KLA Corporation — 2023 Q4
Transcript
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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 June Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions] And I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead, sir.
Thank you for joining us for our earnings call to discuss the results of the June 2023 quarter and our September quarter outlook. Joining me is our CEO, Rick Wallace, and our CFO, Bren Higgins. During this call, we will discuss our results released today after the market close, along with supplemental materials that are all available on our IR website.
Thank you, Kevin. Let's start with a summary of KLA's performance in the quarter, along with a few highlights. Further color and detail on my comments and the semiconductor demand environment can be found in our shareholder letter released earlier today.
Thanks, Rick. KLA delivered results at the upper end of the range of guidance and commitments, demonstrating consistent execution despite a challenging marketplace. Our continued focus on meeting customer needs while expanding market leadership, sustaining industry-leading gross and operating margins, generating strong free cash flow and maintaining our long-term strategy of assertive capital allocation is what makes us successful.
in memory, we expect WFE investments to decline by approximately 40%; foundry/logic to decline by about 10% overall, with legacy investment outperforming the segment overall due principally to automotive and continued demand for legacy design nodes.
total revenue is expected to be $2.35 billion, plus or minus $125 million. Foundry/logic is forecasted to be approximately 70% and memory is expected to be around 30% of Semi PC systems revenue. Within memory, DRAM is expected to be about 90% of the segment mix and NAND at 10%.
Thank you, Bren. Chelsea, can you please provide instructions and queue for questions?
[Operator Instructions] Our first question will come from Joe Quatrochi with Wells Fargo.
Question. I was wondering if you could maybe talk about the strength that you're seeing in your blank wafer business. How do you see that looking into next year? And is there a risk of maybe some digestion after a pretty strong investment cycle there?
Joe, thanks for the question. This year has been a strong year for that. We have a very strong market position there. So that's been good for us. And you're seeing investment from the global players, but also investment in infrastructure in China to provide more domestic supply. It tends to invest according to a different cycle. I wouldn't exactly call it countercyclical.
Got it. That's helpful. And then as a follow-up, you guys saw some pretty, I think, significant upside to your memory kind of expectations or at least relative to what you were thinking 3 months ago, and particularly around DRAM. Just wondering if you could maybe comment on what drove that in the quarter?
Sure. We had some movement across a number of our customers, and the number overall is, frankly, pretty low. But that was part of it. The other part is we also had some shipments that we weren't expecting to make in the quarter related to 1 of our Chinese DRAM customers. And a clarification of some of the export rules enabled us to ship some additional equipment there. So that was a factor in the upside on the DRAM side.
Our next question will come from C.J. Muse with Evercore.
I guess first question, can you update us on where optical inspection lead times are? And given the importance of that tool set for R&D lines, is that something that you expect will sustain at elevated levels? Or do you think that should normalize over time?
C.J., it's Rick. The answer is the demand continues to be very strong and for a couple of reasons that we've talked about many times. And we have struggled in increasing the output. So we're still booked out through, as far as we can see, into next year. So business remains strong. The product has had a lot of success dealing with some of the challenges we're seeing. So we expect that to remain elevated and we're working hard to actually increase capacity in order to meet that demand, but that's going to take some time.
Yes. Lead times will come down a little bit. I don't know if they'll come down all that much, given the drivers of that product line. But as new capacity comes online as we move through '24 and beyond, we'll see it -- we'll see them come down a little bit, but I think you'll still see them remain elevated for some time.
One of the nice -- we talked about in the past, C.J., is that we're still running Gen 4 in addition to Gen 5. And Gen 4 is really seeing pretty good adoption in places that we didn't necessarily forecast, like automotive. So we still have pretty good tailwinds for that.
Very helpful. And I guess as my follow-up, encouraging to see your Semi Services business grow sequentially. Can you kind of comment on how you see that playing out in the second half? And what kind of potentially negative impact are you seeing from lower utilization from your memory customers?
Yes. We're very pleased with the performance in Services. And it's not atypical for us in a downturn to see Services utilized because people are still trying to squeeze out all the yield capability they have. We have seen utilization. We had forecast from some customers for a higher level of -- or a lower level of utilization, asking us to back off a little bit.
Our next question comes from Krish Sankar with TD Cowen.
I chose -- the first one, Rick, obviously, you have like very strong revenues from China. There's been some chatter that the U.S. might expand export controls, even maybe mature nodes. I know right now, you're capped at 14-nanometer and below for foundry/logic. Is there any commentary you can give on that? And how to think about it, like, let's say, for example, 14 goes to 28, the restriction, or 28 goes to 40. Is there a way to quantify the impact to your sales? And then I have a follow-up.
Yes, I won't speculate what the government will do or not do on that. We have ongoing conversations with them, obviously, and really, we've been supportive of their efforts to try to figure out how to cut off the very leading edge.
Got it. Got it. Thanks, Rick. And then as a follow-up, based on the numbers, it looks like you're going to outperform WFE again this year, and you do this last couple of years. The last couple of years, it is more -- some of your peers were supply chain constrained while you were not. And this year, obviously, there's a lot of technology buys.
Well, so I would say that we were supply-constrained, but for a different reason. We couldn't -- we continue to struggle with the demand that we've had for optical. And as I mentioned to a prior question, we continue to see demand for that. So it's true that we managed our supply chain, but we still had gaps.
Our next question will come from Sidney Ho with Deutsche Bank.
Congrats on the good results. A few of your peers have talked about fab readiness being impacting their shipment this year, especially for EUV tools. Is that something that you already kind of factored in your WFE outlook you gave a quarter ago, when you also said foundry/logic would be down 10%, which you reiterate today? Or are there some other offsets that you would point out that kind of offset that?
Yes. It's -- it's a good question. And it's something that we had already factored in to our plans as we looked out. What you're seeing is the adjustments to some of the ramp plans. And so while there's still some shipments going into some of these facilities, fewer tools.
Okay. Great. That's helpful. As a follow-up, speaking of China, I know the revenue is now back to the 30% level. You talked about some of the shipments that came in a little earlier. But I want to ask a little bit different angle. It's clear that there is a big push for self-sufficiency in China, but certain tool sets are harder to replace than others. Can you give us maybe a little bit of color on the competitive dynamics there, that some of your process control clients could be satisfied by domestic companies?
Yes, our market share continues to be strong. I mean we started focusing on legacy market opportunities several years ago. In fact, restarted some older product lines, and they continue to be the most competitive, really, at all price points in terms of -- so we feel while there is more competition at trailing edge, we're very well positioned to be able to win.
And you have to remember, our competitive offerings in China or in any other region are really based on the portfolio of products that we can offer. So we can -- we can offer lots of solutions to our customers. To Rick's point, some of our older generation tools, which we've restarted, but even deconfigured versions of more recent tools.
Our next question comes from Brian Chin with Stifel.
I guess understanding again that memory investment in general is reduced, and it sounds like the China memory shipment might have hit there in the June quarter, but if I were to assume that some of your DRAM activity in coming quarters will be more geared toward DDR5 and applications for high-performance, high-density DRAM for data center and AI applications, are you noticing or anticipating a higher level of process control intensity for that kind of spend?
Well look, for more advanced -- for more advanced DRAM, particularly with the introduction of EUV, it's driven higher intensity levels, and there's the infrastructure to support the introduction of that, particularly around reticle quality and reticle fidelity. That's been a driver of process control intensity for us over the last couple of years. And so I would expect that, that we'll continue to see it.
Okay. Got it. That's helpful. And then maybe just a broader follow-up question. Obviously, there's some underutilization of capacity at the leading foundries, more advanced FinFET nodes. And this might just be a cyclical phenomena, but in your conversations with them, do you detect any changes in how they might elect to deploy capital in support of multiple advanced nodes differently?
Well, I mean they've slowed down. I mean for sure, we've seen and heard the reports on forecast for their investment in WFE going down. So I think that's been the main one. What the leading indicators that we are looking at that are encouraging, as I mentioned earlier in this call, we've had utilization rates creep back up from what was forecasted just a few months ago.
Our next question comes from Tim Arcuri with UBS.
Bren, can you give the purchase obligation number? I think it was about $12 billion last quarter. I assume it came down a smidge and book-to-bill is still less than 1. And then also, can you tell us how much is sitting outside of 12 months, that number?
So the specific details will come through when we file our K here in another week or so. But it was down about a little over $500 million quarter-to-quarter. So book-to-bill was a little less than 1. We still see some activity in terms of new orders. So the backlog levels are obviously very elevated. So it's come down. It seems like it's been coming down right around that $500 million or so per quarter for the last few quarters, but still close to $11.5 billion overall. And the beyond 12 months is between 40% and 50% of it, which we deliver beyond the 12-month window.
Cool. And then, Bren, just for the top guide for December, it sounds like process control system shipments are pretty flat. It looks like maybe EPC should be up a smidge because you had said before that EPC would be about -- down about 20% for the year. So is that right? And I guess part of that was that you had said last call that maybe the process control shipments in December depended on a couple of projects. So sort of what's the -- what are the puts and takes on process control shipments in December?
Yes. I don't want to get specific on guiding December. But certainly, consistent with the prepared remarks, we see a stabilizing rate moving forward. And obviously, that's plus or minus, given the integers of some of our ASPs, that can be plus or minus $20 million or $30 million generally overall across the businesses.
[Operator Instructions] Our next question will come from Harlan Sur with JPMorgan.
Maybe as a follow-up to Tim's question, your prior view was for process control to be down roughly kind of mid-teens, right, relative to WFE, which was down 20%. Now off of the better June quarter results and if I flatline stabilize that process control for the remainder of the calendar year after the June quarter, it looks like your process control franchise is actually going to be down only 10% to 12% for the full year. So even better outperformance versus WFE.
Yes. Yes, your math is consistent. So yes, that's how it will play out, assuming the December quarter comes through the way we expect today. We talked about bare wafer obviously being a strong driver, optical inspection. Reticle inspection is also a business that isn't declining as much as the overall market.
I appreciate that. Is that advanced packaging demand is kicking off quite strongly, right, driven by all these accelerated compute workloads like AI, right? You have HBM, CoWoS packaging, multichip stack-die configuration. TSMC, Intel, all the memory guys, the old stacks, right, you guys supplying to all of them. Are you seeing the demand pick up for your solutions for accelerated compute applications? And is the advanced packaging segment growing this year for the team? Or is that sort of AI accelerated compute demand being somewhat offset by some of the more consumer-focused end markets?
Harlan, yes, good observation. And we have seen an increase -- there haven't been a ton of bright spots with our customers, but that's one, and that has happened fairly recently. We've seen an uptick. It's a small -- relatively small number as a percent. It's got up quite a bit, but off of a small number.
Yes, you had the overall packaging market down, what, 15% to 20% or so. But if we look at our packaging business within the company, it's pretty flattish year-to-year. Rick talked about some of the recent upside we're seeing related to some of the AI drivers that are occurring right now. So it's a good and evolving story moving forward as more complexity moves into the package across process but also process control.
Our next question will come from Atif Malik with Citi.
I have a question on leading-edge logic investments. At SEMICON West a couple of weeks ago, when you spoke to suppliers, there were expectations that the leading-edge spending could be up less than mature nodes into next year.
Sure. I think that for KLA, the 1 thing you have to keep in mind is we're still supply limited on some of our most critical process control products that apply to the leading edge, such as optical and even some of the reticle products. We just cannot -- we still cannot meet demand. So I think we have a natural governor in there in terms of being able to keep that business sustained over the next several quarters based on even the current booking environment.
[Operator Instructions] There are no further questions in the queue at this time. So I would like to turn the floor back over to Kevin Kessel for any additional or closing remarks.
Thank you very much, Chelsea, and I wanted to thank everyone again for their interest and their time. We know it's a very busy earnings season. It's also a very busy day. This was a later call in order to try to accommodate as much as we could. So we look forward to speaking to all of you in the weeks ahead. And with that, I'll turn it back to Chelsea for any final remarks.
Thank you, ladies and gentlemen. This concludes the KLA Corporation June Quarter 2023 Earnings Call and Webcast. Please disconnect your line at this time and have a wonderful day.