KLA Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 12 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 September Quarter 2023 Earnings Conference Call and Webcast. To 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

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

Speaker 1

Thank you for joining us for our earnings call to discuss the results of the September 2020 to turn the call over to our Q3 and our December quarter outlook. I'm joined by our CEO, Rick Wallace and our CFO, Brent Higgins to discuss our results released today after the market close, to note that these are available on our IR website along with the supplemental materials.

Speaker 2

Today's discussion is presented on a

Speaker 1

non GAAP financial basis to discuss unless otherwise specified, our full year references all relate to calendar years. A detailed reconciliation of GAAP to non GAAP results is in the earnings materials posted on our website. To Our IR website also contains future investor events as well as presentation, corporate governance information and links to our SEC filings, including our most to turn the call over to our Investor Relations website. Thank you, Mr. Chairman.

Speaker 1

Thank you, Mr.

Speaker 2

Chairman. Our comments today are subject

Speaker 1

to risks and uncertainties reflected in the risk factor disclosures in our to review the 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. To our actual results may differ significantly from those projected in our forward looking statements. Rick will begin the call with some comments and quarterly highlights. To that concludes our financial highlights, including our guidance and outlook.

Speaker 1

I will now turn the call over to our CEO, Rick Walz. Rick? Thanks, Kevin. To Before we cover KLA September quarter outlook, I'd like to address the situation in Israel as it pertains to KLA. To We have many KLA employees based in Israel.

Speaker 1

We're deeply saddened by the unspeakable acts of terrorism in the Middle East to conclude our presentation with all the victims and their families, friends and loved ones. At KLA, we're focused on employee safety and well-being and are making efforts to assist our teams through terrible circumstances, Including resources and support for our employees and broader humanitarian support through the KLA Foundation. To we all hope for a peaceful solution soon. Moving on to our September quarter results, which to specifically revenue of $2,400,000,000 finished at the upper end of the guidance range. To GAAP EPS was $5.41 and non GAAP EPS was $5.74 to both also finishing at the upper end of the respective guidance ranges.

Speaker 1

These results were driven by the strength and relevance of Halo's process to introduce our full portfolio. Additionally, focused execution enabled continued free cash flow generation and capital returns. We're proud of how the KLA teams continue to outperform in the marketplace and deliver on customer commitments. To The overall business environment remains relatively stable for KLA. We continue to see strength in markets served by legacy nodes despite softness to introduce the memory and leading edge logic and foundry investments.

Speaker 1

As the industry continues to navigate the slowdown in the electronics markets, to We are closely monitoring any adjusting results that affect our customers' capacity. To scaling continues to outperform the industry on a relative basis because customer investment in R and D for technology advancement and transition has proven to be more resilient to market to turn the call over to Steve. If we look at some specific highlights in the quarter, revenue was driven by strength in legacy node investment globally and industry infrastructure investment. KLA's market leadership, product success and unpatterned wafer, optical and macro inspection also demonstrate the power of the KLA portfolio. Rapid growth of AI both enables KLA's differentiation and helps drive industry growth.

Speaker 1

KLA is a pioneer to in adopting AI to improve the performance of our systems and create differentiation. And KLA has a long track record of employee deep learning to and physics based algorithms in our core technologies. As the cost of compute has declined, we are now able to deploy this capability more broadly to discuss our product portfolio. Leveraging our AI expertise, KLA's inspection, metrology to and data analytics systems help customers solve challenges associated with current process technologies and critical industry inflections,

Speaker 3

to

Speaker 1

to KLA's service business grew both sequentially and year over year ending at $560,000,000 in the September quarter and remains on track to provide a single digit percent year over year growth in 2023. Finally, the September quarter was another excellent period from a cash flow and to turn the call back to the operator. Quarterly free cash flow was $816,000,000 which drove the last to take a look at our 12 months free cash flow up 3% year over year to $3,200,000,000 Total capital returns over the past 12 months to 2,400,000,000 In summary, KLA's September quarter results demonstrate our continued process control to thank our leadership and the success of our portfolio strategy. Our consistent execution despite challenges in the marketplace highlights the resiliency of the KLA operating model to driven by the dedication of our global teams. I'll now hand it over to Brent to cover more details on our financial performance and our outlook.

Speaker 1

Brent?

Speaker 2

To Thank you, Rick. KLA delivered a strong September quarter demonstrating consistent execution despite a challenging work marketplace. Revenue was 2,400,000,000 to Non GAAP diluted EPS was $5.74 and GAAP diluted EPS was $5.41 with all three coming in at the upper end of the guided to Non GAAP gross margin was 62.4%, 40 basis points above the guidance range to turn the call

Speaker 3

over to Steve. Thank you, Steve. Thank you, Steve. Thank you,

Speaker 2

Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 2

Thank

Speaker 3

you, Steve. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone.

Speaker 3

Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone.

Speaker 2

Good morning, everyone. To Total non GAAP operating expenses comprised $311,000,000 of R and D and $223,000,000 in SG and A. Non GAAP operating margin was 40.2%. Non GAAP other income and expense net was 47,000,000 to And the quarterly effective tax rate was 14%. At the guided tax rate of 13.5%, non GAAP EPS would have been $0.03 higher or 5.7 to quarterly non GAAP net income was $786,000,000 GAAP net income was 741,000,000 to Cash flow from operations was $884,000,000 and free cash flow was $816,000,000 As a result, free cash flow conversion was a to turn the call back to the operator.

Speaker 2

The breakdown of revenue by reportable segments and end markets and major products and regions can to be found within the shareholder letter and slides. Turning to the balance sheet, KLA ended the quarter with $3,350,000,000 in total cash, to provide cash equivalents and marketable securities, debt principal outstanding of $5,950,000,000 and a flexible and attractive bond maturity to provide a strong investment grade ratings from all 3 agencies. KLA has an impressive history of consistent free cash flow generation, to provide free cash flow conversion and strong free cash flow margins across all phases of the business cycle and economic conditions. Over the last 12 months, KLA has returned $2,400,000,000 to shareholders, including $1,700,000,000 in share repurchases and to $726,000,000 in dividends paid. I also wanted to highlight that on September 5th, to KLA announced an increase in the quarterly dividend level to $1.45 per share from $1.30 the 14th consecutive annual dividend increase.

Speaker 2

To Since its inception in 2006, KLA has grown the quarterly dividend level at approximately 15% compound annual growth rate. To Additionally, on that date, KLA announced an incremental $2,000,000,000 share repurchase authorization. These capital return actions to reflect confidence in our business model and growth strategy as we progress along the path to our 2026 financial targets. Moving to our outlook, to As we review the market and assess relative performance of our peers across the industry, we are adjusting our wafer fab equipment outlook for 2023 up to approximately 80,000,000,000 to Reflecting a decline of approximately 16% from the $95,000,000,000 level in calendar 2022. While the timing of a meaningful resumption in WFE investment growth to remains unclear as most underlying end markets remain soft.

Speaker 2

We continue to see KLA's overall demand stabilizing around current business to we expect this demand profile to continue into the first half of calendar twenty twenty four. ALA's primary value proposition to

Speaker 3

turn the call over to Steve.

Speaker 2

Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Good morning, everyone.

Speaker 2

While capacity plans are often adjusted due to changing demand expectations, technology roadmap investments are more resilient. This adds additional confidence to our business expectations as customers align shipment slots with roadmap requirements. To In this environment, we will continue to focus on meeting customer requirements, maintaining our high level of investment in R and D to advance our product roadmaps to and KLA's market leadership in delivering strong relative revenue growth and financial performance. As for guidance, our December quarter guidance is as follows. To Total revenue is expected to be $2,450,000,000 plus or minus $125,000,000 Foundry Logic is forecasted to be approximately 68%, to Memory is expected to be around 32% of semiconductor process control systems revenue to semiconductor customers.

Speaker 2

Within memory, DRAM is expected to be about 85% of the segment mix and NAND 15%. To We forecast non GAAP gross margin to be 61.5 percent plus or minus 1 percentage point as product mix expectations are modestly weaker versus the September quarter And service period cost benefit realized in the September quarter normalizes. Inclusive of this guidance, calendar 2023 gross margins are to end up in the mid-sixty one percent range. Non GAAP operating expenses are expected to be approximately 540,000,000 to Other model assumptions for the December quarter include non GAAP other income and expense net of approximately 45,000,000 to and an effective tax rate of approximately 13.5%. Finally, GAAP diluted EPS is expected to be $5.54 to plus or minus $0.60 and non GAAP diluted EPS of $5.86 plus or minus $0.60 to EPS guidance is based on a fully diluted share count of approximately 136,000,000 shares.

Speaker 2

In conclusion, we remain focused on driving differentiation through innovation as we execute our successful portfolio strategy that supports our customers' technology road to pass. Though the industry is correcting in calendar 2023 and sustainable demand recovery still remains unclear, to

Speaker 3

We are

Speaker 2

sizing our business to ensure that we deliver a differentiated product portfolio that meets our customer technology roadmap requirements to And that we have the capacity to execute our business in line with our long term growth expectations. With the KLA operating model guiding our best in class execution, to continue to implement our strategic objectives, which are geared to drive outperformance. Our focus on customer success, to deliver an innovative and differentiated solutions and operational excellence is what enables us to deliver industry leading financial and free cash flow performance to return capital on a consistent basis. We are confident that process control's importance to enabling technology advancements bodes well for to KLA's long term growth outlook despite challenging near term demand trends. KLA is well positioned to deliver strong near term to relative financial performance driven by the better than market performance of our semiconductor process, control and specialty semiconductor businesses to continue growth in service.

Speaker 2

KLA is also uniquely exposed to wafer and radical infrastructure to turn the call over to our relative outperformance in calendar 2023. Our business continues to stabilize and the long term secular trends driving semiconductor to conclude our prepared remarks. Kevin, let's begin the Q and A. To

Speaker 1

Thanks, Brian. Chelsea, if you could please provide instructions to queue for Q and A and hope to get

Operator

to and if possible, pick up your handset for optimal sound quality. In the interest of time, we ask that you please limit yourself to 1 Our first question will come from Vivek Arya with Bank of America Securities. Your line is open.

Speaker 4

To Thanks for taking my question. I wanted to revisit your suggestion that first to have to be stable at this the December quarter levels. So does it mean you're not expecting any change to your China shipment or if you could just kind of give us how you are thinking about the mix in different end markets and geos? And then And a part B of that is what assumption are you making about the timing of memory recovery? Is that still kind of second half Weighted and can it be incremental to this kind of conceptual first half outlook?

Speaker 2

Welcome, Mac. It's Brent. So We are I'm not going to guide the first half of the year in terms of what regions or customers might be driving. As we look at the overall sales funnel and look how we're sizing the factories, our stabilization comment is at the total company level, to We see the business roughly operating at about the guided levels here over the next few quarters. So we'll see how it plays out.

Speaker 2

Obviously, it's a fluid and dynamic environment. I think we'll see the semi PC business to be very consistent with that. We'll see the parts of EPC tend to be a little more capacity and shorter lead time type Businesses, so we'll have to see how that plays through. But as we aggregate and just as we look out, trying to give you as much as we can into the first half, We see the business bouncing along at roughly these levels.

Speaker 4

And anything on the potential In memory, like if let's say memory were to be recovering in Q1, Q2, Q3, is that visibility you would necessarily have or if I to ask it in a different way. What is kind of the difference between when you start to see it and when it actually starts to show up in your sales numbers?

Speaker 2

To Rick here. When we talk to customers and we have had several conversations with memory customers recently, They've all kind of echoed the same thing in terms of historical lows right now in the market and utilization continue to be less to what they're hoping for, although stabilized. So we don't have any indication of any near term change in that. And they will certainly let us know to Because we do have long lead items. So there's some products where we're still shipping based on the fact that they're for R and D work.

Speaker 2

But In terms of capacity increases, we have no indication of any near term changes.

Operator

To thank you. Our next question will come from Harlan Sur with JPMorgan. Your line is open.

Speaker 5

To Good afternoon. Thanks for taking my question. On your services business, close to 25% of your sales, you'll be driving high single digits percentage growth this year and that's with to Your customer production activity at an all time low, but in your shareholder letter, you guys say that you expect growth in services to to accelerate to your target range of 12% to 14% next year. I know you've got a wave of tools and systems coming off to take a look

Speaker 3

at the Q1 of 2019.

Speaker 5

For warranty and on to contract, this would be a big driver. But what else are you guys assuming on this strong growth outlook for next year? And what are your

Speaker 2

to Yes, Arlen. So there have been drivers or long term drivers to focus on service growth that are implicit in our modeling and are continuing right in terms of the level of utilization to the installed base customers using tools for longer periods of time and so on. You did hit on the biggest driver in terms of our expectations for growth to take a look into next year is that we will have a number of tools that we shipped in 2021 and 2022, but we significantly outperformed the market. Those tools will be coming off to take a look at the Q1 and A portion of the contract and our attach rate is pretty high. So it does give us some visibility into that service stream.

Speaker 2

To As you know, our contract percent of the total revenue in service is over 75%. And so that visibility allows us to to Not only be able to plan for, but also to optimize the cost structure that's underneath it in terms of how we deliver to our to Yes. One other thing, Harlan, is that, as you know, our services isn't dependent on consumables. And so Customers want to keep these tools up and going even when they have slower utilization in other parts of the SAP, but then they definitely want to ramp them as they're to bring on new nodes and starting to ramp new technology. So it's kind of the best of all worlds in the sense we don't slow down that much when it goes down, but But then they're going to want to ramp as activity continues, whether it's on new technology or beginning capacity ramps on new technology.

Speaker 2

I think the final thing I'll say about it is Rick talked about memory utilization. If you look in foundry utilizations today, We are seeing some improving utilization to the leading edge. And the legacy utilization depending on where you're at and kind of The N-one is a little bit softer, more mature nodes, it's a little firmer. So utilization rates are stabilizing and increasing to see in certain parts of our business. And so that's an indicator for us as we look forward into 2024 in terms of additional growth for our to

Speaker 5

Great. That's hugely insightful. Thank you. Given the strong lineup and aggressive cadence of tech to And transitions, right, especially in foundry and logic. And that's obviously driving more EUV layer adoption, right, which is driving demand for both the optical inspectors, reticle inspection, your entire portfolio metrology products as well.

Speaker 5

If we look into next year with more tech inspections, the gate all around, introduction of backside power distribution, next gen advanced Packaging architectures, is that wave of new tools, systems adoptions to support these transitions, Is that still in front of the KLA team or are you actually starting to see quite a bit of that now?

Speaker 2

Well, so It's good insight, Harlan. I think there's 2 ways to think about it. One is we're definitely seeing R and D development around that and we have for some time. But many customers have stalled their expansion and delayed. And as you know, there's been quite a while in especially the leading edge to Companies out there in terms of really much CapEx at all as it goes toward new technology to Expansion, but that's coming.

Speaker 2

And when that comes, we can map out layer counts. We know we have pretty good sense of deployment once it goes on the run card to and it's both on films. It covers both metrology, but also it covers inspection. And so I'd say it's in front of

Speaker 1

us as we get it

Speaker 2

to calendar 2024 and beyond.

Operator

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

Speaker 5

To Yes, thanks for taking the question. First is, Hovind brand, I know it will come out in the queue, but can you help us with the RPO where that was exiting the quarter?

Speaker 2

It came down a little over $500,000,000 quarter to quarter. So you'll get the specifics in the 10 Q, which we'll be filing here in the next few days, Somewhere just north of $500,000,000 So still pretty high levels, North of $10,000,000,000 overall, but did come down a little bit quarter to quarter.

Speaker 5

Okay. That's helpful. And then just in that kind of context, to How do we think about the optical inspection lead times? I think you mentioned that the demand remains stronger than supply, your ability to supply. To How do we think about that looking into the first half of twenty twenty four?

Speaker 5

Do we expect that you'll start to see maybe some of that alleviate In the first part of next year as

Speaker 2

we get into more demand into the second half? Because we've got some new supply coming on related to some to extend the long lead time parts. I would expect that we'll ship more in 2024 than we have in 2023. And so we still have to A fair amount of imbalance here between where our customer demand is and our ability to supply, but there is some catch up that's to but those lead times are still pretty long. The rest of the company is somewhere around varies across different products, more capacity to take your questions.

Speaker 2

Your product lead times are very normal today and around some of these unique products that are critical in terms Industry requirements, those are still a little bit longer. Got it. Thank you.

Operator

To thank you. Our next question will come from Chris Caso with Wolfe Research. Your line is open.

Speaker 2

To Yes, thank you. Good evening. I wonder if you could speak a bit about the China business right now, a little more color on the strength that you're to and we obviously heard this from your peers as well. And I think the investor questions right now are about The sustainability of the China revenue at these areas, I wonder if you could address that. Yes, absolutely.

Speaker 2

So a couple of thoughts for KLA in particular relative to China. Because of the actions that were taken, most of the investment nearly all of the investment that all of it we're exposed to is on legacy notes. And there's both mostly that's to support the industries that are in China where they want self sufficiency, such as EV. And you have a lot of projects going on that require basically greenfield. So you have a fair amount of inspection measurement across to But beyond that, there's infrastructure investment also going on in China relative to the legacy nodes, Both MassShop and also Wafer Manufacturing.

Speaker 2

Those projects, I think, are It's going to continue for some period of time. So what we don't see is any I think the leading edge stuff has already been taken out and they stopped that and of course for to But the legacy continues and it's pretty broad based and we don't believe that's going to change to take a look at the size or intent of those and those are things that are projects that are various stages As they continue to build. So we feel pretty good about the sustainability of the business as we see it right now in China.

Speaker 1

So Brian can give more

Speaker 2

to In the near term, in the September quarter, we saw the level as more elevated than what I'd call a run rate as We had other customers that were moving around in terms of deliveries. And so we were able to so we backfilled that with to some of this demand in China. So it did push up a little bit. I would expect it would drop somewhat in Q4, but certainly remain to at elevated levels and it's certainly something that has strengthened over the course of the year consistent with Rick's commentary. So as we look at next year, we've got meaningful backlog with these customers.

Speaker 2

I've got In excess of $800,000,000 in deposits for shipments for these customers. So I would expect that we'll see some sustainability of that demand as we move into next year. And I think it's really across the segments that Rick talked about. So as I think about growth into to make sure that part of the business. I think it's from a baseline point of view, we see this is more or less flat.

Speaker 2

You have greenfield projects as you have construction dynamics that are influencing to some timing issues, but in general, I would expect it to continue more or less at that level over a broader period of to A lot of these orders we booked over the last couple of years and frankly in the expansion periods of 2021 2022 to Our more strategic and larger customers consumed the bulk of our slots. So as we've seen some slowdown over the course of 2023 that's created the slot availability for these shipments and these customers are performing in line with the commitments that they make. To That's very helpful. Thank you. Just as a follow on to some of the other things you said with As you're starting to fill some of those orders, for say some of those Chinese customers that were to You weren't able to fill because of some of the shortages before.

Speaker 2

What effect has that had on the backlog? And Is your backlog visibility going out in time about the same as it was last quarter, quarter before? Or is that backlog visibility starting to shrink as you to catch up on some of those orders that you weren't able to fulfill before. I would say with new business coming into backlog that it's not

Speaker 3

changing all that much. Right. So about

Speaker 2

the same. To Right. So about the same? I'd say it's about the same. Visibility is pretty consistent.

Speaker 2

Like I said, construction to The issues would be probably the bigger factor of whether projects we're pushing on in a lot of cases. These are new customers that are to are getting established and so aren't necessarily exposed to

Speaker 1

some of

Speaker 2

the economic sort of supply demand drivers that would affect more established customers. Now there are those kinds of customers also and we're seeing normal behavior from them in terms of how

Operator

to our next question will come from Atif Mehlich with Citi. Your line is open.

Speaker 4

Hi, thank you for taking my questions. To Brent, in the past, you have talked about the China domestic spending as 1 third memory makers, 1 third to kind of mature foundries and 1 third as a new entrant into the market. And my question is like you talked about China to drop somewhat in Q4. Which segment of the China market you're seeing the drop off in Q4?

Speaker 2

Yes. I'm not I don't have that detail here. There's another piece of that that's also related to the to the infrastructure investments that Rick talked about, the wafer infrastructure and reticle infrastructure. So there's also a component of investment that's happening there. To I know I'm not we guided the company level, customer specific activity, I'm not going to get into that.

Speaker 4

Got it. And then Rick, I have a question on Gauge all around. Historically, you guys have benefited when the transistor moved to to that architecture and as we start to see initial orders on data all around for some of the deposition companies, Can you talk about what that data around opportunity means for both infection and metrology for KLA?

Speaker 2

To Yes, great question. It means a couple of things. 1, obviously, Gail Around has been in development for a while, so we had a to start in terms of some of the architectures that we need to modify to support it. Specifically, we are leveraging Gen 4 technology Instead of Gen 5 because of the nature of the contrast ability of Gen 4 to see the defects that are relevant to a gate all around architecture. We've made that made those investments and seen those results.

Speaker 2

And that's been one where we've leveraged existing technology, but also to leverage the work we talked about with AI to provide capabilities. So we're well prepared for that when it comes to to The inspection challenges associated. Metrology, big opportunities there because you're looking both for increased level of to take a look at the actual measurements, larger sample size because of the concerns about consistency across the wafers and across wafer to wafer And also some of the specifics around the high k metal gate control that people are looking for. So more capability, again, we had a head start because to As you know, that technology has been in development. So we work with development partners on that, so well positioned to be able to support that as it expands.

Speaker 2

So it's going to help both process control intensity when it comes to both inspection and with metrology and we're well positioned to support our customers to do that. To

Operator

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

Speaker 6

To Great. Thank you. I want to ask about the DRAM strength that you guys are seeing. It seems like that was the main source of revenue to and it looks to be based on your comments down slightly in the next quarter in calendar Q4. How much of That strength is coming from shipping to the DRAM customers in China that you alluded to in the past and how much of that is tied to Advanced DRAM technology, high bandwidth memory, whatnot.

Speaker 6

And when you look at Q4, which part of that segment is going to come down?

Speaker 2

Yes. So when I look at the details, certainly the shipments into China, which were expected were to take a look at the December quarter in DRAM, I think you'll see a little bit of

Speaker 1

a mix across customers, to I don't think

Speaker 2

the number really the absolute number doesn't really come down all that much. So Most of the investment is in that area or it's in the area that you alluded to, right, in terms of supporting some of the AI demand that's out there. But And then many of it just general R and D investment that's happening. So it's at a pretty low level overall, and the bulk of it coming from some catch up related to The China customer that we referred to. Well, one other area, we are seeing some when it comes to the interposer in terms of packaging related to HBM.

Speaker 2

So that is also a driver. Smaller at this point, but the growth projections are good. Remember as DRAM is going to leverage to as the investment resumes, that's going to be

Speaker 1

a great opportunity for us to to

Speaker 2

continue to penetrate when it comes to the R and D, but that's not what's driving it right now.

Speaker 6

Okay, great. And maybe a follow-up for me. If you look at the to SPC systems revenue, it looks like it's going to be down 5% to 7% in calendar 'twenty three. I think a quarter ago that number was like down 10% to 12%. To Can you talk about what has changed?

Speaker 6

Is it just that the WFE market has improved somewhat? Or are there other KLA specific reasons that you will point out? But more importantly, How do you think that outperformance will do next year considering some of the areas that you are strong in this year may see some moderation? Thanks.

Speaker 2

I'm sorry, for EPC or was that was SPCH? Yes, that's for SPCH. SPCH. SPCH. Okay, got it.

Speaker 2

Look, we had some strength. We continue to have strength, kind of the same things we talked about strength in OptiBal. I think the process control intensity has to across our customers and we continue to see wafer being strong. We talked about macro being strong. So really, it's really across to take a look

Speaker 1

at the portfolio of bleeding edge.

Speaker 2

The thing that's fallen off the most when it comes to capacity has been the product areas that are most linked to wafer starts and those would be things like to overlay and films, but when it comes to the technology inspection, continued strength there. Yes. And I think the infrastructure to Parts of the business as well. We've seen that hold up fairly well, both in China, as we talked about in terms of doing mature Building capability to not only provide wafers, but also to do mature reticle sets to for all the design activity that's happening. So you got that.

Speaker 2

But then on the wafer side, you also have investments that are happening globally as those customers to prepare for not only as capacity comes on fairly slowly in that industry, preparing for The resumption of demand that we're expecting here in the near future, but also different strategies to on inventory stocking, more wafer to wafer bonding, other demand for wafers. So that's also been a driver that we've seen hold to process control intensity is helping again. I've been pretty open with it over the course of the last year that Despite some catch up that might happen with some peers related to challenges in 2022 with supply, we felt to talk pretty good about our positioning and our exposure to some of the fastest growing markets overall, the mix of business that's more logicfoundry centric And this infrastructure exposure that I referred to.

Operator

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

Speaker 7

To Yes. Thanks for taking my question. Rick or Brent, kind of curious, you mentioned like the demand profile stays in the first half of next year, to Some of your peers have called calendar 2024 like a transition year. And now how do I overlay the fact that memory could rebound in the back to next year's, how to think about either industry WFE or KLA revenue profile next year?

Speaker 2

To So I'll take part of it and Brent can answer. We don't know

Speaker 1

what 2024 is going to look like.

Speaker 2

We just don't know. And we know what our customers are saying right now, But they don't really know yet either. So we're talking about a sustained level of business kind of being similar to what it is right now to We have a reason to believe it's going to go up. Customers talk about things improving. We have meetings and they talk about asking us to get ready.

Speaker 2

But to Until we actually see it happening, we don't really know. So it's very hard to talk about the levels. What we do know is you have historically low levels of investment happening right now in memory. And we see the same things

Speaker 1

you do in terms of pricing.

Speaker 2

And then we're well positioned for ramping when it to We also know we have some very good indications on some of our long term products that our products that have long lead times. But as Brent said, like an optical inspection, we're capacity constrained, not demand constrained on those. So That's kind of how we're looking at it. We don't really have any unique visibility into 2024 than those shareholder trends. And the fact that utilization seems to have stabilized and is increasing on some of our market segments, but

Speaker 1

not much visibility beyond that.

Speaker 2

Yes. Look, I made a comment about utilization rates, and I think that's encouraging in terms of the stabilizing environment that we're articulating here. That's certainly a fact here. Well, of course, we watch our customers' business model and their profitability, their cash flows That will okay, you're seeing the industry digest the capacity that was added and then get to healthy again and see pricing and all those things improve, but then one of the catalysts that are going to drive growth into next year. In our near term, as we said in the prepared comments, We see roughly this level of business as we move through the first half of the year.

Speaker 2

One of the things that we really focus on is we got to make sure that we're flexible enough to be able to respond. And so we've made a lot of investments over the last few years in our supply chain and our own capacity to make sure that we have the flexibility to respond because I would expect that we could get surprised. We usually do. And so we wanted to make sure that we're in a position that We're not constrained in our ability to supply and meet that when it happens. So that's our focus.

Speaker 2

And I think to The color we provided in terms of how to think about the company and how we're sizing the company in the near term is reflected in all that.

Speaker 1

To Got it, got it.

Speaker 7

Thanks for that, Rick and Ben. And then a quick follow-up. Is it set as being the recent export control work has no material impact

Speaker 2

to So we're looking at that and working our way through it. It's quite complex. But preliminary estimates based to take a look at the baseline that was established in October of last year. Right now, we don't see any real material change to to our business expectations related to those new regulations. Well, we're working our way through it.

Speaker 2

It's complex.

Operator

Next, we'll have Timothy Arcuri with UBS. Your line is open.

Speaker 8

To Thanks a lot. Bren, everyone's asking about 2024 WFE, but I guess I'm still a little confused as to what the right baseline is for this year, Because pretty much everyone is now guided for Q4. So if I take you plus Applied plus Lam, Yes, it's down 13%. So that would mean that your $80,000,000,000 number might be in the ballpark off of that mid-90s last year. But if I include ASML, it's like flat.

Speaker 8

I mean, even if you exclude the fast shipments, it's barely down. So how is WFE down this year? To I guess I'm just trying to get some understanding of like how you get to that $80,000,000,000 number. Is it excluding ASML somehow? Thanks.

Speaker 2

Yes, Tim, we're not experts on this. What we do is we take a look at what we look at the universe of peer companies and to We look at what our customers say. We have some modeling that we do and we come up with an estimate for that. So This year is a little hard because of fast shipments and I don't even really understand all the nuances in that. I mean, that's for you guys to figure out, but also some of the issues that affected some of the other providers in late 2022 in terms of their ability or inability to deliver in 2022 and how that shows to But when we look at how we're performing overall, we think that it's in and around that level.

Speaker 2

Certainly, the fact that We're down given our belief about our market position. And if you look at semi PC based on the guidance we provided being somewhere around down, We'll call it 9%, 10%, somewhere in that ballpark. It doesn't feel flat to me.

Speaker 8

To Okay. All right, Brent. And then I guess my second question is on inventory. It's now up to almost 300 days. It's up like $500,000,000 over the past 6 months.

Speaker 8

But we're not really sure when WSE picks up inside of next year. I get that you still have this huge $10,800,000,000 to that you're kind of working off, but why is this stuff parked so far out in the future? Is it and if so, why to hold the inventory now. What's the bottleneck? Is there something on your side still that's a bottleneck?

Speaker 8

Or is it more that the orders have been placed and maybe waiting for the fab to be ready to take the equipment and that's why you're building up the inventory. I guess I'm just not sure why you would build the inventory if this stuff is still parked so far out in the

Speaker 3

future. Thanks.

Speaker 2

Yes, Tim, it's a great question. It's a little bit of the trade offs that we make and I spent a to talk about how we were able to outperform the industry for a couple of years in a row in terms of some of the supply chain challenges that others were facing that we weren't. Part of it has to do with how we to manage our suppliers. We do have a lot of long lead time parts. And so if you just go back to, to We'll call it 15 months ago, we thought 2023 was going to be a growth year on top of what we thought was going to be 100 to make a solid year in 2022.

Speaker 2

So we had made commitments. We were putting commitments out longer to get our suppliers to invest. To be invested in them in terms of partnering on their capacity expansion. We manage our so I place those commitments to We've been able to manage what we can, but in a lot of cases, we honor our commitments. And we feel that in the long run, we're in a good position to take a question and

Speaker 3

answer session in terms of the longevity of our

Speaker 2

platforms and where we expect demand to come from that will consume those parts. So some of it is what you're to Optimizing for in terms of our differentiation in terms of how we work with our supply chain and we're accepting that we're going to be pretty good customers. To We're going to live up to our commitments and take the part that we've committed to. So we feel pretty good in the long run about our positioning in terms

Speaker 3

of our

Speaker 2

ability to grow when we see a reacceleration from the industry. And the other issue is that our service business continues to grow, right? It grows every year And that growth drives a fair amount of demand in service. It's a high complexity, high mix, low volume business. To And because of the customization of the parts, we tend to have to do end of life buys and have to buy a lot of parts to support to That is, when you look at our margin profile overall for the company, feel like the trade offs that we're making are appropriate.

Speaker 2

And we think it's played a big role in our relative success.

Operator

To thank you. Our next question will come from Charles Hsieh with Needham. Your line is open.

Speaker 5

To Hi, thanks for taking my question. This morning, I think one of your smaller peers in Europe to talk about seeing some weakening of the mature foundry logic side of the WFE. I wonder if KLA is seeing something similar, I mean, either through your process control business or the EPC business. If not, why is that? And I have a second question.

Speaker 5

Thank you.

Speaker 2

Not really. Look, we're watching for certain parts of, to I'll call non China legacy exposure to automotive, industrial, some of those markets to see if that has an effect to on customer demand. But right now, our expectations around legacy in the near term has been fairly consistent. To Got it. So, Bren, maybe

Speaker 5

a question on OpEx. Both of your peers In the Bay Area, they are raising their OpEx for basically the next calendar year. How should we think about KLA's to OpEx going into next year, say, you're talking about you're expecting revenue to be run rating at the current level. You will be thinking OpEx is kind of flat until you see the uptick in the revenue, I mean, before you really raise the OpEx? Thanks.

Speaker 2

Our run rating at the current level does give you a little bit of growth into next year. As I said, we would expect to see growth in service. I actually think EPC probably has some A modest improvement off of pretty depressed levels. Our incremental operating margin model drives how we're to Running the business in terms of expectations for leverage on incremental revenue. So I would expect to see a modest uptick in OpEx.

Speaker 2

We're also balancing sort of near term in terms of how we're sizing for the current environment, but also our long term investment to requirements and given our market position and our desire to go to market with the portfolio that we think is to A competitive advantage for KLA does drive some requirements for investment. And we'll do that to independent of top line when appropriate. But as we're looking out going forward, I would say that we'll probably see OpEx to pick up a little bit as we move through 'twenty four, but not a big change. They're more in line with general kind of Cost of living type adjustments overall.

Operator

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

Speaker 6

Great. Thank you. You talked about maybe

Speaker 9

a little bit of weakness at the cutting edge to of foundrylogic. What if you could talk about that? And then I guess just contextually, if we're in an environment where There's very aggressive investment in gate all around and backside power, but there's sort of limited to Wafer requirements in year 1 for those technologies. I would think that helps KLA in terms of percentage of WFE. But can you just walk us through how much of your how much money Will they spend on the development of those processes versus the expansion of wafer fab capability there?

Speaker 2

Well, so we still we do get investment at the front end, but the for more for development, But the ramp phase is really where you see that's where you see more of it.

Speaker 7

So you get it at

Speaker 2

the front when they're doing development, then as it starts to ramp, you get more. And we get less incrementally across the portfolio as you earn high volume. So yes, it would help us in terms of intensity around those new nodes, but often those companies are also expanding The trailing nodes at a similar time, 1 or 2 generations. So on balance, it doesn't look that different overall as to most of these companies ramp, if that makes sense. So you get it at the front end, but the rest of the so you look at process control intensity, it doesn't to really change that much in foundry logic year to year because they're investing across multiple parts.

Speaker 2

The biggest change has to come from the mix of battery logic to memory and memory is increasing some. So yes, there are more layers, there's more investment going on, but it's still balanced by they're going to ramp, We hope not just the R and D, but they're going to be ramping in terms of across the board. That's how we get to the model that we sell for 2026 Yes, the roadmap schedules have held pretty well together. What we've seen is customers adjusting some of the capacity plans. So as you look at 2024, you're more likely to see, for example, more N3, you're going to see N2 activity, And we'll start to see some of that soon.

Speaker 2

And but most the bulk of it will be more at N3. What you likely don't see is you probably won't see a lot of investment from our major customers in The more legacy parts of their businesses where they pull back. But to Rick's point, we're to We're seeing some of it. We'll see that investment as they ramp. We're seeing more investment today in production given the number of designs that are moving through

Speaker 1

to The leading edge nodes

Speaker 2

and the different process flows is creating opportunities for and more challenges for our customers to in terms of process control and defectivity challenges across different designs as they test design rules in different ways. So I think we have our normal historic exposure to R and D and to ramp. But over the last few years, we were seeing, particularly With the introduction of BUV and the progressing of scaling, we're seeing more adoption in what we call the HVM or the high volume manufacturing phases. To Thank you.

Operator

Thank you. Our next question will come from Blayne Curtis to speak with Barclays. Your line is open.

Speaker 10

Hey, thanks for letting me take the question. I had 2. I just wanted to follow back up on the comments you just made on foundrylogic. So It was flat. It seems like China is probably up within that mix and then

Speaker 4

you said leading edge is weak. I'm just

Speaker 10

kind of curious how that changes for December. It seems like the outlook is fairly flat. So is that weakness in Leading Edge kind of stabilized? And then kind of any perspective as to where Leading Edge goes next year?

Speaker 2

So I feel like where we are today, I think your stabilization comment is the right one. I think we derisked it. To And given that we tend to be more of a long lead time provider, I think we've made a lot of the adjustments that we needed to make already in terms of how we're planning for this year. And as we move into next year, right, I think if you just sort of aggregate leading edge activity, we'll see as customers start to to provide a little bit more insight. But again, back to the stabilization comments, I don't see it declining from

Speaker 3

to

Speaker 10

Thanks. I just want to ask on service. In your letter, you talked about getting back to that 12% to 14%. I just want to know, is that assuming any utilization increases or Just purely the tools coming off of their agreement.

Speaker 2

Yes, it's the latter. I think we're expecting utilization to slightly improve, but the bulk of it will come from new tools coming into contract. Thanks.

Operator

Thank you. I

Speaker 2

think to expect to start to see overall to call industry improvement into 2024, the first thing you'll see is utilization start to improve. So we would expect that. And then once you see that, then eventually utilization gets to a place where customers need new capacity and then those decisions to

Operator

thank you. Our next question will come from Mehdi Hosseini with SIG. Your line is open.

Speaker 7

Yes. Thanks for taking my question. Just a quick follow-up. As you think about the R and D pricing, especially you highlighted gate all around at some point, we have to change the narrative to Hi, Ynais. And I want to just get an update, how do you see Kale opportunities as it relates to Hi, Ynais, specifically On the patterning and I have a follow-up.

Speaker 2

Well, I mean what I and A enables is the continuation of scale, Right. So that's been goodness for KLA. You've noticed process control intensity in general, but more specifically to has gone up as EUV has started to be adopted because now you're scaling. We're not on what was to traditionally Moore's Law, but we're seeing scaling. So high NA means there's going to be more scaling happening and that's going to be good and specifically good for KLA because to It drives the highest performance requirements, which plays to our portfolio strength.

Speaker 2

So part of what our modeling is when we look now we don't see a lot of high NA happening to in the timeline that we laid out for 2026 for our Investor Day, it's after that. But we'll see early stages of it before 2026 and to continue to provide more opportunity for us to participate in higher process control intensity.

Speaker 7

Are you implying that Gen 5 could be the use of Gen 5 could be extended to high NA for PADI?

Speaker 2

Absolutely. Absolutely. We're still using Gen 4. We're using Gen 4 now because of the extensions that we made in the platform, not just in terms of wavelength, to adding more processing capability, the leveraging of AI, the use of both Gen 4 and Gen 5 actually Gen 4 will out ship Gen 5 this year and we'll continue to see that adoption. So it's really just talking about the critical layers and we have more extensions in mind in the on the works that we're doing right now for Gen 5 that will extend it to Well and into the even in the high NA, the hyper NA, which is going to come after that.

Speaker 2

So we feel very good about our optical product portfolio.

Speaker 7

Okay. And then the second follow-up has to be with China. It seems like to for Kele and the peer group, the China mix is getting closer to 50%. Could there be a scenario where opportunities for to say that we would actually step up given the fact that many of these customers are new and they have yield issue. To I understand China is mostly for trailing edge, but with new entrants, new players, could the Higher emphasis on improving yield by Disney players, have a higher mix of China for KLA relative to the peer group?

Speaker 2

We have a lot of customers that are subscale that are trying to develop process capability and demonstrate to capability to customers also invest for viability over time in terms of longer term node progression. So in early stages, upscale stages like that, you're going to see a heavier investment in process control. Now as they continue to push roadmaps, it might stay there because they never really add a huge meaningful amount of capacity at each node. But you do see higher levels of adoption early on as you're trying to because if you think about it, you might buy a

Speaker 3

few process tools here and there, but

Speaker 2

you need the whole suite of process to there, but you need the whole suite of process control. And so that's why we tend to see a little bit more activity there. But I think given that the desire to progress along roadmaps and to progress nodes, you're going to see, I think a continued level of investment overall. But certainly, as you start to mature and if you're running a limited number of to Fine, process control intensity while higher in production than it used to be, it's still lower than it is in what we'll call the ramp phase

Operator

to Thank you. Our last question will come from Brian Chin with Stifel. Your line is open.

Speaker 11

Hi, there. Thanks for sneaking me in. I'll just ask one question then to get us out of here. But And you can correct me if I'm wrong here, but I've gotten the sense maybe that given how strong the infrastructure bare wafer and to turn the call back to the question and answer session.

Speaker 3

Yes, I think it's a little bit more color on the

Speaker 11

calendar 'twenty four relative to its strength again this past year. Is that sort of implicit in your outlook In the first half next year and also do you think that is proportional in any way to sort of the rate of China fab bill activity that you can maybe observe for next year?

Speaker 2

Well, I don't think it's I think the overall wafer infrastructure investment will that's been to faster than WFE growth this year will flatten out as we move into next year. So there's that starts to slow down. On China specifically though, I don't see it changing much. I don't think it's going to grow much next year, but I don't see it falling off. And that's across to for silicon wafer, but also around reticle capability.

Speaker 2

Okay, great. Thank you. To Thank you, Brian. And

Speaker 1

yes, thank you, Chelsea. I just wanted to thank everyone again for their time and turn the call back over to you for any final instructions.

Operator

To this does conclude the KLA Corporation September quarter 2023 earnings call and web to ask, please disconnect your line at

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KLA Q1 2024
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