KLA Corporation — 2024 Q2
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
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 December Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions].
Thank you for joining the earnings call to discuss the December 2023 results and the March quarter outlook. I'm joined by our CEO, Rick Wallace, and our CFO, Bren Higgins.
Thank you, Kevin. I will briefly summarize KLA's performance for 2023 calendar year and the December quarter and then set up our view for 2024. For 2023 KLA revenue was almost $9.7 billion, down 8% versus the prior year. This was higher than our expectations coming into the year as strength from legacy node customers and semiconductor infrastructure offset weaker-than-expected leading-edge investments in both logic and memory. While overall WFE spending was down for the year, there were areas of growth in the KLA business segments, including the infrastructure business supporting wafer and mass manufacturers, automotive and specialty semiconductor process equipment.
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 to meeting customers' changing and fluid requirements. Revenue was $2.49 billion, slightly above the guidance midpoint of $2.45 billion. Non-GAAP diluted EPS was $6.16, above the midpoint of the guided range of $5.26 to $6.46. GAAP diluted EPS was $4.28. GAAP EPS was negatively impacted by $1.59 for goodwill and purchased intangible asset impairment charge.
In memory, we expect WFE investment to be slightly up from low levels with investments focused on high bandwidth memory capacity and leading-edge node development.
Revenue is expected to be $2.3 billion, plus or minus $125 million. Foundry/logic is forecasted to be approximately 60%, and memory is expected to be 40% of Semi Process Control systems revenue. Within memory, DRAM is expected to be about 85% of the segment mix and NAND the remaining 15%.
Thanks, Bren. Chelsea, if you can just give the instructions and set up the queue.
[Operator Instructions] We'll take our first question from Harlan Sur with JPMorgan.
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 project delay that materialized just over the last couple of months. It looks like based on your December quarter end market mix and expected March quarter mix that it's a foundry/logic customer. Was that a leading edge or mature node customer, was the delay more technology-related or just weak demand trends? And does the sequential growth outlook beyond March assume that this customer comes back this year?
Harlan, it's Bren. So yes, as we said in the prepared remarks, over the last couple of months, we had a project that we were planning to ship roughly a couple of hundred million dollars of business, too, that had a pushout that's extended, I think, somewhere around 12 months. So could we see it at the end of '24, maybe could be early '25 as well. So it was more leading edge centric. And as a result of that, as we backfill that business with other business, we did see the percent of China go up a little bit higher than we had thought we would see when we were giving guidance at the beginning of the quarter.
No, I appreciate the insights there. Your total process control systems business outgrew WFE yet again, right, in calendar '23. Within that, Inspection significantly outperformed, right? It was only down 5%, but your Patterning business was down almost 20%, which is actually worse versus WFE. And it's like most of that full year underperformance was due to the sharp drop-off in patterning just in the December quarter. So was that tied to the customer pushout dynamics, as 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 WFE this year?
Yes. Great question, Harlan. I think -- 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 ramp. And some of the metrology business is more tied to capacity. So when you see a falloff of capacity, it impacts metrology more than it would impact Inspection. And that's what we saw in '23.
Harlan, it's Bren. On the relative performance, we do feel pretty good about the performance overall when you think about how much legacy business was in the year and how the leading edge fell off, which typically drives higher process control intensity. Also in WFE this year was a little unique in that there was a lot of carryover WFE from 2022 for a number of peers. And so that showed up in '23, it was really activity that we started in 2022. So when you take into account those factors and look at how well we performed in '22 relative to the overall market, we were -- our growth rate was 4x what the market was.
Our next question will come from Joe Quatrochi with Wells Fargo.
I just wanted to go back to the pushout. So that I just sort of understand, if we were to adjust for the couple of hundred million that's now pushed into the June quarter and assumed it was still in the March quarter, I guess, would you still expect that the June quarter would be up quarter-over-quarter? Or would it be more flattish like we were thinking or talking about last quarter, just the first half kind of still being a similar run rate of the business?
Yes. I think it's more the latter, right? We've, obviously, got a lot of moving parts in how it affects the quarters. But as we talked about last quarter, we saw the business generally continuing at guided level. We guided was [ $2.450 billion ] right? We ended up outperforming by $40 million or so. So it would have been probably flattish, more or less. But this adjustment coming out obviously has the kind of impact, and I like sized it earlier. So flattish, and then we would expect to see the second half start to improve.
That's helpful. And then just as a follow-up, I know you're going to -- you'll file your 10-Q probably tomorrow, but any color on where the RPO stood exiting the quarter?
Yes. So RPO was down about $200 million. I expected you to ask that question, Joe. So yes, $200 million quarter-to-quarter and with about 50%. So that takes you to about $10.6 billion, 45% to 50% of it to ship beyond 12 months. And then within that, we have about just short of $800 million in customer deposits.
Our next question comes from CJ Muse with Cantor Fitzgerald.
I guess, first question, can you speak to domestic China? And I guess, to what degree '23 was helped by bare wafer and reticle inspection and your thoughts on how that progresses in '24. And I guess with the mix shift to perhaps maybe incrementally more DRAM. And I don't know in terms of the really core legacy some shift is there. How are you seeing your kind of implied market share '24 versus '23?
So for China -- C.J. I think overall, for China it looks pretty flattish year-to-year. We did benefit from the infrastructure investment that I 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 is happening more so on the wafer side than the reticle side. And so that obviously will get made up by what I would expect to be slightly higher [indiscernible]. I think the memory piece will shift to -- potentially shift to another customer. So I could see that being flattish overall.
No, you covered it. I guess, for my follow-up, as you think about kind of second half stronger than first half, how would you kind of rank order leading-edge foundry logic versus DRAM in terms of the key drivers for you?
I think leading edge will be -- we'll see some growth in the year. It will be, I think, a fairly modest growth as we continue through the year. I would say -- I'm just kind of looking quickly here, I would say that it is reasonably balanced across the year. So I would think that we'll see -- I would expect to see DRAM probably be -- actually, I think it's going to be pretty balanced as well 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.
Our next question will come from Krish Sankar with TD Cowen.
I have 2 of them too. One is, I was just kind of curious, Rick, if you can kind of give color how to think about China revenues this year ex EPC?
Well, Bren just covered that, but -- in the last question, but essentially flattish. I mean that's the general view for China this year. Flattish, little less infrastructure than we saw, especially, in wafer and reticle continues to remain basically level at this current run rate.
Got it. Got it. And then just as a quick follow-up. If I look at kind of like where your optical inspection is and you said that revenue should start improving over time. Where is the lead times today for them -- today versus, let's say, 3 months or 6 months ago? And where do you expect them to go over the next few months?
Yes. I'll start on that. On optical inspection, so we're still constrained on Gen 4 in terms of demand relative to our supply. I would expect to see supply increase this year. And that's part of our business, I would expect to do better than overall market as we move into '24. We have -- right now, I think we've seen some normalization around Gen 5 lead times, which tend to be somewhere between 7 and 9 months. But Gen 4 is still out over a year or so, but new capacity coming online. I think not enough for what we expect over the next year to 1.5 years. But then we have another tranche of capacity that will come online as we move into the '26 time frame.
Our next question will come from Brian Chin with Stifel.
I want to ask a few questions. Maybe just -- I think someone might have had asked this earlier in the queue, but taking your WFE sort of outlook for flat to modest based on your '23 base level, flat to modest growth this year, relative to sort of the pickup and maybe your revenue and WFE being sort of in the second half kind of modest, right? You probably would need to see an acceleration in the back quarters of the year in order to kind of get to say even towards the mid -- the low to mid-single-digit kind of growth that you're talking about for WFE at the moment. So I'm kind of curious, do you see process control intensity type of profile of spending this year sort of neutral in terms of WFE, do you think intensity is higher or lower, relative to this -- again that profile of spending this year? And then how does that reflect in your revenue?
Yes. No, you're right in terms of the math, right? As we look at the first half of this year, which is we'll call maybe slightly down versus the second half of '23 and then an acceleration in the second half would put you somewhere in the, I'll call it, high single-digit growth. That assumes that WFE is marginally up more or less 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 the 7% depending on your WFE number, but assuming you're $87 billion to $88 billion in WFE in '23, about 7.6% or so. So I would expect it to be similar as we move into '24.
Okay. And then just given that emphasis this year on memory conversions and upgrade activity, can you comment on the areas where KLA benefits and how meaningful a benefit that this sort of spending represents?
You mean in terms of just where we benefit in memory investment or we expect to see -- I mean, certainly, you've got the -- in DRAM with more DRAM investment with the introduction of EUV, that's tend to be a positive dynamic for our business. We saw process control intensity increase as we saw EUV introduced into DRAM. So that's probably one of the bigger positives for us. So you're right, as you start to do technology conversions, instead of new capacity, it will be a little bit more muted investment. But we would expect to see our customers continue to invest in the -- in their leading-edge development for the next nodes. And so I think that will be the biggest driver for our business.
Our next question will come from Chris Caso with Wolfe Research.
I guess, the first question is kind of looking beyond 2024 and, obviously, don't expect you to provide any guidance there, but take any opinion that you have. Some of the other equipment suppliers that have had longer lead times were starting to express a little more confidence on a turn on '25. 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.
It's a great question. And we have definitely had those conversations. I think that customers are looking at from a couple of perspectives. One, we do have long leads on the most advanced optical tools, but there's also a lot of development that we're doing right now to make those tools even better for 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. They're all bullish about '25. I can't think of a customer that we have on a 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.
Got it. That's very helpful. As a start-up, with regard to the foundry/logic business, would you characterize, and I guess, what you talked about your WFE assumptions is some kind of slight growth this year. Is it safe to say that, that growth is either tied to new node deployments and kind of technology upgrades and such as opposed to capacity at this point?
It's a little bit of capacity, too. I mean '23 was down, right? And so we're seeing some expansion in our capacity. The big node ramps aren't really happening as much this year, which is part of why the WFE gets driven up. And you heard TSM's call, and I think they are fairly bullish on their forecast, but we'd have to see what happens in the early parts of '25 for those ramps on, especially, the newest technologies.
And we would expect the legacy business non-China to be lower in '24 than '23. So there's -- so it's being offset. You've got some improvement with the leading edge investment offset by some of the non-China legacy falling off a bit. So that's how we get to our forecast. And we'll see as we start -- we're having these conversations with customers. We're certainly planning for it from a capacity point of view, and we'll see as we progress through the year as we start to firm up when those shipments will actually start to take place.
Our next question comes from Joe Moore with Morgan Stanley.
You talked about memory utilization remaining low. And, I guess, I feel like you guys kind of talked about that relatively early, and then you saw it kind of static. We've heard from memory customers, all kinds of things about different times that they brought it down and like some of them bought it up. I just want to confirm that you're seeing that as kind of a steady trend? And then can you talk about how that affects your the services revenue you can get from those guys?
Yes. But having met with a number of memory customers recently, there's a marked difference in their tone right now. And so when we talked to them last year, it was -- there's a lot of [indiscernible] looks about -- because they had been ready for a much bigger consumption of memory. And now I think they're starting to turn the corner on that. We do see conversion technology, but utilization is -- hasn't really changed much. Service continues to be higher than -- historically, we -- our utilization rates on our equipment are higher than historically, but because I think customers, even those that have the ability to flex down the utilization on our systems have chosen not to.
The customers don't have the same level of redundancy with what they buy from KLA versus a lot of process equipment. And when you're focused on trying to be as efficient with your capital as you can, you'll tend to really focus on trying to drive yield. So the way they buy process control, they don't buy a lot of extra. So they take capacity offline for a process, they tend to run process control much more consistently. The customers that cut more in terms of utilization earlier have come back more. I think overall, to Rick's statement, it's been fairly flat overall.
Our next question will come from Atif Malik with Citi.
Bren, you talked about strategic alternatives for the display business. Can you help us out how big the display business was last year? And then in general, on the EPC business, there are kind of auto is starting to [indiscernible] mobility is getting better. Can you just talk about how you're looking at the EPC business, excluding display?
You're breaking up a little bit there, Atif. So in regards to the comments on display, it's about 1.5% of the revenue of the company. And there are parts of display they are more commodity based and there's aspects of that industry structurally where profitability is more challenged. And then there's some interesting parts of it, too, in terms of some of the future road map opportunities and where some of the higher-end customers are moving. So we will have more to say about that as we assess the alternatives we're considering.
Great. And then as my follow-up, Rick, you talked about uncertainty in leading edge with some push out. If your foundry customers decide to focus more in putting these investments of fabs in Japan versus U.S. Is there an impact to your business?
Well, the work that they're doing in Japan is not at the leading edge, but it is part of their overall investment with the exception of the Japanese company that's investing there. So I would say, yes, of course, that's a different kind of business for us. It's important. But the leading edge business that's being done in the foundries isn't being done there right now with the exception of one. So we're talking about the -- what we're seeing and hearing is the development is going on for the leading-edge work. The question is, at what point will they be in a position to ramp that.
Our next question will come from Charles Shi with Needham.
First off, I really just want to ask for some clarification about the service business expectation for calendar 2024. I think that you talked about higher forecasted growth in service. Is it higher than what you thought at the 12% to 14% this year? Or if you're just talking about higher growth than compared with your systems business? Just a quick clarification.
Yes, more in line with the long-term target model of 12% to 14% and closer to the high end of the target range. And that's really being driven by, we talked about some of the improving utilization that we expect to see as we move through the year, which if you think about our customers, their businesses get better. They have more demand, they start to consume the capacity they have. They have sustainability in that. And then as their profitability improves, then they start to invest in new equipment. So we would expect to see that play through as we move through the year.
Maybe another question, maybe a little bit longer term. I think in the past, you talked about particularly some of your leading-edge customers reusing their capacity in the past and may put a little bit pressure a few cycles ago on your overall growth. Your largest customer, I think, last week, talked about maybe converting some of the 5-nanometer to 3-nanometer. We don't know whether they're going to continue to do that. But any thoughts there and looking a little bit ahead, do you expect any sort of negative impact going forward?
The -- you're right. I mean historically, customers have always tried to reuse whatever they could. There's a couple of factors that impacted going forward. One is the technology that they're going to need for [ 3 ] and then for [ 2 ] is upgraded from what they have at [ 5 ].
Our next question will come from Timothy Arcuri with UBS.
Bren, I wanted to ask about book-to-bill. So it's below 1 for the fifth quarter in a row. It's up a little bit. It's up to like 0.9. So you're reaching some sort of like steady state. But it's a much different dynamic of what's sitting in RPO than what used to sit in backlog because you used to have 4 to 5 months worth of backlog.
Yes. I think the easiest way to think about that part of it is it's related to customers giving orders that are tied to facilities that they're planning greenfield projects. And so the schedules are driving the orders. And so it's one of those where it is a lead time centric. It's -- the customer has a project that's going to open in '25, they want their tools when they have that scheduled planned opening. And so they've given us orders. In a lot of cases, you have some China business where you've given us orders and deposits that are tied to those schedules. So that's the biggest factor in the piece that's out.
Yes. Yes. I mean it was up, definitely. But I guess just my follow-up on that is what's the advantage? If I'm 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 that's kind of sit in your backlog it's -- but parked beyond 12 months? I mean, unless I'm 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? I still don't know why I would park something like way, way beyond your lead times?
Well, if you're a new customer and you have new relationships with us, the demonstration of credibility in terms of, hey, we want this, we want to engage. We want you to put resources in place to support the fab and that takes some time to do so. And then in a lot of cases, that also comes with deposits for a portion of the orders.
Well, that's a ton of customers that we actually never heard of before.
Our next question will come from Toshiya Hari with Goldman Sachs.
I have 2 as well. The first one is on high NA. There seems to be a bit of a disconnect among some of your customers in terms of, I guess, their appetite to take tools and to develop using those tools. Curious, how you're thinking about your potential insertion of high NA over the medium to long term? And how should we think about the positive impact to your business from an intensity standpoint?
Our views haven't really changed in terms of the timing for high NA. We're encouraged to see the shipments of the tools that were 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 the increased adoption of NA -- of EUV 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.
That's very helpful. And then as my follow-up, maybe one for Bren. Just on the display business, so it's 1.5% of revenue last year. I'm curious if you could speak to the profitability of that business. I mean, to the extent you do end up, say, selling the business, how should we think about accretion to gross margins and bottom line earnings?
Yes, profitability is less than 1.5 -- 1.5% of KLA. So it's 1.5% of revenue, the profitability is less than 1.5% of KLA's profitability.
[Operator Instructions] 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.
Thank you, Chelsea, and thank you again, everyone, for your time. We know it's a busy day of earnings a busy week. We appreciate it. We'll be in touch with sure all of you over the coming days and weeks. And with that, back to you, Chelsea, to provide any final instructions.
This concludes the KLA Corporation December Quarter 2023 Earnings Call and Webcast. Please disconnect your line at this time, and have a wonderful day.