January 27, 2022
Financial Results
Income Statement
Total revenue in the second quarter was $2.35B, a 13% sequential rise. Sales were 80% tools and 20% services, more heavily weighted to equipment than in the previous quarter when the split was 75-25. Gross margin in the quarter was 61.4%, 30 bps better than the first quarter. Overhead increased 8%, to $478M. While overhead grew, it did not increase at the same pace as revenue. With the high rate of sales growth seen in KLA and the other WFE companies, they can afford to expand their investments in technology and product development while still expanding operating margins. KLA provisioned almost double the normal percent for income taxes, 22.5%, leading to net income of $717M in the quarter. Were this quarter to use last year’s tax rate of 12%, earnings would have been $816M, or $5.36 per share. Actual EPS was $4.71 per diluted share on a diluted share count of 152.3M.
Statement of Cash Flows
Because of KLA’s rapid growth, working capital investment consumed a lot of cash flow during the second quarter. A total of $365M went into AR and inventories in the quarter. I won’t include the puts and takes in working capital in my owner’s cash flow calculation. Surprising for a growing company, capital expenditures continue to be lower than depreciation and amortization. D&A was $85.5M and capex was $64.9M. Management shifted a net $40M more into available-for-sale securities during the quarter. Between this and the $65M in capex, investing activities in the quarter were ($106M). Owner’s cash flow in the second quarter was $801M. This annualizes to a 5.5% owner’s cash flow yield using the current (2/9/22) market cap of $58.1B. Of this $801M, management returned $552M to shareholders, split 2.5-to-1 between repurchases and dividends. I hope KLA’s share price holds on at these levels so I can buy some later in 2022 when I have cash available to do so.
Balance Sheet
KLA’s book value grew another 5% quarter-over-quarter, to $4.05B, or $26.64 per share. This is a mere 7% of the current market value of their equity, to be expected from an asset-light business like KLA. Of their total assets of $11.7B, only $717M are property, plant, and equipment. Fully $3.1B is intangible assets, with $2B of this in Goodwill. The company has $2.8B in cash and equivalents against $3.4B of debt.
Earnings Call Notes
Earnings call discussion and comments are all non-GAAP
Rick Wallace (CEO)
• Calendar year 2021 was the company’s sixth consecutive year of revenue growth. They anticipate 2022 to be another sales growth year.
• 75% of their services revenue in WFE was from subscription-like contracts. This was 90% for assembly inspection equipment.
• Within memory, they expect NAND to grow faster than DRAM in 2022. This is the reverse of 2021 when DRAM led NAND.
• The company reached the financial goals they set two years ago for 2023 two years early
Bren Higgins (CFO)
• They again called out cost pressure in labor and forecasted $495M in operating expenditures in the March quarter, and these will continue to grow throughout the year. They continue to target operating margin to be 40% to 50% incremental operating leverage on revenue growth over the long term.
• Their long-term tax planning rate remains at 13.5%
• Returning 70% or more of cash flow to shareholders is their long-term target
• In 2022, they expect the WFE market to grow in the high teens % off of a base of $86B in 2021. Foundry-logic will lead this growth. The industry continues to be constrained by supply chain shortages, which will ease as the year progresses
• KLA’s debt is rated investment grade by all three agencies
• Revenue in the March quarter is 8-10% lower than it would be without parts shortages. March is expected to be the lowest revenue quarter of 2022.
• March 2022 quarter guidance: revenue of $2.2B +/- $100M, non-GAAP gross margin of 61.5% to 63.5% down because of a less rich product mix. Their tax rate is expected to be 13.5%. GAAP diluted EPS is forecasted between $4.54 +/- $0.45 per share and non-GAAP diluted EPS of $4.80 +/- $0.45 per share, based on a fully diluted share count of 151M. Memory is expected to be 41% of revenue and foundry/logic will be 59%. This is a strong shift to memory from foundry/logic from the previous quarter.
• Gross margin for the year is expected to be 63% +/- 50 bps
Question and Answer
• In the last few weeks, the component shortages have been different than what they were short of earlier in the year. They are starting to see easing in the supply chain constraints now, which is why they are confident the March quarter will be the bottom for KLA’s revenue for the year.
• Foundry/logic is expected to outgrow overall WFE in 2022. This means memory will grow at a slower rate than the overall WFE market in 2022, according to KLA’s model.
• They see 65% to be a ceiling for their gross margins, in the long term
• The second half of 2022 will be stronger than the first half, as supply chain constraints clear
• KLA said they have pretty good visibility further out in time than in the past. Because of their record-high backlog customers are booking out into 2023 today. They softly said that 2023 is anticipated to be another growth year for their revenue.
• They believe WFE revenue will outgrow semiconductor revenue over the long run. This implies either semiconductor maker margins will shrink, or other inputs will grow at a lower rate than the overall semiconductor market. I am dubious on this belief because I don’t think semiconductor makers writ large won’t be able to maintain their gross margins, even as capital intensity continues to increase.
Summary
This quarter was derailed at the end because of new supply chain issues. Constraints of component parts continues to be a theme across the WFE companies, with all of their revenues being reduced as a result. KLA is forecasting shortages to gradually ease throughout 2022 with the March quarter being their low for revenue in the year. All the companies I follow have said that supply constraints will gradually ease as 2022 progresses, unleashing the true demand underlying the market. Management said overall WFE came in at $86B in 2021 and they are forecasting this to reach $100B in 2022. While not outright saying so, they strongly suggested that 2023 would be a growth year over 2022. In my view, KLA continues to be the best value of the four WFE companies and I don’t understand why the Market is making this the case. I hope their share price holds at this level so I can buy some in the next few months as my situation allows.
-S. Hughes (no KLAC position)