outperformance.

Brent Higgins: Additionally, on that date, KLA announced an incremental $2 billion share repurchase authorization. These capital return actions reflect confidence in our business model and growth strategies as we progress along the path to work 2026 financial targets. Moving to our outlook, as we review the market and assess relative performance of our peers across the industry, we are adjusting our wakeers at equipment outlook for 2023 up to approximately $80 billion, reflecting a decline of approximately 16% from the 95 billion level in calendar 2020.

Our focus on customer success, delivering innovative and differentiated solutions and operational excellence is what enables us to deliver industry, leading financial and free cash flow performance.

Return capital on a consistent basis.

We are confident in the process controls importance to enabling technology advancements bodes well for <unk> long term growth outlook, despite challenging near term demand trends.

KLA is well positioned to deliver strong near term relative financial performance driven by the better than market performance of our semiconductor process control and specialty semiconductor businesses and continued growth in service.

Brent Higgins: C2. While the timing of a meaningful resumption in WSE investment growth remains unclear, as most underlying end markets remain saw, we continue to see KLA's overall demand stabilizing around current business models, and we expect this demand profile to continue into the first half of calendar 2024. KLA's primary value proposition is focused on enabling innovation through technology advancements and transitions which our customers continue to prioritize across all business environments. While capacity plans are often adjusted due to changing demand expectations, technology roadmap investments are more resilient.

KLA is also uniquely exposed to wafer and radical infrastructure investments that are contributing to our relative outperformance in calendar 2023.

Our business continues to stabilize and the long term secular trends driving semiconductor industry demand and investment WSB remain intact and are compelling.

That concludes our prepared remarks, Kevin let's begin the Q&A.

Thanks, Brian Chelsea, if you could please provide the instructions to queue for Q&A and hope to get that.

Brent Higgins: This adds additional confidence to our business expectations as customers align ship and slots with roadmap requirements. In this environment, we will continue to focus on meeting customer requirements, maintaining our high levels investment in R&D to advance our product requirements, and KLA's market leadership in delivering strong relative revenue growth in natural requirements.

At this time, we would like to ask a question. Please press star one on your telephone keypad.

If you wish to remove yourself from the queue you may do so by pressing star Q.

We remind you to please on mute your line when introduced and good possible pick up your handset for optimal sound quality.

Brent Higgins: As for guidance, our December quarter guidance is installed. Total revenue is expected to be 2.45 billion plus or minus 125 million. Foundry logic is forecasted to be approximately 58%. And memory is expected to be around 32% of semiconductor, softest control systems revenue to semiconductor customers. Within memory, DRAM is expected to be about 85% of the second mix, and MAM is 15%. Before cast non-gatherous margin to be 61.5% plus or minus 1% at a point, this product makes expectations are modest and weaker versus the September quarter, and service period cost benefit realized in the September quarter normalizes.

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

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

Hello, Thanks for taking my question.

I wanted to revisit your suggestion that first half could be stable at this.

The December quarter levels.

Does it mean youre not expecting any change to your China shipment or if you could just kind of give us how are you thinking about the mix in different end markets and deals and then kind of part D of that is what assumption are you, making about the timing of a memory company.

Brent Higgins: Inclusive of this guidance, calendar 2023 growth margins are expected to end up in the mid 61% range. Non-gatherous margin expenses are expected to be approximately 540 million. Other model assumptions for the December quarter include non-gatherous income and expense net of approximately 45 million, and an effective tax rate of approximately 13.5%. Finally, gap distributed EPS expected to be $5.54 plus or minus 60 cents, and non-gatherous EPS of $5.86 plus or minus 60 cents. EPS guidance is based on a full limited share count of approximately 136 million shares.

Company is that still kind of second half <unk>.

<unk> and kind of be incremental to this kind of conceptual first.

Look.

Hello, Matt.

This brand. So we are I am not going to guide the first half of the year in terms of what regions or customers might be driving as we look at is the overall.

Sales funnel and look how we're sizing the factories are stabilization comment is that the total company level, we see the business roughly operating at about the guided levels here over the next over the.

Next few quarters, so we'll see how it plays out obviously.

Fluid and dynamic environment, I think we'll see the semi PC business be be very consistent with that we will see that.

Brent Higgins: In conclusion, we remain focused on driving differentiation through innovation as we execute our successful portfolio strategy that supports our customer's technology roadmaps. Whether the industry is correct eating calendar 2023 and sustainable demand recovery still remains unclear. We are citing our business to ensure that we deliver a differentiated product portfolio that meets our customer technology road map requirements, and then we have the capacity to execute our business in line with our long-term growth expectations.

The parts of EPC tend to be.

A little more capacity in shorter lead time type.

Businesses. So so we'll have to see how that plays through but as we aggregate and just as we look out trying to give you as much as we can into the first half we see the business bouncing along at roughly these levels.

And anything on the potential of the company in memory, but if let's say memory, where debate accompanying in Q1 Q2 Q3 is that visibility you wouldn't necessarily have or if I ask it in a different way what is kind of the difference between when you start to see it and benefactor of that.

Brent Higgins: But the KLA operating model guiding our best-in-class execution, we continue to implement our strategic objectives which are geared to drive out performance. Our focus on customer success, delivering innovative and differentiated solutions, and operational excellence is what enables us to deliver industry-leading financial and free cash flow performance, and return capital on a consistent basis. We are confident that process control is important to enabling technology advancements both well for KLA's long-term growth outlook despite challenging near-term demand trends.

To show up in your sales numbers.

So that could work here when we talk to customers and we have had several conversations with memory customers recently, they've all kind of echoed the same thing in terms of.

Historical lows right now in the market and.

Brent Higgins: KLA is well positioned to deliver strong near-term relative financial performance driven by the better-than-market performance of our semiconductor process, control, and specialty semiconductor businesses and continue growth and service. KLA is also uniquely exposed to wafer of radical infrastructure investments that are contributing to our relative out performance in calendar 2023. Our business continues to stabilize and the long-term secular trends driving semiconductors industry demand and investment in WFB remain intact in our compelling.

<unk> continue to be less than what they're hoping for all those stabilized. So we don't have any indication of any near term change in that and they will certainly let us know because we do have long lead items. So there are some products, where we're still shipping based on the fact that there are for R&D work, but.

In terms of capacity increases we have no indication of any near term changes.

Thank you.

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

Brent Higgins: That concludes our prepared remarks.

Kevin Kessel: Kevin, let's begin the Q&A. Thanks, Bren.

Good afternoon. Thanks for taking my question on your services business close to 25% of your sales will be driving high single digit percentage growth this year and Thats, where we are.

Chelsea: Chelsea, if you could please provide the instructions to Q for Q&A and co-pick it up. At this time, if you would like to ask a question, please press star one on your telephone keypad. If you wish to remove yourself from the Q, you may do so by pressing star Q.

Customer production activity at an all time low but in your shareholder letter you guys say that you expect growth in our services to accelerate to your target range of 12% to 14% next year I know you've got a weevil tools.

Chelsea: We remind you to please unmute your line when introduced and if possible, 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.

Systems coming off of warranty and onto contract. This will be a big driver, but what else are you guys, assuming along with strong growth outlook for next year and what are your assumptions for industry manufacturing utilization.

Vivek Arya: Our first question will come from Vivek Arya with Bank of America Security. Your line is open. Thanks for taking my question. I wanted to revisit your suggestion that first half could be stable at the December quarter levels. So does it mean you're not expecting any change to your China shipments or if you could just kind of give us how you are thinking about the mix in different N-markets and geos? And then part D of that is what is function are you making about the timing of memory recovery? Is that still kind of second half awaited and can it be incremented to this kind of conceptual first half outlook?

Yes Harlan.

There've been drivers are long term drivers around service growth that that are implicit in our.

In our modeling and our continuing right in terms of.

The level of utilization of the installed base customers using tools for longer periods of time and so on you did hit on the biggest driver in terms of our expectations for growth into next year is that we will have a number of tools that we shipped the 2021 and 2022, where we significantly outperformed the market those tools will become.

Off of warranty and moving into contract and our attach rate is pretty high. So it does give us some visibility into that service stream as you know.

Brent Higgins: Welcome, Vivek. It's brand so we are, I'm not going to guide the first half of the year in terms of what regions or customers might be driving. As we look at it, the overall sales funnel and look how we're sizing the factories, our stabilization comment is that the total company's level we see the business roughly operating at about the guided levels here over the next of the next few quarters. So we'll see how it plays out.

Our contract the percent of the total revenue and services is at over 75% and so that visibility allows us to not only be able to plan for it but also to optimize the cost structure.

Underneath that in terms of how we deliver to our customers.

Yes, one other thing Heartland is that as you know our services isn't dependent on consumables and so customers want to keep these tools up and going even when they have slower utilization in other parts of the fab, but then they definitely want to ramp up and as they're bringing on new nodes and starting to ramp new technology. So it's kind of a basketball world in this.

Brent Higgins: Obviously it's a fluid and dynamic environment. I think we'll see the semi-PC business be be very consistent with that. We'll see the parts of the DPC tend to be a little more capacity and shorter lead time type businesses. So we'll have to see how that plays through. But as we aggregate and just as we look out, trying to give you as much as we can into the first half, we see the business bouncing along at roughly these levels.

We don't slow down that much when it goes down, but then theyre going to want to ramp. This activity continues whether it's on new technology or beginning capacity ramps on new technology nodes.

The final thing I'll say about it as Rick talked about memory utilization, if you look in foundry.

Utilizations today, we are seeing some improving utilization the leading edge.

Brent Higgins: And anything on the potential recovery in memory, like if left in memory were to be recovering in Q1, Q2, Q3, is that visibility you would necessarily have or if I asked it in a different way, what is the difference between when you start to see it and when it actually starts to show up in your Back at Rick here, when we talk to customers and we have had several conversations with memory customers recently, they've all kind of echoed the same thing in terms of, you know, historical lows right now and market and utilization continue to be less than what they're hoping for all those stabilized, so we don't have any indication of any near term change in that and they will certainly let us know because we do have long lead items. So there's some products where there's we're still shipping based on the fact that they're for our D work, but in terms of capacity increases, we have no indication of any near term changes.

And the legacy utilization, depending on where you are adding out of the N minus one is a little bit softer.

More mature nodes its a little firmer, so utilization rates are stabilizing and increasing in certain parts of our business and so that's an indicator for us as we look forward into <unk>.

2024 in terms of additional growth for our search business.

Great Thats hugely insightful. Thank you Kevin.

The strong lineup going aggressive cadence of tech transitions, right, especially in foundry and logic.

That's obviously driving more views, we layer adoption rate, which is driving demand for both optical inspector is relatively inspection your entire portfolio of metrology products as well if we look into next year with more tech constructions.

Keith all around introduction of backside pod distribution Nextgen advanced packaging architecture is that wave of new tools systems adoptions to support this transition is that still in front of the KLA team are you actually starting to see quite a bit of that now.

Brent Higgins: Thank you.

Harlan Sur: Our next question will come from Harlan Sur with JP Morgan. Your line is open. Good afternoon. Thanks for taking my question on your services business, close to 25% of your sales will be driving high single digits percentage growth this year and that's with your customer production activity at an all time low, but in your shareholder letter, you guys say that you expect growth and services to accelerate to your target range of 12 to 14% next year.

Well so.

That's good insight Heartland I think theres two ways to think about it one is we're definitely seeing R&D.

R&D development around that and we have for some time.

But many customers have stalled their expansion of delayed and as you know there's been quite a law and especially the leading edge.

He is out there in terms of really much capex at all as it goes towards new technology expansion, but thats coming and when that comes.

Harlan Sur: I know you've got a wave of tools and systems coming off of warranty and onto contrast. This would be a big driver, but what else will you guys assuming on this strong growth outlook for next year and what are your assumptions for industry manufacturing utilization? Yeah, Harlan, so there've been drivers are long term drivers around service growth that are implicit in our modeling and are continuing in terms of the level of utilization of the install base customer choosing tools for longer periods of time and so on.

Can map out layer counts, we know we have a pretty good sense of deployment once it goes on the run card for these ramping up there and.

And it's both on films that covers both metrology, but also it covers <unk>.

And so I'd say, it's in front of us as we get it.

Calendar 'twenty four and beyond.

Thank you.

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

Harlan Sur: You did hit on on the biggest driver in terms of our expectations for growth into next year is that we will have a number of tools that we shipped in 2021 and 2022 will significantly outperform the market. Those tools will be coming off of warranty and moving into contract and our catch rate is pretty high. So it does give us some visibility into that service frame. As you know, our contract percent of the total revenue service is over 75%.

Yes, thanks for taking the question.

First of all Brandon.

Brandon I know it will come out in the Q, but can you help us with the RVO, where that was exiting the quarter.

It came down a little over 500 million quarter to quarter. So youll get the specifics in the 10-Q, which we'll be filing here in the next few days, but somewhere just north of $500 million, so still feel pretty pretty high levels.

Harlan Sur: And so that visibility allows us to not only be able to plan for but also to optimize the cost structure that's underneath in terms of how we deliver to our customers. Yeah, one other thing, Harlan, is that as you know, our services isn't dependent on consumables. And so customers want to keep these tools up and going even when they have slower utilization, other parts of the app, but then they definitely want to ramp them as they're bringing on new nodes and starting to ramp new technology.

With a $10 billion overall, but it did come down a little bit quarter to quarter.

Okay. That's helpful. And then just in that context, how do we think about the optical inspection lead times I think you mentioned that the demand remains stronger than than supply your ability to supply. The how do we think about that looking into.

In the first half of 'twenty four we expect that Youll start to see maybe some that alleviate.

And the first part of next year as we get into more demand into the second half.

Harlan Sur: So it's kind of a vast world in the sense that we don't slow down that much when it goes down, but then they're going to want to ramp this activity continues whether it's on new technology or beginning capacity or apps on new technology. I think the final thing I'll say about it is Rick talked about memory utilization. If you look in foundry. We are seeing some improving utilization, the leading edge and the legacy utilization that depending on where you're adding kind of the N minus one is a little bit softer, more mature, those it's a little firmer.

Because we've got some new supply coming on related to some extremely long lead time parts I would expect that we will.

Shipped more than 24 than we have in 'twenty three and so we still have a fair a fair amount of imbalance here between where customer demand is and our ability to supply, but there is some catch up that's happening there, but those lead times are still pretty long the rest of the company and somewhere around various across <unk>.

Products more capacity centric products lead times are very normal today and around some of these.

The unique products that are critical in terms of.

Harlan Sur: So utilization rates are are stabilizing and increasing in certain parts of our business. And so that's an indicator for us as we look forward into 2024 in terms of additional growth. No, great. That's a huge insight.

Industry requirements.

Those are still a little bit longer.

Got it thank you.

Yes.

Thank you.

Our next question will come from Chris <unk> with Wolfe Research. Your line is open.

Harlan Sur: Well, thank you. Given the strong line-up and aggressive cadence of tech and transitions, right, especially in phology and logic, and you know, that's obviously driving more easy layer adoption, right, which is guiding demands for both the optical inspectors, radical inspection, your entire portfolio, metrology products as well. If you're looking to next year with more tech instructions to get all around, introduction of backside part distribution, next-gen events, packaging architectures, is that wave of new tools, systems, adoptions to support these transitions?

Yes. Thank you good evening I Wonder if you could speak a bit about the China business right now a little more color on the strength that youre seeing.

And it would be obviously <unk> heard this from your peers as well and I think the investor questions right now are about.

Staying ability of the China revenue at these areas I was wondering if you could address that.

Yes, absolutely.

So a couple thoughts for KLA in particular relative to China.

Because of the actions that were taken.

Harlan Sur: Is that still in front of the KLA team or are you actually starting to see quite a bit of that now? Well, so it's good insight, Harlan. I think there's two ways to think about it. One is we're definitely seeing R&D development around that, and we have for some time. But many customers have solved their expansion and delayed, and as you know, there's been quite a while, especially the leading edge companies out there in terms of really much cat-backs of all as it goes toward new technology expansion, but that's coming.

Most of the investment nearly all of the investment that all of that we're exposed to is on legacy nodes and there is both.

Mostly that's to support the industries that are in China, where they want to self sufficiency.

As EV.

And you have a lot of projects going on that require <unk>.

Greenfield. So you have a fair amount of inspection measurement across the board, but beyond that there is infrastructure investment also going on in China relative to the legacy nodes, both mass shop and also wafer manufacturing.

Harlan Sur: And when that comes, we can map out layer accounts. We know we have pretty good sense of deployment once it goes on the run card for these ramping up new nodes, and it's posed on films that it covers both metrology, but also it covers inspection.

Those projects I think are.

<unk> going to continue for some period of time. So what we don't see is any I think the leading edge stuff has already been taken out.

Stopped at and of course for a lot of reasons, but the legacy continues and it's pretty broad based.

Harlan Sur: And so I'd say it's in front of us as we get it to calendar 24 and beyond. Thank you.

And.

We don't believe that's going to change in terms of.

The size or intent of those and those are things that are projects that are various stages as they continue to build so we feel pretty good about the sustainability of the business as we see it right now in China, and Bryan can give more specifics in the near term and in the September quarter. We saw the level is is more elevated then.

Joe Quatrochi: Our next question will come from Joe Kutrachi with Wells Fargo. Your line is open. Yeah, thanks for taking the question. First of all, I know it will come out on the queue, but can you help us with the RCO where that was exiting the border? I came down a little over 500 million quarter to quarter. So you'll get the specifics in the 10Q, which will be filing here the next few days, but somewhere just just north of 500 million. So still pretty high levels, north of 10 billion overall, but did come down a little bit quarter quarter.

What I would call a run rate.

As we have other customers that were moving around in terms of deliveries and so we were able to.

So we backfill that with some of this is.

As demand in China. So it did it did push up a little bit I would expect it would drop somewhat in Q4, but certainly remain at elevated levels.

Brent Higgins: Okay, that's helpful. And then just in that kind of context, I don't think about the optical inspection lead times. And as you mentioned in the demand remains stronger than then supply your ability to supply the, how do we think about that looking into, you know, the first half of 24 do you expect that you'll start to see maybe some that alleviate, you know, in the first part of next year as we get into more demand into the second half?

It's certainly something to have strengthened over the course of the year consistent with Rick's commentary. So as we look at next year, we've got meaningful backlog with.

With these customers I have got.

In excess of $800 million in deposits for shipments for these customers. So I would expect that we will see some sustainability of that demand as we move into next year.

Brent Higgins: Because we've got some new supply coming on related to some extremely long lead time parts that would expect it will, will ship more in 24 than we have in 23. And so we still have a fair amount of imbalance here between where our customer demand is and our ability to supply, but, but there is some catch up that's happening there, but those lead times are still pretty long. The rest of the company somewhere around, you know, very across different products, more capacity, centric products, lead times are very normal today and around some of these, you need products that are critical in terms of industry requirements. Those are still a little bit longer.

And.

I think it's really across the segments.

That Rick talked about so as I think about growth into next year in that part of the business I think it from a baseline point of view, we see it as more or less flat.

Brent Higgins: Got it. Thank you.

Greenfield projects as you have construction dynamics that are influencing.

Some timing issues, but in general I would expect it to continue.

More or less at that level over a broader period of time a lot of these orders we booked over the last couple of years and frankly in the expansion periods of 'twenty, one and 'twenty, two or more strategic larger customers consume the bulk of our slots. So as we've seen some slowdown.

Over the course of 2023 Thats created the slot availability for for these shipments and.

Chris Caso: Our next question will come from Chris Caso with Wolf Research. Your line is open. Yes, thank you. Good evening. I wanted to think a bit about the China business right now. A little more color on the strength that you're seeing. And, you know, it would be obviously heard this from your peers as well. And I think, you know, the investor questions right now are about, you know, the sustainability of the China revenue at these areas.

And these customers are performing in line with the commitments that they make.

Chris Caso: I wonder if you could address that. Yeah, absolutely. So a couple of thoughts for KLA in particular relative to China. Because of the actions that were taken, most of the investment, nearly all of the investment that all of that we're exposed to is on legacy notes. And there's both mostly that's to support the industries that are in China where they want self-sufficiency, such as EV. And, you know, you have a lot of projects going on that require basically greenfield.

That's very helpful. Thank you.

As a follow on to some of the other things you said with.

As you are starting to fill some of those orders for say some of those Chinese customers that.

Sure.

You weren't able to fill because of just some of the shortages before.

What effect has that had on the backlog and is your backlog visibility going out in time about the same as it was last quarter quarter before or is that backlog visibility starting to shrink as you catch up on some of those orders that you weren't able to fulfill before.

Chris Caso: So you have a fair amount of inspection measurement across the work. But beyond that, there's infrastructure, investment also going on in China relative to the legacy nodes, both now shop and also wait for manufacturing. Those projects, I think, are going to continue for some period of time. So what we don't see is any, I think, the leaning at stuff has already been taken out. And they've stopped that. And of course, you know, for a lot of reasons.

I would say.

New business coming into backlog that it's not changing all that much.

Alright, so about the same.

So I'd say its about the same visibility pretty consistent like I said construction issues to be probably the bigger factor.

Whether projects pushing out a lot of cases. These are new customers that are getting established so.

Necessarily exposed to some of.

The economic sort of supply demand drivers that would affect more established customers.

Now there are those kinds of customers also and we're seeing normal behavior from them in terms of how they are balancing their capacity given their customer demand.

Chris Caso: But the legacy continues. And it's pretty broad-based. And we don't believe that's going to change in terms of the size or intent of those. And those are things that are projects that are various stages as they continue to build. So we feel pretty good about the sustainability of the business as we see it right now in China. Brad can get more specifics. In the near term, in the September quarter, we saw the level as more elevated than what I call a run rate.

Thank you.

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

Hi, Thank you for taking my questions.

And in the past you have talked about the China domestic spending as one code.

Maybe make those one third.

Kind of mature foundries and one third of the new entrants into the market.

My question is like you're talking about China to drop somewhat in Q4.

Chris Caso: As we had other customers that were moving around in terms of deliveries. And so we were able to, so we backfilled that with some of this demand in China. So it did push up a little bit. I would expect it would drop somewhat in Q4, but certainly remain at elevated levels. And it's certainly something to strengthen over the course of the year consistent with Rick's commentary. So as we look at next year, we've got meaningful backlog with these customers.

Which segment of the China market are you seeing the drop off in Q4.

Yes.

I don't have that detail here.

There's another piece of that that's also related to the infrastructure investment that Rick talked about wafer infrastructure reticle infrastructure. So there is there's also a component of investment that's happening there.

We guided the company level customer specific activity I'm not going to get into that.

Chris Caso: I've got an excess of 800 million deposits for these customers. So I would expect that we'll see some sustainability of that demand as we move into next year. And I think it's really across the segments that Rick talked about. So as I think about growth into next year and that part of the business, I think it's from a baseline point of view. You see this is more or less flat. You have green field projects as you have construction dynamics that are influencing some timing issues.

Got it and then Rick.

Question Gate all around historically, you guys have benefited.

When they are trying to sort of move to Finfet architecture, and as we start to see initial orders on data all around for some of the deposition company can you talk about what that data around opportunity means for both inspection and metrology.

Ali.

Yes, great question it means.

Couple of things one obviously Gail around has been in development for a while so we had a head start in terms of some of the architectures that we need to modify the supported specifically.

Chris Caso: But in general, I would expect it to continue more or less at that level over a broader period of time. A lot of these orders we booked over the last couple of years. And frankly, in the expansion periods of 21 and 22 are more strategic and larger customers consumed the bulk of our slots. So as we've seen some slowdown over the course of 2023, that's created a lot of availability for these shipments and these customers are performing in line with the commitments that they make.

Leveraging gen four technology instead.

Instead of Gen five because of the nature of the contrast ability of Gen. Four to see the defects that are relevant to our gate all around architecture, we've made that.

Those investments in those results and that's been one where we've leveraged existing technology, but also leverage the work we talked about with AI.

To provide capabilities. So we're well prepared for that when it comes to the inspection challenges associated metrology big opportunities there because youre looking both for <unk>.

Chris Caso: Thank you. It's very helpful. Thank you. Just as a follow on, you know, some of the other things you said with as you're starting to fill some of those orders, for say, some of those Chinese customers that were you weren't able to fill because of the some of the shortages before. What has the fact has that had on the backlog and is your backlog visibility going out in time, you know, about the same as it was.

Increased level of precision when it comes to the actual measurement larger sample size because of the concerns about consistency across the waivers and across wafer to wafer and also some of the specifics around the high K metal gate control.

<unk> four so more.

More capability again, we had a head start because as you know that technology has been in development. So we work with development partners on that so well positioned to be able to support that as it as it expands so it's going to help both process control intensity when it comes to both inspection and metrology and we're well positioned to support our customers to do that.

Chris Caso: Last quarter quarter before or is that backlog visibility starting to shrink as you catch up on some of those orders that you weren't able to fill before. I would say with with new business coming into backlog that it's not changing all that much. Right. So about the same. So I say it's about saying visibility is pretty consistent. Like I said, construction issues to be probably the bigger factor of whether projects with pushing on a lot of cases.

Thank you.

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

Great. Thank you I wanted to ask about the DRAM strength that you guys are seeing it seems like that was the main source of revenue upside in the quarter and then it looks to be based on your comments down slightly in the next quarter in calendar Q4, how much of that strength is coming from shipping to the DRAM customers in China as you alluded to in the past.

Chris Caso: These are our new customers that are getting established. And so aren't necessarily exposed to some of the economic sort of supply demand drivers that would affect more established customers. Now there are those kinds of customers also. And we're seeing normal behavior from them in terms of how they're balancing their capacity given their their customer. Thank you.

How much of that is tied to advanced DRAM technology high bandwidth memory went on.

When you look at Q4.

Out of that segment is going to come down.

Yes, so when I look at the details certainly the shipments into China, which were expected were a.

Rick Wallace: Our next question will come from a team may look with city. Your line is open. Hi, thank you for taking my questions. Bren, in the past, you have talked about the China domestic spending as one third memory makers, one third kind of mature found Greece and one third. I think you went into the market and my question is like, you talk about China to drop some work in Q4, which segment of the China market you're seeing the drop off in Q4.

A driver from from the baseline.

As I look at the December quarter.

Ram I think youll see a little bit of a mix across customers, but I don't think the number really the absolute number or does it really come down all that much.

So.

Yeah. Most of the investment is in that area or it's in the area that you alluded to Frank in terms of support and some of the demand that's out there, but but and then you've got just general R&D investment that's happening so it's at a pretty low level overall.

Rick Wallace: Yeah, I don't have that detail here. Either there's another piece of that that's also related to the infrastructure investment that Rick talked about, the way for infrastructure and radical infrastructure. So there's also a component of investments that's happening there. I know I'm not, you know, we guide at the company level customer specific activity. I'm not going to get into that. And then Rick, I have a question on data all around historically.

And the bulk of it coming from some catch up related to the China customers.

One other area, we are seeing some when it comes to the inner poser in terms of packaging related basically app. So that is also a driver.

Smaller at this point, but the growth projections are good remember as DRAM is going to leverage.

As you know.

Rick Wallace: You guys have benefited when the transistor moved to fit that architecture. And as we start to see initial orders on data all around for some of the deposition companies. Can you talk about what that data around opportunity means for both infection and metrology for KLA? Yes, great question. It means a couple of things. One, obviously GAL around has been in development for a while. So we had a head start in terms of some of the architectures that we need to modify to support it.

The investment resumes that's going to be.

Great opportunity for us to continue to penetrate when it comes to the R&D, but that's not what's driving it right now.

Okay, Great and maybe a follow up from me.

Look at the SPC systems revenue it looks like it's going to be down 5% to 7% in calendar 'twenty three.

I think a quarter ago that number was like down 10% to 12% can you talk about what has changed is it just that the <unk> market has improved somewhat.

KLA specific reasons that you would point out but more importantly, how do you think that the outperformance will do next year considering some of the areas that you are strong in this year may see some moderation. Thanks.

Rick Wallace: Specifically, we are leveraging Gen 4 technology instead of Gen 5 because of the nature of the contrast ability of Gen 4 to see the defects that are relevant to a GAL around architecture. We've made that, made those investments as you know, as a result. And that's been one where we've leveraged existing technology but also leveraged the work we talked about with AI to provide capability. So we're well prepared for that when it comes to the inspection challenges associated.

I'm, sorry for ABC or was that was <unk>.

Okay got it.

But we had some strength we continue to have strength kind of the same things we talked about strength in optical.

I think the process control intensity hasn't slowed across our customers and we continue to see.

Rick Wallace: Patrology being opportunities there because you're looking both for increased level of precision when it comes to the actual measurements. Larger sample size because of the concerns about consistency across the waivers and across wafer wafer. And also some of the specifics around the high k metal gate control that people are looking for. So more capability, again, we had a head start because, as you know, that technology has been in development. So we work with development partners on that to a well position to be able to support that as it expands. So it's going to help both process control intensity when it comes to both inspection and with metrology and we're well positioned to support our customers to do that.

Wafer being strong we talked about macro being strong so really it's really across the portfolio of bleeding edge. The thing that's fallen off the most when it comes to capacity has been the product areas that are most linked to wafer starts and those would be things like overlay and films, but when it comes to the technology inspection.

Rick Wallace: Thank you.

Continued strength, there and I think the infrastructure.

It's a the business as well we've seen that hold up fairly well both in China as we talked about in terms of doing mature.

Building capability to not only provide wafers, but also to do mature radical critical sets for for all the design activity. That's happening so you've got that but then on the wafer side. You also have investments that are happening globally as those customers prepare for not only as capacity comes on fairly slowly in that in that industry.

Sydney Ho: Our next question will come from Sydney Ho with Deutsche Bank. Melana's open. Great. Thank you. I want to ask about the DRAM strength that you guys are seeing. It seems like that was the main source of revenue upside in the quarter. And it looks to be based on your comments down slightly in the next quarter in calendar queue for how much of that strength is coming from shipping to the DRAM customers in China that you alluded to.

Sydney Ho: In the past, and how much of that is tied to advanced DRAM technology, high bandwidth memory, whatnot. And when you look at you for which part of that segment is going to come down? Yeah, so when I look at the details, certainly the shipment into China, which were expected were a driver from the baseline. As I look at the December quarter right in DRAM, I think you'll see a little bit of a mix across customers, but I don't think the number really, the absolute number doesn't really come down all that much.

Ari.

<unk> four.

The resumption of demand that we're expecting here.

In the near future, but also.

Different strategies around inventory stocking or wafer to wafer bonding.

Other other demand for for wafer. So that's also been a driver that we've seen hold together fairly well as we move through this year process control intensity is tell me and I have been pretty pretty open with it over the course of the last year that despite some catch up that might happen with appears related too.

Challenges in 'twenty, two with supply we felt pretty good about our positioning and our exposure to some of the fastest growing markets overall the mix of business, that's more logic foundry centric.

This infrastructure exposure that.

That I referred to.

Sydney Ho: So most of the investment is in that area or it's in the area that you alluded to, right? In terms of supporting some of the AI demand that's out there, but and then many bit just general R and D investment that's happening. So it's at a pretty low level overall and in the bulk of the coming from some catch up related to the China customer. Well, one other area, we are seeing some when it comes to the inter-poser in terms of packaging related to HDM.

Thank you.

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

Yes, hi, Thanks for taking my question, a recurrent dreams kind of curious.

Mentioned like the demand profile stays in the first half of next year.

But some of your peers have called this out into 'twenty, one like a transition year and how do I Oh.

Obviously, the fact that many could rebound in the back half of next year.

Sydney Ho: So that is also a driver smaller at this point, but the growth projections are good. Remember as D-RAM is going to leverage EUV as the investment resumes, that's going to be a great opportunity for us to continue to penetrate when it comes to the R&D, but that's not what's driving it right now. Okay, great. And maybe a follow-up for me, if you look at the SPC systems revenue, it looks like it's going to be down five to seven percent in calendar 23.

How to think about either industry W. E. R. Kelly revenue profile next year.

So I'll take part a and Brian can answer we don't know what 'twenty, one is going to look like.

We just don't know and we know what our customers are saying right now.

But.

They don't really know yet either so we're talking about a sustained level of business kind of being similar to what it is right now until we have a reason to believe it's going to go up customers talk about things improving we have meetings when they talk about it yet.

Sydney Ho: I think a quarter ago that number was like down 10 to 12 percent. Can you talk about what has changed? Is it just that the WFU market has improved somewhat? Oh, are there other KLA-sensitive reasons that you will point out? But more importantly, how do you think that's how performance will do next year considering some of the areas that you are strong in this year may see some moderation? Thanks. I'm sorry, for EBC or would that be SPC?

Asking us to get ready, but until we actually see it happening we don't really know so it's very hard to talk about the levels, but we do know as you have historically low levels of investments happening right now in memory.

And we see the same things you do in terms of pricing.

And then we're well positioned for ramping when it does ramp. We also know we have some very good indications on some of our long term product.

Sydney Ho: Yes, that's SPC. Oh, okay, got it. Look, we have some strength. You know, we continue to have strength. It's kind of the same thing since we talked about strength and optical. I think the process control intensity hasn't slowed across our customers and we continue to see way for being strong. We talked about macro being strong. So really, it's really across the portfolio of leading edge. The thing that's fallen off the most when it comes to capacity has been the product areas that are most linked to waiver starts and those to be things like overlay and films.

Our products that have long lead times.

But as Brent said like.

Optical inspection, we're capacity constrained not demand constrained numbers. So that's kind of how we're looking at it we don't really have any unique visibility into 24 then.

Then those general trends and the fact that utilization seems to have stabilized in this increasing on some of our market segments, but not much visibility beyond that.

Sydney Ho: But when it comes to the technology inspection, continue to strengthen there. Yeah, and I think that the infrastructure parts of the business as well, we've seen that hold up fairly well both in China as we talked about in terms of doing mature building capability to knowledge of my waivers, but also to do mature, radical, radical sense for all the design activity that is happening. So you got that, but then on the waiver side, you also have investments that are happening globally as those customers prepare for not only as capacity comes on fairly slowly in that in that industry preparing for the resumption of demand that we're expecting here in their future.

Yes look I made a comment about utilization rates and I think thats encouraging in terms of the stabilizing environment.

We're we're articulating here, that's certainly a factor and of course, we watch our customers.

Is this model with their profitability their cash flows.

That will okay, youre seeing the industry.

Digest the capacity that was added and then and then get sort of healthy again as the pricing and all of those things improve but then what are the catalysts that are going to drive growth into next year.

Near term as we said in the prepared comments.

We see roughly this level of business as we move through the first half of the year one of the things that we really focus on is we've got to make sure that we're flexible enough to be able to respond and so we've made a lot of investments over the last few years in our supply chain and our own capacity to make sure that we have the flexibility to respond because I would expect that.

That we could get surprised we usually do and so we wanted to make sure that we're in a position that we're not we're.

Sydney Ho: But also different strategies around inventory stocking or wafer to wafer bonding, other demand for wafer. So that's also been a driver that we've seen hold together fairly well as we move through this year process control intensity is telling again, I've been pretty pretty open with it over the course of the last year that despite some catch up that might happen with appears related to. Thank you.

We're not constrained in our ability to supply and meet that when it happens so that's our focus.

I think.

The color we provided in terms of how to think about the company and how we're sizing the company in the near term.

As reflected in all of that.

Got it got it thanks for that we can bring and then a quick follow up.

Is it fair to assume the reason and export control.

Road.

No material impact to your outlook.

And so we're looking at that and working our way through it it's quite complex.

Preliminary estimates based on the I'll call. It the baseline that was established in October of last year.

Krish Sankar: Our next question will come from Krish Sankar with TD Cowan. Your line is open. Yeah, I think you're making my question. A little bit curious. You mentioned like the demand to find space in the process of next year. Some of your peers have called talent for like a transition year. And now, how do I all the way the fact that memory could rebound in back half of next year. How to think about even in the CWC or KLA revenue profile next year? A lot of things part of the burden can be answered.

Right now, we don't see any real material change to our to our business expectations related to those regulations.

But we're working our way through it it's complex.

Next we'll have Timothy arcuri with UBS. Your line is open.

Thanks, a lot Brent.

Everyone's asking about 2020 for Wi Fi, but I guess I'm still a little confused as to what the right baseline is for this year.

Because pretty much everyone is now guided for Q4, so if I take U plus applied plus Lam, yes, it's down 13%. So that would mean that your $80 billion number might be in the ballpark off of that mid Ninety's last year, but if I include ASML, it's like flat I mean, even if you exclude the fast shipments it's barely down.

Rick Wallace: We don't know what 24 is going to look like. We just don't know. And we know what our customers are saying right now. But they don't really know yet either. So we're talking about a sustained level of business kind of being similar to what it is right now. Until we have a reason to believe it's going to go up. Customers talk about things improving. We have meetings and they talk about, you know, asking us to get ready. But until we actually see it happening, we don't really know. So it's very hard to talk about the levels.

So.

How is that basically down this year I guess I'm just trying to get some understanding of like how you get to that $80 billion number is it excluding ASML somehow thanks.

Yeah, Tim we're not experts on this what we do is we take a look at what we.

We look at the universe of peer companies and how they report we look at what our customers say, we have some modeling that we do and we come up with.

Rick Wallace: What we do know is you have historically low levels of investment company right now in memory. And we see the same things you do in terms of pricing. And then we're well positioned for ramping when it does ramp. We also know we have some very good indications on some of our long term products that you know our products that have long lead times. But as Brent said, like an optical inspection or capacity constraint, not the man can turn on those. So that's kind of how we're looking at it.

An estimate for that so this year is a little hard because of fashion and I don't even really understand all the nuances in that and Thats, what you guys do to figure out.

But also some of the issues that affected some of the other providers in late 'twenty two in terms of their ability or inability to deliver in 'twenty, two and how that shows up in 'twenty three but when we look at how we're performing overall, we think that.

Rick Wallace: We don't really have any unique visibility into 24. Then then those general trends and the fact that utilization seems to have stabilized in this increasing on some of our market segments, but not much visibility. Yeah, look, I need to comment about utilization rates. And I think that's encouraging in terms of the stabilized environment that that we're articulating here. That certainly is back there. Well, of course, we watch our customers business models, their profitability, their cash flows that will, okay, you're seeing the industry digest the capacity that was added and then and then get sort of healthy again and see pricing and all the things that prove.

In and around that level.

Certainly the fact that that we're down given our our belief about our market position and if you look at semi PC based on the guidance, we provided being somewhere around down we'll call it 9%, 10% somewhere in that ballpark.

It doesn't feel flat to me.

Okay, Alright, and then I guess my second question is on <unk>.

Inventory is now up to almost 300 days, it's up like $500 million over the past six months, but we're not really sure when WSI picks up inside of it.

Yes.

Outside of next year I get that you still have this huge $10 $8 billion worth of Po that youre kind of working off but why is this stuff parks so far out in the future as it is.

Rick Wallace: But then, you know, one of the catalysts that are going to drive growth next year, you know, in our near terms, we said in the prepared comments. We see roughly, you know, this level of business as we move through the first half of the year, one of the things that we really focus on is we've got to make sure that we're flexible enough to be able to respond. And so we've made a lot of investments over the last few years in our supply chain in our own capacity to make sure that we have the flexibility to respond because I would expect that we could get surprised.

And if so why why why hold the inventory now what's the bottleneck because there is something on your side still that's a bottleneck or is it more that the orders have been placed and maybe waiting for the fab to be ready to take the equipment and that that's why you're building up the inventory I guess I'm just not sure why you would build the inventory. If this stuff is still parks so far out in the future. Thanks.

Rick Wallace: We usually do. And so we want to make sure that we're in a position that we're not, we're not constrained in our ability to supply and meet that when it happens. So that's our focus. And I think the color we provided in terms of how to think about the company and how we're sizing the company in the near term is reflected in.

Yes, Tim it's a great question, it's a little bit up.

The tradeoff that we make and I spent a lot of time talking about how we were able to outperform the industry for a couple of years in a row in terms of some of the supply chain challenges that others are facing that we werent part of it has to do with how we.

<unk> our suppliers when you have a lot of long lead time parts.

Brent Higgins: Karin, Carter, thanks for the weekend, Bren, and then we could follow up. Is this hit or seemed to be an export control road that has no material impact to your outlet? So we're looking at that and working our way through it, it's quite complex, but preliminary estimates based on the alcoholism, but they find it was established in October of last year. Right now, we don't see any real material change to our, to our business expectations related to those new regulations, but we're working our way through it, it's complex.

And so if you could just go back to we'll call. It 15 months ago, we thought 2023, there's going to be a growth year on top of what we thought was going to be 100 billion year.

Ear in 2022.

So we have made commitments, we're putting commitments out longer to get our suppliers to invest invested in them in terms of.

Partnering on their capacity expansions, we manager so I played those commitments to suppliers.

We've been able to manage what we can but a lot of cases, we honor our commitments and we feel that in the long run we're in a good position in terms of the longevity of our platforms and where we expect demand to come from that will consume those parts. So some of it is what you're optimizing for in terms of our differentiation in terms of how we work with.

Timothy Arcuri: Next, we'll have Timothy Arcuri with the UBS, your line is open. Thanks a lot. Bren, everyone's asking about 2024, WFE, but I guess I'm still a little confused as to what the right baseline is for this year, because pretty much everyone is now guided for Q4, so if I take U plus applied plus lamb, yeah, it's down 13%, so that would mean that your $80 billion dollar number might be in the ballpark off of that mid-90s last year, but if I include ASML, it's like flat, I mean, even if you exclude the fast shipments, it's barely down.

Supply chain and we're accepting that we're going to be pretty good customers. We're going to we're going to have lived up to our commitments and take the parts that we've committed to so we feel pretty good in the long run about our positioning in terms of our ability to to grow when we see a reacceleration from the industry and the other issue is it is that our service business continues to grow.

All right. It grows every year.

And that growth drives.

Fair amount of demand.

Timothy Arcuri: So how is WFE down this year? I guess I'm just trying to get some understanding of how you get to that $80 billion number, is it excluding ASML somehow? Thanks. Yeah, Sam, we're not experts on this. What we do is we take a look at what we look at the universe of peer companies and how they report. We look at what our customers say, we have some modeling that we do, and we come up with an estimate for that.

Service, it's a high complexity high.

Mix low volume business and because of the customization of the parts we tend to have to do.

And the wife buys and have to buy a lot of parts to support that business. When you look at our margin profile overall for the company.

Feel like the tradeoffs that we're making are appropriate and.

We think it plays a big role in our in.

Timothy Arcuri: So this here's a little hard because of the fast shipments, and I don't even really understand all the nuances in that, and that's what you guys did to figure out, but also some of the issues that affected some of the other providers in late 22 in terms of their ability or inability to deliver in 22 and how that shows up in 23. But when we look at how we're performing overall, we think that it's in and around that level.

And our relative success.

Thank you.

Our next question will come from Charles <unk> with Needham Your line is open.

Hi, Thanks for taking my question.

This morning I think.

One of your smaller peers.

<unk> talked about seeing some weakening.

Timothy Arcuri: Certainly the fact that we're down, given our belief about our market position, and if you look at semi-PC based on the guidance we provided being somewhere around down, we'll call it 9%, 10% somewhere in that ballpark, it doesn't feel flat to me.

Mature foundry logic side, the copy that fee.

I'm wondering if you're seeing something similar.

To grow our process control business or the EPC business.

If not why is that.

Second question. Thank you.

Not really look you were watching for certain parts of all.

Timothy Arcuri: Okay, bye, Brent.

Brent Higgins: And then I guess my second question is on inventory. It's now up to almost 300 days. It's up like 500 million over the past six months, but we're not really sure when WSE picks up the inside of next year. I get that you still have this huge $10.8 billion with the PO that you're kind of working off. But why is this stuff parked so far out in the future? Is it, and if so, why hold the inventory now?

Called non China legacy exposure to automotive industrial some of those markets to see if that has an effect on <unk>.

Customer customer demand, but right now our expectations around legacy in the near term it's been fairly consistent.

Got it so Brian maybe a question on Opex.

Both of your peers.

Brent Higgins: What's the bottleneck? Is there something on your side still that's a bottleneck, or is it more that the orders have been placed and maybe waiting for the fab to be ready to take the equipment, and that's why you're building up the inventory? I guess I'm just not sure why you would build the inventory if this stuff is still parked so far out in the future. Thanks. Yeah, Sam, it is a great question.

The area there, yes, they are raising their opex for basically the next calendar year.

How should we think about opex going into next year.

You talked about Youre expecting revenue to be run rating at the current level.

Should we be thinking opex kind of flat until you see the uptick in the revenue.

Brent Higgins: It's a little bit of the trade off that we make, and I spent a lot of time talking about how we were able to outperform the industry for a couple of years in a row in terms of some of the supply chain challenges that others were facing that we weren't. Part of it has to do with how we manage our suppliers. We do have a lot of long lead time parts, and so if you just go back to, we'll call it 15 months ago, we thought 2023 was going to be a growth year on top of what we thought was going to be $100 billion a year in 2022.

How many people you bring you raised the opex. Thanks.

Well run rating at the current level does give you a little bit of growth into next year and as I said, we would expect to see growth in service actually think EQT probably add some.

Modest improvement off of a pretty pretty depressed levels, our incremental operating margin model drives how we're running the business in terms of expectations for leverage on incremental revenue. So I would expect to see a modest uptick in opex.

Brent Higgins: So, we had made commitments. We were putting commitments out longer to get our suppliers to invest. We invested in them in terms of partnering on their capacity expansions. We manage, so I think when I went to those commitments with suppliers, we've been able to manage what we can, but in a lot of cases, we on our commitments. We feel that in the long run, we're going to, in a good position in terms of the longevity of our platforms, and where we expect demand to come from, that will consume those parts.

We're also balancing sort of near term in terms of.

How we're sizing for the current environment, but also our long term investment.

Our requirements, given our market position and our desire to go to market with the portfolio that we think is a competitive advantage for KLA does drive.

Some some requirements for investment.

And we will do that.

Independent of topline when appropriate, but as we're looking out going forward I would say that we'll probably see opex ticked up a little bit as we move through 'twenty, four but not not not a big change.

Brent Higgins: So, some of it is what you're optimizing for in terms of our differentiation, in terms of how we work with our supply chain, and we're accepting that we're going to be pretty good customers. We're going to, we're going to flip up to our commitments and take the parts that we've committed to. So, we feel pretty good in the long run about our positioning in terms of our ability to grow when we see a re-acceleration from the industry.

They're more in line with general kind of cost of living type adjustments overall.

Thank you.

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

Brent Higgins: And the other issue is that our service business continues to grow, right? It grows every year, and that grows drives a fair amount of demand in service. It's a high complexity, high mix, low volume business, and because of the customization of the parts, we tend to have to do end-of-life buys and have to buy a lot of parts to support that. When you look at our margin profile overall for the company, feel like the trade-offs we're making are appropriate. And we think it's, it had played a big role in our, in our relatives success.

Great. Thank you.

Charles Shee: Thank you.

<unk> talked about maybe a little bit of weakness.

The cutting edge of foundry logic would if you could talk about that and then I guess just contextually if we're in an environment, where there's very aggressive investment in gate, all around and backside power, but they are sort of limited.

<unk> requirements in year, one for those technologies.

I would think that helps KLA in terms of percentage of wip, but can you just walk us through how much of your how much money will they spend on the development of those processes versus the expansion of wafer that capability there.

So we still we do get investment at the front end, but.

Charles Shee: Our next question will come from a Charles Shee with Meadham. Your line is open. Thanks for taking my question. This morning, I think one of your smaller peers, you were a talk about seeing some weakening of mature, or foundry logic side up with WFC. I wonder if KLA is seeing something similar. I made either through your office control business or the DPC business.

Yeah.

For more for development, but the ramp phase is really where you see.

Rick Wallace: If not, why is that? And I have a second question. Thank you.

That's where you see more of it so you got into the front when they are in development and as it starts to ramp you get more.

We got less of incrementally across the portfolio as you are in high volume.

So yes it would.

It would help.

Help us.

The intensity around those new nodes, but often those companies are also expanding the tree.

Ailing nodes at a similar time Warner to generation so on.

On balance it doesn't look that different overall as most of these companies ramp if that makes sense. So you get into the front end, but the rest of the so you look at process control intensity. It doesn't really change that much in foundry logic year to year, because theyre investing across multiple parts the biggest change.

Rick Wallace: Not really. You were watching for certain parts of what we call non-China legacy exposure to automotive, industrial, some of those markets that has an effect on customer demand. But right now, our expectations around legacy in the near term have been fairly consistent. Got it.

<unk> has come from the mix of foundry logic to memory and memory is increasing.

So yes, there are more layers, there's more investment going on but it's still balanced by theyre going to ramp.

Brent Higgins: So, Brian, maybe a question on off-hacks, both of your peers in a Bay Area, they are raising their off-hacks for basically the next calendar year. How should we think about KLA's off-hacks going into next year's year? You're talking about you're expecting revenue to be run rating at the current level. She will be thinking off-hacks is kind of flat, untaused, the optic of in the revenue.

Not just the R&D, but theyre going to be ramping in terms of across the board that's how we get to the market.

Model, we found for 2026.

Based on process control intensity.

Entering up overtime as processes, just get more challenging.

Roadmap schedules have held pretty well together, what we've seen is customers adjusting some of the capacity plans. So as you look at 2024, you're more likely to see for example, more than three youre going to see into activities.

Brent Higgins: I mean, before you really erase the off-hacks, thanks. Well, one rating at the current level does give you a little bit of growth into next year. And as I said, we would expect to see growth in service. I actually think EPC probably has some modest improvement off of pretty, pretty depressed levels. Our incremental operating margin model drives how we're running the business in terms of expectations for leverage on incremental revenues. So, I would expect to see a modest uptick in OPEX.

And we will start to see some of that soon.

But most the bulk of it will be more than three.

You likely don't see is you probably won't see a lot of investment.

From our major customers and some of the.

The more legacy parts of their businesses, where they pulled back.

But to Rick's point.

We're seeing some of it we will see that investment as they ramp we're seeing more investment today in production given the number of designs that are moving through.

Brent Higgins: We're also balancing sort of near term in terms of how we're sizing for the current environment but also our long-term investment requirements and given our market position and our desire to go to market with the portfolio that we think is a competitive advantage for KLA. It does drive some requirements for investment. And we'll do that in independent of top lines when appropriate. But as we're looking at going forward, I would say that we'll probably see off-hacks tick up a little bit as we move through 24 but not a big change. The more in line with general kind of cost-to-living type adjustments overall.

The leading edge nodes and the different process flows is creating opportunities for for <unk>.

And more challenges for our customers in terms of <unk>.

Joe Moore: Thank you.

Process control and deep activity challenges across different designs as they test design rules are different ways.

So I think we have our normal historic exposure to two R&D and to ramp but.

Over the last few years, we are seeing particularly with the introduction of <unk> and the progressing of scaling.

Seeing more and more adoption.

What we call the HBM are the high volume manufacturing basis.

Rick Wallace: Our next question will come from Joe Moore with Morton Stanley. The line is open. Great, thank you. You talked about maybe a little bit of weakness with the cutting edge of Foundry Logic. What if you could talk about that? And then I guess just contextually, if we're in an environment where there's very aggressive investment in, eight all around, and backside power, but there's sort of limited wafer requirements in year one for those technologies.

Okay. Thank you.

Thank you.

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

So let me take the question I had two I just wanted to follow back up on the comments you just made on foundry logic. So it was flat it seems like China is probably up within that mix and then you said leading edge of this week I'm just kind of curious how that changes for December it seems like the outlook is fairly flat. So is that weakness in leading edge kind of stabilize.

Rick Wallace: I would think that helps KLA in terms of percentage of WFE because you just walk us through how much of your, how much money will they spend on the development of those processes versus the expansion of wafer fabric capability there? Well, so we still, we do get investment at the front end, but the, you know, that from more of our development, but the ramp phase is really where you see, that's where you see more of it.

And then kind of any perspective as to where leading edge goes next year.

So I feel like where we are today think youre stabilization comment is the right. One I think we derisked it.

And given that we tend to be more of a long time provider I think we've made a lot of the adjustments.

But we need to make already in terms of how we're planning for this year.

And as we move into next year right I think if you just sort of aggregate leading edge activity.

Rick Wallace: So you got to the front when there's been development, then it starts to ramp you up or, and we get a lesser incrementally across the portfolio as you are in high volume. So yeah, so it would help us in terms of intensity around those new nodes, but often those companies are also expanding the trailing nodes at a similar time, one or two generations. So, you know, on balance, it doesn't look that different overall as most of these companies ramp if that makes sense.

As customers start to provide a little bit more insight.

But but again back to the stabilization comment I don't see it.

Declining from here.

I just wanted to ask on service in your letter you talked about getting back to that 12% 14%.

Wanted to know is that assuming any utilization increases or is that just purely the tools coming off of their agreement.

Rick Wallace: So you get it at the front end, but the rest of the, so you look at process control and intensity, it doesn't really change that much in boundary logic year-to-year because they're investing across multiple parts. The biggest change has come from the mix of boundary logic to memory, and memory is increasing some. So yeah, there are more layers, there's more investment going on, but it's still balanced by, they're going to ramp.

Yes, it's bill.

The latter I think we're expecting utilization six slowly improve but the bulk of it will come from from new tools coming into contract.

Thanks.

I think they expect to expect to start to see overall industry improvement into 2000 and for the first thing you'll see is utilization start to improve so we would expect that.

Rick Wallace: We hope not just the R&D, but they're going to be ramping in terms of cross support, that's how we get to the, you know, the model that we found for 2026 is based on process control and intensity, inching up over time as processes just get more challenging. Yeah, the roadmap schedules have held pretty well together what we've seen as customers suggesting some of the capacity plans. So when you look at 2024, you're more likely to see, for example, more, you know, N3, you're going to see N2 activity, and we'll start to see some of that soon, but most, the both of it will be more N3, what you likely don't see is you probably won't see a lot of investment from our major customers and some of the more legacy parts of their businesses where they pull back.

And then once you see that and then eventually.

Utilization will get to a place where customers need new capacity and those decisions happen.

Thank you.

Next question will come from Mehdi Hosseini with ISI.

Your line is open.

Yes. Thanks for taking my question just a quick follow up as you think about the R&D prices, especially you highlight the gate all around at some point.

We have to change the narrative to Honeywell and I wanted to just to give an update how do you see kind of opportunities as it relates to high and it's specifically.

On the patterns and how the follow up.

Well I mean <unk> enables is the continuation of scale right. So thats been goodness for KLA.

Rick Wallace: But to Rick's point, you know, we're seeing some of it, we'll see that investment as they ramp, we're seeing more investment today in production given the number of designs that are moving through the leading edge nodes and the different process flows is creating opportunities for more challenges for our customers in terms of process control and effectivity challenges across different designs as they test design rules in different ways. So I think we have our normal historic exposure to R&D and to ramp, but over the last few years, we were seeing, particularly with the introduction to BUV and the progressing of scaling, we're seeing more, more adoption in what we call the HVN or the high volume manufacturing cases.

Otis process control intensity.

In general, but more specifically for KLA has gone up as EOG is starting to be adopted because now you're scaling we're not we're not on what was traditionally Moore's law, but we're seeing scale. It means there's going to be more scaling happening and thats going to be good and specifically good for KLA because it drives the highest.

<unk> requirements, which plays to our portfolio strength.

So part of what our modeling is when we look now we don't see a lot of <unk> happening.

Rick Wallace: Thank you.

In the timeline that we laid out for 2026 for our Investor day after that but we will see early stages of it before 2026 and that will drive.

Continue to provide more opportunity for us to participate in higher process control intensity.

Are you implying that gen <unk> could be the use of June price could be extended to higher name.

Rick Wallace: Our next question will come from Blaine Curtis with Bargwee. Your line is open. Hey, thank you. Let me take a question. I just wanted to follow back up on the comments you've made on Foundry Logic. So it's flat, it seems like China is probably up within that mix and then you said leading edge is weak. I'm just kind of curious how that changes for December, it seems like they all look fairly flat.

For polo for.

Absolutely absolutely and we are still using gen. Four we're using gen. Four now because of the extension that we made in the platform not just in terms of wavelength, but adding more promise.

Processing capabilities leveraging of AI.

Rick Wallace: So is that weakness in leading edge kind of stabilized and then kind of anti-perspective as the we're leading edge goes next year? So I feel like where we are today, I think your stabilization comment is the right one. I think we'd be listed and given that we tend to be more the long time provider, I think we've made a lot of the adjustments that we need to make already in terms of how we're planning for this year.

The use of both.

Gen four and Gen. Five actually Gen. Four will out ship Gen. Five this year and we'll continue to see that adoption. So it really is talking about the critical layers and we have more extensions in mind and in the.

On the works that we're doing right now for Gen five at all extended well.

And to the.

Even given the high in a.

<unk>, which is going to come after that so.

Rick Wallace: And as we move into next year, I think if you just sort of aggregate leading in edge activity, we'll see as customers start to provide a little bit more insight. But again, back to the stabilization comment, I don't see it declining from here.

Feel very good about our optical product portfolio.

Okay and then the second follow has to return rates.

Full care than the peer group, the China mix is getting closer to 50%.

Could there be a scenario where opportunities where KLA would actually step up given the fact that many of these customers are new and they had a yield issue.

Rick Wallace: Thanks. I just want to ask on service in your letter, you talked about getting back to that 12 to 14%. I just want to know, is that assuming any utilization increases, or is that just purely the tools coming off of their agreement? Yeah, it's the latter. I think we're expecting utilization that's like slowly improved. But the bulk of it will come from new tools coming into contract. Thanks. I think I think to expect to start to see overall industry improvement into 24, the first thing you'll see is utilization start to improve. So we would expect that. And then once you see that, then eventually, you know, utilization again to a place where customers need your capacity, and then those decisions happen.

Mary Hussini: Thank you.

And I understand China is mostly portrayed image, but with new entrants new players.

Higher.

Emphasis on improving yield with these new players.

Have a higher mix of China, Okay relative to the peer group.

But what do you have a lot of customers that are subscale that are trying to develop process capability and demonstrated capability to customers also invest for for viability over time in terms of longer term node progression. So in early stages upscale stages.

That youre going to see a heavier investment.

And process control now as they continue to push roadmaps it might stay there because they never really at a huge meaningful amount of capacity.

Mary Hussini: Our next question will come from Mary Hussini with SIG. Your line is open. Yes, thanks for taking my question. Just a quick follow-up. As you think about the R&D project, especially you highlighted the data all around at some point, we have to change the narrative to higher NA. And I want to just get an update. How do you see a kind of opportunities as it relates to higher NA specifically on the patterning and how the follow-up?

At each node, but you do see higher levels of adoption early on as you are trying to prove because if you think about it you might buy a few process tools here and there, but you need the whole suite of.

Process control and so so that's why we tend to see a little bit more activity, there, but I think given the desire to progress along roadmaps and to progress nodes youre going to see I think a continued level of investment overall, but certainly as you start to mature and if youre running <unk>.

Mary Hussini: Well, I mean, what high NA enables is the continuation of scale. So that's been goodness for KLA. You've noticed process control intensity in general, but more specifically for KLA has gone up as EUV has started to be adopted because now you're scaling. We're not on what was traditionally more as long, but we're seeing scale. So high NA means there's going to be more scaling happening, and that's going to be good. And specifically good for KLA because it drives the highest performance requirements, which plays to our portfolio strength.

Limited number of design process control intensity will higher production than it used to be it's still lower than it is in what we'll call the ramp phase.

Of a project.

Thank you.

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

Yes.

Hi, there. Thanks, Thanks for sneaking me in I'll just ask one question then.

To get us out of here, but.

Mary Hussini: So part of what our modeling is when we look, no, we don't see a lot of high NA happening in the timeline that we laid out for 2026 for our investor day. It's after that, but we'll see early stages of it before 2026, and that'll drive, continue to provide more opportunity for us to participate in higher process control. Are you implying that Gen 5 could be the use of Gen 5 could be extended to higher NA?

And you can correct me, if I'm wrong here, but I've gotten the sense, maybe that given how strong the infrastructure bare wafer and reticle inspection business in China was this year that it could subside a little.

And the calendar 'twenty four relative to its strength again. This past year is that sort of implicit in your outlook in the first half next year and also do you think that is proportional and any way to sort of the rate of China fab build activity that you can maybe observe for next year.

But I don't think it's I think the overall.

Mary Hussini: Absolutely, absolutely. We're still using Gen 4. We're using Gen 4 now because of the extension that we made in the platform, not just in terms of wavelength, but adding more processing capability, leveraging the AI. The use of both Gen 4 and Gen 5, actually Gen 4 will outship Gen 5 this year, and we'll continue to see that adoption. So it's really, it's talking about the critical layers, and we have more extensions in mind, and in the works that we're doing right now for Gen 5 that'll extend it well, and you know, into the, even in the high NA, the hybrid NA, which is going to come after that.

Wafer infrastructure investment will that fab.

Faster than Wi Fi growth. This year will will flatten out as we move into next year. So there is.

That starts to slow down on China, specifically, though I don't see it changing much I don't think I don't think its going to grow much next year, but I don't see it falling off.

And that's across a witness across wafer silicon wafer, but also around radical capability.

Okay, great. Thank you.

Thank you Brian.

Thank you Chelsea I just wanted to thank everyone again for their time and turn the call back over to you for any final instructions.

Great.

Rick Wallace: So we can feel very good about an optical product portfolio. Okay, and then the second follow, happy to be in China, it seems like, for Canada and the peer group, the China mix is getting closer to 50%. Could there be a scenario where opportunities for Canada would actually step up, given the fact that many of these customers are new, and they have new issue, and I understand China is mostly for Tritonage, but with new entrants, new players, could the higher entrances are improving the youth, but these new players, have a higher mix of China, okay, let it be through the peer group?

This does conclude the KLA Corporation September quarter, 2000, <unk> earnings call and webcast.

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

Mhm.

Hum.

Hmm.

Okay.

Oh.

[music].

Rick Wallace: Well, you have a lot of customers that are sub-scale, that are trying to develop process capability and demonstrate capability to customers, also invest for viability over time in terms of longer term, no progression. So in early stages, up-scale stages like that, you're going to see a heavier investment in process control. Now, as a contingent of put it, road maps, it might stay there because they never really had a huge, meaningful amount of capacity at each node.

Rick Wallace: But you do see higher levels of adoption early on as you're trying to, because if you think about it, you might buy a few process tools there and there, but you need the whole suite of a process control, and so that that's why we tend to see a little bit more activity there. But I think given that the desire to progress along road maps and to progress nodes, you're going to see, I think, a continued level of investment overall.

Rick Wallace: But certainly as you start to mature, and if you're running a limited number design, you know, process control intensity will higher in production than it used to be, it's still lower than it is in what we'll call the ramp phase of a project. Thank you.

Brian Chen: Our last question will come from Brian Chen with people. Your line is open.

Brian Chen: Hi there. Thanks for speaking me out. I'll just ask one question then to get us out of here, but you can correct me if I'm wrong here. But I've gotten the sense maybe that given how strong the infrastructure bear away for in critical inspection business in the China was this year that it could supply a little in the counter 24 relative to its strength again this past year. Is that sort of implicit in your outlook in the first half next year?

Brian Chen: And also do you think that is proportional in any way to sort of the rate of China fat bill activity that you can maybe observe for next year? Well, I don't think it's I think the overall way for infrastructure investment will that's been faster than WFE growth this year will will flatten out as you've been to next year. So there's the you know that that starts to slow down on China specifically though I don't see it change you much. I don't think I don't think it's going to grow much next year, but I don't see it falling off. And that's across that's a way that's across way for Silicon Wafer, but also around radical capability.

Chelsea: Okay, great. Thank you. Thank you, Brian. Yeah, thank you, Chelsea. I just wanted to thank everyone again for their time and turn the call back over to you for any final instructions.

Chelsea: This does conclude the KLA Corporation September 4, 2021 Earnings Call and Webcast. Please disconnect