KLA Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2022

There are 7 speakers on the call.

Operator

Good afternoon. My name is Leo, and I will be your conference operator today. At this time, I'd like to welcome everyone to the KLA Corporation June Quarter 2022 Earnings Conference Call and Webcast. All participant lines have been placed in a listen only mode to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.

Operator

I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead.

Speaker 1

Thank you, and welcome to KLA's fiscal Q4 2022 quarterly earnings call to discuss the results of the June quarter and the outlook for the September quarter. Joining me today is Rick Wallace, our Chief Executive Officer and Bren Higgins, our Chief Financial Officer. During this call, we will discuss our results released today after the market closed. You can find the press release, shareholder letter, slide deck and infographic on the KLA IR section of our website. Today's discussion is presented on a non GAAP financial basis unless otherwise specified.

Speaker 1

Whenever references are made to full year business performance, they are calendar year references. 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 Volaris Presentations, Corporate Governance Information and the Links TO Our SEC filings, Including Our Most Recent Annual Report and Quarterly Reports on Forms 10 ks and 10 Q. Our comments today are subject to risks and uncertainties reflected in the risk factor disclosure in our SEC filings. Any forward looking statements, including those we make on the call today are subject to those risks and KLA cannot guarantee those forward looking statements will come true.

Speaker 1

Our actual results may differ significantly from those section of our forward looking statements. Our CEO, Rick Wallace, will begin the call with some brief comments on our recent June quarter results before discussing our view of the semiconductor industry demand environment and then a few June quarter highlights. Vern Higgins, our CFO, will conclude with some additional financial highlights in the quarter as well as our outlook and guidance. I'd like to now turn the call over to our CEO, Rick Wallace. Rick?

Speaker 1

Thank you all for joining us today. I'd like to begin with a few comments about the quarter. First, KLA continues to benefit from multiple growth that remain focused on responding to evolving customer needs and strategically navigating supply chain challenges. They are steadfast in their commitment to creating value for our customers, partners and shareholders. Our teams continue to call of the KLA operating model as a guide to meet our challenges and benefit from the opportunities of an evolving market.

Speaker 1

Driving this performance is strong customer demand across major product groups. Macroeconomic uncertainty and the resulting effects of consumer demand are areas we are monitoring closely. Our customers have indicated some end markets, specifically PCs and mobile devices have softened over the past few months. We have seen memory pricing in both segments weaken. While we have elevated concerns, we continue to see strong demand beyond our ability to supply from our customers with no material change in our shipment profile beyond the normal facility readiness issues and customers aligning tool deliveries with their production.

Speaker 1

In assessing the full CY22 WFE outlook, we have evaluated the persistent supply chain challenges and recently announced CapEx adjustment in the memory category. With this in mind, KLA's outlook for WFE growth in 'twenty two has tempered. Bren will expand more on the details when he discusses the outlook. We still see high single digit WFE growth in calendar 'twenty two and are confident in our ability to relative WFE outperformance. If supply chain challenges abate, this would be an additional upside.

Speaker 1

Process control is one of the fastest growing segments of the overall WFE market. And as the market leader, KLA is in an enviable position that fits the current demand landscape. We see continued investment in technology at the leading edge and increased demand for legacy nodes. We also see growth in technology categories, including Advanced Packaging. These factors all support steady long term growth for the WFE category.

Speaker 1

We attribute KLA's consistent and strengthening market leadership to our focus on investing in innovation at a high level to drive differentiation through a unique portfolio of products and technologies that addressed the most critical process control challenges. Our technologies help our customers drive their growth strategy. I'd like to now briefly summarize a few quarterly highlights. 1st, KLA continues to drive strong relative outperformance versus peers. In foundrylogic, simultaneous investment across multiple nodes remain a tailwind.

Speaker 1

In memory, Even with some customers' investments signaled the slow, demand diversification remains strong across multiple 2nd, our wafer inspection business again delivered impressive results in the June quarter as revenues grew 20% sequentially and 49% year over year. 3rd, KLA delivered record quarterly revenue from our electronics, packaging and components business in the June quarter. 4th. The KLA service business surpassed the $500,000,000 quarterly revenue level for the first time as revenue was $512,000,000 up 15% year over year. Finally, the June quarter was another exceptional period from the perspective of free cash flow and capital returns.

Speaker 1

We generated quarterly free cash flow of $746,000,000 amounting to 23% year over year growth. We also announced a $6,000,000,000 share repurchase program, a 24% increase in our quarterly dividend level. Additionally, we increased our long term targeted capital returns to 85% of free cash flow. We remain focused on returning capital to shareholders versus via our dividend and stock repurchase programs. Also this quarter, We introduced our new long term revenue growth targets and financial model for 2026 at our June 16, 2022 Investor Day in New York City.

Speaker 1

KLA's new 9% to 11% revenue growth objective through 20 26 features strong relative growth in each of our major business lines over period. Our long term model assumes a baseline semiconductor industry growth CAGR of 6% to 7% through 2026, with many forecasts today for the semiconductor market to exceed $1,000,000,000,000 by 2,030. In summary, KLA's June quarter results once again demonstrates sustainable outperformance. Our consistent execution against various challenges in the marketplace, both in terms of macroeconomic uncertainty and in addressing persistent supply chain issues highlights the resiliency of the KLA operating model, the dedication of our global teams and our commitment to assertive capital allocation and delivering long term value to our stakeholders. Chief Financial Officer, Brent Higgins will now go through our June quarter financial license and outlook.

Speaker 2

Brent? Thank you, Rick.

Speaker 1

As Rich has said, KLA's June quarter results reinforce the success of our execution and strong market position. Revenue was near $2,500,000,000 non GAAP gross margin was 62.4% and non GAAP diluted EPS and GAAP EPS were $5.81 $5.40 respectively. Non GAAP operating expenses were $514,000,000 below our expectation of $525,000,000 mostly due to the timing of new employees joining versus our plan. In addition, we also realized the cost benefit from the strong U. S.

Speaker 1

Dollar impact resulting from our global footprint. Total operating expenses comprised $297,000,000 in R and D $217,000,000 in SG and A. Given the strong demand backdrop, rapid expansion over the last couple of years and our revenue expectations going forward, we expect to continue our important investment in our global Insurance Systems to scale the leverageable KLA operating model to facilitate growth. Our investments include new product development programs and volume dependent resources to support our business expansion

Speaker 3

as we position the company

Speaker 1

to execute against our long term structural growth thesis. As a result, we expect operating expenses to be approximately $530,000,000 in the September quarter and we forecast quarterly operating expenses to continue to trend higher over the balance of 20 22 to support our sequential revenue growth expectations. We will size the company based on our target operating model, which delivers 40% to 50% incremental non GAAP operating margin leverage on revenue growth over normalized time horizon. Non GAAP operating margin was strong at 41.8%, almost 1 point higher than the guidance midpoint implied. Other income and expense debt was $22,000,000 below guidance of $43,000,000 but the positive variance from guidance reflecting a gain on a strategic investment that was transacted in the quarter, offset by a recurring mark to market adjustment of the supply investment.

Speaker 1

For the September quarter, we forecasted at approximately 75,000,000 to reflect the impact of the new debt issuance. Quarterly effective tax rate was 14.8%, higher than the 13.5% guidance and principally to the equity market impact on deferred compensation programs. At the guided rate, non GAAP earnings per share would have been $0.09 higher at 5.9 sets. We continue to guide 13.5 percent for the long term tax planning rate. Non GAAP net income was 8 $67,000,000 GAAP net income was $805,000,000 cash flow from operations was $819,000,000 and free cash flow was $746,000,000 resulting in a free cash flow conversion of 86% and a free cash flow margin of 30 The breakdown of revenue by reportable segments and end markets and major products and Regions can be found within the shareholder letter and slides.

Speaker 1

Moving to the balance sheet where we saw a lot of activity this past quarter. KLA ended the quarter with $2,700,000,000 in total cash, debt of $6,700,000,000 and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three agencies. In June, SMP upgraded KLA 1 notch to A-, citing improved scale and outlook for further profitable growth. Later in June, we issued $3,000,000,000 in new debt and announce the completion of a tender offer for $500,000,000 of senior notes due 2024. These actions reinforce that KLA maintains active and diligent oversight and awareness of the impact on shareholder value of the appropriate capital structure for our business and productive capital allocation.

Speaker 1

As demonstrated by the new calendar 2026 financial targets and the capital return actions announced at our recent Investor Day, KLA has confidence in our business over the long term and is committed to a consistent strategy of cash returns that includes both dividend growth increasing share repurchases. Consistent with this, we increased our long term capital returns target, as mentioned earlier. Over the last 12 months, KLA has returned $5,500,000,000 to shareholders, including $4,900,000,000 in share repurchases at $639,000,000 in dividends paid. Turning to our outlook. We have adjusted our overall WFE outlook for calendar 'twenty two to reflect persistent supply chain challenges that are gaining shipments and revenue recognition for many of our peers.

Speaker 1

We now expect the WFE market to grow in the high single digits to approximately $95,000,000,000 in 2022 off a baseline of roughly $87,000,000,000 in calendar 2021. This outlook reflects the continued broad based strength of demand across customer segments. While we work hard to manage capacity KLA and with our suppliers, supply chain shortages continue to constrain our ability to meet customer demand. While our supplier and gating strategy that we discussed at our Investor Day has been validated through this cycle, supplier visibility remains challenging and has not improved over the past 3 months. As indicated in the last couple of quarters, we continue to expect sequential growth through this calendar year and expect KLA's total revenue growth to meet or exceed the low 8% range, with semiconductor process control systems growing several points faster than the company average.

Speaker 1

Finally, we expect demand to continue exceeding supply during the calendar year second half. KLA is in position to deliver another year's sustainable outperformance in our semi PC business, which should translate to strong relative growth overall. Looking ahead, as indicated earlier, their concern with the macroeconomic environment and how it may affect the demand for our customers' products and their capacity plans as we move into calendar 2023. Today, the pressure from customers to deliver remains high and is driving our expectations for sequential growth through calendar 2022. We're encouraged by the diversification and sustainability of our current demand profile and the company's operational execution.

Speaker 1

We are strategically adding capacity across our global manufacturing footprint to support our customers' growing process control requirements, our near term outlook and our long term through cycle growth thesis. Our September quarter guidance is as follows. Total revenue is expected to be in a range of $2,600,000,000 plus or minus $125,000,000 Foundry logic is forecasted to be approximately 64% and memory is expected to be around 36% of semi PC systems revenue. In memory, DRAM is expected to be about 40% of the segment mix and NAND 60%. We forecast non GAAP gross margin to be in a range of 62% to 64%.

Speaker 1

Finally, GAAP diluted EPS is expected to be in a range of $5.28 to $6.38 and non GAAP diluted EPS in a range of $5.70 to $6.80 The EPS guidance is based on a fully diluted share count of approximately 143,000,000 shares. In conclusion, despite the macro and supply chain headwinds, see The secular trends driving semiconductor growth and investments in WFE is both durable and compelling over the long run. Broad based customer demand and simultaneous investments supporting growing semiconductor content across technology nodes remains important trends in our industry. These are long term secular growth drivers for the 3rd. As technology investment and the resumption of scaling reflects the value that semiconductors and our industry have in lowering our customer the cost for our customers in enabling a broader application universe for semiconductor based technology across multiple end markets.

Speaker 1

When When it comes to KLA, considering our track record of execution and the power of our portfolio, we have confidence in our ability to continue to deliver sustainable outperformance throughout changing economic periods. As we look at the leading indicators for our business, including our backlog and sales funnel visibility, we continue to invest in expanding our business infrastructure and the required capabilities to support our outlook and maintain our product development investments to enable industry growth and support our customers' multiyear investment plans. This provides an element of stability that shores up our confidence and outlook for the future. These factors combined with the KLA operating model that guides our execution position us to continue outperforming our industry as we execute our strategic objectives. These objectives fuel our growth, reliable operational excellence and differentiation across an increasingly diverse product and service offering.

Speaker 1

They are also the foundation of our sustained technology leadership, wide competitive mode, industry leading financial performance, long standing track record of robust free cash flow generation and consistent and growing capital returns to shareholders. That concludes the prepared remarks. I'll turn the call back over to Kevin to begin the Q and A. Kevin? Thank you, Bren.

Speaker 1

We are ready to queue for questions.

Operator

We'll take our first question from Harlan Sur of JPMorgan.

Speaker 2

Hey, good afternoon, guys. Congratulations on the solid results and quarterly execution. You guys' lead times are quite long, right? You guys Good visibility into next year and I think even into, in some cases, 2024. You highlighted some of the demand headwinds in your prepared remarks and also maybe some of the early signals from your customers on their sort of conservative CapEx spending plans going forward.

Speaker 2

I know you're not seeing anything meaningful in terms of near to mid term shipment plans, but given your customers are all booking into next year, Have you guys seen any changes in longer term orders as a result of your customers' increasingly negative views on demand for next year?

Speaker 1

Yes, Harlan, thanks for the comments and the question. I would say that certainly in the near term, we've seen No changes from our customers. In fact, the pressure is as high today as it was 3 months ago. And our adjustments to the near term WFE were really related to Some of the challenges that a lot of our peer companies are facing in terms of their ability to either ship tools or recognize revenue and that would have an impact on WFE given the expectations for the second half in terms of growth in the second half versus the first half. It's too early for us to call 2023.

Speaker 1

We're monitoring what we see there. As we think about our planning and as we move into As we move outside of this year from at least from where we sit today, we see a sustainability in our output levels as we move into the 1st part of 'twenty 3. Yes, we'll have to watch and see what our customers end up doing and particularly some of the challenges in the memory space and what that might mean. But at least from where we sit today, we see no real churn in the backlog and in expectations in terms of delivery time. Yes.

Speaker 1

Even to add to that, Harlan, one of the things we have seen, because obviously we've been talking with customers recently and they're they know we're aware of some of the talk, They're telling us basically 2 things. 1, keep our spots. And 2, if somebody else's spot opens up, could you please give it to us? So What we're seeing for process control, I feel like we're probably a little bit in a different position than the process players are.

Speaker 2

Great. And in the event of a WFE decline next year, you've got several positive buffers, right? And I feel like one of the biggest ones is that your services business historically does not decline during downturn. So like if I look back over the past 20 years. I think there's only been 1 year that your services business has been down and then more near term, I think over the past 4 downturns, The KLA team has actually grown its services business in all four of those downturns.

Speaker 2

So outside of the stable annuity like subscription service contracts. And I know you guys talked about expansion on services opportunities on legacy nodes. Like What else has allowed the team to grow its services business in periods where WFE spending is weak? And what's the historical track record on the ETC services business during downturns.

Speaker 4

So kind of two questions

Speaker 1

you threw in the EPC one at the end. Let me start with the process control one. Often what we've seen historically in downturns is customers still want to get productivity. And one of the ways they do that is they focus heavily on yield Deploy some of their limited budget toward upgrading their installed base. In terms of EPC, obviously, we've not really been through a cycle with that.

Speaker 1

So it's a little bit secondhand knowledge, but it depends on the segment that they're in in terms of but as you know, as a percent of our overall business, That will not change the dynamic that we see overall for our services, should we hit some headwinds going into next year. The only other thing I'd add Harlan is that we're seeing investment across multiple nodes. And so from a leading edge point of view, certainly the complexity of the tools that are going in to support those markets, The drivers of those markets, particularly around data center and high performance compute, will drive our customers to Given how they buy process control to want to keep these tools up and use them as they're trying to navigate through these technology transitions. And so that's an important perspective of the value that we add. So even if they're pulling back on some of the capacity investments they might be making, they're still investing in R and D and ramping facilities and the wafer start goals within a particular time frame may just change.

Speaker 1

If you think about within memory or even within Some of the trailing edge areas, those areas are areas where process control intensity tends to be a little bit lower. And so I think just in terms of how we see the investment play out, those are areas that we're less exposed to. So I don't think that they would impact the business to the degree that they might impact other more capacity centric players.

Speaker 2

Okay. Thank you.

Operator

Our next question comes from Krish Sankar of Cowen. Your line is open.

Speaker 5

Hi. This is Bob Martens on for Chris. Thanks for taking my questions. My first question was just around if you could provide any color on a potential impact to the business In terms of shipments to China, if there were any sort of restrictions, what this might look like, whether pool Pacific or based on tax based sub-fourteen animator shipments, just sort of how you're thinking about that? And then I

Speaker 1

have one follow-up. Well, specific to that question, and of course, there was some I know some of our peers have gotten this question as well. We did receive a notification from the U. S. Government about new licensing requirements for China related to sub-fourteen nanometer development and production.

Speaker 1

Of course, we'll continue to engage with the government, have an active dialogue and hopefully comply with all applicable I would say that given the lead time and timing unpredictability of new licenses This has no effect on our guidance for the upcoming quarter or comments on the remainder of 'twenty two. And I would say as I look at the funnel over the next 12 months, given Where investment is happening and what we expect, we don't see any material impact to our business from this new requirement. So I don't want to speculate on what else could happen, but based on what we know today and what we've been asked, That's mostly what I have to say about the topic. Okay. That's helpful.

Speaker 1

And then just real quick, Have you provided in the past the breakdown between domestic and international shipments to China? If I remember correctly, maybe you mentioned domestic customers who are more skewed towards smaller foundry players. Is that a fair assumption? Yes, that's still true. The multinational activity in China is more mature.

Speaker 1

And so most of our business In China, it tends to be native China as it relates to semiconductor process control. So within semiconductor process control About 25% or so of our shipments are to China. And now overall for the whole company as you service and include other parts of the company and EPC and so on, you end up closer to well, in this last quarter, it was 29%. So most of the business is there and most of it is across multiple projects. There's a lot of projects.

Speaker 1

They tend to be more Foundry Logic. You also have investment in infrastructure related to reticle infrastructure and wafer infrastructure. And so there's investments that are happening there and we have products that serve those parts of the market as well. Great. Thank you.

Speaker 1

That's all for me.

Operator

Our next question comes from Joe Quatrochi of Wells Fargo.

Speaker 4

Yes. Thanks for taking the question. I was wondering if you Brendan, you could go through kind of the puts and takes on gross margin this quarter and how we should think about and cost pass through this quarter and what's embedded in the guidance.

Speaker 1

Yes, it pretty much played out the way we expected. We had more EPC revenue quarter to We had a record quarter in EPC, and that was a little dilutive from a mix point of view. Certainly, the challenges related to supply And what that means in terms of factory efficiency is also a bit of a drag on our margins. But we had modeled that in for the most part. And I think the guidance midpoint was 62.5% and we were 62.4%.

Speaker 1

So pretty much as we had expected. As we look at the September quarter, Most of the growth is coming from our in fact, all the growth and then a little bit because I would expect EPC to be down some quarter on quarter is coming from semi PC. It's a richer mix. And so we'll see that go up about 50 basis We are seeing pressure from cost increase both in terms of parts, but also in terms of freight and Logistics. And I think that's taking away some of the what you would expect to see in terms of incremental leverage in an expanding revenue environment like we're in.

Speaker 1

So it's offsetting some of those benefits. But at the end of the day, we felt like we'd be operating somewhere around 63% through this year and that's been the guidance I've been giving and We're for the most part in line with that.

Speaker 4

That's really helpful. And then maybe I missed it, but What was the mix of DRAM versus NAND for this quarter? I know you did it for the September quarter guide.

Speaker 1

Yes. So 45% was memory and the mix was 2 thirds DRAM. Perfect. Thank

Operator

you. Our next question is from Patrick Ho of Stifel.

Speaker 4

Thank you very much and congrats on the nice quarter. Rick, maybe first off, in terms of leading edge versus trailing edge foundrylogic, Obviously, I think a lot of your leading edge customers are still powering through with your investment plan. It's more the question of timing of when they can get tools. Can you characterize what you're seeing on the trailing edge given that there's a lot of noise around that? Have you seen any changes in that marketplace or are investment plans for that device marketplace still on track on a going forward basis.

Speaker 1

Sure. And yes, you're right. The leading edge guys are continuing and we don't expect in our conversations with them, we don't expect any change in that. In terms of the trailing edge, it's not really been a big part of our business. And as we look forward, we're still struggling with demand, with supply for some of them.

Speaker 1

And so actually the conversations we've been having have been more about them asking if they can accelerate deliveries than changing the profile. So Given the conversations we've had and their desire to upgrade their facilities, it's not really a change in our profile. It may soften, but it hasn't yet. And in fact, if anything, a comment I made earlier, people are asking if spots open up, could they get access and that's really been more of the conversation that we've been having because some of the products that they need, especially in the trailing edge, Tend to be BBT kind of oriented products where we have tremendous demand. Yes, Pat, you got to add.

Speaker 1

The other thing I would add is about 80% of the revenue tends to leading edge. So where we are selling to the trailing edge, you do have customers that are strategically trying to in source more, so they're making more investments in longer term investments. And as specifications for and as specifications for end products are changing, that could change process control requirements. But generally, if they're just expanding capacity to run parts that they've been running for a long time that are just inflecting as a result of the strong demand environment. You don't see real significant changes in process control intensity.

Speaker 1

They just add their process control equipment as they're expanding the wafer starts in a particular facility. So that drives the process control intensity that's fairly light. Now over time, that's I think what's happening in the end markets is creating some opportunities for us, but it is less of an impact in terms of the financial or the revenue contribution from those customers to KLA. It's great revenue and it's profitable revenue given that we're selling older platforms or platforms that we've been able to extend into those markets. But it's a big driver for our business.

Speaker 1

It's much more around leading edge than what we're seeing in the trailing edge.

Speaker 4

Great. That's really helpful. And Brent, maybe as a quick follow-up question for you. You guys have done a really good job of managing through the supply chain issues that the industry and the ecosystem is seeing. The costs are obviously elevated, whether it's freight and logistics, the movement components and things of that nature.

Speaker 4

How do you look at the cost environment over the next several quarters? Is this something that we're just going to have to assume at least through the rest of 'twenty two and

Speaker 1

And so we're seeing that flow through earlier in prior quarters, maybe last quarter or the quarter before, I talked about this year, expecting to see 100 basis point kind of impact, 1 point or so from incremental cost increase. I think if you add freight Intuit is probably a little bit higher than that. And so we are seeing that play through. Generally, when prices go up, they don't And so we're not really planning on it. And we'll have to as I said at Investor Day, there's work for us to do in terms of how we think about in this overall.

Speaker 1

Our products generally, we're a value sell and so we think about the returns our customers are getting from our products and we try to share in the value of that return. And part of our new capability cadence in terms of how we offer that to the market, managing not only new capability from a competitive point of view is important to that, but also what it means to financial model in terms of an opportunity for us to reassess the cost situation in a particular tool and how cost of ownership plays out in terms of the improvements that we're offering and how we will share that. So we're being opportunistic where we can. Certainly, we're not benefiting from Revenue expansion from a scale point of view and so we're not giving discounts related purely to volume to the extent that we have in the past. And so we're resetting some of that with our customers.

Speaker 1

But in general, I think it's much more about the value offering and how things kind of how things are priced over time. Great. Thank you again.

Operator

We'll take our next question from Atif Malik of Citi.

Speaker 3

Hi. Thank you for taking my question. I have

Speaker 4

a question on Chips Act, and

Speaker 3

I understand it's early. It looks like equipment companies might be able to get money to

Speaker 4

expand manufacturing of equipment in the U. S. With priority going first to

Speaker 3

companies that of equipment in the U. S. With priority going first to companies that already manufacture in the U. S. And I understand you guys have acting both inside U.

Speaker 3

S. And outside. And how would this change, if at all, your long term and patching strategy?

Speaker 1

Thanks for the question. It doesn't really change our strategy. We're not going to make decisions based on that. We're going to make decisions as we always have based on where it makes the most sense for us to build the products to support our customers, where we can get the talent where we can have the supply chains that we need. So it will not impact our decision making.

Speaker 1

You also have to remember assets that were fairly asset light. So to the extent that we're building or expanding our facilities anywhere, it's really about space more than anything and So it isn't it's very different than what our customers in terms of significant 1,000,000,000 of dollars investment in a production facility. So So to Rick's point, it's much more about the operational motives that we have in terms of why we build, what we build where. And incentives, whether they come in the form Grants that come in form of taxes are secondary. Obviously, we always optimize for wherever we are, but the primary motive is very operational for us.

Speaker 3

Great. As my follow-up, Bren, 19 years ago, you were talking about EPC systems growing 20% for the year and I understand June was a record quarter. Are you still looking at 20% growth for the EPC systems for the full year? And how are you what are you in the mobile segment versus the auto segment of that end market.

Speaker 1

Yes. No, it's a great question. Auto is Continues to be strong on auto and power, but we have seen some pressure, particularly in the PCB part of the business, driven by The softness in the mobile market, I would expect EPC Systems to be in the mid teens in terms of growth this year, a little bit stronger in the second half versus The first half just as the whole company is a little bit stronger. But yes, it's mostly been we've seen strength and improvement in VTS, our specialty semiconductor, given its exposure to automotive and power, but we've seen some softness on the PCB side. So net net, Still nice growth, mid teens growth, but not 20%.

Speaker 6

Great. Thank you.

Operator

We'll take our final question from Vedwadi Chokshi of Jefferies.

Speaker 6

Hi. Thanks for taking my question. I just wanted to go back on something that was asked earlier. So you mentioned that So, your customers are sort of looking for slots in case any opens up. So, can you help me Understand how that works.

Speaker 6

So if you get a push out from your customer, does that mean That slot is sort of closed and the customer has to go back into line. Is that the right interpretation?

Speaker 1

Yes. So I think our customers have the same kind of question you do. It doesn't really work that way. I mean, what they really want to do is move up the priority list. But as we keep Planning to them, we have far more demand than we have supply and while we're working hard to expanded.

Speaker 1

So it's just the question of can we get things done sooner. And that's really what they're asking is can you help. But my point is that is For many customers, the way they're approaching this, they're hopeful that this will give them a chance to get some of the products that are pretty far out in delivery. That's kind of the way to think about it. It's not really exactly the same.

Speaker 1

We do have allocations for people, but there just are no free slots. If somebody were to drop out of the queue, the next person would just move up in terms of the way that would work. So it's not People aren't going to jump ahead in the line.

Speaker 6

And so if I understand correctly, so if in case If there's a push out and not a cancellation, does that necessarily open up a slot or is push out kind of different from

Speaker 1

So if somebody had a December slot right now and they said we don't need that until June, the next person in line in December would get that slot And they would be fit in somewhere in June. Right. And there likely are customers that have slots in June that would love to have a slot in December, So given the lead times on some of our products. So that's the natural churn we see and a lot of it is tied to sometimes facilities and facility readiness. It also can be tied to whether they receive certain tools from other customers as they're setting up or other suppliers as they're setting up their production lines.

Speaker 1

So So you always see a little bit of movement like that. But to Rick's point, we're underserving the level of demand we have. And so customers are having to get in line a long way out in a lot of cases. And so the ability to satisfy that demand earlier would be an opportunity for A lot of our customers that they would certainly want to take advantage of given the strength of the demand that they have seen, but also their desire for these products and our constraints around them.

Speaker 6

Got it. Thank you very much. It's very helpful.

Speaker 1

Thank you, and thank you everyone for joining us. We know how busy of a day it is today in terms of earnings, so appreciate your time and interest. With that, I will turn the call back over to Leo to close it.

Operator

This concludes the KLA Corporation June quarter 2022 earnings call and webcast. Please disconnect your line at this time and have a wonderful day.

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