March 2023 Quarter Financials and Analyst Call

April 26, 2023

Letter to Shareholders

  • · The company said supply chain challenges remain. I thought the collective we is past supply chain constraints. This may be problems unique to KLA or they may be disclosing more than most
  • · Automotive and other segments served by legacy nodes have remained strong.
  • · According to Gartner, Process Control was the fastest-growing WFE market segment in 2022, increasing 30% during the year, to $13.5B. Within this market, KLA’s share is over 4x greater than the next closest competitor. They estimate their market share to be 57%. This is up over 600 bps since 2018.
  • · KLA Services grew to $529M in the March quarter, an 8% increase year-over-year. Unlike other WFE companies, this total does not include equipment upgrades or sales of refurbished equipment.
  • · Gross margin came in at the lower end of the guided range. Product mix was stronger than expected but was offset by incremental inventory reserve requirements brought on by continues weakness in end markets for PCB, display, and component inspection.
  • · Revenue contracted in all segments sequentially, except for Services. That segment grew by 2% over the prior quarter.
  • · March quarter semiconductor process control segment revenue was 86% foundry/logic and 14% memory (was 77%/23% in the prior quarter. It was 63% and 37% the quarter before). In absolute dollars, this is a sequential decline of more than 50%. Memory spending is down more than two-thirds in half a year.
  • · Revenue by region for the March quarter was (previous three quarters): China = 26% (23, 31, 29%), Taiwan = 20% (26, 27, 25%), Korea = 19% (20, 15, 16%), NA = 14% (12, 6, 10%), Japan = 9% (9, 8, 9%), Europe = 9% (6, 6, 8%), rest of Asia = 3% (4, 4, 3%). Slowing in Taiwan is a little bit of a surprise. I think this is lower investment by TSMC in leading-edge foundry, a market that is starting to see softness.
  • · Calendar 2023 overall WFE spending is expected to be down 20%, to $75B, from the 2022 level of $94B - $95B. This is unchanged from their view ninety days ago. They expect the current demand profile for KLA products to continue into the back half of the year. That means they think the equipment market from memory customers has bottomed.
  • · As other WFE companies have said, they are seeing strength from customers to buy fab equipment to make products on legacy nodes.
  • · Within their estimate for overall WFE spending in 2023, memory will be down 35-40% and foundry/logic will decline 10%, with legacy falling less than this average.
  • · June quarter guidance: total revenue of $2.25B +/-$125M with Foundry/Logic at 77% and Memory at 23% of process control system sales. Within Memory, DRAM will be 85% and NAND will be 15%. Non-GAAP gross margin will be in a range of 59.75% to 61.75%. Operating expenses in the quarter will be approximately $540M. They also expect ‘other income, net’ to be $58M in the quarter. Their effective tax rate will be approximately 13.5% and GAAP diluted EPS will be $3.87 to $5.07 and non-GAAP will be $4.23 to $5.43, based on 137.5M fully diluted shares.
  • · For calendar 2023, the company expects non-GAAP gross margins to be in the range of 60% to 61%. This is more resolution than the guidance they gave of “>60%” last quarter.

Financial Results

Statement of Operations

Last quarter was the peak for revenue. Sales declined sequentially from $2.98B to $2.43B. Surprisingly, within this revenue drop, more than 100% came from lower value of tools sold. Services revenue increases slightly. Gross margin also compressed some, to 58.7%. This gets up into the low-60% range when the semiconductor market is strong. Declining sales also means declining operating margins as operating expenses are largely fixed, or at least slow to move. Operating margin declined from 40.2% in the December quarter to 35.4% in the March quarter. Net income was $697.8M. On KLA’s ever-shrinking share count, this produced an EPS of $5.03.

Statement of Cash Flows

So far this year, KLA has produced $2.71B of operating income. They continue to invest less in capital expenditures than they use up in depreciation. This is exceptional among the WFE companies and is an example of how they are more of a software company than the rest. Working capital has been a consumer of cash this year as the market weakens. Management is comfortable with their cash position, as evidenced by the net $260M that has been shifted into available-for-sale securities in the first three quarters. They paid off $1.08B of debt, bought back $802M worth of stock (net of SBC) and paid $553M in dividends. Owner’s cash flow yield for the first nine months (annualized) is 7.8%. To calculate this, I adjusted by adding cash into working capital back in and took SBC back out. This give a rosier view than where KLA’s financial performance is headed in the near term. The next year, at least, will look like the June quarter’s guidance, or worse of leading-edge foundry softens more. Net cash has changed negligibly this year. Management is clearly targeting the level of cash they have at this level and buying short-term investments with the excess.

Balance Sheet

Their cash level of comfort is around $1.57B. At the end of the March quarter the company held $1.57B of cash on their balance sheet and another $1.32B of marketable securities. Total current assets were $8.0B and current liabilities were $3.4B. Inventories have more than doubled since the Pandemic started. For the first two years, that was the company trying to catch up with demand. In the last year that has been momentum from the strong market leading into slowing today. Inventory is now $2.75B. Long-term debt was paid down this year and now stands at $5.9B. Book value has doubled in the last nine months, off a low base. They have added a billion in assets and kept liabilities flat.

Earnings Call Notes

Earnings call discussion and comments are all non-GAAP. Full year references are to the calendar year.

Rick Wallace (CEO)

· The silicon wafer industry is investing in growth. KLA mentioning this is an example of how their market opportunity is wider than other WFE companies.

Bren Higgins (CFO)

  • · They are currently underutilized in their production facilities, raising costs.
  • · The company has made “modest” headcount reductions in the March quarter. As they didn’t announce any layoffs, this reduction is either from a small layoff or from not backfilling normal attrition. My guess is mostly this is coming from the latter.

Execs at KLA keep prepared comments to less than 15 minutes, an atypical positive.

Question and Answer

  • · They see a stabilization around the current levels for bookings.
  • · Strength in the legacy markets has been surprising, with China being a significant portion of this, as are sales to makers of silicon wafers.
  • · Memory as a percent of their total revenue has “maybe never” been as low as it is now.
  • · Their market share gains are disproportionately in optical inspection.
  • · When asked, they suggested company revenue may be down modestly from the first half of 2023 to the second half.
  • · Memory customers, they don’t believe, will further reduce their fab utilization rates. That market has stabilized at this low level.
  • · KLA makes more customized products than other companies. This means more inventory risk and longer lead times, to get the premium pricing they are able to earn from customers. Inventory will be higher than others for this reason.


The December quarter was the peak for WFE. KLA stands out from its peers in that their services business grew slightly even as memory customers reduced fab utilization. I think this is because KLA requires customers to pay a fixed amount every month for service, regardless of how much they utilize their tools. As I said in Lam’s results, the second calendar quarter of 2023 will be the bottom for the memory market. Further softness in WFE would come either from growing weakness in leading-edge foundry or a slowdown in legacy nodes. I think Intel’s struggles are already fully visible in KLA’s results.\

-S. Hughes (Long KLAC)

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