KLA Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2021

Key Takeaways

  • KLA reported Q1 fiscal 2022 revenue of $2.08 billion, up 35% year-over-year and 8% sequentially, with non-GAAP EPS of $4.64 increasing 53% year-over-year.
  • The company raised its 2021 wafer fab equipment (WFE) industry growth outlook to approximately 40% and expects strong secular demand trends to continue into calendar 2022.
  • KLA generated record quarterly free cash flow of $795 million, driving trailing-12-month free cash flow to $2.29 billion and returned $563 million to shareholders via buybacks and dividends in the quarter.
  • With roughly 4× the market share of its nearest competitor in process control and new product launches like the Voyager 1035 wafer inspector, KLA is gaining share in its largest growth segments.
  • The company expects non-GAAP operating expenses to rise sequentially to approximately $470 million in Q2 due to higher R&D, SG&A and labor cost pressures, which may weigh on operating margins.
AI Generated. May Contain Errors.
Earnings Conference Call
KLA Q1 2022
00:00 / 00:00

There are 14 speakers on the call.

Operator

Good afternoon. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation September Quarter 2021 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 session.

Operator

Thank you. And 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 Q1 2022 quarterly earnings call to discuss the results of the September quarter and the outlook for the December quarter. With me on today's call is Rick Wallace, our Chief Executive Officer and Brent Higgins, our Chief Financial During this call, we will discuss quarterly results for the period ended September 30, 2021, released this afternoon after market close. 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. And whenever we make references to a year, we are referring to calendar years.

Speaker 1

A detailed reconciliation of GAAP to non GAAP results is in the earnings material 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 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 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 1

Let me now turn the call over to our Chief Executive Officer, Rick Wallace. Rick?

Speaker 2

Hello and thank you for joining us today. KLA's September 2021 quarter continued our track record of consistent execution and commitment to outperformance. The company's focus on delivering on top and bottom line goals remained at the forefront of how we run our business. During the quarter, revenue grew 8% sequentially and 35% year over year to $2,080,000,000 Non GAAP earnings per share was $4.64 representing 5% sequential growth and up 53% compared to the prior year. These results demonstrate growth momentum in our core markets and the operating leverage in the KLA financial model.

Speaker 2

Customer demand across KLA's major product groups Continues as secular trends drive growth across a broad range of markets and applications in the industry. This growth is putting pressure on the semiconductor industry supply across multiple technology nodes. In parallel, leading edge customers are increasing their strategic CapEx investments to improve their ability to address market demanding new semiconductor capabilities. Against this intense demand backdrop, We are navigating evolving customer needs and supply chain challenges. Still KLA continues to outperform expectations by operating with purpose and precision and keeping our focus on creating value for our customers, partners and shareholders.

Speaker 2

Now turning to the industry demand environment, KLA remains in an excellent position when we look at the industry demand landscape. Strong secular growth drivers are creating important tailwinds that translate into momentum for our business. As a result, We are increasing our outlook for the Wafer Fab Equipment or WFE Industry. Last quarter, We estimated WFE growth would be in the mid-30s percent range. We now estimate that WFE will grow approximately 40% in 2021.

Speaker 2

With sustained demand trends, we expect positive industry dynamics to continue into calendar 2022 and fuel another year of growth. Along with increased demand due to digitization across multiple categories. KLA's business is benefiting from customers increasing their focus on investment in leading edge development, optimization of fab utilization for established production nodes and regionalization for future fab construction. To address this growth, we continue to invest high levels of R and D to ensure we're constantly improving and remaining indispensable to our customers. For example, we're prioritizing investment in R and D for software that enhances the value customers extract from KLA systems.

Speaker 2

Data analytics, advanced simulation and machine learning technologies are driving adoption of process control. KLA's data analytics Platforms connect, centralize and analyze the data produced by our systems in the field. This creates a network effect that enhances performance across the product portfolio and for customers. KLA's breadth of products is uniquely positioned to speed time to results for our customers. We're making investments in these critical technologies as process control intensity KLA's market leadership in the process control markets remain an impressive level and an impressive level of 4 times the nearest competitor.

Speaker 2

Thanks to focus on execution and the industry demand backdrop, we remain on track to achieve our 2023 financial targets well ahead of expectations. Let's now move along to the top highlights of the quarter. First, we continue to benefit from strength across all major end markets with overall company revenue expected to be up mid-30s on a percentage basis year over year based on the midpoint of our guidance for the December quarter. While we're not immune to the unprecedented supply chain challenges affecting the electronics industry, we are navigating them as well as can be expected. In foundrylogic simultaneous investments across multiple nodes and rising capital intensity continues to be a tailwind.

Speaker 2

In memory, demand remains broad based across multiple customers with growth in 2021 led by DRAM and 2022 setting up to be a relatively strong year for NAND. 2nd, our optical metrology business continues to stand out. KLA's metrology revenue is on track to grow meaningfully faster than the WFE market in 2021 after experiencing similar levels of absolute growth in 2020. The optical metrology market is strongly leveraged EUV and its critical next generation architectures, including data all around and multi stack 3 d NAND. 3rd, KLA's leadership in the largest and fastest growing segments of the process control market is fueling strong relative growth in our Semiconductor Process Control segment.

Speaker 2

Optical Pattern Wafer Inspection is forecasted to be among the fastest growing segments of WFE in 2021 for product segments over $1,000,000,000 in revenue. KLA's cadence of innovation and new product introduction continues to outpace the competition. Just last month, we introduced our new Voyager 1035 laser scanning patterned wafer inspector, the latest in an extensive portfolio of inline defect inspection tools for critical process monitoring application in advanced chip manufacturing. Coupled with the Gen 4 and Gen 5 broadband plasma portfolio, KLA's laser scanning systems help comprise the most comprehensive optical pattern wafer inspection portfolio in the marketplace today. 4th, our services revenue was $454,000,000 in the September quarter, up 15% year over year.

Speaker 2

For the quarter, it was 22% of revenue, more than 75% of service revenue in the semiconductor process control segment and over 90% of services in the PCB business comes from recurring subscription like contracts. Services is on track for another year of strong double digit growth in 2021. This is driven by our growing installed base, higher utilization rates and increasing expansion of service opportunities in the trailing edge. Finally, The September quarter was exceptional from a free cash flow perspective. We generated record quarterly free cash flow of $795,000,000 which helped drive last 12 months free cash flow up 42% year over year to $2,290,000,000 We also have remained focused on returning capital to shareholders via our dividend and stock repurchase program, both of which are up materially year over year, including $563,000,000 in share repurchases and dividends in the quarter.

Speaker 2

In addition to executing against our strategic objectives and disciplined capital management, KLA delivers value through corporate stewardship. KLA's values are reflected in efforts to reduce our environmental footprint, provide for a safe and healthy workplace for employees, advance inclusion and diversity and make positive contributions to the communities where we live and work. We published our latest global impact report in August 2021. It highlights how KLA delivers lasting values through corporate citizenship. Our journey on this path began when we opened our doors in 1976.

Speaker 2

We are now expanding our efforts to be more holistic across environmental, social and governance topics most relevant to our business. We've also broadened our tracking and reporting to be inclusive of our full global footprint and acquired companies. We continue to build our long term ESG strategy to focus on reducing climate impact, Increasing disclosure and deepening the positive impact we deliver through our business and community engagement. With that, I will pass the call over to Brent to cover our financial highlights, outlook and guidance. Thank you, Rick.

Speaker 3

KLA's quarterly results highlight the soundness and strength of our ongoing strategies. We continue to demonstrate our ability to meet customer needs In a robust demand environment, while expanding market leadership, growing operating profits, generating strong free cash flow and maintaining our long term strategy of productive capital allocation. Total quarterly revenue was 2,080,000,000 Non GAAP gross margin was 62.9% as the various components performed mostly as expected with upside coming from the higher than expected Semiconductor Process Control Systems revenue, which enhanced the product mix for the quarter. Non GAAP diluted EPS was $4.64 Our performance reflected the mark to market of an equity position in a strategic supplier that negatively impacted non GAAP earnings per share by $0.06 Without this adjustment, which is reflected in other income and expense on the income statement, non GAAP earnings would have been $4.70 GAAP diluted EPS was $6.96 due primarily to a one time tax benefit of $395,000,000 Resulting from changes made to our international structure to better align ownership of certain intellectual property rights with how our business operates. Non GAAP operating expenses were $432,000,000 and included $252,000,000 of R and D expense and $180,000,000 of SG and A.

Speaker 3

Technical applications is a competitive advantage for KLA and drives demand for our products by helping our customers develop solutions that address their complex process challenges. Technical applications is included in SG and A and was $47,000,000 in the quarter. The combination of R and D and technical applications represented approximately 70% of total operating expenses. Given the rapid growth of the business over the last couple of years and our revenue expectations for the business going forward. We expect the company's operating expenses to continue to grow as we invest in global infrastructure, systems to scale the KLA operating model, new product development programs and volume dependent resources to support our business expansion.

Speaker 3

Furthermore, we as most companies are seeing a strong labor market driving cost pressure across our global workforce. As a result, we expect operating expenses to grow sequentially to approximately $470,000,000 in the December quarter and we forecast sequential growth to continue through calendar 2022. While operating expenses are trending higher, going forward, we will make the necessary investments to scale our business, While we continue to size the company based on our target operating model, which delivers 40% to 50% incremental operating margin leverage on revenue growth over a normalized time horizon. Non GAAP operating income as a percentage of revenue was strong at 42.2% in the September quarter. Other income and expense net was $52,000,000 compared with guidance of $43,000,000 with the variance from guidance reflecting the impact of the mark to market of the investment discussion earlier.

Speaker 3

For December, we forecast other income and expense net at approximately 44,000,000 The quarterly effective tax rate was 13.9 percent just above our guided tax rate of 13.5%. Non GAAP net income $712,000,000 GAAP net income was $1,070,000,000 Cash flow from operations was $864,000,000 and free cash flow was a record $795,000,000 resulting in a free cash flow conversion of 112%. Turning to our reportable segment and end markets. Revenue for the Semiconductor Process Control segment, including its associated service business was $1,780,000,000 up 40% year over year and up 13% sequentially. The approximate semiconductor process control system customer segment mix was tilted slightly more towards foundry logic than we forecasted at 61%, above our 59% estimate.

Speaker 3

Memory was 39% and within memory, the business was split roughly 61% DRAM and 39% NAND. Revenue for our EPC group continues to be driven by strength in 5 gs, mobile and infrastructure, as well as continued demand in automotive. More specifically, the Specialty Semiconductor Process segment, which includes its associated service business generated record revenue of 102,000,000 up 15% over the prior year and up 4% sequentially. PCB display and component inspection revenue was 203,000,000 up 12% year over year, but down 18% sequentially after a record quarter in the PCB and the component inspection businesses in June. For a breakdown of revenue by major products and regions, please see our shareholder letter or the earnings slides.

Speaker 3

Moving forward to our balance sheet, we ended the quarter with $2,630,000,000 in cash, bonds outstanding of $3,450,000,000 with no maturities until 2024 and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three agencies. Over the last 12 months, KLA returned $1,730,000,000 to shareholders, including $581,000,000 in dividends paid and $1,150,000,000 in share repurchases. While circumstances can change, current expectations are that capital returns for calendar 2021 to exceed 85% of expected free cash flow generated in the calendar year. For the quarter, we generated a record $795,000,000 cash flow and repurchased $400,000,000 of common stock, while also paying $163,000,000 in dividends. Moving to our outlook and guidance.

Speaker 3

Our overall semiconductor demand and WFE outlook continues to increase from our views earlier in the year. At the start of this year, we characterized the expected growth of the WFE market to be in the low teens plus or minus a few percentage points. In April, we revised that view to the low to mid-20s on a percentage basis with a bias to the upside. In July, we revised our WFE outlook upward again to the mid-30s. Today, we see continued strengthening and expect the WFE market to grow approximately 40% to the mid-eighty billion dollars range 2021, growing from approximately $61,000,000,000 in calendar 2020.

Speaker 3

This reflects the broad based strengthening demand across all customer segments. KLA is in position to deliver strong relative growth this year with the semiconductor process control systems business now expected to grow in the mid-40s on a percentage basis over calendar year 2020. This growth profile is driven by our market leadership and strong momentum in the marketplace across multiple product platforms. Looking ahead, we remain encouraged by the strength and sustainability of our current demand profile across all customer segments. For the total company, we expect that the first half of twenty twenty two will grow in the high single digits versus the second half of twenty twenty one.

Speaker 3

It It is abundantly clear today that demand is constrained by the industry's ability to supply. This pent up demand should enable another year of solid growth in 2022. While it's too early to put a fine point on our growth expectations for next calendar year, early indications point towards the WFE industry maintaining its growth momentum. Given our bookings momentum and strong backlog, we believe KLA is well positioned to outperform WSE. As in calendar 2021, we are adding capacity across our global manufacturing footprint to drive this outlook and to enable us to support our customers' process control requirements.

Speaker 3

Our December quarter guidance is as follows. Total revenue is expected to be in a range of $2,325,000,000 plus or minus 100,000,000 Foundry logic is forecasted to be approximately 74% and memory is expected to be approximately 26% of semiconductor process control systems revenue Semiconductor customers. Within memory, DRAM is expected to be about 53% of the segment mix and NAND is forecasted to be 47%. We forecast non GAAP gross margin to be in a range of 62% to 64%. At the midpoint, gross margin is roughly flat sequentially as revenue volume and product mix improvement is offset by higher expected service and manufacturing costs.

Speaker 3

Other model assumptions for December include non GAAP operating expenses of approximately $470,000,000 other income and expense net of approximately 44,000,000 and an effective tax rate of approximately 13.5%. Finally, GAAP diluted EPS is expected to be in a range of $4.69 to $5.59 and non GAAP diluted EPS in a range of $4.95 to $5.85 EPS guidance is based on a fully diluted share count of approximately 152,000,000 shares. In conclusion, the tailwinds driving semiconductor growth and investments in WFE continue to remain compelling. Broad based customer demand and simultaneous investments across multiple technology nodes are strong and resilient trends. We have confidence in the leading indicators of our business, including our backlog and sales funnel visibility, which is Spurring us to invest in expanding our business infrastructure and the required capabilities to support our outlook.

Speaker 3

Our customers' multi year investment plans provide an element of stability in the demand outlook for the future. KLA continues to execute exceptionally well and is on track to exceed our 2023 financial targets well ahead of expectations. The KLA operating model positions us well to outperform our industry and guides our important strategic objectives. These objectives fuel our growth, operational excellence and differentiation across an increasingly diverse product and service offering. They are also the foundation of our sustained technology leadership, wide competitive mode, leading financial performance, long standing track record of strong free cash flow generation and capital returns to shareholders.

Speaker 3

With that, I'll turn the call back over to Kevin to begin the Q and A.

Speaker 1

Thank you, Brent. Ashley, can you please queue up for questions?

Operator

We'll take our first question from John Pitzer with Credit Suisse. Please go ahead.

Speaker 4

Yes. Good afternoon, guys. Thanks for letting me ask the question and congratulations On the solid results and outlook. Rick, I'm wondering if you can talk a little bit about your optimism around the NAND market, whether it's the December guide specifically where it's moving up as a mix or in your prepared comments, you said that next calendar year setting up for a strong year in NAND. To what extent is that just being driven by technology transitions that might be a little bit more insulated from the overall market conditions in the NAND market overall?

Speaker 2

Hey, John. Yes, thanks. It is for us, it is more driven by technology transitions than overall capacity. As you know, Mostly that's what drives the early adoption of our leading technologies. And what we're seeing with NAND is, NAND is as the design rules Before the complexity continues, we're seeing a larger adoption of process control.

Speaker 2

As you know, the design rules aren't as advanced in NAND as they are as DRAM, But they get they're getting more challenging. And so that's driving a larger amount of inspection requirement, but also quite a bit in metrology as well. So it's really both.

Speaker 3

Hey, John, it's Brent. I mean, it is ticking up off of pretty low levels, right? And I think overall, if you look at the growth Of the year for the market, the NAND market grew considerably. It was growing, but considerably slower than the overall market. So there's some optimism there in terms of we are seeing some tick up, although the percentage is, As I said, the absolute value is not a lot.

Speaker 3

And I think as we move into the 1st part of 22, I think we'll see a little bit more investment there.

Speaker 4

That's helpful. And then as my follow-up, Bren, just going back to your commentary around OpEx, It makes sense given the opportunity ahead of you that you guys are making the investments. I'm wondering if you can just put some guardrails on growing sequentially every quarter from that 4.70 level. Where might the exit trajectory be next year? And I guess is there any flexibility around a revenue environment That might become a little bit more volatile in the second half of the year.

Speaker 3

It's a great question, John. And we're in the middle of our strategic planning process right now and Assessing not just our top line expectations, but how to size the company relative to program demands, but also Some of the volume dependencies that we've seen. We're also making significant investments in infrastructure. So as you've got the world coming back from travel, you've got programs, You've got infrastructure investments. Those are all driving what we're seeing.

Speaker 3

We're certainly feeling pressure as most companies are, as we said in the prepared remarks around compensation. So that's also a big part of it. I'm not going to guide 2022 because we're going through that process. But what I would say is Based on how we size the company, we're going to size we do expect growth in the company and we'll size the company based on our incremental margin model, Which is 40% to 50% incremental operating margin leverage on revenue growth. And so that will be a driver for us.

Speaker 3

Certainly some of this investment It's a catch up, if you will, in terms of the revenue growing so fast over the last couple of years. And it's been hard for us to catch up in terms of just Being able to support the business in the way that we'd like. We're also encouraged by the growth opportunities over time, I'll call it the through cycle or normalized long term growth. We want to make sure the company is positioned right for that. So I'll have more to say about how to size it.

Speaker 3

I would say that we're going to be consistent with our long term model. We've been way ahead of the model over 50% over the last couple of years. I would expect us to be in the target range as we think about 2022. Hopefully that helps.

Speaker 4

It does. Thank you.

Operator

And we'll take our next question from C. J. Muse with Evercore. Please go ahead. Your line is open.

Speaker 5

Yes, good afternoon. Thank you for taking the question. I I guess a similar question on the gross margin side. As you think about the investments that you're making now, how should we think about the trajectory For gross margins into calendar 2022. And I guess as part of that, we'd love to know mix wise, what would enable you to hit the higher end or 4% of the December quarter as well.

Speaker 5

Thank you.

Speaker 3

Yes. CJ, One of the challenges, all the things I mentioned, there is a COGS component to it. And I think one of the other challenges we're facing is pressure on cost in the supply chain. As I think about 2022, I do see an impact from incremental costs probably somewhere in the 75 to 100 basis point level. I do think that that's implied in the guidance that we provided.

Speaker 3

I'll have a firmer point On it as I think about 2022 in the next call as we start to just lay out a more comprehensive plan around the year. But I do think we're operating in the 63% range and I'll put a little bit wider range than I normally would today and maybe set plus or minus 75 basis points on that based on our early expectations for next year. Absent those pressures, I think we'd be very consistent with the kind of trajectory we've seen. Certainly, the mix is more process control centric given expectations for next year right now. But I do think we'll continue to operate within our longer term expectations of trying to drive somewhere between 60% 65% incremental.

Speaker 3

But certainly these cost pressures are real out there And we're trying to navigate our way through it. But I don't think it'll change much from current levels in terms, but I don't think it's going to go up much So I think it's we're going to be operating and hovering sort of in this area with mix affecting performance in any given quarter.

Speaker 5

That's very helpful. As a follow-up, on the revenue guide for first half calendar twenty twenty two, that implies roughly I think $50,000,000 higher each quarter. And so curious, is there any seasonal impact we should be thinking about Orbotech Lower in the March quarter. And otherwise, should we be thinking about really process control being a key driver of that uplift?

Speaker 3

Yes, it's a good question. Right now, and again, things could change, but I don't see any seasonal impact into the Q1. I think process control will be above, obviously, the high single digit commentary. So I think we'll Process control systems higher than that, in terms of the first half expectations.

Speaker 5

Thank you.

Speaker 6

Thank you.

Operator

And we'll take our next question from Vivek Arya with Bank of America. Please go ahead.

Speaker 7

Thank you for taking my questions. On the first one, the industry is about to start making this transition to 3 nanometer. And I was hoping you could contrast what that move means for process control intensity, right, the move from 5 to 3 versus the change you saw when the industry moved from 7 to 5. And can this transition from 5 to 3 change the competitive line

Speaker 2

Well, I think, yes, I think It's a more similar change, I think, as traditional ones because EUV has already been introduced. So what you're seeing is An increase, it's less of a revolutionary one in the sense that EUV is in 5 and so you're going to see expansion of EUV layers as part of 3. So in that way, I think the mix phenomena will change toward some of the higher end tools. So for example, Gen 4 for us Significantly outselling Gen 5 in this calendar year because the bulk of the layers that can be done on a Gen 4 system. So So as you move to 3, you're going to have more leverage toward a Gen 5.

Speaker 2

And now it turns out we'll also be improving the Building is

Speaker 3

on Gen 4, but I

Speaker 2

think you'll see it slightly shift. Remember customers are always looking at the most cost effective Inspection strategy that they can have. So you're going to see it there. It will show up in metrology as well because they'll just be more points that will have to be sampled and that'll drive utilization and the throughput requirements on tools. So process control intensity at the advanced nodes does get pushed harder and we're definitely getting that Feedback from our leading edge customers, the need for more capability and capacity to support that.

Speaker 2

So I think if anything, You're going to see a shift towards some of the higher ASP capability. At the same time, we're improving it. But in terms of a KLA market share perspective, We think it's actually positive for our market share because most of the time when we have competitive situations, We tend to be in price competition at the lower end of most of the competition and this will push things toward higher end, Which are the tools that we're really well positioned in and that'll allow us to continue to our march towards higher market share over time.

Speaker 3

Vivek, I'd also say that at N5, you're going to have a lot of a high number of design starts. So you're going to see customers adding capacity at N5, which means it's Much harder for them to try to migrate any of that capacity to N3. So they're going to be investing in N3, but also adding capacity So the technical drivers make that harder already based on a lot of the things that Rick just talked about, but also the design start activity We'll also be a factor in that. So it's there's a lot of new capacity that comes in to support that note.

Speaker 7

Very helpful. And then for my follow-up, at the risk of pushing you a little more on the calendar 2022 because you were so Nice to give us what you're seeing in the first half. Usually the second half of the year, calendar year tends to be better than the first half. So to the extent that you have visibility, right today based on bookings and whatnot, is there any factor that could prevent that From happening next year. Thank you.

Speaker 2

Look, I'm not going

Speaker 3

to guide the second half. It's pretty far out. Yes, we have seen that phenomenon over the last couple I would say and part of why we felt comfortable with the first half guidance is that we do have Very high levels of backlog. And given the fact that the WFE number this year is clearly a supply number and not a demand number, there's certainly Evidence of visibility through our customers and how they're lining up for tools into the first half of the year. So we feel pretty comfortable about what we see there, hence the guidance we provided and are driving the business and in The capacity we have to

Speaker 8

be able to

Speaker 3

support long term growth in the industry. So I'm not going to give you the second half, But I don't see any reason why things are would fall off given the nature of what we're seeing and the demand in conversations we have from customers.

Speaker 7

Perfect. Thank you so much.

Operator

And we'll take our next question from Christian Carr with Cowen and Company. Please go ahead. Your line is open.

Speaker 8

Hi. Thanks for taking my question. I have 2 of them. First one, Rick or Brent, looks like your China sales has been really strong. And when I look at the industry, it looks like both you and your peers are all Getting demand from a long tail of smaller customers, many of them are focused on things like IoT.

Speaker 8

So I'm kind of curious, What is the split between MNC and domestic? And how durable do you think the China business from these smaller customers Who seem to have cropped up recently and maybe don't have the scale. How do you think it is? And then I have a follow-up.

Speaker 3

Well, just in terms of overall percentages, I would say our semi process control is pretty consistent with the overall this quarter for the company. Sometimes EPC It tends to be heavier weighted to China and does pull the overall company up a little bit. But this quarter, it's pretty close. It does tend to be lumpier. So, I think overall, if you look at the business, we probably expect overall China to be somewhere around In the low 20s as a percent for calendar year 2021.

Speaker 3

And of that, I would say 15% or so, maybe 20% is Multinational, so 80% of that would be native.

Speaker 2

And the second part of that, when it comes to sustainability, These are to your point, they're smaller scale, but they're also lagging in terms of when people were thinking about Leading Edge Technologies. They're not leading edge. They're supporting domestic demand. And if you think about the EV industry, for example, the car, There's quite a bit of activity in China around that. So they're trying to have more control over their own supply chain for those trailing edge parts.

Speaker 2

So it's actually quite sustainable when you look at the amount of demand there is for specialty semiconductors in the China market. So I think that that's something that you'll And it's a long way away from some of the concerns people have about leading edge in China. I guess the final point on

Speaker 3

that also is that when you think about our business, we do have exposure to wafer and to mask. And so if you look at what's going on in terms of domestic capacity for infrastructure to support the semiconductor business. We do have some exposure to that overall.

Speaker 8

Got it. Super helpful, Rick and Ben. And then a quick follow-up. Just wanted to see what is the status of the e beam tools. I remember last quarter it was about 15 or so tools in the field.

Speaker 8

Can you give us a status update on that? And where do you think your market share is today on e beam? Thank you.

Speaker 3

Well, I don't know if things have changed all that much. I mean, certainly, we're confident in the product roadmap that we have for e beam. And I think It's complementary with our optical tools. Now when we say e beam, it's a broad term. It covers not just metrology, but also inspection and review.

Speaker 3

There's a lot of efforts that are happening across the company including in reticle inspection. But we our strategy around EBI, which I think you're referring to inspection is really to try to leverage and use the EBI technology and the machine learning that we have to drive the inspectors and add more value or more relevancy to the inspection tools. So It's more of a portfolio strategy than a point product strategy. And I think it's going pretty consistent with our overall expectations today.

Speaker 2

Yes, I would just add to that. I think the team has done an outstanding job of developing this capability and delivering it. We're getting very positive feedback from our customers. They really like the idea of some of the capabilities. They also like the leverage that we have between some of the algorithms we've developed in our other systems that they're familiar with being able to apply those to Hebeam and also as Brent said the interoperability.

Speaker 2

So we're where we are anticipated and planned from a revenue standpoint on these. There are really multiple applications which we're serving with e beam. So we feel very good, but just as an overall cautionary reminder, e beam as a percent of optical wafer inspection That continues to be right about where it's been for the last 20 years and we know that. We're providing this capability because there are some special applications where customers need it and there are actually some expansion opportunities and things like some of the increased demands of overlay That require or people are looking at for e beam in order to control the very advanced design roles. So, it's meeting what we planned.

Speaker 2

We're happy with our execution And the market share is climbing, but it's a long haul to gain share in many of these markets and we know that.

Speaker 8

Very helpful. Thank you.

Operator

We'll take our next question from Joe Moore with Morgan Stanley. Please go ahead.

Speaker 9

Yes, thank you. I wonder if you could just talk about the mix this year in foundrylogic seems to have shifted More to the legacy nodes a little bit, or at least those are stronger than they've been. Can you talk about maybe where that mix is? I mean, given that Sort of qualitative color on that in the past. And what does that do for KLA?

Speaker 9

Does that sort of a headwind for you relative to WFE? Or And if that rolls off, could it help you in the other direction?

Speaker 3

Yes. It's interesting this year, I think last year was a little bit more Heavy and trailing edge in 2021, it's been very leading edge centric for our business. And I think 2022 probably Expands a little bit more in terms of the trailing edge. So, it's about 20% to 25% of our foundry revenue I'd classify as below 28 nanometer. And so I'd call that leading edge.

Speaker 3

So 28 and above is about 25% or so. So 75% is below 28%. And I think as we go into next year, I think we'll see a little bit more of the trailing objective.

Speaker 2

Yes. One of the things that it's done for us, I mean, versus I think if you go back long enough, We have a Gen 5 and Gen 4 we talked about in detail. We also have different variants of BBP, which are even more suitable to some of the lower end. And those customers often are familiar with the higher end tools and they want some of that So we're seeing these products actually run quite a bit longer than they ever have. And so we have another product we call the C205, which is Targeted for the auto industry and we're able to sell that and we're seeing that it really leverages a lot of the R and D that we've done for years.

Speaker 2

So The platform even we talk about a portfolio of products, but the truth is we have a portfolio of BBP products and it is not just across The different technologies, it's one technology across the different generations and we're really leveraging that. So what's really surprising When we look at it is the Gen 5 while it's doing quite well, it's actually one of the smaller relative to the Gen 4, it's Significantly smaller dollar volume this year and that will grow over time, which makes us feel really good about the sustainability and the overall potential for us to Continue to be able to invest and provide capability for our customers across all nodes. So it's pretty exciting to see.

Speaker 9

It's Very helpful. Thank you very much.

Operator

And we'll take our next question from Joe Quatrochi with Wells Fargo. Please go ahead.

Speaker 10

Yes. Thanks for taking the question. You talked about the increase in your manufacturing capacity, but how do we think about the ability of your supplier partners Capacity to grow in order to support your growth given some of your components I know are several months for lead times. Yes.

Speaker 3

It's a great question, Joe. When I say capacity, I mean people, parts and space. So I'm covering all of those things. Certainly, supply chain tends to be The longest pole in the tent, if you will, in terms of our ability to add capability. We've been doing that For a long period of time, I'm going back to the middle of or towards the end of 2020.

Speaker 3

So we have around the key Components and subsystems where there are long lead times. We have very strong partnerships with those suppliers and We've been working with them. We've been investing where appropriate to ensure that they're able to increase their capacity. So that capacity comes online over time. Our volumes Lower around a lot of those parts.

Speaker 3

And so getting single digit upticks sequentially quarter to quarter in terms of units Can have a pretty big impact on the company's overall revenue. So we continue to make those investments and work with those suppliers. Obviously, you never know what Future is, but we do have this belief that with semiconductor revenue growing the way that it is, capital intensity rising that this will be a Demand for the company going forward. And so whether it's near term or longer term, I'm willing to make the investments to ensure that we can be as flexible and responsive to customers As we need to be. We're also carrying more inventory and that provides a little bit of extra buffer as well around some of these components.

Speaker 3

Because our volumes are where they're at, some of the more fungible or more commodity like parts that are out there, our Challenges are probably a little less than some of the other folks out there just because I don't need as many of them. I need them, but I don't need as many of them just because of the level of volume we have. So I think it's across all those things. And we feel pretty good that look, Ultimately, our customers would like things sooner if we could deliver to them, but we are managing our way through it and I feel pretty good about the guidance that we provided

Speaker 2

Yes. And let me just add one perspective where I think actually it differentiates KLA in a positive light relative to our peers in the industry. Because we've always been high mix, Low volume. And we have several strategic relationships with key suppliers as Brent. We've actually always been working the supply chain And making sure we invested in our suppliers so that we had capability because in many cases, where We've been for years inextricably linked to them.

Speaker 2

So when this thing hit, I think we were able to navigate it better because to Brent's point, we don't need as many. We don't need the biggest volume and with the critical ones, we've had historically strong relationships, which we maintained through the different cycles. So that's why I think, Again, it's another example of KLA being less volatile in a dynamic market. So that is part of it. It comes with a lot of work, a lot of hard work with our supply chain.

Speaker 2

But I think we have the trust and relationships with them that when we make commitments, We can follow through on them. So it has taken work to do, but I think that's part of why we've been able to scale and we went through the whole period. We didn't Stop guiding because our numbers, we haven't missed our performance expectations. I think largely it's because of those things.

Speaker 10

Got it. That's really helpful. And then just as a follow-up, in the prepared remarks, you talked about increasing expansion of service opportunities in the trailing edge. I was curious if you could double click on that and maybe also how do we think about that from a margin profile Just given it seems like maybe some of those opportunities are maybe a little bit more hands on.

Speaker 2

Well, I'll take the first part and Brenna can speak to the margin Trinity, I think that as you well know, a lot of these fabs are running a lot longer than historically. Some of them have relied on Some version of 3rd party or their own service. As those factories have been upgraded with more recent KLA technology, It's really been falling on us to support that. So I gave you the example of the C2O5 product line. That's not something that they're That would be able to readily get a 3rd party to service or do it themselves or just wait.

Speaker 2

So we're engaging when we sell some of the newer capability into these More, I guess, traditional or trailing edge fabs, we provide more services and capability and that's been part of the value proposition. The other factor of course that is helpful is they're all quite profitable enterprises for our customers. So they're willing to Make that investment to secure their capabilities.

Speaker 3

I don't think the margins are any different than other parts of the service business that we have. And Look, we serve to an entitlement, we serve to what our customers purchase a certain service level and we Optimize the organization to be able to support that. Certainly, the utilization rates are higher and so that's creating a revenue stream. Also the demands on that capacity in terms of not just incremental volume, but also demands in terms of reliability It's also increasing and so that's creating opportunities for us to sell more capability, but also to introduce some of our newer products To have roadmaps and have the ability to have an upgrade stream to it.

Speaker 10

Thank you.

Operator

And we'll take our next question from Timothy Arcuri with UBS. Please go ahead.

Speaker 11

Hi, thanks a lot. I guess, Brent, you gave guidance first half versus the second half of this year for the whole company. But it seems like process control systems could be up like low teens first half of next year versus the second half of this year. Is that a reasonable number?

Speaker 3

So I said high single digits and I would think that process control systems based on what we see today will be higher than the company average.

Speaker 11

Higher than the company average. Okay, got it.

Speaker 3

Yes. So if it's 8% -ish I expect it to be higher.

Speaker 11

Yes. Okay.

Speaker 3

High single digits, right, 8%, 9% whatever that is.

Speaker 11

Yes. Okay. Got it. And then on EPC, so I know that the long term outlook is for EPC to grow double digits, but you're growing More than 20% this year and that's kind of even before the big packaging stuff from the big guy who has this huge project has even really You hit your orders yet. So can you just talk about the timing of that?

Speaker 11

And do you think that You can grow double digit next year even off this elevated level and maybe when do you expect that big project to start to positively impact your EPC Business.

Speaker 3

Well, we would expect growth next year in EPC. I'm not going to get into specific sizing overall, but we are encouraged by what we're seeing here for next year. And I don't want to get into Timing for customers are pretty optimistic about the opportunities that exist there and some of the product offerings that we have. So, We'll have to see it play through, but I am encouraged to think it's another year of growth. I think EPC will have solid growth into next year.

Speaker 2

So yes, Tim, just to give a little Color on that. I do think if you thought about these big programs, they're pretty early stages. So I think by the time That it will result in significant accelerant to that growth. We're in 2023. So it's not really 2022, I think rises with Some of the industry and programs and partnerships that we already have, 23 is a result of some of the newer things that are being worked on now.

Speaker 2

And I've mentioned before, we've talked, we are very excited about what we're hearing and seeing in terms of both the opportunity And the desire for these bigger players to engage with KLA. So, but that's not as much a 2022 as it is a 2023 phenomenon.

Speaker 11

Awesome, Rick. Thank you so much.

Operator

And we'll take our next question from Patrick Ho with Stifel. Please go ahead. Your line is open.

Speaker 12

Thank you very much and congrats on the nice quarter. Rick, maybe first off on a big picture basis, you're seeing a lot of Changes in the DRAM industry right now from a process technology standpoint as you go to 1Z and 1A. From a process control intensity standpoint, it's likely to increase. What are the biggest process challenges That you're helping customers address, is it the new materials, is it the deeper vias? Maybe if you could give a little color of the applications that are driving increasing intensity in DRAM.

Speaker 2

I think the biggest thing for what we're seeing in DRAM and this was a question I think for quite a while was EUV going to be simply for advanced logic devices, mass foundry. And now we're seeing it as you know starting to happen in EUV. And everything that comes with that, all the infrastructure that goes with that, all the work that's going to go on to make sure that You can qualify the reticles, even though they have redundancy, there's still a huge fear of throwing away. This is very expensive infrastructure. So There's a lot of work going on already with Gen 5 to make sure that we can help qualify.

Speaker 2

And of course, you mentioned the high aspect ratio Devices, you're going to see more, I think they've been in a honeymoon period for actually several years. I would say that some of the DRAMs Historically, and you didn't see the process control intensity grow. This is a real chance for it to increase as a result of The new capabilities that are bringing just EUV what that brings on. We also have a lot of metrology applications as well. So I think we do see it broadly.

Speaker 2

I don't think it will ever get to the levels of process control intensity we see in leading edge foundry logic, but it will increase probably at a faster rate In terms of growth of process control as we go forward, assuming the successful deployment of EUV, which right now is Certainly what they're working on. Just one example of that is in what we're hearing now is for DRAM is that There seems to be no pellicle going to be used in lithography. That's the belief right now. And if so, That puts a lot of pressure on PrintCheck, which is a very high intensity application for Gen5. So there would be an example of a new application.

Speaker 2

I can't remember. I can vaguely remember, but it wasn't in any It's decades since we've been doing a quick one of print check-in DRAM. So this would be a whole new application for those customers. As you know, some of them have experience in advanced logic, so they know what that means. And so at least one of them does.

Speaker 2

So there's going to be Yes, some crossover from that. So we're feeling pretty good about where that's coming in terms of shaping up yet another driver for intensity.

Speaker 12

Great. And just as a quick follow-up maybe for Bren. You guys have been posting really strong services revenues, which is not a surprise. Do you believe any of this incremental pickup in services is related to, I guess, the shortage situation with chips? It's driving probably higher utilization rates and probably the need to keep these tools running.

Speaker 12

Do you feel like any of this incremental pickup in services is related to The current market situation involved with semiconductors.

Speaker 3

Sure, sure. That's driving the higher utilization rate. So that's certainly a factor. One of the also the large factor is you're starting to see tools that were shipped in 2020. As we've seen the systems business grow and ramp that those tools are coming out of Now as we move into the second half of twenty twenty one.

Speaker 3

And so that is also a driver of incremental service revenue. I think that contract penetration has been good in this environment. Customers rely on us to keep their capacity up. And so we've also Seeing some incremental benefit of from a contract renewal point of view. So I think there's a number of factors that are driving it.

Speaker 6

Great. Thank you.

Operator

And we'll take our next question from Mehdi Hosseini with SIG. Please go ahead. Your line is open.

Speaker 13

Yes. Most of my questions have been And so just a quick follow-up for the team. Your December quarter revenue implies a wide range, up 7% to 16%. I would like to hear what are the key variables that would drive the low end versus the high end?

Speaker 3

Hey Mehdi, it's Bren. So our typical revenue guidance Ranges plus or minus $100,000,000 And typically for that, it tends for us to be more about, look, we have very large integer tools. We can have systems that can cost upwards of $40,000,000 a piece. And so at times depending on dynamics around supply chain, dynamics around customer readiness, In some cases, you have to go to customer acceptance. So there are always those factors that influence our where we could land in a certain range.

Speaker 3

So our range has been very consistent over the last several quarters. I don't think anything's really changed on that front. It really gets down to our assessment of where we're at. Some cases we have evaluations, assignments that have to be bought out. So there's always Some fluidity to our expectations and our revenue plan is to build it up.

Speaker 3

But I wouldn't say that there's any one issue or another that Is driving how we're thinking about the overall range.

Speaker 13

Got it. That's right. And then one quick follow-up on WFE. Given your view on the first half of calendar year twenty twenty two, it seems to me that your share gain Could be in the 50 to 100 basis points. And you're not providing absolute dollar value of WFE, but if I just take your commentary, it seems like a minimum of 50 basis points share gain is actually very conservative.

Speaker 13

Do you have anything you can share with me?

Speaker 3

Well, we feel very good about the relative performance this year and to our prepared remarks also next year. When we were At our Investor Day in New York back in 2019, we laid out a plan that we thought that would drive KLA share of WFE up 75 to 100 basis Point between 2019 2023. Part of that was market share gain, part of it we thought were intensity opportunities related to the introduction of some new products. So we feel pretty good about the trajectory we're on. I don't want to provide a specific number there, but our goal is to hit our plan And I feel pretty good about where we are relative to that plan.

Speaker 13

Got it. Thank you.

Speaker 1

Thank you, Mehdi. Operator, we have time it looks like for one last question.

Operator

Our final question will come from Harlan Sur with JPMorgan. Please go ahead.

Speaker 6

Hi, good afternoon guys. Great job on the quarterly EUV adoption continues at a pretty aggressive pace and EUV mass layer counts Continue to expand with every new technology node. And then additionally, you have the 1 large logic customer that is now back on an aggressive Technology cadence leveraging EVU. So how are you guys thinking about the growth of your reticle inspection business relative to overall process control for this year? And how are you thinking about reticle inspection growth into next year?

Speaker 3

Yes. When I look at reticle inspection, I think it's a market growth Kind of number this year, probably will be a record for us this year. And but I think on a go forward basis, You're right. The introduction of EUV and increasing layer counts are driving growth in that overall market. As you know, we support that market with multiple products that help optimize for our customers to optimize around some of the technology challenges, but also the economic objectives that they have.

Speaker 3

So I do think that there's an inflection in that market. We've seen a nice performance this year and we expect to see it continue to grow over the next few years.

Speaker 6

Yes, I appreciate that. And then one of the big growth drivers for next year in terms of WFE is more of these mature and specialty nodes and

Speaker 8

you guys talked a But I

Speaker 6

think the team actually did recently introduce 4 or 5 new tools, which are primarily focused on mature and specialty inspection and metrology like the C205 broadband plasma inspection platform. Can you guys just give us a sense of early adoption curve? What's the differentiation of these tools versus Customers just buying like refurbished older generation KLA tools?

Speaker 2

Sure, Harlan. I mean, I think that There was I think historically a view of trying to leverage the older technology. But as you can imagine, those tools are quite aged at this point. So we definitely saw

Speaker 1

a step up plus it was harder for

Speaker 2

us to service it. So we're seeing a lot more capability we can offer now in some of these And I'd say the C205 is like a derivative tool of the VBP tool. So that's one where you get a lot of capability and Certainly take advantage of all the work we've done in the algorithm area. And so we can offer to lower costs because of the configuration and all that, but Has a lot of capability. So we're seeing much more interest in newer capability.

Speaker 2

And remember these guys are getting pushed very hard by their supply chain, Especially in automotive because there's such a focus on preventing some of the defects, liability issues. As you know, those are incredibly expensive If they're caught later. So we're seeing pretty good adoption and growth and it's kind of a little bit countered overall WFE cyclicality. So we think that is a steady area of investment. What we laid out at the Investment Day 100 years ago feels like 2019.

Speaker 2

We're still on track actually ahead of plan for that in terms of automotive and we anticipated bringing on some of these products at that time.

Speaker 6

And I assume that you're getting what higher dollar capture value for these new tools relative to let's say purchasing a refurbished tool?

Speaker 2

Much higher and I think it's just it's a better deal frankly for everybody. I mean the capability that's offered, they could do more with them. We can service them more effectively, have a longer life. I think a lot of upside for them to do that. In fact, in many of these older fabs, this might be the one area where they are bringing in

Speaker 6

Great. Thank you. Thanks, Harlan.

Speaker 1

Thank you. Thank you, Harlan, and thank you everybody for your time. This will conclude the call. I'll pass it back to the operator for any final instructions.

Operator

And this concludes the KLA Corporation September quarter 2021 earnings call and webcast. Please disconnect your line at this time and have a wonderful day.

Speaker 7

Goodbye.

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