Q2 2025 KLA Corp Earnings Call
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Todd: Good afternoon. My name is Todd and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation December quarter 2024 earnings conference call and webcast.
Todd: All participants' lines have been placed in a listen-only mode to prevent any background noise.
Todd: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, please press star 2.
Please limit yourself to one question and one follow-up.
Todd: Lastly, if you should require operator assistance, please press star zero. Thank you.
Speaker Change: I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead.
Speaker Change: Welcome to our earnings call to discuss the December quarter and calendar year 2024 results and outlook. I'm joined by our CEO Rick Wallace and our CFO Bren Higgins.
Speaker Change: We will discuss today's results released after the market close and available at IR.KLA.com along with supplemental materials
Speaker Change: Today's discussion and metrics are presented on a non-GAAP financial basis, unless otherwise specified. All full-year references we make are to calendar years. The earnings materials contain a detailed reconciliation of GAAP to non-GAAP results.
Speaker Change: KLA's IR website also contains future investor events, presentations, corporate governance information, and links to our SEC filings, including our most recent annual report and quarterly reports on Forms 10-K and 10-Q.
Speaker Change: Our comments today are subject to risks and uncertainties reflected in the disclosure of risk factors in our message to violence. Any forward-looking statements, including those we make on the call today,
Speaker Change: 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.
Speaker Change: Rick, we'll start with some introductory comments followed by Bren with financial highlights and our outlook. Before I turn the call over to our CEO, Rick Wallace, I wanted to remind everyone that our 2025 Investor Day will be held on the morning of June the 18th in New York City.
Rick Wallace: Now, over to Rick. Thank you, Kevin. I will summarize KLA's overall performance for calendar 24 and the December quarter and cover company highlights and updates on the industry landscape.
Rick Wallace: For calendar 2024, KLA again delivered relative growth outperformance, strong profitability, and healthy return to shareholders.
Specifically, 2024 revenue grew 12% to a record $10.85 billion.
Rick Wallace: and the process control revenue grew by over 12 percent, which indicates increased market share, while the services business grew 15 percent to $2.5 billion a year.
Rick Wallace: Also, for the calendar year, KLA maintained industry-leading gross and operating margins at 61 and 41 percent, respectively.
Rick Wallace: The company grew free cash flow to $3.4 billion and returned $2.9 billion in a combination of dividends and share buybacks.
Rick Wallace: Kalei's outperformance for the year was driven by a return to growth at the leading edge, which includes increased investment in AI, high-performance computing, and continued momentum in advanced packaging, as well as sustainable performance for Kalei's services business.
Rick Wallace: In turning to the December quarter, results for KLA came in above the midpoint of non-GAAP guidance range, despite navigating through the business impact of new U.S. government export controls, which were released late in the quarter.
Rick Wallace: Specifically, the quarter revenue topped $3 billion for the first time. The looted gap was $8.20, finishing at the upper end of the guidance range for the quarter.
Gap diluted EPS was $6.16.
Rick Wallace: The business landscape is performing as expected and we're encouraged by the strong demand we're experiencing in leading-edge logic.
Rick Wallace: with specific memory customers supporting high bandwidth memory and advanced packaging.
Rick Wallace: KLA's differentiated portfolio of solutions aligns exceptionally well with enabling our customers to navigate increasing complexity, growing design starts, and larger semiconductor devices in an environment of rising semiconductor demand.
Rick Wallace: Specific highlights in the quarter include a combination of strong, sequential, and year-over-year revenue growth to demonstrate an improving industry environment.
Rick Wallace: KLA is specifically positioned to benefit from accelerating growth at the leading edge.
Rick Wallace: Across all sectors, there are technology development investments supporting AI and HBM, as well as strengthening supply-demand environment, which positions the wafer fab equipment industry for growth in calendar 2025.
AI continues to be a crucial catalyst for KLA.
Rick Wallace: We are well aware of the recent revelations of Deep Seek.
Rick Wallace: and the implication that it portends a diminished demand for advanced semiconductors in support of the AI infrastructure build-out.
Rick Wallace: As a company that has been developing AI models for use in our own inspection systems for many years, our own experience supports the theory that increased compute efficiency enables more adoption of AI on our platforms.
The demand is clearly elastic.
as it pertains to the demand environment for advanced semiconductors.
Rick Wallace: We see no reason to believe that the increased compute efficiency in AI will have an impact on the advanced demand environment in the foreseeable future. AI is both an important driver and enabler of KLA's business.
Rick Wallace: Specific drivers connected to AI that are positive for KLA's growth are higher volume and higher value labor demand.
more complex designs, accelerating product cycles, larger die size
Rick Wallace: and growing advanced packaging demand. These trends demonstrate the increasing value of process control and assisting our customers through managing a dynamic production environment as investments and complexity increase.
Rick Wallace: Exemplifying this momentum for our advanced packaging portfolio continued in the quarter. The growing demand for more powerful systems of chips is driving more complex heterogeneous chip integration enabled by advanced packaging.
Rick Wallace: which increases the value of process control in the CHIP package. This is fueling growth for KLA and our broad portfolio system.
Rick Wallace: KLA Advanced Packaging Revenue grew to approximately $500 million in calendar 2024 and is expected to exceed $800 million in calendar 2025, up from our last estimate of $750 million.
Speaker Change: Haley's service business grew to $667 million in the December quarter, up 4% sequentially and 18% year-over-year. This makes 50 consecutive quarters of growth for our services business on a year-over-year basis.
Speaker Change: Finally, quarterly free cash flow was $757 million in calendar 2024 and the free cash flow margin was 31% over the same period, putting KLA amongst the top companies in the S&P 500.
Speaker Change: Total capital return in the December quarter was $877 million, comprised of $650 million in share repurchase and $227 million in dividends.
Speaker Change: Total capital return over the past 12 months was $2.9 billion. Daley views consistent and healthy capital returns as fundamental to delivering value for shareholders.
Speaker Change: KLA's December quarter results delivered strong sequential and year-over-year growth, which validates KLA's process control leadership and portfolio strength. The KLA operating model and the dedication of our global teams continues to be the foundation of our sustained success.
Speaker Change: We'll now pass the call over to Bren to cover financial highlights and our Outlook.
Speaker Change: Thanks Rick. Stanley's December quarter results demonstrate market leadership combined with the consistent execution and dedication of our global team to meet customer commitments and drive sequential and year-over-year growth profitability improvements.
Bren Higgins: Revenue is $3.08 billion, above the guidance midpoint of $2.95 billion.
Non-GAF diluted EPS was $8.20 above the guidance benchmark.
GAAP diluted EPS was $6.16.
Bren Higgins: Gross margin was 61.7%. Operating expenses were $596 million. Operating expenses were comprised of $342 million in R&D and $254 million in SG&A.
Operating margin was 42.3%.
Other income and expense met with a $31 million expense.
The quarterly effective tax rate is 13.7 percent.
Bren Higgins: That income was $1.1 billion, cash flow from operations was $850 million, and free cash flow was $757 million.
Bren Higgins: A breakdown of revenue by reportable segments and markets, major products, and regions can be found within the shareholder letter and slides.
Bren Higgins: Moving to the balance sheet, KLA ended the quarter with $3.8 billion in total cash, cash equivalents, and marketable securities, debt of $5.9 billion.
Bren Higgins: and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three major rating agencies.
Bren Higgins: During the December quarter, we retired our $750 million November 2024 bonds at maturity with cash on hand.
Bren Higgins: KLE's balance sheet provides the ability to fund our growth strategies, organic and inorganic, and offer attractive capital returns to shareholders.
Bren Higgins: Turning to our outlook, the industry outlook continues to gain momentum in the near term.
Bren Higgins: Driven by an increasing investment in leading-edge logic, high bandwidth memory, and advanced packaging.
Bren Higgins: We expect the WFE market to grow by a mid-single-digit percentage in 2025, from the high $90 billion level for calendar 2024.
Growth in calendar 2025 is expected to be fueled principally
Bren Higgins: by increasing investment in both leading-edge foundry logic and memory to support growing AI and premium mobile demand offset by lower overall demand from China due to the digestion of elevated levels of investment over the past couple of years.
Bren Higgins: In an encouraging development, our top customer recently said in an earnings call that they expect a number of new takeouts for N2 for the 2nm node.
Bren Higgins: in the first two years to be higher than both N3 and N5 in their first two years.
fueled by both smartphone and HPC applications.
Thank you.
Speaker Change: As communicated in early December, we continue to estimate the impact on KALY's revenue in calendar 2025 from recent export controls in China to be approximately $500 million plus or minus $100 million, with roughly 70% of the impact affecting our systems business.
Speaker Change: While we are hopeful, based on our interpretation of the regulations, that there should be licensing opportunities that will mitigate some of this impact, we are taking a cautious view given the significant delays in processing license requests by the U.S. government over the past few years.
Speaker Change: However, given KLA's business momentum, market share opportunity, and higher expected process control intensity at the leading edge across all segments, we are confident we will continue to deliver growth outperformance compared with the WFP market in 2025.
Daly's March quarter guidance is as follows.
Speaker Change: Total revenue is expected to be $3 billion, plus or minus $150 million.
Speaker Change: Our revenue guidance is up 27% year-over-year at the midpoint, further illustrating the improvement we expect to see in calendar 2025.
Speaker Change: FoundryLogic revenue from semiconductor customers is forecasted to be approximately 73% and memory is expected to be approximately 27% of semi-process control systems revenue to semiconductor customers.
Speaker Change: In memory, DRAM is expected to be about 75% of the revenue mix and NAND the remaining 25%.
Speaker Change: Non-gap gross margin is forecasted to be 62%, plus or minus 1 percentage point, or up approximately 30 basis points sequentially at the midpoint, despite slightly lower revenue primarily due to more favorable product mix expectations.
Speaker Change: For calendar 2025, based on expectations for business mix across systems and service.
Systems Product Mix
Speaker Change: and factory utilization, we expect gross margin for the year to be approximately 62% plus or minus 50 basis points.
Speaker Change: Non-GAAP operating expenses are forecasted in March quarter to be approximately $585 million as we continue to make significant product development and scaling investments to support expected revenue growth.
Speaker Change: given our expectations for company growth over the next couple of years.
We will maintain our operating expense trajectory.
Speaker Change: For the remainder of calendar 2025, we expect sequential increases of approximately $15 million in incremental operating expenses per quarter.
Speaker Change: This is driven by our priority around our product development roadmap requirements.
as well as revenue growth expectations.
Speaker Change: Our business model is predicated on ensuring 40 to 50 percent incremental non-gap operating margin leverage on revenue growth over the long run.
Speaker Change: Other model assumptions include non-GAAP other income and expense net of approximately a $36 million expense for the March quarter.
Speaker Change: and expect this to be roughly consistent throughout the calendar year.
Speaker Change: The tax assumption for March remains at 13.5%, and we expect this to remain through the June quarter.
Speaker Change: Beginning in the September quarter, which is the first quarter of our fiscal year, our tax rate will reflect the adoption of Global Taxation Pillar 2.
Speaker Change: Based on our current modeling, we think Pillar 2 implementation will drive the tax rate slightly higher to approximately 14% in the second half of the calendar year.
Speaker Change: We will provide an update on this planning rate mid-year if necessary.
Speaker Change: For the March quarter, GAAP diluted EPS is expected to be $7.77, plus or minus $0.60.
Speaker Change: DPS guidance is based on a fully deleted share count of approximately 133.38 million shares.
Speaker Change: In conclusion, our near-term revenue guidance points to relative stability around current business levels.
Speaker Change: Based on the strength of our backlog and market position, we see growth in calendar 2025 and expect to outperform the mid-single-digit growth rate we expect from the WFE market.
Speaker Change: KLA's focus on delivering a differentiated product portfolio that addresses customer's technology roadmap requirements.
It drives our longer-term relevancy and growth expectations.
for the KLA Operating Model Guiding our Best-in-Cross Execution.
Speaker Change: KLA is focused on implementing our strategic objectives designed to drive out performance.
Speaker Change: Kayleigh's focus on customer success, innovative solutions, and operational excellence drives industry-leading financial and free cash flow performance and allows us to return capital consistently.
Thank you.
That concludes the prepared remarks. Let's begin the Q&A.
Speaker Change: Thank you, Bren. Operator, can you please provide the instructions for Q&A?
Thank you for having me.
Speaker Change: At this time, if you would like to ask a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing star 2.
Speaker Change: We remind you to please unmute your line when introduced, and if possible, pick up your handset for optimal sound quality.
Speaker Change: In the interest of time, we ask that you please limit yourself to one question and one follow-up.
Speaker Change: We'll take our first question from Vivek Arya with the Bank of America. Please go ahead. Your line is open.
Speaker Change: Hi, this is Michael Mani on for Vivek Arya. Thank you for taking our questions. To start, we heard from two of your peers yesterday. The peer that is action deposition focused issued a pretty similar WFP view to you guys for investigating digits.
Speaker Change: while the other reiterated their annual guide suggesting that lethal spending remains healthy.
So the question is, if total WCE is...
Speaker Change: increasing something like $5 billion or so this year. But within that, WFP is also increasing.
Speaker Change: actually end up also growing pretty strong, so consuming a good part of that incremental growth.
Speaker Change: What exactly is happening to the process control part of the market this year? And if process control WFE is growing solidly, which it seems like it is, does that suggest that mid-cycle digits for WFE could be conservative? Or are there other parts of the market that are shrinking by that much? Thank you.
and pardon me do speakers do you have us muted?
My apologies.
Speaker Change: Yes, this is Brent, I'll take that one. And the guidance was clear that we think it's...
Speaker Change: Somewhere in that range of about 5 billion to use your number
Speaker Change: into 2025 versus 2024. We feel pretty good about KLA's share of overall WFE opportunity into next year. Obviously, as we move into 2025, we've got more investment and leading edge, and that's certainly a nice driver for our business, and we're already seeing KLA's share of WFE at the N2 node being meaningfully greater than what we saw at N3.
Speaker Change: What's happening in DRAM, first advanced DRAM is good for us with scaling and EUB, but also as you look at high bandwidth memory, high bandwidth memory is also driving process control intensity due to the lack of redundancy, more complex logic circuitry in the base die, the need for more reliability, bigger chips and so on.
Speaker Change: So, we feel pretty good about all of that, and then I think finally, the growth that we referenced in the letter in Advanced Packaging.
Speaker Change: is accelerating for the company. It seems like every quarter I keep raising the numbers.
Speaker Change: So I'm pretty excited about the opportunities that are there, and it seems to be accelerating as we move into this year. So for all those reasons, it looks like process control intensity, KLA's share of market, looks to increase.
Speaker Change: in 2025 based on our assessment, and in an environment where...
Speaker Change: Memory is probably a higher percent given expected growth in DRAM. I think the dynamics I talked about more than offset a slightly changing mix that still foundry logic heavy but but a little bit more DRAM in terms of our views on 25.
Speaker Change: Got it. That's helpful. Thank you. And for my next question, just...
Speaker Change: Could you help us with the linearity for revenue this year to the best extent you can, you know, just because we're kind of at a high watermark for revenue this quarter. So should we expect, you know...
Thank you very much.
Speaker Change: You know the second half I'm not going to comment on it as we said in the letter We feel pretty good about relative stability as we look at the funnel here moving forward
Speaker Change: We'll see, you know, as we start to move through the year what happens, but in terms of, you know, how we're modeling the company, it seems that we're bouncing around this $3 billion level, plus or minus, at least as we look at the first half of the year.
Next question please.
Speaker Change: Thank you. As a reminder, that's star one to ask a question. Our next question will come from Harlan Sir with J.P. Morgan. Please go ahead.
Harlan Sir: Good afternoon, thanks for taking my question. You know in process control, strong off performance for the team in calendar 24, I think you are.
Harlan Sir: Pus control systems business was up 15% year-over-year, right? That's versus WSC it up
Harlan Sir: and a mid-single digits. But if I look back over the past five years, the team's process control business has outgrown WSE on average by about
Harlan Sir: 500 to 700 basis points per year. So given this year is going to be...
Harlan Sir: more leading-edge technology inflection driven which is where obviously you guys have a strong leadership position. Is it fair to assume that if WFE is up mid-single digits percentage points this year that your process control business should grow kind of low to mid-teens percent in calendar 25?
Harlan Sir: But clearly, we're feeling great about the position we have, and a couple things have changed, as you well know, in terms of the dynamics. One, because we've resumed scaling, there's more opportunity for more inspection.
Harlan Sir: So I've always viewed the opportunities as being two-fold. One, there needed to be an opportunity and then we had to have a solution.
Harlan Sir: And so, and sometimes we've had the case where, for example, if you go back years to 3D NAN.
Harlan Sir: where, of course, if we could have looked through and found defects, there would have been an opportunity. It was tough to do. But now we're really at an interesting point where the leading edge, every dynamic is going kind of in our favor. In terms of higher value wafers, you've got larger die size. We talked about this in the prepared remarks.
Harlan Sir: And you've got accelerated technology nodes and more layers that need to be
Harlan Sir: figured out. The other dynamic, of course, that you know is HBM.
Bren Higgins: is looking more like logic than it used to, less redundancy, more valuable buy, and of course the dynamic around packaging. So we feel great, as Bren said, about process control's position and overall spend for our customers, and that's the conversation.
Bren Higgins: we're having with our leading customers is very focused on getting that availability and being supportive of their technology ramps as they make these big investments going forward.
Speaker Change: That's great. Thank you for that. And then on the 60% growth outlook for your advanced packaging businesses here
Speaker Change: Can you just kind of help us unpack that a bit? How much of that mix is two-and-a-half D packaging technology, like COAS versus HBM versus other packaging types? And what is the rough mix of process control versus semi-manufacturing systems? And then we're already starting to see some.
Speaker Change: Future AI designs moving to 3D SOIC technology study next year. Is this a further tailwind for the team given, you know, the higher complexity of these next-generation 3D architectures?
Speaker Change: Yeah, great questions. I mean, I think two things have happened, and we got this early indication from our leading customers a year and a half, two years ago, that the
Speaker Change: The challenges in packaging were going to look a lot more like what was going on in the front end, and they asked us to make some of...
Speaker Change: the platforms that we use for the front end available for packaging. So back to the question, what is this? A lot of it's inspection and metrology, derivatives of the projects and programs that we have.
Speaker Change: these high-end chips along with this complex packaging and this HCM.
Speaker Change: The risks are very high if there's a yield loss, so there's more inspection opportunity there. And we feel great about the continued growth as we go forward. Right now it's mostly 2.5 HP, but we see it's going to go forward.
Speaker Change: This is an area that's moving very quickly, and because they need solutions, they're very focused on making sure we understand them as we go forward.
Bren Higgins: Hey Arlen, Bren here. It's about 65-70% semi PC versus process.
Great insights. Thank you.
Boom!
Speaker Change: Thank you. Our next question will come from CJ Mews with Cantor Fitzgerald. Please go ahead.
CJ Mews: Yeah, good afternoon. Thank you for taking the question. I just wanted to dig a little bit deeper in your outperformance relative to WFE.
Speaker Change: Within that, you're including that 500 million China hit. And so, we'd love to hear, I guess, beyond the rising process control intensity at 2 nanometer in HPM, are there other drivers, or are those the two principal ones we should be thinking about?
Speaker Change: Yeah, TJ, those are the two principal ones. Plus some surrogate.
Speaker Change: Yeah, you've got higher intensity at the node, and to Rick's point, we feel very good about some product momentum in a number of our markets. So that's... And then I think finally, if you look at that and you look at what's driving growth...
Speaker Change: Within process control you've got an acceleration in certain products where we have a strong market position. So they're influencing the growth rate obviously more relative to the overall. So that also drives an improvement in share. Optical pattern inspection being one of those areas.
Speaker Change: Well, and Radical, and we saw some improvement in some of the work in Radical, and including the Gen 5 CTA for print check, which obviously shows up in the optical, but it's part of that solution.
Speaker Change: We're feeling pretty good and there was some investment made by our customers to support prior nodes once they realized that there was still a yield opportunity there.
Thank you.
Speaker Change: Just to follow up on that, you, Rick, you talked about shared gain, can you elaborate on that? And then my second question would be on service. You talked about hitting kind of the long-term growth rate over time, but would be curious given kind of the China impact, you know, how you're thinking about growth for overall service in calendar 25. Thanks so much.
Speaker Change: sure so on the share side I think there's a couple areas that might be more obvious than others one is optical simply because optical grew disproportionately perhaps than the rest of the market and we have a large share there so that creates
Speaker Change: greater overall position there. We had some really strong momentum in E-Beam but then the other area where we really saw some strong performance
was in packaging.
Speaker Change: and so that's the one where the teams have really done a great job focusing the last couple years and we've been able to see.
continued momentum there, so we feel pretty good about it.
Speaker Change: you know obviously the numbers for the year aren't going to come out but we have gained a lot of share in the last couple years and the question was would there be any retransfer and we feel pretty good about where we are.
Speaker Change: For service, anytime you lose access to a fab, you have the immediate headwind that you can't get access to that equipment. So as I look at growth this year, I think growth is probably in the high single digits for service.
which is below the long-term model we outperformed.
Speaker Change: the long-term model by a little bit in 2024. Over time though, it's generally our view, at least in terms of how we run the company, as we think about the efficiency of the market, that if you have fabs that are inhibited from being able to supply, that that
Speaker Change: capacity has to get added somewhere else and so that would create an opportunity for us to make some of that up over the very long term.
Speaker Change: So, and obviously that would mean that, you know, you would end up with whatever was spent before would have to be replaced somewhere else.
Speaker Change: So I think over the long run, we feel pretty good about the growth trajectory in our long-term model.
Speaker Change: But in the short run, it does affect, obviously, your ability to get at that capacity.
which puts pressure on the growth rate.
Speaker Change: and also put some pressure on our ability to move resources around. And so we'll have to deal with some inefficiencies. We've staffed up to support those fabs, and now we have to move those folks to support other customers.
Speaker Change: So there's a few moving parts, but in the long run, we feel pretty good about the trajectory given the higher value offerings, what we're seeing in terms of pricing as it relates to new products, the opportunities in packaging for incremental service.
Speaker Change: So I think that the drivers for service are all pretty compelling. Obviously the install base is growing, lifetimes are increasing. So in the long run, we feel pretty good about the long-term target.
Thanks so much.
Speaker Change: Thank you. Our next question will come from Joe Quadrocki with Wells Fargo. Please go ahead.
Speaker Change: Just to follow up on the services impact from China, just given the fact that most of your services is...
Speaker Change: are highly recurring. Do we just take that, I guess, quarterly kind of run rate impact all in the March quarter and then grow from there? Or is there, you know, further kind of headwinds to think about in the out borders?
Yeah, I think that's the way to think about it.
Speaker Change: Because you lose what you would have gotten at those fabs, and then it grows from there.
Speaker Change: So I think that's a reasonable way to think about it.
Speaker Change: And then just thinking about capital intensity or process control on the DRAM side, can you talk about just the difference in HVM, process control intensity, relative to conventional DRAM, just how to think about that adoption? I know, obviously, EUV being adopted across the board is helpful for you guys, too.
Speaker Change: Yeah, so, as I said earlier, right, with an HBM device,
Speaker Change: You've got a few things that are happening. You've got bigger die because you have to drill the PSGs. They're bigger, so you have less redundancy, which historically has been pretty significant to DRAM, and so that's been a headwind to process control intensity.
The logic circuitry is more complex.
Speaker Change: The reliability on all the guy in the stack is higher.
Speaker Change: So for all those reasons, it's very good for process control intensity. I think overall for DRAM, it's moving the needle, probably.
Speaker Change: somewhere from, you know, we'll call it the 9 to 10 range where we've been historically as a percent of WFE.
Speaker Change: that it probably moves up, you know, a good hundred to, you know...
150 basis points from there. Now obviously, you know, mix...
Speaker Change: will affect that. Most of the focus is on HBM in terms of new requirements, so mixed dynamics could affect that, but we feel pretty good about these dynamics as they affect and drive the DRAM market. And it's most pronounced in the latest
Speaker Change: technology nodes and that's where we're seeing it more and so it's going to take a little bit of a time for us to really figure out what that overall looks like. I think by investor day we should be in a pretty good position to talk about it and on a longer term basis.
Thank you.
Speaker Change: Thank you. Our next question will come from Timothy Arcuri with UBS. Please go ahead. Your line is open.
Thank you.
Speaker Change: Thanks. Brian, can you give us RPO? It was supposed to be up. Can you give us the number?
Speaker Change: Yeah, so RPO was down about $900 million. About half of that was related to...
Speaker Change: deep bookings we took due to the December 2nd regulations so about half of it related to that and and then the other half you know shipment levels were were higher so that's how it played out in the quarter.
Got it. Okay. Thanks.
Speaker Change: Process control systems you said pretty stable from here, but what about EPC? It was up a lot this quarter It grew a lot in well, it didn't grow that much but it but it grew, you know a lot in Q4 So so how to think about it for this year? Can it grow 10, you know, perhaps low double digits this year?
Speaker Change: Yeah, I think overall EPC is probably going to be about mid-single digits. You have to remember that what shows up in EPC is flat panel business, and so at the end of this quarter, we will be done shipping systems for flat panel after we announce the end of manufacturing.
Speaker Change: 12 months ago. So you have the flat panel revenue coming out and so obviously that this year affects the overall growth rate of the EBC businesses as we report those segments.
Speaker Change: So, overall, we feel pretty good if you look at SBGS.
Speaker Change: grow especially semiconductor mostly driven by advanced packaging growth year-to-year. ICOs, component inspection, again a packaging centric business, is also growing. PCB businesses are more tied to mobility and capacity, so less growth in those areas. And then of course you've got the offset from losing the SPDPs.
Speaker Change: Now, losing the FPD does enhance the margin ratios, right? Gross margins probably, yeah.
Speaker Change: 20 bits higher. I think operating margins are probably, you know, 30 bits higher because the revenue mix is a little bit richer and certainly that's factored into how we guided gross margins as we look at this year, or look at this year 2025.
Thank you, Ben.
Speaker Change: Thank you. Our next question will come from Krish Sankar with TD Cowan. Please go ahead.
Krish Sankar: Hi, thanks for taking my question, and Richard Grant, thanks for clarifying the 500 million plus or minus impact from export controls. You also spoke about, you know, China W3 digestion. I'm just kind of curious, if you live in the digestion from China,
Krish Sankar: How do you think about your decline in China sales year-over-year on top of export controls in 2025 versus 2024?
Thank you. Bye.
Krish Sankar: Yeah, I'll try to help with that, and obviously we'll have to see how the year plays out. But if you look at how we finished the year, right, this last quarter was 36%, we finished the year at 41% of our business in China. As we look at 2025, I think that percentage drops to about, you know, 29%, plus or minus.
Krish Sankar: a point or two as we go forward here and so when you do the map on that assuming the stability that we articulated about our top line as we think about
Krish Sankar: where we are right now, that translates into the overall China business down somewhere around 20% or so.
Thank you.
Speaker Change: got it got it that's very helpful and then another question is can I know you know in China, I apologize for this, but you know when you look at your numbers compared to some of your peers, all the last two quarters your China sales have been more resilient compared to your peers.
Speaker Change: Is it due to the vapor business or is it because China's building domestic reticle capacity? What's happening there that kind of makes you relatively more resilient to your peers?
Speaker Change: Thank you. Our next question will come from Chris Caso with Wolfe Research. Please go ahead.
Chris Caso: Yes, hi, thanks.
Chris Caso: Just a follow up question with regard to the China impact and you've given.
Chris Caso: Some color on what you expect that for the year from a quarterly basis.
Chris Caso: Is there any sort of incremental headwind or benefit as we go into the second half.
Chris Caso: I know that you talked about some of the mitigation and licenses, which are taking some time, but.
Chris Caso: I guess, how do we think about this as we go sequentially through the year.
Chris Caso: <unk> been pretty cautious with it overall, we'll see how it plays out as I said in the prepared remarks in terms of licenses that could mitigate the impact.
Chris Caso: But when we look at it over the course of the year or what we expected it.
Chris Caso: It was pretty consistent across the year. So it wasn't maybe again that could be the nature of how customers buy process control versus other types of products, but it was pretty half to half was was more or less pretty consistent.
Chris Caso: Okay.
Chris Caso: And just to follow up on on gross margins again.
Chris Caso: Again, youre kind of starting out with with <unk>.
Chris Caso: 62, Youre guiding to <unk> 62 for the full year so.
Chris Caso: Sort of assuming that remained stable as you go through the year.
Chris Caso: And I guess at what point with regard to some of the operating leverage that you typically get with the fall through whats kind of the starting point for that and that we can start to see some of the some of the leverage kick in as revenue starts to starts to grow.
Chris Caso: Yeah.
Chris Caso: We have mix issues that that generally are the <unk>.
Chris Caso: Biggest impacting item to our overall gross margins more so than customers or segments.
Chris Caso: I would expect as we start to see growth overall.
Chris Caso: Overall revenue accelerate we will start to see the kind of leverage that we've seen historically, so I said, 62% plus or minus about 50 basis points. The reason I think some of that is predicated on what happens moving forward you do have it depends on the mix right you do have markets like the packaging market, which carries a lower gross margin.
Chris Caso: Given the complexity of the tools and some of our higher end systems, but obviously the gross margin dollars are quite significant and the relevancy of growth to KLA.
Chris Caso: <unk> so so.
Chris Caso: We're pleased with that but I think as we move forward.
Chris Caso: I think you're likely to see us continue in that 60% to 65% range as we as we.
Chris Caso: <unk> revenue over time, and as we talked about in our 2022 plan.
Chris Caso: We saw gross margins were around 63% or so obviously predicated on a volume level of about $3 5 billion. So that gives you a sense of kind of where we're at from here to there moving forward and I feel pretty good about.
Chris Caso: About our ability to achieve that given the investments we've made.
Speaker Change: And that are still.
Speaker Change: I think we're in a good position to deliver against that I don't think we have to go and make incremental investments in terms of the capacity the hard asset capacity, we have to execute to those those business levels.
Speaker Change: Got it helpful. Thank you.
Speaker Change: Thank you. Our next question will come from <unk> <unk> with Raymond James. Please go ahead.
Speaker Change: Thank you one short term question on your March quarter guidance.
Speaker Change: You know just the foundry logic, I think youre guiding for 73% of the mix to be foundry logic.
Speaker Change: That is I think.
Speaker Change: Implies at least in a mid single digit type decline, we haven't seen a decline in that business in a while and I'm just trying to understand how that reconciles with your comment about demand being strong in the short term.
Speaker Change: I'm, taking a look at it I don't think.
Speaker Change: It doesn't look like it changes all that much.
Speaker Change: So I think.
Speaker Change: Even given the overall revenue guidance is what it was I think for semi PC systems, I mean, we'll see how the quarter ends up.
Speaker Change: And we do have business that isn't there's infrastructure business for example that doesn't show up in those percentages. So when I look at the business is that.
Speaker Change: The semiconductor customers.
Speaker Change: Yes.
Speaker Change: Pretty consistent so I don't think it'll change a little bit, but as we talked about I think memory overall.
Speaker Change: Is a higher percentage of the mix in 2025, there was in 2024.
Speaker Change: Okay got it.
Speaker Change: Some other customers non and two and three that showed up in December.
Speaker Change: But aren't showing up.
Speaker Change: Oh, okay, Okay that makes sense.
Speaker Change: And then I guess.
Speaker Change: We go through the year, obviously and two is going to be relatively strong.
Speaker Change: Do you still have I guess material contribution are you still expecting material contribution from M. Three or is it is it at a minimal level and then I guess, just a follow up to that.
Speaker Change: How does the I guess piece of intensity change as you go from <unk>. Thank you.
Speaker Change: Yes, so most of the focus in terms of new investment is on 10 nanometer.
Speaker Change: There's still some incremental investment that's happening in three but the vast majority of it is two nanometer centric obviously, there's packaging investment that's also happening and I mentioned it earlier in his store have been over the last.
A couple of quarters or so.
Speaker Change: And three versus into it into we thought we were about 75 basis points higher in terms of kellys share of Wi Fi.
Speaker Change: I think that we're likely higher than that is probably 90 ish to 98 basis points, maybe 100 basis points, so trending in the right direction for sure.
Speaker Change: Got it thank you.
Speaker Change: Thank you. Our next question will come from Brian Chin with Stifel. Please go ahead.
Brian Chin: Good afternoon, and thanks for letting us ask a few.
Speaker Change: Questions.
Speaker Change: Yeah I was just curious in terms of.
Speaker Change: Logic foundry chipmakers that are at the leading edge, but maybe not expanding capacity aggressively.
Speaker Change: Can you comment on the magnitude of residual spending you still see with them tied to R&D and technology development. Obviously, you were able to offset that or any drag there and Ralph outgrowing WMC distributors curious if you had any sort of commentary around that.
Speaker Change: Are you, saying I'm, sorry, you said, one could orange at the leading edge.
Speaker Change: At the leading edge, but not expanding capacity aggressively there was kind of and that's kind of one guy doing that but in terms of the other ones that are sort of on the on the pace or maybe something on the pace then that does not doing out aggressively.
Speaker Change: Sometimes I signaled spending engagement you still have with them.
Speaker Change: But.
Speaker Change: So, let's say, we derisked it out in our 25 clients.
Speaker Change: Okay.
Speaker Change: Fair enough.
Speaker Change: And then maybe just carrying for that loss.
Speaker Change: Question.
Speaker Change: I thought the process control intensity going from.
Speaker Change: Yes, two nanometer Gail around to <unk>, because I think they're kind of meant to be somewhat closely coupled to some degree.
Speaker Change: Yes, we're a little early on that one so I'd like to before we started making comments actually shifting to support that activity in a way it actually model it.
Speaker Change: One of the things obviously, we've seen over the course of the last several nodes.
Speaker Change: For intensity reasons, but also for sure is that because of the design start environment.
Speaker Change: <unk> customers are managing a much more dynamic design environment. You now have more designs that are driving that ramps. All of these things have been positive factors and then theres a share element as well.
Speaker Change: This fundamentals I think shift moving forward and the composition of semiconductor revenue to larger higher value di would be backed out defect density.
Speaker Change: Very problematic I think plays to growing opportunities for process control, we have to execute on our programs to be able to deliver the right solutions for customers to solve their problems solved the right problems at scale to production, but I think if we execute on our own business.
Speaker Change: Creating opportunities for us to see a continued tailwind in this area, Yeah, and let me give a little more perspective too because we've actually.
Speaker Change: Usually the.
Speaker Change: The spending is done at a node that process control intensity is kind of set but what we've seen happen is when we have new solutions, but find new effects problems better yield impacting with back porting of that so in other words, you might see some systems going into prior nodes, which actually.
Speaker Change: Drives those entities.
Speaker Change: Higher node, which is the new baseline could go forward. So we feel.
Speaker Change: I think part of the outperform is the fact that we're actually have more solutions that solve the problems we've always had.
Speaker Change: More opportunities than we've had answers for in terms of customers trying to figure out how to learn quicker and adopt new technologies, but our technologies are really coming together in a way that we think there's it's both share but also it drives adoption simply because we're solving more problems. So when we look at what were seeing Brent too.
Speaker Change: Feel pretty good about the potential to help our customers ramp those nodes and that'll be it.
On which to build going forward for example, a lot of people didn't model early on the reticle verification our wafer the print check that we're using for Gen. Five that's essentially a new applications. Once people valued that then they might even go back and get back some of that capability when there's opportunity.
Speaker Change: So we feel pretty good about where we are in terms of driving overall intensity and that'll be part of the message. We shared at our Investor Day is how we see that going forward, which will include the note you talked about.
Speaker Change: Okay, great. Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question will come from Charles <unk> with Needham and company. Please go ahead.
Charles: Hi, Yes. Good afternoon. Thanks for taking my question so.
So I.
Speaker Change: I think that you guys don't want to explicitly call out the direction for the second half in terms of the growth relative to the first half of the year, but it sounds like the base. The base case assumptions on you guys. As you are probably going to be around that $3 billion per quarter level, maybe if you look throughout the year.
Speaker Change: Maybe some of that is contingent upon whether you can get some export licenses.
Speaker Change: For that 400 dollar an impact upon the latest of export control, but is there any other swing factors that you probably don't have a <unk>.
Speaker Change: Cruising yet.
Speaker Change: Could support some of the second half growth is there anything that that you you haven't mentioned.
Speaker Change: Well look licenses.
Speaker Change: As we said earlier, we haven't built that into the plan and so we'll see how that plays out and I think that.
Speaker Change: The stabilizing around current levels as we look forward.
Speaker Change: It seems like we're operate around this level and you know as we even go beyond the middle of the year, we will see what happens we mentioned earlier about de risking some opportunities and so we'll see how those potentially play out around certain customers, but that could be a swing factor as well and I think that back to what we said about certain parts of.
Speaker Change: The market have you been a little bit more cautious on we'll see if theres more upside there in China that I think we've tried to derisk that relative to the levels of investment we've seen over the last couple of years.
Speaker Change: But we'll see how that plays out as we move forward.
Speaker Change: But I think for now it feels like a around the current levels as the best that I can do from a guidance point of view.
Speaker Change: Spring, maybe a quick follow up what's the expectation for China revenue contribution into the March quarter.
Speaker Change:
Speaker Change: It will come down as a percent.
Speaker Change: Hi, <unk>.
Speaker Change: We will see you will see what ends up revenue.
Speaker Change: Because you've got different Rev. Rec policy issues from whether it's a new customer in a new fab versus an established customers. So that could either accelerate revenue to revenue shipment or extend it to an acceptance process. So we'll see how things play out but in general I would expect it to drop from the 35.
Speaker Change: That level probably into the high twenty's.
Speaker Change: Maybe 30 at the highest.
Speaker Change: Thanks, that's very helpful. Thank you.
Speaker Change: Sure.
Speaker Change: Thank you as a reminder, if you would like to ask a question at this time. Please press star one on your telephone keypad.
Speaker Change: We will take our next question from <unk> Malik with Citi. Please go ahead.
Malik: Hi, Thank you for taking my question.
Speaker Change: The question on foundry concentration comes.
Speaker Change: Good luck with investors, obviously, you guys have been very well with your top foundry customer an end to end it all around and that is the rapidly within Japan.
Speaker Change: Kind of a ramping this year.
Speaker Change: How are you guys leaning into the truly struggling foundry this year, if that poses a risk to your business.
I'm, sorry say it would be how are we dealing with it and.
Speaker Change: How are you guys.
Speaker Change: Like leading eating into traveling foundries and what impact that could have a little bit here in outer years in terms of good exposure.
Speaker Change: Well.
<unk>.
Speaker Change: We obviously work with all our customers and so if there's a way for us to add value. We're doing that I think the bulk of it.
Speaker Change: The state of Capex number it pretty clearly.
Speaker Change: And towards the direction of the biggest player in the market in terms of investment, but the others we.
Speaker Change: Engage I mean, certainly everyone that we work with wants to improve their ramp up time of new technology and improve their yield and so.
Speaker Change: So.
Speaker Change: Of course, we're doing that but that's not where the bulk of the businesses. These days. So I don't I don't see a huge difference in terms of how we think that we're engaging now relative.
Speaker Change: So how we were.
Speaker Change: In the past it's just.
Speaker Change: Dynamics have shifted much more towards the leader who is further ahead now than they've been in quite a while.
Speaker Change: Okay.
Speaker Change: Fair enough and Brent on the 500 million restrictions impact can you give some color.
Speaker Change: Like trailing edge logic projects.
Speaker Change: Projects or was it DRAM contribution from those sales.
Speaker Change: Yes, most of it was was logic.
Speaker Change: Yes, very very little in fact, all of it was logic.
Speaker Change: Well, they're very little.
Speaker Change: It was a memory.
Speaker Change: Thank you.
Speaker Change: Thank you and it appears we have no further questions at this time I would like to turn the call over to Kevin Kessel for any additional or closing remarks.
Speaker Change: Thank you very much and thank you everybody for your time and your attention and we know how busy today isn't this weekend. So we appreciate it we'll be speaking with you all very soon I will turn it back to the operator for any closing instructions.
Speaker Change: Thank you. This concludes the KLA Corporation first quarter 2024 earnings call and webcast. Please disconnect. Your line at this time and have a wonderful day.
Speaker Change: [music].
Speaker Change: