Q2 2024 KLA Tencor Corp Earnings Call
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Thank you for joining the earnings call to discuss the December 2023 result of the March quarter outlook.
I'm joined by our CEO, Rick Wallace and our CFO, Brian Higgins will discuss today's results released after the market close and available on our IR website, along with supplemental materials. Today's discussion is presented on a non-GAAP financial basis, unless otherwise specified.
Audio references all relate to calendar years.
A detailed reconciliation.
non-GAAP.
Brian Higgins: A GAAP to non-GAAP results.
Brian Higgins: In the earnings materials posted on our website.
Brian Higgins: Please IR website also contains future investor events as well as presentations corporate governance information and links to our SEC filings, including our most recent annual report and quarterly reports on 10-Q and 10-K.
Brian Higgins: Our comments today are subject to risks and uncertainties reflected in the risk better disclosure in our SEC filings any forward looking statements, including those we make on the call today are 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.
Brian Higgins: Frank will begin the call with some comments on quarterly highlights and will conclude with our financial items, including our guidance and outlook I will now turn the call over to our CEO Rick Wallace Rick. Thank you, Kevin I will briefly summarize Kelly's performance for 2023 calendar year in the December quarter, and then set up our view for 2024.
Rick Wallace: 2023, tailing revenue was almost $9 7 billion.
Rick Wallace: 8% versus the prior year this was higher than our expectations coming into the year of strength from legacy nodes customers and semiconductor infrastructure offset weaker than expected leading edge investments in both logic and memory.
Rick Wallace: While overall <unk> spending was down for the year there were areas of growth in KLA business segments, including the infrastructure business supporting wafer and mass manufacturers automotive.
Rick Wallace: And specialty semiconductor process equipment.
Rick Wallace: Service business grew 7% to $2 2 billion for the year. The company continued to deliver strong industry, leading margins with non-GAAP gross margins of 62% and a non-GAAP operating margin of 39% free cash flow grew 6% in 2023% to a record $3 2 billion.
Rick Wallace: Moving to <unk> December quarter results, which were ahead of expectations as revenue grew 4% sequentially to $2 $49 billion.
Rick Wallace: Accordingly, non-GAAP net income was $839 million.
Brian Higgins: GAAP diluted earnings per share was $4 28, and non-GAAP diluted EPS was $6 16.
Brian Higgins: We saw sequential growth in all three of Kla's business segments, you can find specific details in our shareholder letter released earlier today.
Brian Higgins: Additional highlights in the quarter, including growing adoption for <unk> 8900 series platform for high throughput macro inspection.
Brian Higgins: Increased demand in the legacy nodes and advanced packaging categories.
Brian Higgins: For me one of the best performing product lines, and our optical inspection portfolio in 2023.
Brian Higgins: Growth in AI enables kla's differentiation and helps drive industry growth, we continue to deploy deep learning and physics based algorithms to cross <unk> latest inspection and metrology product portfolio.
Brian Higgins: Improved signal noise recognition and reduce process learning cycles as customers resolve critical yield challenges.
Brian Higgins: Daily service business grew 1% on a sequential quarterly basis to $565 million and remains on track to resume the targeted 12% to 14% annual revenue growth trajectory in calendar 2024.
So we look and see why 'twenty four we're encouraged by recent reports from many of our customers, but the demand environment is expected to continue to gradually improve throughout the calendar year through collaboration with customers KLA is focused on preparing our teams for a return to growth at the leading edge and levering leveraging the KLA operating.
Brian Higgins: To ensure readiness to support our customers' needs as the demand environment improves.
Brian Higgins: Near term, we see the March quarter is the low point for the year, we expect business levels to improve as we progress throughout the year.
Brian Higgins: We will as always prioritized commitments to our customers and executing on our product roadmaps.
Brent: I'll now hand, the call over to Brent to provide more specifics around the financials and our guidance.
Brent Smith: Thanks, Rick our results demonstrated the consistent execution of our global team. Despite the challenges and complexity of the current industry environment KLA continues to show resourcefulness and the ability to adapt meeting customers' changing and fluid requirements.
Brent Smith: Revenue was $2 9 billion slightly above the guidance midpoint to four five.
Brent Smith: non-GAAP diluted EPS was $6 16.
Brent Smith: Above the midpoint of the guided range of $5 26 to $6 46.
Brent Smith: GAAP diluted EPS was $4.
Brent Smith: GAAP EPS was negatively impacted by a $1 59 for goodwill and purchased intangible asset impairment charge.
Rick Wallace: non-GAAP gross margin was 62, 6% just above the high end of the guidance range of 65% to 62, 5%.
Rick Wallace: non-GAAP operating margin was 47% quarter.
Rick Wallace: Accordingly, non-GAAP net income was 839 million GAAP net income was $583 million cash flow from operations was $622 million and free cash flow was $545 million.
Rick Wallace: As I just mentioned during the quarter KLA recognized a goodwill and purchased intangible asset impairment charge of $219 million for the PCB display reporting unit attributed to a weaker long term outlook, primarily for the flat panel display business.
Rick Wallace: Investigating strategic alternatives for this business, which accounted for one 4% of total revenue in calendar 2023.
Rick Wallace: The breakdown of revenue by reportable segments, and end markets and major products and regions can be found within the shareholder letter and slides.
Rick Wallace: Turning to the balance sheet KLA ended the quarter with $3 $3 billion in total cash cash equivalents in marketable securities debt of $5 95 billion.
Rick Wallace: In a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three agencies.
Rick Wallace: In December 2023, Fitch rating upgraded kla's debt rating to a from a minus with a stable outlook.
Rick Wallace: Moving to our outlook looking ahead to calendar 2024.
Rick Wallace: That timing of a meaningful and sustainable resumption in wip investment growth continues to remain uncertain.
Rick Wallace: Though there are signs of improvements in some end markets. This improvement is off low levels impacting our customers profitability and cash flow generation in the near term.
Rick Wallace: Kelly's overall demand is stabilizing around current business levels, plus or minus the guidance ranges.
Rick Wallace: Now this translates into KLA revenue bottoming in the March quarter, driven mostly by a customer project delays occurring in the last couple of months.
Rick Wallace: Based on current past schedules in our June quarter shipment plan.
Rick Wallace: <unk> sequential growth returned in the June quarter and continue for the remainder of the calendar year.
Rick Wallace: For calendar 2024, we currently expect <unk> demand to be in the mid to high $80 billion.
Rick Wallace: Roughly flat to modestly up from the anticipated level in calendar year 2023.
Rick Wallace: We expect that the second half of the calendar year will be stronger than the first half for WP investment.
Rick Wallace: <unk> estimate reflects our current top down assessment of industry demand has followed in memory, we expect WP investment to be slightly up from low levels with investments focused on high bandwidth memory capacity.
Rick Wallace: And leading edge node development.
Rick Wallace: Both NAND and DRAM Fabs are still at low utilization levels as consumer markets have not yet returned to the growth levels needed to bring factory utilization back to the high levels seen in recent years.
Rick Wallace: Once customers consume this excess capacity and focus on node migration, we would expect to see new investments.
Rick Wallace: Foundry and logic is expected to be slightly up with leading edge investment returning to modest growth levels.
Rick Wallace: Legacy investment declining versus 2023.
Rick Wallace: China legacy note investments remaining relatively flattish to current levels.
Rick Wallace: As for guidance dailies March quarter guidance is as follows.
Rick Wallace: Revenue is expected to be $2 3 billion, plus or minus a $125 million.
Rick Wallace: Foundry logic is forecasted to be approximately 60% and memory is expected to be 40% of semi process control systems revenue.
Rick Wallace: And then memory DRAM is expected to be about 85% of the segment mix in NAND the remaining 2%.
Rick Wallace: non-GAAP gross margin is forecasted to be in a range of 61, 5% plus or minus one percentage point as product mix weakened quarter to quarter due to lower overall semiconductor process control systems revenue.
Rick Wallace: For calendar 2024 based on current industry outlook topline growth expectation.
Rick Wallace: Higher forecasted growth in services and expected systems product mix, we are modeling gross margins to be relatively stable around the mid 61% range.
Rick Wallace: What we delivered in 2023.
Rick Wallace: Variability quarter to quarter is typically driven by product mix fluctuations.
Rick Wallace: Operating expenses are forecasted in the March quarter to be approximately $545 million relatively flat with the December quarter.
Rick Wallace: For calendar 2020 for operating expenses, we expect $5 million to $10 million incremental growth per quarter beyond the March quarter inline with expected sequential growth in revenue.
Rick Wallace: Prototype material purchases and drive variability quarter to quarter.
Rick Wallace: For the calendar 'twenty for tax rate based on current forecast, we do not expect material change you should continue to continue using the 13, 5% effective rate for modeling purposes.
Rick Wallace: Other modeling assumptions for the March quarter included other income and expense net of approximately $45 million.
Rick Wallace: GAAP diluted EPS is expected to be $4 93.
Rick Wallace: Plus or minus 60.
Rick Wallace: And non-GAAP diluted EPS of $5 26, plus or minus 60.
Rick Wallace: EPS guidance is based on a fully diluted share count of approximately 135 6 million shares.
Rick Wallace: In conclusion, we are optimistic that most end markets are showing signs of improvement.
Rick Wallace: <unk> will remain focused on supporting customers.
Rick Wallace: <unk> on our product roadmap and positioning the company for a return of growth at the leading edge.
So visibility into the precise timing of a sustainable demand recovery is still unclear KLA is running the business to ensure delivery of a differentiated product portfolio that meets customers' technology roadmap requirements and to execute our business in line with our longer term growth expectations.
Rick Wallace: The KLA operating model guiding best in class execution, KLA continues to implement strategic objectives, which are geared to drive outperformance.
Rick Wallace: With a focus on customer success, delivering innovative and differentiated solutions and operational excellence KLA is able to deliver industry, leading financial and free cash flow performance and return capital consistently.
Rick Wallace: The past few years to strengthen our confidence in the increasing importance of process control and enabling technology advancement and optimizing yield and a high design mix volume production environment.
Rick Wallace: This bodes well for <unk> long term growth outlook, despite still challenging near term demand trends.
Rick Wallace: In the meantime, KLA business continues to stabilize and a long term secular trends driving semiconductor industry demand and investments in WP remain very compelling.
That concludes our prepared remarks, Kevin let's begin the Q&A.
Rick Wallace: Thanks, Brian Chelsea, if you can just give the instructions and set up the queue.
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Rick Wallace: We'll take our first question from Harlan sur with JP Morgan.
Rick Wallace: Your line is open.
Rick Wallace: Good afternoon. Thanks for taking my question it looks like relative to your prior view the March quarter came in lower by roughly about $200 million I know you talked about a customer a project delay that materialized just over the last couple of months.
Rick Wallace: It looks like based on your December quarter end market mix than expected March quarter mix that foundry logic customer was that a leading edge or mature node customer was the delay in more of a technology related or just weak demand trends in the sequential growth outlook beyond much assumed at this customer comes back this year.
Rick Wallace: Hey, Heartlands brands, so yes, yes.
Rick Wallace: The prepared remarks over the last couple of months.
Rick Wallace: A project that we're planning to ship roughly a couple hundred million dollars of business to that.
Rick Wallace: That had a push out thats extended I think somewhere around 12 months. So could we stayed at the end of 'twenty four maybe could be early 'twenty five as well.
Rick Wallace: So it was more leading edge centric and as a result of that.
Rick Wallace: As we backfill that business.
Rick Wallace: With other business.
Rick Wallace: We did see the percent of China go up a little bit higher than we had thought we would see.
Rick Wallace: And we were giving guidance at the beginning of <unk>.
Rick Wallace: At the beginning of the quarter so late in the quarter, obviously affected.
Rick Wallace: In fact Q4 because of the moving around of.
Rick Wallace: Other customers and.
Rick Wallace: In slots, but certainly had an effect on Q1.
Rick Wallace: As we think about sequential improvement into the June quarter. We also have.
Rick Wallace: Part of our revenue recognition policy is that when we shipped to new customers. We have to go to acceptance to demonstrate that we can that our tools are meeting specifications around reliability at matching and so forth and there are some shipments that we shipped at the end of Q4 and were shipping it in the March quarter.
Rick Wallace: We're aligned with a couple of projects for new customers, where the Fabs are opening late in the quarter. So our ability to get those acceptances in and complete that process could be potentially constrained. So we will see that revenue shift into the June quarter. Once you get it established.
Rick Wallace: Performance than that revenue happens at shipment going forward with that customer, but we do have some unique dynamics that are affecting us here in the first half. So it does give me some comfort about the sequential growth guidance as we move into June but it is affecting what we ultimately guided for the March quarter, consistent with our revenue recognition policy.
Rick Wallace: I appreciate the insights there.
Rick Wallace: The total process control systems business group <unk>, yet again right in calendar 'twenty three.
The inspection significantly outperformed right. It was only down 5%, but your packaging business was down almost 20%, which was actually worse versus <unk>. It looks like most of that full year performance was due to the sharp drop off in patterning just in the December quarter, So was that.
Rick Wallace: The customer Pushout dynamics that you mentioned or is it just the lumpy shipment trends in patterning and I guess do you guys expect process control systems business to outgrow <unk> this year.
Harlan Sur: Yes, Great question Harlan I think.
Harlan Sur: If you think about our business and the composition and how it moves with customers inspection, especially the leading edge inspection is much more tied to development of new technology, whether it's in pilot or even brown and some of the metrology business is more tied to capacity. So when you see a falloff of <unk>.
Harlan Sur: Pass it impacts petrology more than it would impact inspection and Thats, what we saw in 'twenty three.
Harlan Sur: Hey, Charlie Heartland, it's Brad on the relative perform we do feel pretty good about the performance overall, when you think about how much legacy business.
Brad: Within the year and how the leading edge fell off which typically drives higher process control intensity also nwfp. This year was a little unique in that there was a lot of carryover Ws April 2022.
For a number of peers and so that showed up in 'twenty three but was really activity that we started in 2022. So when you take into account those factors and look at how well we performed in 'twenty two relative to the overall market, but we were.
Growth rate was four X what the market was.
Brad: The fact that we're mostly I think in line, maybe a little bit better than the overall market in 'twenty. Three is I think a pretty good indicator of the growing process control intensity that we're excited about here Kelly.
Brad: Okay.
Brad: Thank you.
Our next question will come from Joe <unk> with Wells Fargo.
Brad: Yes, thanks for taking the question I just wanted to go back to the push out of it.
Joe Quatrochi: Just so I understand if we were to adjust for a couple of hundred million Thats now pushed into the June quarter and assumed it was still in the March quarter.
Joe Quatrochi: I guess would you still expect that the June quarter will be up quarter over quarter or would it be more flattish like we were thinking or talking about.
Joe Quatrochi: Last quarter or the first half kind of still being a similar run rate of the business.
Joe Quatrochi: Yes, I think its more the ladder right, obviously, you've got a lot of moving parts and how it affects the quarters, but as we had talked about last.
Rick Wallace: Last quarter, we saw the business generally continuing a guided level guided was two four or five O right. We ended up outperforming by.
$40 million or so so it would have been probably flattish more or less.
Rick Wallace: But this adjustment coming out obviously.
Rick Wallace: The kind of impact.
Rick Wallace: I said earlier, so flattish and then we would expect.
Rick Wallace: To see the second half start to improve.
Rick Wallace: That's helpful.
Rick Wallace: And then just as a follow up.
Rick Wallace: Youre going to file your 10-Q filing tomorrow, but any color on where the <unk> exiting the quarter.
Rick Wallace: Yes, so RVO was down about $200 million.
Joe Quatrochi: Expected you to ask that question Joe.
Joe Quatrochi: Yes, sorry, yes, $200 million quarter to quarter.
Joe Quatrochi: And.
Joe Quatrochi: With about 50% or so that takes you to about $10 6 billion, 45% to 50% of it to ship beyond 12 months.
Joe Quatrochi: And then within that we have about just short of $800 million in customer deposits.
Joe Quatrochi: Thank you.
Joe Quatrochi: Our next question comes from CJ Muse with Cantor Fitzgerald.
Joe Quatrochi: Yes. Good afternoon. Thanks for taking the question I guess first question can you speak to domestic China and I guess.
Joe Quatrochi: To what degree 23 was helped by bare wafer reticle inspection.
Christopher James Muse: Your thoughts on how that progresses in 'twenty, four and I guess with mix shift.
Christopher James Muse: Perhaps maybe incrementally more DRAM and I don't know in terms of the really core we did see some shifts there how you're seeing your kind of implied market share at <unk> 24 versus 23.
Christopher James Muse: So for China C. J I think overall for China looks pretty flattish.
Christopher James Muse: Year to year.
Christopher James Muse: We did benefit from from the infrastructure investment that I've talked a lot about over the course of the last year or so I would expect that part of the business to come down some as some of the digestion that's happening more so on the wafer side than the radical side.
Christopher James Muse: And so that obviously will get made up by what I would expect to be slightly higher foundry I think the memory piece will shift to potentially ship to another customer.
Christopher James Muse: You could see that being flattish overall, so feel pretty good about the trajectory of China. There is some lumpiness given our asps.
Christopher James Muse: But I think through the year it'll be relatively consistent across the quarters.
Christopher James Muse: Notwithstanding the timing of certain fab projects.
Christopher James Muse: Instructions schedule is complete and so on and then I think we'll start to see the percent come down as we move into the second half as you see other customers drive our expected growth.
Christopher James Muse: Through the second half of the year.
Christopher James Muse: What was the second part.
Christopher James Muse: No you covered it I.
Christopher James Muse: I guess for my follow up.
Christopher James Muse: Think about kind of second half stronger than first half.
Christopher James Muse: How would you kind of rank order, leading edge foundry logic versus DRAM in terms of the key drivers for you.
Rick Wallace: I think leading edge will be.
Rick Wallace: We will see some some growth in the year.
Rick Wallace: It will be I think.
Fairly modest growth as we continue through the year.
Rick Wallace: I would say Im just kind of look at quickly here.
Rick Wallace: I would say that it is.
Rick Wallace: Reasonably balanced across the year, so I would think that we'll see.
Rick Wallace: I would expect to see DRAM probably be.
Rick Wallace: Actually I think it's going to be pretty balanced as well.
Rick Wallace: From a leading edge DRAM point of view, so I think it's pretty balanced on both fronts and then just ticking up a little bit as you move into the second half.
Rick Wallace: Thank you.
Rick Wallace: Okay.
Speaker Change: Our next question will come from Chris <unk> with TD Cowen.
Speaker Change: Yeah, Hi, Thanks for taking the question I told them to one is I was just curious.
Speaker Change: <unk>.
Christopher James Muse: If you can kind of give color on how to think about China revenues this year.
Christopher James Muse: Ex EPC.
Christopher James Muse: Well, Brian just covered that but.
Brian Higgins: The last question, but essentially flattish I mean, thats the general view for China. This year.
Brian Higgins: <unk> little less infrastructure than we saw especially in wafer.
Michael: Michael continues to increase.
Michael: Principally bubble.
Michael: The current run rate.
Michael: Got it got it and then just.
Michael: As a quick follow up.
Michael: No.
Michael: So if I look at kind of the various optical inspection you said that revenue should start improving overtime.
As the lead times today four of them today versus say three months or six months ago, and very quick them to go over the next few months.
Michael: Yeah I'll start on that one on optical inspection. So we're still constrained on gen four.
Michael: In terms of demand relative to our supply I would expect to see supply increase this.
Michael: This year and that's part of our business I would I would expect to do better than overall market.
Brian Higgins: As we move into <unk> into 'twenty four we have.
Rick Wallace: <unk> right now I think we've seen some normalization around gen five lead times, which tend to be.
Rick Wallace: Somewhere between 7% to nine months the Gen four is still out.
Rick Wallace: Over a year or so, but new capacity coming online I think.
Rick Wallace: Not enough for what we expect over the next year to year and a half, but then we have another.
Rick Wallace: Another tranche of capacity that will come in line as we move into the 2006 timeframe. So we feel pretty good about what we have in terms of overall capacity both within the.
Rick Wallace: Within KLA in our facilities, but also within our supply chain to support the growth that we expect as we move into 'twenty five with more meaningful there'll be a fee growth and then as we as we target.
Rick Wallace: But 2026 financial plan that we laid out back at our Investor day in 'twenty two.
Rick Wallace: Thank you very much.
Rick Wallace: Yes.
Rick Wallace: Our next question will come from Brian Chin with Stifel.
Rick Wallace: Hi, there good afternoon.
Brian Chin: A few questions.
Brian Chin: Maybe just the mix.
Brian Chin: Some of them might have had asked this earlier in the queue, but.
Brian Chin: Taking your WSB sort of outlook for.
Brian Chin: Flat to modest based under 23 base level flat to modest growth this year.
Yes relative to sort of pick up in maybe your revenue WMC being sort of in the second half that kind of modest rate.
Brian Chin: You probably would need to see an acceleration in the back quarters of the year in order to kind of get to say.
Brian Chin: Even towards the mid low to mid single digit kind of growth.
Brian Chin: But then you're talking about for <unk> at the moment. So I'm kind of curious do you see process control intensity type of profile spending this year sort of.
Brian Chin: Neutral in terms of <unk> do you think intensity is higher lower relative to again that profile of spending this year and then how does that reflect in the revenue.
Brian Chin: Yes.
Brian Chin: In terms of the math right. If you look at the first half of this year, which is yes, we'll call maybe slightly down versus the second half of 'twenty three and then an acceleration in the second half, which puts you somewhere.
Brian Chin: And I'll call. It high single digit growth that assumed that wip is marginally up more or less from from.
Brian Chin: From 2023, and so against that backdrop with slight improvement in memory I would expect our process control intensity to be roughly flat. So we were in that.
Brian Chin: Seven depending on your WP number, but assuming 87% $88 billion at WPZ in 'twenty, three about seven 6% or so so I would expect it to be similar as they move into.
Brian Chin: Into 'twenty, four and as we expect to see more and more growth and leading edge investment as we move into 'twenty five and we'll start to see favorability in terms of leading edge dynamic that tend to drive our business higher process control intensity overall so.
Brian Chin: I think thats, how to think about right now.
Brian Chin: Okay. Thanks, and then just.
Brian Chin: And given that emphasis emphasis this year on memory conversions and upgrade activity can.
Brian Chin: Can you comment on the areas where KLA benefits.
Brian Chin: How big meaningful benefit that this sort of spending represents.
Brian Chin: You mean in terms of just where we benefited in memory investment.
Brian Chin: We expect to see I mean, certainly you've got <unk>.
Brian Chin: In DRAM with more DRAM investment.
Brian Chin: With the introduction of EV, that's tend to be a positive dynamic for our business, we saw process control intensity.
Brian Chin: Increases as we saw you'd be introducing.
Brian Chin: Into DRAM so thats.
Brian Chin: Probably one of the bigger positives for us. So you are right as you start to do technology conversions instead of new capacity are being a little bit more muted investment, but we would expect to see our customers continue to invest in the.
Brian Chin: And their leading edge development or for the next nodes and so I think that will be the biggest driver for our business.
Brian Chin: Okay. Thank you.
Brian Chin: Our next question will come from Chris <unk> with Wolfe Research.
Brian Chin: Yes. Thank you good evening I guess the first question is.
Brian Chin: Looking beyond two.
Brian Chin: 2024, and obviously don't expect you to provide any guidance there, but let's take any opinion that you have.
Brian Chin: Some of the other equipment suppliers that have had longer lead times.
Brian Chin: We're starting to express a little more confidence on.
Brian Chin: Turn on 25.
Brian Chin: I don't expect that you've seen that in your order book, yet, but interested to see what your customers may be talking about.
That's a great question and we have definitely had those conversations I think that.
Brian Chin: Customers are looking at for a couple of perspectives. One we do have long lead on the most advanced optical tools, but theres also a lot of development that we're doing right now to make those tools.
Brian Chin: Even better or the advanced logic ramps that are coming so we're actually engaged quite a bit in R&D and in pilot with those customers. So we have a pretty good sense.
Brian Chin: They are all bullish about 25% I can't think of a customers. We have on the leading edge that isn't bullish about 25, but as you say, we're not going to see the orders for those yet, but we're certainly having those conversations but more importantly, we're seeing the discussions happen around capability that we're demonstrating is they do pilot the other.
Rick Wallace: Thing is we're seeing a trend toward more designs and we've talked about this.
Rick Wallace: Last several years one of the leading indicators for US is the advanced designs because thats an indicator of how broad a node is going to be and we're seeing that continue and that will drive both reticle business, but also as a good leading indicator for the strength of <unk> 25, that's why one of the objectives for the company is to <unk>.
Rick Wallace: A pair for growth is bleeding edge, because that's what we believe will happen over the next 24 months.
Rick Wallace: As Brian indicated not the next six months, we should start to see the green shoots of that towards the end of the year and then we will see it in 25 years. The way we are modeling the business and our investment right now.
Rick Wallace: Got it that's very helpful.
Brian Chin: As a startup with regard to the foundry logic business.
Brian Chin: Would you characterize and I guess, what can you talk about new WMC assumptions as some kind of slight growth this year.
Brian Chin: Is it safe to say that that growth is tied to new node deployments and kind of technology upgrades and such as opposed to capacity at this point.
Brian Chin: It's a little bit of capacity too.
Brian Chin: 2023 was down right and so we're seeing some expansion capacity.
Brian Chin: The big node ramps aren't really happening as much this year, which is part of why the wip gets driven up.
Brian Chin: And you heard Tsm's call and I think they are fairly bullish on on therefore cast, but we'd have to see what happens in.
Brian Chin: The early parts of <unk> 25 for those ramps on especially the newest technologies.
Brian Chin: And we would expect the legacy business non China be lower in 'twenty four 'twenty three so there's so it's been offset and you've got some improvement with the leading edge investment offset by by some of the non China legacy falling off a bit.
Brian Chin: That's how we get to our forecast.
Brian Chin: And we will see as we start day, we're having these conversations with customers.
Brian Chin: Certainly planning for it from a capacity point of view and we will see as we progress through the year as we start to firm up when those shipments will actually starting to take place.
Brian Chin: Thank you.
Brian Chin: Our next question comes from Joe Moore with Morgan Stanley.
Brian Chin: Great. Thank you.
Brian Chin: Talking about memory utilization remaining low and I guess I feel like you guys kind of talked about that relatively early and then you start kind of static we've heard the memory customers all kinds of things about different times that they brought it down it's like similar brought it up it just wanted to confirm that you are seeing that as kind of a steady trend and then can you talk about Colorado next year.
Joseph Moore: The services revenue you can get from those guys.
Joseph Moore: Yes, but having met with a number of memory customers recently.
Brian Chin: Difference in their tone right now and so when we talked to them last year.
Brian Chin: There's a lot of.
Brian Chin: Downcast looks about the because they had been ready for a much bigger.
Brian Chin: Much bigger consumption of memory and now I think they are starting to turn the corner on that we do see conversion technology, but a few.
Brian Chin: Utilization is hasnt really changed much service continues to be higher.
Brian Chin: Historically, our utilization rates on our equipment are higher than historically, but because I think customers even those that have the ability to flex down their utilization on our systems have chosen not to and so that's been a real strength for us and why services for KLA did so well.
Brian Chin: 'twenty, three and we expect that growth to resumed.
Brian Chin: The numbers, we targeted a couple of years ago for 'twenty four and beyond.
Brian Chin: I'd say the posture is different and we're going to we expect to see that continue to strengthen throughout the year with.
Brian Chin: The customers don't have the same level of redundancy with with what they buy from KLA versus a lot of process equipment and when you're when you're focused on on trying to be as efficient with your capital as you can youll tend to really focus on trying to drive yield so the way they buy process control. They don't they don't buy a lot of extra so as they take capacity offline.
Brian Chin: For process they tend to run a process control much more consistently the customers that cut more in terms of utilization earlier.
Come back more I think overall to Rick statement, it's been fairly flat overall DRAM has tightened a bit because of some of the AI drivers for that.
Rick Wallace: But on the flash side I think it's been fairly stable and like I said, some improvement for folks who who cut more aggressively early on.
Rick Wallace: Okay. Thank you very much.
Rick Wallace: Our next question or comment.
Keith Murray: Keith Murray quick study.
Keith Murray: Hi, Thank you for taking my question and Dan talked about strategic alternatives for the display business can you help us out how big the display business was lost here.
Dan: And then in general on the EPC business they are kind of.
Dan: Until it's time.
Dan: Mobility is getting better can you just talk about how you're looking at the EPC business.
Dan: <unk> displayed.
Dan: And you are breaking up a little bit there. So so in regards to the comments on display.
Dan: It's about one 5%.
Dan: Of the revenue of the company and is there are parts of display that are more commodity based and there's aspects of that industry structurally where profitability is more challenged and then theres. Some interesting parts of it too in terms of some of the future.
Dan: Roadmap opportunities and where some of the higher end cut.
Dan: Customers customers are moving so we'll have more to say about that as we as we assess.
Dan: The alternatives, we're considering if the rest of EDC as kind of a tale of two businesses overall, the specialty semiconductor business has done exceptionally well as we talked about in the shareholder letter.
Dan: Really outperforming.
WNBA overall I think it's a combination.
Dan: Customer engagement more applications new products. So we're really pleased with where we are performing there and the ability to differentiate and I would expect that to be roughly flat and with some mix shift as it has some diversity in terms of end markets between automotive and mobile at advanced packaging. So you could see a shift where automotive wheel.
Brian Chin: And we will see more investment on the <unk>.
Brian Chin: Packaging side, so we're pretty it's pretty positive on that Iqos, we're already starting to see some improvement there which tends to be a little bit of a leading indicator in terms of a finished components and so we're more optimistic about how that will translate back into the other parts of our business given that that's a short lead time more capacity centric business. So again back to.
Brian Chin: Our views have some improvement as we move into the second half.
Brian Chin: <unk> been more mobile centric in terms of and more consumer consumer markets more capacity centric. So that business has been weaker but I would expect it to be a little bit better this year as well and there are some product offerings that we have coming that that start to take advantage of opportunities that high end PCB and substrates as those <unk>.
Brian Chin: Great into heterogeneous packages. So we expect the APC business overall to be up we'll call it.
Brian Chin: Maybe high single digits, a little a little less lead time over there so a little harder to forecast off of the off of the year, we had in 2023.
Great and then as my follow up Rick.
Rick Wallace: You talked about uncertainty leading edge with some push outs.
Rick Wallace: If your foundry customers decided to focus more and putting the.
Rick Wallace: Investment the Fabs in Japan, and the U S is there any impact to your business.
Rick Wallace: While the work that they're doing in Japan is not at the leading edge, but it is part of their overall investment with.
With the exception of the Japanese company.
Rick Wallace: Investing there.
Rick Wallace: So I would say, yes of course.
Rick Wallace: That's a different kind of business for us it is important but the leading edge business, that's being done on the boundaries isn't being done there right now.
Rick Wallace: With the exception of one so.
Rick Wallace: We're talking about what we're seeing and hearing is the development is going on for the leading edge, where the question is at what point will they be in a position to ramp to that so the reason we're confident of the growth. That's coming is because of the engagements. We've had the design starts that we see in the <unk>.
Rick Wallace: Plans that we know that they've been they've been discussing so we feel pretty good about the setup as we go towards the end of the year and into next year.
Rick Wallace: Thank you.
Rick Wallace: Our next question comes from Charles <unk> with Needham.
Rick Wallace: Hi, Thanks.
Charles <unk>: I really wanted to just wanted to ask.
Charles <unk>: For some clarification on that.
Charles <unk>: This business expectation for calendar Q4, I think that you talked about higher forecasted to grow service.
Charles <unk>: Is it higher than what you thought that the plant up to 14% this year or you're just talking about higher growth compared with our systems business just a quick clarification. Thanks.
Charles <unk>: Yes, more in line with the long term target model of 12% to 14% in closer to the high end of the target range and Thats really being driven by we talked about some of the improving utilization that we expect to see as we move through the year, which.
Charles <unk>: If you think about our customers their businesses get better they have more demand they start to consume the capacity they have.
Rick Wallace: They have sustainability in that and then their profitability improve then they start to invest in new equipment. So we would expect to see that play through as we go through the year, but we also will start to benefit from the tools that we shipped in 2021 and 2022 as they move from warranty into contract and so that should be a driver.
Rick Wallace: For service growth as we move into next year. So we'll be back in line with the overall target model.
Rick Wallace: In terms of how we're planning for the business next year.
Rick Wallace: The great thing about services.
Brian Chin: This growth that happens pretty continuously it does have a little bit of a dilutive effect on our overall margins, which is one of the factors in the 'twenty four gross margin color that I provided.
So even if we would expect to see revenue increase a bit I do think that you'll see a little bit of pressure on margins now it tends to be based on the way, we do the accounting accretive to operating margin. So.
Brian Chin: At that level, it's pretty positive, but it does have an effect on the puts and takes within gross margin.
Brian Chin: Thanks, Brendan maybe maybe another question, maybe a little bit longer term I think in the past you talked about.
Brian Chin: Yes.
Brian Chin: Particularly some of your leading edge customers reusing their compounds at the in the past it may put a little bit pressure a few cycles ago.
Bren Higgins: <unk> growth.
Bren Higgins: Your largest customer I think last week, they talk about may be.
Bren Higgins: <unk> some of the five nanometer to 40 nanometer, we don't know whether theyre going to continue to do that but any thoughts there.
Looking a little bit ahead, but do you expect any negative impact going forward. Thanks.
Bren Higgins: You are right I mean, historically customers have always tried to reuse wherever they could.
Brian Higgins: A couple of factors that impacted going forward. One is the technology that theyre going to need for three and then for two upgraded from what they have at five in the second one is they still have volume at 5%. So the question will be historically when this was.
Brian Higgins: The most pronounced was when there was a great fall off an existing node going to a new node.
Brian Higgins: And our conversations with them in our modeling of it.
We see a pretty consistent from what we've seen in the last few years not as not as high as the reuse was what several years ago, but that factor drives us to continuously provide more capability in the tool to give them incentives to go to the new technology or to upgrade the existing so theres nothing specifically knew about this upcoming.
Brian Higgins: Next generation of new technology, but it is definitely something customers are always trying to optimize their footprint.
Brian Higgins: Thank you.
Brian Higgins: Our next question will come from Timothy Arcuri with UBS.
Brian: Thanks, Brian.
Brian: Brian I wanted to ask about book to Bill So it's.
Brian: It's below one for the fifth quarter in a row, it's up a little bit it's up to like <unk> nine.
Brian: So you are reaching some sort of like steady state.
Brian Higgins: But it's a much different dynamic what's sitting in.
Brian Higgins: <unk> then what you considered backlog because he used to have four to five months worth of backlog and now.
Brian Higgins: If you assume half of this stuff is parked outside of 12 months in assets inside of 12 months.
Brian Higgins: I mean, it's not that different than it was before but you still have this.
Brian Higgins: $5 billion plus it's.
Brian Higgins: Beyond 12 months and that was never there before so.
Brian Higgins: As we look pre Covid and post COVID-19.
Brian Higgins: What changed why is there this $5 billion worth of <unk>.
Bookings or RPI part beyond 12 months, because it isn't like your lead times have gone out that far.
Brian Higgins: And I understand that.
Brian Higgins: There's long lead times, but look there's always been long lead time, so what's kind of changed for you.
Brian Higgins: Yes, no I think the easiest way to think about that part of it is it's related to come.
Brian Higgins: Customers giving of orders.
Brian Higgins: That are tied to facilities that they are planning greenfield projects and so the schedules are driving the orders and so it's one of those were in the lead time centric.
Brian Higgins: But the customer has a project that is going to open in 25, they want their tools when they have that that scheduled plan to ob and so they've given us orders and a lot of cases, you have some China business, where you have given us orders and deposits that are tied to those schedules.
Rick Wallace: So thats the biggest factor in the pieces out and Youre right. It is a bit of a new phenomenon I think that that we started to see after the massive.
Rick Wallace: Ramp that we saw from 19 to 22 or so so.
Rick Wallace: And each quarter, it's been pretty consistent.
Rick Wallace: And we've been cleaning up a certain amount of that backlog every quarter, but it's been pretty consistent and it's been roughly 50% or so.
Rick Wallace: So in the quarter, we just completed if you notice if you look at the balance sheet, you'll see the deferred systems revenue.
Rick Wallace: Actually a little bit higher and thats related to the dynamic I talked about earlier, where we're shipments where were higher than revenue levels.
Rick Wallace: That drove down the.
Rick Wallace: The <unk>.
Rick Wallace: But the book to Bill relative to the revenue was actually was.
Rick Wallace: It was actually positive so, but but I don't think that changes the nature of your question in terms of the trend line.
Rick Wallace: A little bit better more kind of <unk>.
Rick Wallace: Distant with what we thought and a little bit positive in the December quarter.
Rick Wallace: Yes, yes, I mean the guy.
Rick Wallace: Definitely but I guess, just just just my fault.
Rick Wallace: Follow up on that is what's what's the advantage.
Rick Wallace: That customer and if your lead times are well inside of that what's the advantage if I'm, a Chinese customer to booking something thats going to sit in your backlog.
Rick Wallace: But partly on 12 months I mean, unless im worried about export control and maybe I think because I have something I've given you a down payment that entitles me to get the tool like is that part of it.
Rick Wallace: Still don't know why I would.
Rick Wallace: Park, something like way way beyond your your lead times.
Rick Wallace: Well, if you are a new customer and you have new relationships with us.
Rick Wallace: The demonstration of credibility in terms of.
Rick Wallace: Hey, we want this we want to engage we want you to put resources in place to support the bap and that takes some time to do so and then and a lot of cases that also comes with.
Rick Wallace: With deposits for a portion of the orders. So I think it comes down to you don't want if you're one of those customers want to ensure that when your fab opened that this isn't a bottleneck or so an obstacle to.
Rick Wallace: To your ramp in your plan, so and a lot of cases, if they are newer customers to us. This is R&R I wouldn't say that the customers. You know are our booking orders that far in advance.
Rick Wallace: But there are certain customers that want to make sure that we're prepared to support their plans and so they give us orders to two.
Rick Wallace: To ensure that they are credible and those.
Brian Higgins: Well, that's a ton of time.
Brian Higgins: Customers have you actually I haven't heard it before so okay. Okay. Thanks.
Harlan Sur: Our next question will come from <unk> Hari with Goldman Sachs.
Hari: Hi, Thank you so much for taking the question.
Hari: I have two as well the first one is on high and there seems to be a bit of a disconnect.
Among some of your customers in terms of I guess, our appetite to take tools in two.
Harlan Sur: Develop you're using those tools curious how youre thinking about potential insertion of <unk> over the medium to long term and how should we think about the positive impact to your business from a from an intensity standpoint.
Harlan Sur: Our views haven't really changed in terms of the timing for <unk>.
Harlan Sur: We're encouraged to see the shipments of the tools that we are well publicized and I think that's great. It is going to take a while of course as with any new technology to get those up and into production. So really haven't changed in terms of our view of when that turns into pilot and then when it turns to the high volume, but one thing that's clear is.
Brent Smith: The increased adoption of <unk>.
Harlan Sur: <unk> is good for KLA and the broadening of it as we see it being more applicable in memory also creates more opportunities not only just in the reticle space, but because we're now dealing with the deep activity challenges are greater as they start printing smaller features.
Harlan Sur: It drives both the number and intensity of the tools that we need but also how they run so you need to run for example, bvt tool at a higher sensitivity, which as you know requires a week.
Harlan Sur: Keep adding capability, but it does require more capacity to cover the same amount of silicon to support that so it's a very good trend for for process control and one that we're encouraged by but from our standpoint, no change, which I guess is really good news because if we look back at the U V. It did delay.
Time is high and it seems to be on track with the schedule that has been out there for some time now.
Harlan Sur: That's very helpful. Thank you and then as my follow up maybe one for Brian just on the display business. So one 5% of revenue last year.
Brian: Curious if you could speak to the profitability of that business I mean to the extent you do end up selling the business how should we think about accretion to gross margins.
Brian: And bottom line earnings Thank you.
Brian: Yes profitability is less than one of them.
Brian Higgins: One 5% of KLA. So it's one 5% of revenue the profitability is less than one 5% of KLA profitability.
Brian Higgins: Okay, I figured that much but thank you.
Brian Higgins: As a reminder, that is star one to ask a question.
Brian Higgins: All right and we have no further questions in the queue. So I'll turn the floor back over to Kevin Kessel for any additional or closing remarks.
Brian Higgins: Thank you Chelsea and thank you again, everyone for your time, we know it's a busy day of earnings a few weeks. We appreciate it we'll be in touch with all of you over the coming days and weeks and with that back to your Chelsea to provide any final instructions. Thank you.
Brian Higgins: This concludes the KLA Corporation.
Brian Higgins: 2023 earnings call and webcast. Please disconnect. Your line at this time and have a wonderful day.
Brian Higgins: [music].