Rick Wallace
Chief Executive Officer at KLA
Thank you, Kevin. Let's start with a summary of KLA performance in the quarter along with a few highlights. Further color and detail on my comments and the semiconductor demand environment can be found in our shareholder letter released earlier today. KLA's March quarter results again demonstrate the company's consistency in delivering our long-term strategic objectives and financial targets.
Specifically, revenue of $2.43 billion is above the midpoint of the guidance range. This represented 6% growth on a Year-over-Year basis, although down 18% sequentially. GAAP EPS was $5.03 and non-GAAP EPS was $5.49, with each finishing above the midpoint of their respective guidance ranges.
From a customer perspective, demand in the quarter was slightly ahead of expectations. Near-term headwinds related to the global macro-economy and supply-chain remain, but we also see positive assets emerging as automotive demand and other markets served by legacy nodes remained strong. Additionally, the silicon wafer industry continues to invest to support long-term wafer demand growth. Our customers are adjusting capacity plans across both Foundry logic and memory due to changing demand expectations.
However, we see R&D investments remain a top priority. This is important for KLA as our products are consistently relied upon the R&D process, as well as the early ramp phase and faster time to yield is critical. We had a number of additional business highlights in the quarter. 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 $13.5 billion.
Within Process Control, KLA increased market leadership in most segments, resulting in overall market-share gain of approximately 300 basis-points in 2022. So we're 57% greater than four times our nearest competitor. KLA sustained market leadership is underpinned by our innovation and commitment to high levels of R&D investments. Additionally, the successful execution of KLA strategies for market diversification were demonstrated by the rapid growth in KLA's automotive focused business.
Automotive semiconductor demand is growing in applications where a zero defect mentality is required to achieve superior standards of quality and reliability. KLA has been working with the entire automotive ecosystem to standardize our inline defect screening methodology called, I-PAT, to augment existing liability test methods. As electrification proliferates, the industry is facing an additional opportunity with the integration of introduction of new compound semiconductor materials such as silicon carbide that offer a significant improvement in power efficiency over silicon.
In this category, KLA's revenue has grown 2.5 times since 2019, approaching $700 million in annual revenue in calendar 2022 and including five times growth in silicon carbide related businesses which account for almost half of total automotive sales. We expect this growth to continue in calendar 2023.
In services, our business grew to $529 million in the quarter, up 8% Year-over-Year, 2% sequentially. KLA service strength was driven by our growing installed-base, increasing customer adoption of long-term service agreements, expanding service opportunities in legacy nodes and emerging long-term opportunities and acquired businesses. And finally, the March quarter was another excellent period from a cash-flow and capital returns perspective. Quarterly free-cash flow was $526 million, which drove the latest 12 month free-cash flow of 20% to $3.2 billion.
Total capital returns over the past 12 months was $5.11 billion, a 160% of free-cash flow. Dividends and share repurchases in the March quarter were $659 million, composed of $478 million in share repurchases and $181 million in dividends. Our consistent execution despite challenges in the marketplace continuing to prove the resiliency of the KLA operating model, the dedication of our global teams. I will now hand the call over to Bren go through our financial highlights. Bren. Thank you, Rick. KLA delivered on our quarterly guidance and commitments, demonstrating consistent execution in a challenging marketplace. Our continued focus on meeting customer needs, while expanding market leadership, growing revenue, sustaining industry-leading and operating margins, generating strong free-cash flow and maintaining our long-term strategy and conservative capital allocation is what makes us successful. Quarterly revenue was $2.43 billion, above the midpoint of the guided range of $2.2 billion to $2.59 million. 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. While volume and product mix were stronger than expected, persistent end market weakness continues to effect the PCB and Display and Component inspection businesses to a greater degree than expected and drove incremental inventory reserve requirements. Factoring our absorption also remains a factor across the company as we adjust our capacity down to reflect the current business environment. These issues combined diluted gross margins by approximately 100 basis points and offset the volume and product mix benefits mentioned earlier. Non-GAAP operating expenses were $534 million, below our expectation of $545 million, reflecting the impact of modest headcount reductions implemented in the quarter and prudent cost management across the company. Total operating expenses comprised $322 million in R&D and $212 million in SG&A. Non-GAAP operating margin was 38.8%. Other income and expense net was $60 million, 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 $5.52. Quarterly non-GAAP net income was $761 million. GAAP net income was $698 million. Cash flow from operations was $1.01 billion, and free cash flow was $926 million. As a result, free cash flow conversion was 122%, and free cash flow margin was 38%. The company had approximately $139 million diluted weighted average shares outstanding at the end of the quarter. The breakdown of revenue by reportable segments and end markets and major products and regions can be found within the shareholder letter and slides. Switching to the balance sheet. KLA ended the quarter with $2.9 billion in total cash, cash equivalents and marketable securities, debt of $5.95 billion and a flexible and attractive bond maturity profile supported by strong investment-grade ratings from all three agencies. Over the last 12 months, KLA has returned $5.1 billion to shareholders, including $4.4 billion in share repurchases and $711 million in dividends paid, the total capital returns amounting to 160% of free cash flow. Turning to our outlook now. We continue to estimate WFE to decline approximately 20% to $75 million in calendar '23 from approximately $95 million in '22. 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 for our semiconductor process control systems business. We expect this demand profile to continue through the second half of the calendar year. 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 reticle infrastructure spending worldwide. Our WFE estimate reflects our current top-down estimate of industry demand as follows. In 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 expect Foundry/Logic 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 $2.25 billion, plus or minus $125 million; 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%. We forecast non-GAAP gross margin to be 60.75%, plus or minus one percentage point, due primarily to the expected product and segment mix. 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% and 61% for calendar '23 with product mix being the largest factor in quarter-to-quarter variability. Looking ahead, we will continue to manage costs carefully. The June quarter always represents the first full quarter of our annual salary adjustments. As a result, operating expenses will tick up slightly to approximately $540 million. We continue to see operating expenses trending down for the remainder of calendar '23, exiting the calendar year in the $530 million to $535 million range. Other model assumptions for the June quarter include other income and expense net of approximately $58 million and an effective tax rate of approximately 13.5%. Finally, GAAP diluted EPS is expected to be $4.47, plus or minus $0.60 and non-GAAP diluted EPS of $4.83, plus or minus $0.60. EPS guidance is based on a fully-diluted share count of approximately 137.5 million shares. In conclusion, after three years of strong industry growth, our view of total WFE demand remains unchanged at down approximately 20% in calendar '23. Against this backdrop, KLA is well positioned to continue to outperform the industry, building on the increased market relevancy delivered in calendar '22. Looking ahead, we remain confident of the secular trends driving long-term semiconductor industry demand and investments in WFE are intact. Broadening semiconductor demand, the increasing strategic role semiconductors 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 a lowering cost for customers and enabling a broader application universe for semiconductor-based technology across multiple end markets. For KLA, while the global economy 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 and continued growth in Services. We will continue to focus on innovation as we execute our portfolio strategy to support our customers' technology road maps and multiyear investment plans. With the KLA operating model guiding our execution, we will execute our strategic objectives and drive outperformance. These objectives drive our growth, consistent operational excellence and differentiation across the diverse product and services portfolio. 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 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&A session. Kevin?
