KLA Q3 2023 Earnings Call Transcript

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Provided by Quartr
April 26, 2023

Key Takeaways

  • Q3 Financials: March-quarter revenue of $2.43 billion beat guidance midpoint (+6% YoY), with GAAP EPS of $5.03 and non-GAAP EPS of $5.49.
  • Market Leadership: KLA’s process control segment grew 30% in 2022, capturing an additional 300 bps of share (now 57%+), driven by high R&D spend and innovation.
  • Automotive & Legacy Strength: Automotive-focused business has more than doubled since 2019 to ~$700 million annualized, while legacy-node investments remain robust, aided by the new IPAT inline screening methodology.
  • Strong Services & Cash Return: Services revenue rose 8% YoY to $529 million, and free cash flow of $926 million funded $659 million in dividends and share repurchases (totaling $5.1 billion over 12 months, 160% of free cash flow).
  • June Quarter Outlook: Guides June revenue of $2.25 billion ± $125 million, non-GAAP gross margin ~60.8%, EPS $4.95 ± $0.60, and expects overall WFE decline of ~20% in 2023 with demand stabilizing.
AI Generated. May Contain Errors.
Earnings Conference Call
KLA Q3 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good afternoon. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation March Quarter 2023 Earnings Conference Call and Webcast. Any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

The the press star 0. Thank you. I will now turn the call over to Kevin Tessel, Vice President of Investor Relations and Market Analytics. Call. Please go

Speaker 1

ahead. Thank you, Chelsea, and thank you for joining us for our earnings call to discuss the results of the March 2023 quarter and our June quarter outlook. Call. Joining me 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 market close.

Speaker 1

Call. All materials can be found on our IR website. Today's discussion is being presented on a non GAAP financial basis unless otherwise specified. Whenever we make full year references, they are Q4 of fiscal 2020. A detailed reconciliation of GAAP to non GAAP results is in the earnings materials posted on our website.

Speaker 1

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. Call. Our commentary 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, call today. Are also 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 projected in our forward looking statements. Call. Our CEO, Rick Wallace, will begin the call with some comments and quarterly highlights. Brent Higgins, our CFO, will conclude with our financial highlights, including our guidance and our outlook. Call.

Speaker 1

I will now turn the call over to our CEO, Rick Wallace. Rick? Thank you, Kevin. Let's start with a summary of KLA's performance in the quarter call, along with a few highlights. Further color and detail on my comments and the semiconductor demand environment can be found in our shareholders letter released earlier today.

Speaker 1

Pele's March quarter results again demonstrate the company's consistency in delivering on long term strategic objectives and financial targets. Call. Specifically, revenue of $2,430,000,000 was above the midpoint of the guidance range. This represented 6% growth call. On a year over year basis, although down 18% sequentially, GAAP EPS was $5.03 and non GAAP EPS was $5.49 Near term headwinds related to the global macro economy and supply chain remain, but we also see positive offsets emerging as automotive demand and other markets served by legacy nodes remain strong.

Speaker 1

Additionally, the silicon wafer industry continues to invest to support long term wafer demand growth. The However, we see R and D investments remain a top priority. This is important for KLA as our products are consistently relied upon during the R and D process call. The early ramp phase and faster time to yield is critical. We had a number of additional business highlights in the quarter.

Speaker 1

Gartner recently released their latest industry market share analysis and process control is the fastest growing WFE market In 2022, growing 30% in the year to $13,500,000,000 Within process control, Halo increased market leadership in most segments, resulting in an overall market share gain of approximately 300 basis points in 2022 Over 57% greater than 4x our nearest competitor. Haley's sustained market leadership is underpinned by our

Speaker 2

innovation commencement

Speaker 1

to high levels of R and D investment. Additionally, the successful execution of KLA's strategies for market diversification are Q1 of 2019 as demonstrated by the rapid growth in KLA's automotive focused businesses. Automotive semiconductor demand is growing in applications where Q1. The fewer defect mentality is required to achieve superior standards of quality and reliability. KLA has been working with the entire automotive to standardize our in line ePEX screening methodology called IPAT to augment existing reliability test methods.

Speaker 1

As electrification deliberates, the industry is facing an additional opportunity with the integration of introduction Q4 of fiscal year. In this category, KLA's revenue has grown 2.5x since 2019, approaching $700,000,000 in annual revenue Q1 of 2019. We expect We expect this growth to continue in calendar 2023. In services, our business grew to $529,000,000 in the quarter, up 8% year over year and 2% sequentially. ALAE service strength was driven by our growing installed base, increasing customer adoption of long term service agreements, expanding service opportunities in legacy notes and emerging long term opportunities in acquired businesses.

Speaker 1

And finally, the March quarter was another excellent period from a cash flow and capital returns perspective. Quarterly free cash Total cash returns over the past 12 months was $5,110,000,000 or 160 percent of free cash flow. Dividends and share repurchases in the March quarter were $659,000,000 composed of $478,000,000 in share KLA operating model and the dedication of our global teams. I will now hand the call over to Bren to go through our financial highlights. Bren?

Speaker 1

Thank you, Rick. ALAE delivered on our quarter guidance and commitments, demonstrating consistent execution in the challenging marketplace. Call. Our continued focus on meeting customer needs while expanding market leadership, growing revenue, sustaining industry leading gross and operating margins, generating strong free cash flow Maintaining our long term strategy of assertive capital allocation is what makes us successful. Quarterly revenue was $2,430,000,000 above the midpoint of the guided range of $2,200,000,000 to $2,500,000 Non GAAP diluted EPS was $5.49 above the midpoint of the guided range of $4.52 to $5.92 GAAP diluted EPS was $5.03 Non GAAP gross margin was 60.8%, at the lower end of the guidance range.

Speaker 1

While volume and product mix were Q1 of 2019. The to a greater degree than expected and drove incremental inventory reserve requirements. Factor and absorption also remains a factor across the company Below our expectation of $545,000,000 reflecting the impact of modest headcount reductions implemented in the quarter and prudent cost management call today. Total operating expenses comprised $322,000,000 in R and D $212,000,000 in SG and A. Non GAAP operating margin was 38.8 percent, other income and expense net was $60,000,000 and the quarterly effective tax rate 14%.

Speaker 1

At the guided tax rate of 13.5%, non GAAP EPS would have been $0.03 higher or $5.52 Quarterly non GAAP net income was $761,000,000 GAAP net income was $698,000,000 cash flow from operations was $1,010,000,000 Free cash flow was $926,000,000 As a result, free cash flow conversion was 122% and free cash flow margin was 38%. The company had approximately 139,000,000 diluted weighted average shares outstanding at the end of the quarter. The breakdown of revenue by reportable segments and end markets call and answer session. Switching to the balance sheet, KLA ended the quarter with $2,900,000,000 in total cash, cash equivalents and marketable securities, debt of $5,950,000,000 and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all 3 agencies. Over the last 12 months, KLA has returned $5,100,000,000 to shareholders, including 4,400,000,000 share repurchases and $711,000,000 in dividends paid, the total capital returns amounting to 160% of free cash flow.

Speaker 1

Turning to our outlook now. We continue to estimate WFE to decline approximately 20% to $75,000,000,000 in calendar 'twenty from approximately $95,000,000,000 in 'twenty two. Our customers' capacity planning remains fluid and indications of end market improvement have limited visibility today. While the timing of a meaningful resumption in WFE investment growth remains unclear, we do see overall demand stabilizing around current business levels Semiconductor Process Control Systems business. We expect this demand profile to continue through the second half of the calendar year.

Speaker 1

In particular, we are seeing higher than initially expected investment from legacy customers globally, including in China. We have also received clarification from the U. S. Government on the export rules issued last October and can now resume some shipments that we had previously excluded. Furthermore, we see additional wafer and radical infrastructure spending worldwide.

Speaker 1

Our WFE estimate reflects current top down estimate of industry demand as follows. Memory, we expect WFE investments to decline by 35% to 40% as Memory customers continue to respond to lower consumer demand by adjusting production to bring device supply in line with demand. We We expect foundrylogic to decline by about 10% overall, with legacy investment declining less than the segment overall due principally to automotive and continued demand for legacy design nodes in China. Our June quarter guidance is as follows: total revenue is expected to be 2,250,000,000 Plus or minus $125,000,000 Foundry Logic is forecasted to be approximately 77%, and memory is expected to be around 23% of Semi PC Systems revenue. Within memory, DRAM is expected to be about 85% of the segment mix and NAND approximately 15%.

Speaker 1

We forecast non GAAP gross margin to be 60.75 percent plus or minus 1 percentage point due primarily to the expected product and segment mix. Call. Given the view of a stabilizing demand environment for the remainder of the year, non GAAP gross margin should remain in this range, with the expectation of gross margins to be between 60% 61% for calendar 'twenty three, with product mix being the largest factor in quarter to quarter Excluding the company's financial results. Looking ahead, we will continue to manage costs carefully. The June quarter always represents the 1st full quarter of our annual salary adjustments.

Speaker 1

As a result, operating expenses will tick up slightly to approximately $540,000,000 We continue to see operating expenses trending down for the remainder of calendar 'twenty Exiting the calendar year in the $530,000,000 to $535,000,000 range. Other model assumptions for the June quarter include other income and GAAP net of approximately $58,000,000 and an effective tax rate of approximately 13.5%. Finally, GAAP diluted EPS plus or minus $0.60 EPS guidance is based on a fully diluted share count of approximately 137,500,000 shares. In conclusion, after 3 years of strong industry growth, our view of total WFE demand remains unchanged at Down approximately 20% in calendar 'twenty three. Against this backdrop, KLA is well positioned to continue to outperform the Building on the increased market relevancy delivered in calendar 2022.

Speaker 1

Looking ahead, we remain confident that the secular trends driving long term semiconductor industry play in influencing national industrial policy and simultaneous investments supporting growing semiconductor content across technology nodes remain catalysts for growth. Technology investment and node transitions reflect the value that semiconductors and our industry have in lowering costs for our customers and semiconductor industry faced headwinds in 2023. We are well positioned to deliver strong financial performance, driven by the relative strength of our semi PC and SPTS businesses continued growth in services. We will continue to focus on innovation as we execute our portfolio strategy to support our customers' technology growth maps KLA operating model guiding our execution, we will execute our strategic objectives and drive out conference. These objectives drive our growth, consistent operational excellence and differentiation across the diverse product and services portfolio.

Speaker 1

They are also the foundation that sustains our technology leadership and competitive differentiation. This has enabled us to achieve industry leading financial and free cash flow performance call and deliver consistent and growing capital returns to shareholders. And with that, I'll now turn the call back over to Kevin to begin the Q and A session. Kevin? Thank you, Bren.

Speaker 1

Chelsea, can you please provide the instructions for queuing and then begin the Q and A?

Operator

To the

Speaker 1

operator today. At this time, I would like to welcome everyone to the operator

Operator

and if possible to pick up your handset for optimal sound quality. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Our first question will come from Harlan Sur with JPMorgan. Your line is open.

Speaker 3

Good afternoon and great to see yet another year Congrats on the team last year. You reiterated your full year WFE outlook is down 20%. You also talked Your process control business remaining stable at the June quarter levels through the remainder of this year. I'm wondering If the stable outlook also affects the stabilization of cancellation and push out activity from what I assume has been a clearly volatile bookings environment over the past 6 months.

Speaker 1

Hey, Harlan, thanks for the compliment. Overall, from a bookings point of view, look, the customers are still moving things around in terms of backlog and slotting. There was some scrubbing in the quarter of some adjustments, fairly minor in our overall backlog and our RPO number, which you'll see which is the remaining performance obligations you'll see in our 10 Q filing that we'll do in the next day or so came down about $600,000,000 So that implies that

Speaker 4

the book to bill was

Speaker 1

A little bit less than one and that there were some adjustments overall, but some fluidity in scheduling. But prepared remarks. We do see a stabilization around these levels as we look out over the next few quarters.

Speaker 3

Perfect. Thanks for that. And then on your EPC franchise, it's driven pretty strong growth, right, 10% to 11%. CAGR over the past 3 years, that's including services, It even grew 7% last year, right, in a slower consumer environment. Coming into this year though, you guys are already driving an EPC systems profile of Down about 20% year over year.

Speaker 3

Do you still anticipate the EPC business to grow this year to outperform WFE growth? And Sort of at a high level, how are you thinking about DTC profile second half versus first half?

Speaker 1

Yes, it's a great question, Harlan. And certainly over the last few months, we've seen a shift in our expectations for that business. It tends to be short lead time and very consumer sensitive, if you will. And so as the consumer markets Have yet to really recover. We were expecting to see a bounce back in the second half.

Speaker 1

And while I expect the second half to be a little bit stronger Q1 of 2019. And this is really regarding the PCB business, flat panel business and the IQOS component inspection business. As SPTS But in those businesses, we expect it to increase and improve modestly into the second half, but that we're likely In that segment, that will it will be a decline year over year that's more than what we expect out of the WFE centric business. SBTS on the other hand has had a nice growth trajectory. We had a strong year last year and would expect to see that business be somewhere flat, maybe modestly Q and A session.

Speaker 1

It is very exposed to the automotive market, specifically around power semiconductors and some of the new Specialty Substrates. And so there are opportunities for us there. We're pretty pleased with how we're how that business is

Operator

Thank you. Our next question will come from C. J. Muse with Evercore. Your line is open.

Speaker 5

Good afternoon. Thank you for taking the question. I guess first question, surprised you haven't changed your foundry WFE outlook for 2023 at all. Many of your peers discussed modest adjustments there. So we'd love to hear your thoughts as to what's offsetting that.

Speaker 5

And as part of that, can you speak to the lead times for optical inspection, which I still think are well beyond 12 months. So Is that the kind of the key to the story for KLA where you're finding this sustainable level at the June level into the second half?

Speaker 1

Yes, C. J, in the overall business, we're seeing more strength than we had expected originally in the legacy Parts of the market, so greater than 28 nanometer, and that's a global statement. China is also stronger in terms of expectations there From a legacy point of view, so while we've seen some adjustments in the leading edge expectations, we've seen some strengthening overall in legacy. So obviously, there are some error bars around these percentages as we look out from the March quarter, but that's really what's driving

Speaker 5

call. Great. And then maybe just to follow-up on the legacy part. You talked about native China being 25 percent of process control. How much of that is silicon wafer versus just traditional front end equipment?

Speaker 1

So over the course of the If we just take an annual perspective and think about it, I would say the silicon wafer part is probably And this is an estimate, probably about 20% to 25 So the other thing you asked about lead times are on optical inspection. I'm sorry, I left that the first part of your question. So lead times around optical inspection are still pretty long. There hasn't really been a change there as we are Adding new capacity to support demand, customers are still investing in their technology roadmaps and that product is pretty essential to that. And so we continue to see an environment where demand is outpacing supply.

Speaker 1

So in a down WFE market, I expect the high end optical inspection to grow this year, given those dynamics.

Speaker 3

Very helpful. Thank you.

Operator

Thank you. Our next question will come from Vivek Arya with Bank of America Securities. Your line is open.

Speaker 2

Thank you for taking my question. I'm curious, what is giving you the confidence that sales have gotten when many of your memory customers Deliberate to have a lot of inventory and are unclear when their utilization will pick up. So specifically, how is your visibility to the memory demand Q and A session for the back half of this calendar year. Do you think

Speaker 1

it will be above this level, it will be lower, above this level?

Speaker 2

Because I noticed that in June, the implied memory Sales seem to be picking up, albeit of small numbers. So just any comments on how you're thinking about memory demand recovery from here as it pertains to what you think about utilization at your key memory customers.

Speaker 1

Sure. It's a good question. If you look at the March quarter, it was pretty low, right, at 14%. So and I look back and you go back the Our recent history hasn't been that low really ever. So and even if you see it progress through the year into the guidance, sort of the 23% that we talked about in June and even as it sort of stays in that range as you move through Q2.

Speaker 1

While second half might be a little bit stronger in the first half, given how low the first half was, it's still pretty low overall in terms of our forecast and expectations. And there's some wildcards around how customers ultimately spend. We tend to be more technology centric and so there's still roadmap investment There's also some opportunities related to the clarification of some of the export controls And what that means in terms of some incremental opportunities to support some of the older generation memory devices in China. And so that clarification We received from the government will enable the second half some second half shipments. And so that's in our outlook as Yes.

Speaker 1

Just to add to that, if you look at the business that we have that's more tied to capacity and memory, that's not really showing up. What's showing up, as Bren said, is more on technology. So even as those customers are not or even have a low utilization, not adding capacity, They are very motivated to continue to work on technology development at Place 2. As friends, it's a relatively small number, but There's some stability in that.

Speaker 2

Got it. And for my follow-up, I realize it's early, but I thought that Given that you have long lead times and you are engaged in the technology side with many customers, you probably have a decent view of how calendar 24 might look like. So I'm not asking for numerical guidance, but what's your gut right now that Is WFE likely to grow next year? Is it supposed to be flat or down? Like what could be just kind of qualitative puts and takes call as we start thinking about WFE next year.

Speaker 1

Yes. Obviously, just to start off It would be obvious we don't have a lot of visibility in next year, but we can tell you about the conversations we're having with customers, which have to do a lot with their view Things are kind of stabilizing at this level for the most part. In some cases, it's because things are down quite a bit, but there's a lot of activity And we're still having conversations about supporting projects that are due to happen at Q2. So if you had to pin us down on it, I think we're kind of at these kind of levels plus or minus for a while And hopeful that during calendar 'twenty four, we'll see some recovery, but it's obviously too soon to know that. But I think that that's the general way we're thinking about it Thank you.

Operator

Thank you. Our next question will come from Krish Sankar with Cowen. Your line is open.

Speaker 2

Yes. Hi. Thanks for taking my question.

Speaker 4

I have 2 of them. First one, Rick or Brent, you spoke about resuming some shipments to Can you quantify in terms of 1,000,000 of dollars how much that you're going to expect to recoup in second half? And is that baked into your view that Revenue stays at all these levels into the calendar second half. And along the same path, this China shipment assumption It's like the kind of lagging edge memory, and I'm kind of curious what exactly you mean by lagging edge memory, because I thought memory is always a leading edge? And then I have a follow-up.

Speaker 6

Yes, Chris. So we expect

Speaker 1

to be somewhere greater than $200,000,000 in terms of the opportunity in the second half. And we're working with the customer to make sure that we have what we need to be able to support that activity, but that's how we're sizing it right now Overall. So look, I think on the technology question is that Not everyone is at the leading edge. And so there's activity that's happening in legacy markets and there's some market opportunities out there from an end market point of view to support some of these investments. So that's what's driving that investment.

Speaker 1

And like I said, we see it somewhere in quarter,000,000 range.

Speaker 3

Got it. Got it. Super helpful.

Speaker 4

And then a quick follow-up. Should we still expect your service revenues to grow And how to think about the service between the semi and the EPC portion?

Speaker 3

Yes, this is Rick. So yes, we

Speaker 1

should see growth And I think this is one of the differentiators for KLA is how our service behaves and slow down. We're seeing a lot of interest from our customers to keep that capability. So even when capacity might go off, what customers want to focus on is yield and making sure that they're continuing to develop new technology. So that plays to our strength. Obviously, we talked about some of the slowdown we've seen in This is much more about semi process control.

Speaker 1

But yes, we're still modeling the growth that we've talked about in the past for service, and that's a big part of our value that we provide for our customers. So we feel good about where we are there. Yes. And for the semi PC part of the business, given the reduction of softening in the industry environment, some high dilutive capacity, the dynamics around the memory business that people have I wouldn't expect service to grow in line with the long run target of 12% to 14%. We said last quarter, we see it somewhere in the mid- to high single digit growth rate this year.

Speaker 1

Obviously, some headwinds from the export controls as a factor in that. But still growth, to Rick's point. And on the EPC side, EPC side probably flat, maybe modestly up a little bit. Service business behaves a little bit call. Currently, there are some long term opportunities for us to try to drive that business over time given our global footprint.

Speaker 1

That's obviously a longer But the service business generally is not declining, but not growing a lot this year.

Speaker 3

Got it. Thanks, Audrey. Thanks, Ben.

Operator

Thank you. Our next question will come from Joe Cucharasi with Wells Fargo. Your line is open.

Speaker 7

Yes. Thanks for taking the question. Just the first as a clarification. For the clarification on export restrictions that you received, That $200,000,000 you're thinking about for the second half of this year, did that reenter your backlog or RPO this quarter?

Speaker 1

Never came out. Because it was a clarification issue, so we were, as I've said in prior quarter until we had certainty. We weren't going to scrub out anything out of our backlog. In this case, we required a clarification. And so until we had certain Q3 last thing, Dan.

Speaker 1

So no change from that point of view. Got it. Thanks. And then as a follow-up, On

Speaker 7

the gross margin side, how should we think about inventory reserves for the rest of this year?

Speaker 1

And then can you just remind us how do we think about the timing of those reversals? Yes. I think over the last couple of quarters, you've had some meaningful adjustments from what we were driving the company to the current demand levels. And if you recall back in 2021 2022, given the supply chain shortages that were out there, we were making fairly significant commitments in our supply chain that in a lot of ways drove the performance that we saw in 'twenty one and 'twenty two from a growth point of view and particularly from a relative growth point of view. So as we've had to adjust down to different demand levels in a fairly quick pace, It has driven some incremental reserves related to just excess supply.

Speaker 1

So what I would expect within this happening is over time as we see Meaningful resumption in demand, given the extendibility and lifetime of our platforms, the strength of our service business will ultimately consume those parts. It's not like you throw the parts away. It's just you have more than you need for the demand window in terms of how you do the assessment. So on a go forward basis, I expect it to normalize and But we think that we've adjusted now, and so the impact moving forward, assuming the outlook that we provided normalizes and isn't an incremental factor one way or the other.

Speaker 7

Perfect. Thank you.

Operator

Call. Thank you. Our next question will come from Atif Malik with Citi. Your line is open.

Speaker 2

Hi, thank you for taking my questions. I have two questions on China. First, is the number of customers you're engaged domestically in China on trailing edge higher this year versus Last year or year before.

Speaker 1

I wouldn't say higher. No. There's a lot of projects. I mean that's No. But yes, Rick's right.

Speaker 1

I wouldn't Okay. And then on

Speaker 2

the multinational companies in China, Rick, in your discussions with these companies, how are they looking at their future capacity expansions given that the license period for the export restrictions is coming due in September, October. I mean, how are they looking strategically on investments in China?

Speaker 1

Well, it's hard enough for us to get the clarification. I think for them, they are working on the same thing as getting clarification

Speaker 8

on exactly what they'll be able

Speaker 1

to do. So I think they have conversations with us, but frankly, the discussions they're having the the matter of the most of them are not with us. We're able to support them no matter which way that goes. But I think that's something they're all working through. And there's I think there's a fair amount of anxiousness around that.

Speaker 2

Understand. Thank you.

Speaker 1

Thank you. Thank you.

Operator

Our next question will come from Timothy Arcuri with UBS. Your line is open.

Speaker 8

Thanks a lot. Bren, I had 2. So first, I'm just trying to tie your process control systems commentary to WFE. And it sounds like Orbotech Systems, I mean you're not explicitly saying this in June, but it sounds kind of like they're pretty flattish. So process control systems have to be about 15.50 Down maybe $175,000,000 from March.

Speaker 8

And then in the shareholder letter, you're saying that it's going to sort of remain flat into the back half of the year at that level. So if I just take the $17,000,000 $20,000,000 you did in March and then I take the $15,000,000 in June and I kind of flat line that And I use $75,000,000,000 this year in WFE. That implies you're like 8.5% this year for WFE share. That's I mean, that's a record high. So I guess the question is, is there something structural going on that you think there's staying power to where your WFE share could Usually, I think 6 in the trough and 8 in the peak, but you're at sort of like 8.5 or maybe is it that your

Speaker 1

We do this every quarter. I'm not going to guide individual segments, but your math is reasonable. And again, with our comments around stabilized, it's plus or minus Relative to the current business levels, but that's how we see things moving forward. Now, in terms of your and we talked about this a little bit over the last number of months is that we felt pretty confident about our ability to maintain our share of WFE that There were drivers in terms of as we look at 'twenty three, and you see customers continuing to invest in their roadmaps, particularly product lines that are Reflecting some of the fastest growing product lines at overall WFE would be factors for growth for us. Our exposure So the bare silicon or the silicon wafer industry is a driver of WFE that we're exposed to that others aren't.

Speaker 1

The the infrastructure investment that's happening in China from a wafer and reticle point Thank you. It's also an inflection point. I think what's exposed to export controls overall as a percent of the total for us It's a little bit lower than some of the other peers. And then finally, we're seeing a very strong share performance overall as we talked about in the prepared remarks. So when you add all that up and share is also important because in a downturn when budgets are limited, customers tend to buy best of breed and that tends to play at Caeli's favor as well.

Speaker 1

So So when you add all that up, as I've been saying for a number of months, I felt pretty confident that despite all the adjustments out there that folks were making in deferred revenue and partial shipments and all those kinds of dynamics that were adding some confusion overall that we feel pretty comfortable about our ability to maintain our share of the overall market. Process Control intensity stronger in a foundry logic environment and certainly more of the WFE spend is there. And so that's always a factor for us in any downturn And why typically in down WFE years, KLA has I think we might go back even decades, we've always outperformed the market So I think there's a number of factors that's contributing to it. Yes. Just to build on it, Tim, I think, as Brent mentioned, process control intensity It's up some, but I think the share story is maybe even more significant.

Speaker 1

And then where it's really shown up has been optical inspection. And a lot of that is around relevancy of our optical inspection to some

Speaker 3

of the new nodes that people are dealing with. And it took

Speaker 1

a while for some of our customers We're still constrained. We're capacity constrained on those. Those would grow more if we had more capacity. And the reason for that is, I think we are demonstrating to our customers Q1 of 2019. And when we thought originally it'd be mostly logic and foundry, even there we're seeing some strength, albeit memory is very low, but we're seeing adoption of Advanced Inspection.

Speaker 1

So I think that's another way to look at it. When you look at the performance last year overall for process control, I

Speaker 5

I don't think it was

Speaker 1

an accident, it's relevancy of our solutions.

Speaker 8

Thanks a lot. And then I guess I had a question also on WFE and some people are trying to get at this I think. But so WFE is still sort of flat in the $75,000,000 range. I think Brent you said That there's $200,000,000 for you that can ship that sort of add backs of stuff that was banned in the past. So if you're less than 10% of WFE, that's probably like a few $1,000,000,000 add back from just from China there and then there's all this lagging edge stuff happening in China.

Speaker 8

So Is it that the lagging edge China stuff like it's not helping this year, it's more helping next year? Because I guess I'm a little surprised that the $75,000,000,000 number Just given the massive increase in bookings that we're seeing from Light and Mist China. Thanks.

Speaker 1

Tim, we're in April. It's an estimate, an approximation, plus or minus around $77,000,000 or $75,000,000,000 The way to think about it at this point. So we don't put a lot of extra effort and we focus a lot on running our own business and Excuse me, this one. We just try to do what we can to do an assessment of the overall market and we'll share that with you. But there are a lot of moving parts, right?

Speaker 1

We'll get some clarity In terms of ultimately what that impact is, I sized it, could it be more, could it be less, Perhaps, but just overall. And I think the other factor that could impact this year is just some of the construction dynamics When facilities are being built and when customers actually receive tools, if you have delays in construction schedules that could affect What shows up when and there's a number of greenfield projects that are out there. So a lot of moving parts in it, but we're comfortable with the plus or minus call. Thank you.

Operator

Our next question will come from Sidney Ho with Deutsche Bank. Your line is open.

Speaker 9

Great. Thanks for taking the question. I want to follow-up with the previous question about you talked about the stabilizing demand and maybe similar Q4 for the rest of the year. Are you expecting your revenue for the back half of the year to be roughly flat quarter over quarter inclusive of that $200,000,000 of recoup Revenue or are there other factors to consider whether it's on the service business or the EPC side of banks?

Speaker 1

Yes. Cindy, we just did 2.432, right, in or 433 in the March quarter. And so the The commentary was focused on current business levels at 225. So it might put a little bit of pressure on the second half from a half to half point of view, but we are talking about kind

Speaker 3

of low

Speaker 1

lowtomidsingle digit given that guidance. And again, we're not guiding the second half. We're just giving a view of this stabilization here. So It's possible, right? It will be close.

Speaker 1

But I think just given the strength of the March quarter, that it would If you end up with roughly the same numbers in the second half, you might be half to half down modestly.

Speaker 9

My follow-up question is, one of your largest customer in Taiwan talked about higher levels of tool reuse between the 5 nanometers and the 3 nanometers. How is this factored into your second half outlook and maybe even the longer term outlook? And do you think that's anything incremental to what the industry's current level of

Speaker 1

It's a good question, Sydney. I think that those are always conversations customers the in terms of when they look at their utilization and they look at the differences from node to node, I think it is something that is always being evaluated. They're always Even looking through the rest of the year and next year has contemplated all of that. So there's nothing really in there that's new from our perspective Continue to invest in R and D and bring out new capabilities and continue to support our customers. So nothing really new in what we see in those statements.

Operator

Call. Our next question will come from Toshiya Hari with Goldman Sachs. Your line is open.

Speaker 1

Yes.

Speaker 10

Thank I had a follow-up question to Sidney's question. Given the depth and breadth of Design start activity you're seeing in the leading edge foundry space. What are your expectations for process control intensity into 2024? Is there a bias potentially to the upside From where you are in 2023.

Speaker 1

Well, look, Toshiya, we Process control density has been very strong for the reasons you talked about. If you think about the number of design starts and what that means in terms of our customers managing the number of different design test design rules in different ways and then having to deliver yielded wafers In fairly tight market windows, it all drives a higher level of inspection and metrology. You also have different process flows and process Q2. So those are all have been drivers for process control. The design starts at the previous node, it's also a factor and then new tech, For us, also depending on the mix of the revenue, die size is also a factor.

Speaker 1

So if you end up with exposure to markets with larger die, the

Speaker 3

And we think that

Speaker 1

we can sustain that inflection as we move forward.

Speaker 10

Got it. That's helpful. And then, as my follow-up, I think you commented specifically on China as it pertains to your business with wafer suppliers and radical suppliers as well. But curious on a global basis, how big are those businesses today? And how should we think about sustainability Over the next 12 months or so, again, on the Wafer side as well as both merchant and captive reticle customers.

Speaker 10

Thank you.

Speaker 1

Most of the reticle infrastructure, new infrastructure is being added in China to support legacy activity and that's probably a driver of an incremental couple of 100,000,000 or so of revenue for us. Overall wafer, and I'm separating it this way because I don't want to double count. But overall wafer should grow meaningfully this year compared to last year. And It's a pretty sizable business for KLA. So I don't want to we haven't broken it out before, but we're an expensive or a big part of the CapEx Q4 wafer suppliers, and we would expect to see that growing this year.

Speaker 3

Thank you.

Speaker 1

Thank you.

Operator

Our next question will come from Joe Moore with Morgan Stanley. Your line is open.

Speaker 6

Great. Thank you. You talked about kind of qualitatively about services not being down this year, maybe up a little bit this year. Can you talk about The utilization impact on that and as you see utilizations coming down in both foundry and memory, I guess I would think that has less impact on you than it does for Some of the other guys, but can you just talk to how utilization might weigh on that number?

Speaker 1

Utilization rates have clearly come down particularly in the memory space. It seems like they are fairly stable at this point. We don't see them continuing to decline from where they are. So and that's why we see the overall revenue because customers are not running the tools as hard or in some cases idling capacity. So you don't have the opportunities, the service opportunities that you would have in a higher utilization environment.

Speaker 1

So that's what's driving the overall growth rate down from what a normalized or trend line expectation is. But we're not seeing it really Getting worse at this point in their pockets from time to time of improvement. So, I think stabilization is the right word. It's why we chose to use it, but it feels like that's really what we're seeing

Speaker 6

That's helpful. Thank you. And then separately, on China, you guys have talked to the sort of China trailing edge logic opportunity a couple of different times here. Your sense for whether there's building ahead there, I mean, I would assume you have customers there that have anxiety about future Board controls. Could they be putting in capacity?

Speaker 6

I guess maybe a different way of asking the question. Do you see utilization that kind of validates the requirement of the spending or do you worry that it could be a building ahead of demand of supply?

Speaker 1

Yes. It's possible. I mean, we don't have great clarity on all of it, but It does seem unlikely given the recent history of when you've lost support of equipment provider. The tools aren't very useful. So I think the expectation is the controls will remain on the leading edge And they'll be able to continue to develop some of these mature technologies.

Speaker 1

However, there's a very active EV market in China, so there's a lot of need for Some of that more mature technology as it applies to some of those markets. So it does seem to be based on some real demand around Things that are not leading edge, and that's really what we're seeing and have for quite a while in China. So it doesn't feel like it's necessarily There are companies that are ramping up. And in that sense, they might not have won the markets that they hope to win yet, but we have kind of factored that into

Operator

queue. Thank you. Our next question will come from Duane Curtis with Barclays. Your line is open.

Speaker 7

Hey, thanks for taking my question.

Speaker 1

I was Curious, I mean, you talked about the outlook, legacy growing faster than leading edge. Just curious if you could give us the perspective where that mix is within foundrylogic today and And maybe perspective of where it's come from? Well, so it's declining less. It's not growing. It's really In terms of the overall outlook, I mean for KLA, I think just thought about what's less than 28 nanometers versus what you thought in our mix profile.

Speaker 1

You have about 60% of our revenue is, we'll call it, less than 28 nanometer, and so about 40% of it is above. Call. Normally, it's closer to 75% leading, 25% lagging. So, give you a sense

Speaker 4

the

Speaker 1

China is a pretty big factor in it all, but you also have a fair amount of investments happening from the analog guys and supporting some of the automotive markets, sensor investment, some industrial markets and so on. So that's there's steady investment in these are in markets Semiconductor content is rising, and so you're seeing more investment in those areas that we frankly didn't ship a lot into over the last couple of slides. So in some ways, as we've seen the leading edge adjust and this is a logic and memory statement, we've seen some adjustments the in our largest customers, over the last 6 months or so and into this year, some of that capacity is getting consumed by Thanks. And then I wanted to ask you on the inventories on the balance sheet. I think record level near record in days as well.

Speaker 1

So I guess we've kind of everybody has this phenomena going on. How are you thinking about managing that? Is the top top line kind of flat to down. I'm kind of curious if inventories will still grow and any impact on gross margin as you work it down. Yes.

Speaker 1

And I've said this many times, but we're not the company that you look to for asset velocity as it relates to inventory. There's a reason for that. It starts with the business model that KLA has around driving innovation and differentiation, that drives a fair amount of custom componentry into our systems and very unique supply relationships where our suppliers are Our trusted partner is more than a transactional supply chain. As a result of that, what we optimize for is we optimize for that differentiation. And what we accept is we accept that we're going to need to make commitments.

Speaker 1

Lead times are long. We're going to take parts when we put orders out to take them. And in the long run, we believe that economically, we're in a pretty good place that given the strength of service, extendibility of the platforms, That will consume the parts that we're buying against our volume products. So we've seen it trend up and it's trending up. I would expect it to Starting to flatten out, maybe drift a little bit, but I'm already starting to buy parts for new products that are coming out for things that will have some unique parts for new products that will be coming out over the next 12 to 18 months or so.

Speaker 1

So I don't expect it to turn very much. That's why even in the very strong upturn environment. We've rarely gotten above much above 2 times from an inventory turn point of view. So we'll continue to manage it, but it's fundamental to our supply chain strategy. And as a result of that, when you're buying parts to support products that They are living for 20 to 30 years.

Speaker 1

There's a lot that's by to support that and we carry it. Call. Thank you. Thank you.

Operator

Our next question will come from Brian Chin with Stifel. Your line is

Speaker 7

open. Hi there. Good afternoon. Thanks for letting us ask a question.

Speaker 1

Maybe for Rick, Trailing Edge

Speaker 7

clearly is thought of

Speaker 3

as less process control intensive.

Speaker 7

But I guess to what extent does the immaturity These production lines, particularly in China, there's a lot of greenfield situations and also the desire for faster time to market. How do these factors kind of counteract that typical kind of lower intensity for trailing edge?

Speaker 1

Well, I think that a couple of ways. One is it depends on the applications So if you're an automotive fab, you actually have a different kind of need for process control than you do if you're just a Traditional legacy fabs. So that's one thing. Those that actually process control intensity can be a little bit higher. And then depending on the scale and the size of the fab on a relative basis, it's harder to have you get more efficiency on a large fab.

Speaker 1

And so these These fabs tend not to be as mega fabs, so then you actually get a little bit of intensity as a result. They're also looking for solutions that have been proven in the market. So for us, those are established product lines that we've been supporting for a long time that might not need as much advanced application call. So those are all factors that take us, I think, both good for our customers, but also good business for KLA. So yes, it's not as intensive as Leading Edge, but they still have

Speaker 6

a ways to go to catch up.

Speaker 1

And there's always value in getting higher yields. And whenever they change process nodes. We see interest in upgrading their process control. Great. Thank you.

Speaker 1

And maybe just a quick follow-up. In terms of the

Speaker 7

percent of memory increasing in the June quarter and it looks like also on a dollar basis as well, I think you suggested it's pretty focused towards DRAM. Can you characterize the nature of that uptick? Or is it just more of a kind of a classic case of coming off This is really more of a bouncing along the bottom kind of situation.

Speaker 1

Yes, I think it's more of the latter. I wouldn't characterize Anything other than just some investments that and some timing of Our customer base, and it's very technology centered. So I wouldn't characterize it as given the level of it, it's been a while since it's been the low even with the uptick quarter to quarter. It's pretty technology centered. The exception of some of the China opportunities we missed earlier.

Speaker 1

Thank you, Brian. Operator, we have time for one last question.

Operator

Our last question will come from Mehdi Hosseini with SIG. Your line is open.

Speaker 4

Yes. Thanks for taking my question. Just two follow ups for me. If I just take your commentary regarding the revenue trend first half and second half of the calendar. It seems to me that the peak to trough Decline in revenues in the 25% to 30% range, and I'm not asking you for a guide.

Speaker 4

But what I wanted to better understand, If you did close to $3,000,000,000 in December of 'twenty two with a WFE in a $90,000,000,000 to $95,000,000,000 can you go and hit those Looking forward, especially with raw, semiconductor material and others, we enable you to hit 30 $3,000,000,000 without having W3 to go to $9,000,000,000 plus And I have a follow-up.

Speaker 1

Yes, Mehdi. I mean, one of the things and this ties back to the rising share of WFE that we've seen over the last couple of We're gaining share of the overall market, so we should be able to do more revenue with lower WFE levels as that sustains. Now there are mixed dynamics and other factors that affect it. But given the dynamics that have driven it, we believe there's a fair Q and A. That's a lot in one year.

Speaker 1

We talked a lot about 0.5 point to a point a year in terms of our objectives. But we do think that that is A clear indicator of the differentiation that we have and if we're able to be successful with some of the new products that are coming call. And the mix generally stays as we talked about in our Investor Day of 60 ish percent boundary logic in Q1 of 2019. In terms of overall mix of WFE, that there's an opportunity for us to continue to grow our share opportunity.

Speaker 4

Okay. And then just one quick follow-up. If any of your customers were to reuse some of the equipment, How should we think about process diagnostic content for that application?

Speaker 1

Well, as Rick said earlier, this is nothing new that customers are always looking to optimize their capacity. Even what this equipment cost and the amount investment they're making, they're always looking to do that. And there are certain product types where there are there's more opportunity than others. It was easy for customers to reuse capacity when they only had a very limited number of designs and no major technology drivers. But as you look out going forward, given Scaling dynamics and increase in EUV layers.

Speaker 1

We think that there's a technology element that will drive our customers to the to continue to upgrade their capabilities. But I am sure they will look for opportunities if in the long run they believe that there's a sustainable drop in the wafer start requirement to try to relocate that capacity or try to reuse it. You can't move it overnight, Right, particularly if you're moving it to a different facility. These tools have to be disassembled. They have to be shipped and reassembled and then calibrated and brought So those tend to be longer term decisions.

Speaker 1

So structurally, they have to feel pretty good about the longer term setup for that fab or at that to move the equipment. What they typically do in the short run is they idle capacity if they don't need it for a period of time, but with an expectation that it will come back online. And given the design start environment at 7 and 5 and 3. There's still a fair amount of designs out there that it's just volumes are low. So we'll see how it plays out, but something new.

Speaker 1

And as Rick said, it's modeled in Our view of growth in KLA opportunity moving forward. Okay. Thank you. Thank you, Meny. And thank you everyone for your time today for we know it's a busy earnings season.

Speaker 1

Appreciate it. We'll be seeing many of you at some of the upcoming conferences. And with that, I'll turn the call back over to Chelsea so she can provide any final instructions. Call.

Operator

Thank you, ladies and gentlemen. This does conclude the KLA Corporation's Q4 2023 earnings call and webcast.

Speaker 1

Call.

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