KLA Corporation (NASDAQ:KLAC) Q1 2024 Earnings Call Transcript

KLA Corporation (NASDAQ:KLAC) Q1 2024 Earnings Call Transcript October 25, 2023

KLA Corporation beats earnings expectations. Reported EPS is $5.74, expectations were $5.39.

Operator: Good afternoon. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation September Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions] Thank you. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead.

Kevin Kessel: Thank you for joining us for our earnings call to discuss the results of the September 2023 quarter and our December quarter outlook. I'm joined by our CEO, Rick Wallace, and our CFO, Bren Higgins, to discuss our results released today after the market close, which are available on our IR website, along with the supplemental materials. Today's discussion is presented on a non-GAAP financial basis unless otherwise specified, our full year references all related to calendar years. A detailed reconciliation of GAAP to non-GAAP results is in the earnings materials posted on our website. Our IR website also contains future investor events as well as presentations, corporate governance information and links to our SEC filings, including our most recent annual report and quarterly reports on Forms 10-K and 10-Q.

An automated manufacturing production line of semiconductor components on an assembly line. Editorial photo for a financial news article. 8k. --ar 16:9

Our comments today are subject to risks and uncertainties reflected in the risk factor disclosures in our SEC filings. Any forward-looking statements, including those we make on the call today, are also subject to those risks and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. Rick will begin the call with some comments and quarterly highlights. Bren will conclude with our financial highlights, including our guidance and outlook. I will now turn the call over to our CEO, Rick Wallace. Rick?

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

Specifically, revenue of $2.4 billion finished at the upper end of the guidance range. GAAP EPS was $5.41 and non-GAAP EPS was $5.74, both also finishing at the upper end of the respective guidance ranges. These results were driven by the strength and relevance of KLA's process control portfolio. Additionally, focused execution enabled continued free cash flow generation and capital returns. We are proud of how the KLA team continue to outperform in the marketplace and deliver on customer commitments. The overall business environment remains relatively stable for KLA. We continue to see strength in markets served by legacy nodes despite softness in memory and leading-edge, logic and foundry investments. As the industry continues to navigate the slowdown in the electronics market, we are closely monitoring any adjusting results that affect our customers' capacity.

KLA continues to outperform the industry on a relative basis because customer investment in R&D for technology advancement and transition has proven to be more resilient to market pressures. If we look at some specific highlights in the quarter, revenue was driven by strength in legacy node investment globally and industry infrastructure investment. KLA's market leadership, product success and unpatterned wafer, optical and macro inspection also demonstrate the power of the KLA portfolio. Rapid growth of AI, both enables KLA's differentiation and helps drive industry growth. KLA is a pioneer and adopting AI to improve the performance of our systems and create differentiation. And KLA has a long track record of employee deep learning and physics-based algorithms in our core technologies.

As the cost of compute has declined, we are now able to deploy this capability more broadly across our product portfolio, leveraging our AI expertise, KLA's inspection, metrology and data analytics systems help customers solve challenges associated with current process technologies and critical industry inflections, including gate all around, 3D memory, EUV lithography, and advanced packaging. KLA service business grew both sequentially and year-over-year, ending at $560 million in the September quarter and remains on track or high single-digit percent year-over-year growth in 2023. Finally, the September quarter was another excellent period from the cash flow and capital returns perspective, quarterly free cash flow was $816 million, which drove the last 12 months free cash flow up 3% year-over-year to $3.2 billion.

Total capital returns over the past 12 months were $2.4 billion. In summary, KLA's September quarter results demonstrate our continued process control leadership and the success of our portfolio strategy. Our consistent execution despite challenges in the marketplace highlights the resiliency of the KLA operating model, driven by the dedication of our global teams. I'll now hand it over to Bren to cover more details on our financial performance and our outlook. Bren?

Bren Higgins: Thank you, Rick. KLA delivered a strong September quarter, demonstrating consistent execution, despite a challenging work marketplace. Revenue was $2.4 billion, non-GAAP diluted EPS was $5.74 and GAAP diluted EPS was $5.41, with all three coming in at the upper end of the guided ranges. Non-GAAP gross margin was 62.4%, 40 basis points above the guidance range due to benefits from a richer product mix and better service cost performance than model. Non-GAAP operating expenses were $534 million, in line with guidance. Total non-GAAP operating expenses comprised $311 million of R&D and $223 million in SG&A. Non-GAAP operating margin was 40.2%, non-GAAP other income and expense debt was $47 million, and the quarterly effective tax rate was 14%.

At the guided tax rate of 13.5%, non-GAAP EPS would have been $0.03 higher or $5.77. Quarterly non-GAAP net income was $786 million. GAAP net income was $741 million. Cash flow from operations was $884 million, and free cash flow was $816 million. As a result, free cash flow conversion was a strong 104% and free cash flow margin was 34%. The company had approximately 137 million diluted weighted average shares outstanding at the end of the quarter. The breakdown of revenue by reportable segments and end markets and major products and regions can be found within the shareholder letter and slides. Turning to the balance sheet. KLA ended the quarter with $3.35 billion in total cash, cash equivalents and marketable securities, debt principal outstanding of $5.95 billion and a flexible and attractive bond maturity profile supported by strong investment-grade ratings from all three agencies.

KLA has an impressive history of consistent free cash flow generation, high free cash flow conversion and strong free cash flow margins across all phases of the business cycle and economic conditions. Over the last 12 months, KLA has returned $2.4 billion to shareholders, including $1.7 billion in share repurchases and $726 million in dividends paid. I also wanted to highlight that on September 5, KLA announced an increase in the quarterly dividend level to $1.45 per share from $1.30, the 14th consecutive annual dividend increase. Since its inception in 2006, KLA has grown the quarterly dividend level and approximately 15% compound annual growth rate. Additionally, on that date, KLA announced an incremental $2 billion share repurchase authorization.

These capital return actions reflect confidence in our business model and growth strategy as we progress along the path to our 2026 financial targets. Moving to our outlook. As we review the market and assess relative performance of our peers across the industry, we are adjusting our wafer fab equipment outlook for 2023 up to approximately $80 billion, reflecting a decline of approximately 16% from the $95 billion level in calendar 2022. While the timing of a meaningful resumption in WFE investment growth remains unclear as most underlying end markets remain soft, we continue to see KLA's overall demand stabilizing around current business levels, and we expect this demand profile to continue into the first half of calendar 2021. KLA's primary value proposition is focused on enabling innovation through technology advancements and transitions, which our customers continue to prioritize across all business environments.

While capacity plans are often adjusted due to changing demand expectations, technology road map investments are more resilient. This adds additional confidence to our business expectations as customers align shipment slots with road map requirements. In this environment, we will continue to focus on meeting customer requirements, maintaining our high level of investment in R&D to advance our product road maps and KLA's market leadership and delivering strong relative revenue growth and financial performance. As for guidance, our December quarter guidance is as follows. Total revenue is expected to be $2.45 billion, plus or minus $125 million, foundry logic is forecasted to be approximately 68%, and memory is expected to be around 32% of semiconductor process control systems revenue to semiconductor customers.

Within memory, DRAM is expected to be about 85% of the segment mix and NAND 15%. We forecast non-GAAP gross margin to be 61.5% plus or minus 1 percentage point, as product mix expectations are modestly weaker versus the September quarter and service period cost benefit realized in the September quarter normalizes. Inclusive of this guidance, calendar 2023 gross margins are expected to end up in the mid-61% range. Non-GAAP operating expenses are expected to be approximately $540 million. Other model assumptions for the December quarter include non-GAAP other income and expense net of approximately $45 million and an effective tax rate of approximately 13.5%. Finally, GAAP diluted EPS was expected to be $5.54, plus or minus $0.60 and non-GAAP diluted EPS of $5.86 plus or minus $0.60.

EPS guidance is based on a fully diluted share count of approximately 136 million shares. In conclusion, we remain focused on driving differentiation through innovation as we execute our successful portfolio strategy that supports our customers' technology road maps. Though the industry is correcting in calendar 2023 and sustainable demand recovery still remains unclear, we are sized in our business to ensure that we deliver a differentiated product portfolio that meets our customer technology road map requirements and that we have the capacity to execute our business in line with our long-term growth expectations. With the KLA operating model guiding our best-in-class execution, we continue to implement our strategic objectives, which are here to drive outperformance.

Our focus on customer success, delivering innovative and differentiated solutions and operational excellence is what enables us to deliver industry-leading financial and free cash flow performance and return capital on a consistent basis. We are confident that process controls importance to enabling technology advancements bodes well for KLA's long-term growth outlook despite challenging near-term demand trends. KLA is well-positioned to deliver strong near-term relative financial performance driven by the better than market performance of our semiconductor process control and specialty semiconductor businesses and continued growth in service. KLA is also uniquely exposed to wafer and reticle infrastructure investments that are contributing to our relative outperformance in calendar 2023.

Our business continues to stabilize and the long-term secular trends driving semiconductor industry demand and investments in WFE remain intact and are compelling. That concludes our prepared remarks. Kevin, let's begin the Q&A.

Kevin Kessel: Thanks, Bren. Chelsea, if you could please provide the instructions to queue for Q&A, and we'll begin now.

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