Investment research report for KLAC

Table of Contents

Executive Summary
Valuation Analysis
Industry and Competitors Analysis
Financial Analysis
Earnings Call Multi-Year Analysis
Financial Statements Multi Year
Insider Trading Analysis
Management Compensation Benchmark Analysis
Proxy Statement Analysis
News Analysis
Technical Indicators Analysis
Financial Statements Annual
Financial Statements Quarterly
Earnings Call Analysis

Executive Summary

Company Description

KLA Corporation (KLAC) is a leading provider of process control and yield management solutions for the semiconductor and related nanoelectronics industries. The company’s products and services are used by semiconductor and integrated circuit manufacturers to monitor and control the manufacturing process, enabling them to improve product quality, productivity, and profitability.

Key Insights

Financial Performance and Competitive Positioning

  • KLA has demonstrated strong financial performance, with robust revenue growth, healthy profitability margins, and solid cash flow generation.
  • The company maintains a leadership position in the critical process control segment, with over 50% market share, driven by continuous innovation and R&D investments.
  • KLA’s diversification into adjacent markets like specialty semiconductors, advanced packaging, and PCBs expands its addressable market opportunities.

Growth Drivers and Strategic Initiatives

  • KLA is well-positioned to benefit from secular growth trends in the semiconductor industry, including AI, 5G, automotive electronics, and high-performance computing.
  • The company is making strategic investments in R&D, AI/ML capabilities, and global infrastructure to support long-term growth.
  • KLA’s focus on enabling critical semiconductor innovations positions it to capitalize on future technology transitions and megatrends driving industry growth.

Capital Allocation and Shareholder Returns

  • KLA maintains a disciplined capital allocation strategy, consistently returning capital to shareholders through dividends and share buybacks.
  • The company aims to return at least 70% of free cash flow to shareholders, demonstrating a commitment to shareholder value creation.

Risks and Challenges

  • KLA faces exposure to global trade tensions, export control regulations (particularly related to China), and geopolitical risks that could disrupt operations and sales.
  • The company’s success is highly dependent on its ability to continuously innovate and maintain technology leadership in a highly competitive and rapidly evolving industry.
  • Potential supply chain disruptions, cyclicality in the semiconductor industry, and the need for continuous R&D investments pose ongoing challenges.

Overall, KLA’s competitive advantages, diversification strategy, and capital allocation discipline position it well to drive long-term shareholder value creation by outperforming across semiconductor cycles, while navigating industry challenges and capitalizing on secular growth opportunities.

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Valuation Analysis

PE ratio

  • Low: 13.767573958820279
  • Base: 18.91679902016441
  • High: 24.066024081508544

PB ratio

  • Low: 4.643398823672111
  • Base: 16.00833346325435
  • High: 27.373268102836587

EPS Growth

  • Low: 16.25%
  • Med: 24.13%
  • High: 29.11%

DPS Growth

  • Low: 10.22%
  • Med: 11.70%
  • High: 13.01%

FCF Growth

  • Low: 17.51%
  • Med: 23.33%
  • High: 27.40%

Value forecast by FCF

  • Low: 1155.05
  • Med: 1656.07
  • High: 2128.08

Value forecast by EPS

  • Low: 1068.59
  • Med: 1740.30
  • High: 2362.95

Value forecast by DPS

  • Low: 738.57
  • Med: 807.76
  • High: 875.48

The current price for KLAC is $863.31.

Price target for 18 months from now

  • Low: 874.36
  • Med: 938.43
  • High: 998.45

Price target for 4 years from now

  • Low: 892.78
  • Med: 1063.62
  • High: 1223.67

Price target for 10 years from now

  • Low: 936.99
  • Med: 1364.08
  • High: 1764.21

The net present value multiplier discounted at 10.22% gives the value of the stock as:
– Low: 1.09
– Med: 1.58
– High: 2.04

The upside/downside ratio is 2.23, and our rating is Strong Buy.

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Industry and Competitors Analysis

Based on the information provided, KLAC (KLA Corporation) operates in the semiconductor industry, providing process control, process-enabling, and yield management solutions for semiconductor and related electronics manufacturing.

Key Competitors

Key competitors of KLAC include:

  1. AMAT (Applied Materials, Inc.): A major competitor that provides manufacturing equipment, services, and software for semiconductor, display, and related industries.

  2. ASML (ASML Holding N.V.): A leading provider of advanced semiconductor equipment systems, including lithography, metrology, and inspection systems.

  3. LRCX (Lam Research Corporation): A significant competitor offering semiconductor processing equipment for various fabrication processes, such as deposition, etch, and cleaning.

  4. ENTG (Entegris, Inc.): A provider of microcontamination control products, specialty chemicals, and advanced materials handling solutions for semiconductor and other high-tech industries.

Competitive Positioning

In terms of competitive positioning, KLAC appears to be a well-established player in the semiconductor equipment market, with a focus on process control, metrology, and yield management solutions. Its financial metrics, such as revenue, profitability, and market capitalization, indicate a strong position among its peers.

However, it faces intense competition from industry giants like AMAT, ASML, and LRCX, which offer a broader range of semiconductor manufacturing equipment and solutions. Additionally, companies like ENTG and IPGP (IPG Photonics Corporation) provide complementary products and services in the semiconductor supply chain.

Overall, KLAC’s competitive positioning seems solid within its niche, but it operates in a highly competitive landscape dominated by larger players with diverse product portfolios.

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Financial Analysis

Financial Strength

The company has maintained a healthy current ratio above 2 for most periods, indicating good liquidity and ability to meet short-term obligations. The interest coverage ratio is quite high (mostly above 10), suggesting the company can comfortably service its debt obligations. Return on equity and return on assets have been relatively strong, though fluctuating over the years.

Potential for Growth

Revenue growth has been uneven, with some periods of decline followed by rebounds, which could indicate cyclicality in the semiconductor industry KLA serves. The analyst estimates suggest expectations of continued revenue growth over the next few years, though at a decelerating rate. Operating cash flow growth has been volatile but generally positive, providing funds for investment and growth.

Competitive Advantage

KLA appears to have pricing power, as evidenced by its ability to grow gross profits despite revenue fluctuations. The company seems to have a strong market position in process control and yield management solutions for semiconductors.

Quality of Management

Management has generally maintained a conservative debt level, with debt-to-equity ratios mostly below 2. Capital allocation decisions like dividends and share buybacks have been relatively consistent. However, the fluctuations in revenue and profitability could signal some challenges in managing cyclicality.

Shareholder Friendliness

KLA has consistently paid dividends, though dividend growth has been modest. The payout ratio has generally been below 50%, leaving room for investments and buybacks. Share repurchases appear to have been used to offset dilution from equity compensation.

Valuation

Price multiples like P/E and P/FCF have varied significantly over time, reflecting changes in growth expectations. Analyst EPS estimates for future years suggest a forward P/E in the 20s based on the current stock price, which could be considered reasonable for a leading semiconductor equipment company.

Overall, KLA appears to be a financially solid company with competitive strengths but also exposed to cyclical dynamics in its industry. Continued execution by management and ability to navigate industry cycles will likely determine its long-term growth prospects.

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Chart of Key Per Share Metrics

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Chart of Absolute Metrics

"Chart of Absolute Metrics"

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Earnings Call Multi-Year Analysis

Strong Secular Growth Drivers

KLA is benefiting from strong secular growth drivers in the semiconductor industry like AI, 5G, automotive electronics, high-performance computing etc. This is driving increased investment across different technology nodes and end-markets by chip manufacturers.

Maintaining Market Leadership

KLA maintains a leadership position in the critical process control segment, with over 50% market share. Its continuous innovation and R&D investments are helping it address customers’ evolving needs and gain further share.

Expanding Recurring Revenue

The company’s services business provides a large and growing recurring revenue stream. It is outpacing the growth of the installed base, highlighting KLA’s ability to increase wallet share with customers.

Diversifying into Adjacent Markets

KLA is successfully diversifying into adjacent markets like specialty semiconductors, advanced packaging, PCBs through organic initiatives and acquisitions. This expands its addressable market opportunities.

Resilient Operational Execution

Despite industry cyclicality and supply chain challenges, KLA has demonstrated resilient operational execution by managing costs and capacity effectively. Its strong market position allows it to outperform the broader WFE market.

Commitment to Shareholder Returns

The company remains committed to strong capital returns to shareholders through consistent dividend growth and share buybacks, returning at least 70% of free cash flow.

Strategic Investments for Long-Term Growth

KLA is making strategic investments in R&D, AI/ML capabilities, and global infrastructure to support long-term growth, though this could modestly pressure near-term margins.

Positioning for Future Growth

The company’s diversified portfolio, technology leadership, and focus on enabling critical semiconductor innovations position it to capitalize on future technology transitions and megatrends driving industry growth.

Overall, the key message is that KLA’s competitive advantages, diversification strategy, and capital allocation discipline position it well to drive long-term shareholder value creation by outperforming across semiconductor cycles.

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Financial Statements Multi Year

Revenue and Profitability

KLA has experienced revenue declines in recent quarters due to a broad macroeconomic slowdown impacting semiconductor demand, leading customers to reduce capital spending. However, the company has maintained relatively stable gross margins around 60%. KLA recorded a significant $2.19 billion goodwill and intangible asset impairment charge related to its PCB and Display businesses, reflecting deterioration in the long-term outlook for those segments.

Cash Flow and Capital Structure

The company generates strong operating cash flows, providing ample liquidity, though cash flows have been impacted by the recent industry downturn. KLA has a leveraged capital structure with around $6 billion in long-term debt, which increases financial risk but also provides financial flexibility. The company continues to return capital to shareholders through dividends and share repurchases.

Innovation and Competitive Position

KLA’s success is highly dependent on continuous innovation to meet evolving customer needs in semiconductor, PCB, and display industries. Intense competition from larger players and emerging rivals could pressure pricing and market share. Maintaining technology leadership and protecting intellectual property are critical for long-term competitiveness.

Risks and Challenges

Exposure to global trade tensions, export control regulations (particularly related to China), and geopolitical risks could disrupt operations and sales. Reliance on a concentrated customer base makes KLA vulnerable to changes in their capital spending patterns. Potential supply chain disruptions and the need to continuously invest in R&D to stay ahead of technological advancements.

Overall, while facing near-term headwinds from the industry downcycle, KLA’s strong financial position, cash flows, and commitment to innovation position it well for long-term growth. However, investors should monitor the company’s ability to navigate macroeconomic challenges, regulatory risks, and competitive pressures in its core markets.

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Insider Trading Analysis

The CEO (WALLACE RICHARD P) and CFO (Higgins Bren D.) have been consistently selling large amounts of shares over the past 2-3 years, indicating they may be taking profits or diversifying their holdings. Other key executives like Khan Ahmad A. (SVP), Lorig Brian (SVP), and Donzella Oreste (SVP) have also been regularly selling shares, though not to the same extent as the CEO and CFO. There have been periodic large stock awards/grants to the CEO, CFO, and other executives, likely as part of their compensation packages. This suggests the company is using equity-based incentives to align management’s interests with shareholders.

Recent Patterns

In the past 6-12 months, the pace of insider selling has accelerated, with the CEO and CFO selling over 100,000 shares each. The stock price has risen significantly over this period, from around $200 to over $500 currently. This suggests insiders may be taking advantage of the stock’s appreciation to monetize some of their holdings. There have also been some smaller purchases by directors, indicating they may see value in the stock at current levels.

Implications

The heavy insider selling, especially by the CEO and CFO, could be a concern for long-term investors. It may signal that insiders believe the stock is overvalued and are looking to lock in gains. However, the ongoing equity awards to executives suggest the company still wants to incentivize and retain key talent through stock-based compensation. Short-term investors may view the insider selling as a potential bearish signal, while long-term investors should closely monitor if the selling continues at the current pace. Overall, the insider trading patterns suggest a mixed outlook, with insiders potentially taking profits but also maintaining equity incentives for management. Investors should weigh this information alongside the company’s fundamental performance and growth prospects.

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Management Compensation Benchmark Analysis

Base Salary Composition

The average percentage of base salary out of total compensation for KLAC executives across all years is 28.778537913807895%. This is higher than the average for AMAT (16.269363857674882%) and ACLS (49.65869223456292%), suggesting KLAC’s executive compensation structure is more weighted towards base salary compared to the other two companies.

Compensation Structure

The base salary portion of total compensation for the top executives at KLAC is generally in the range of 10-25%, with the CEO’s base salary being the lowest at around 5% of total compensation. This indicates that a significant portion of the executives’ pay is tied to performance-based incentives like stock awards and incentive plan compensation.

Alignment with Shareholder Interests

The compensation structure appears to align the interests of the executives with creating long-term shareholder value, as a majority of their total compensation comes from equity-based awards and incentive plans rather than just fixed salary.

Competitiveness of Compensation

The compensation levels for the top executives at KLAC, especially the CEO, are quite high compared to the other companies. This suggests KLAC is able to attract and retain top talent by offering competitive compensation packages.

Overall, the executive compensation structure at KLAC seems to strike a reasonable balance between fixed and variable pay, with a focus on aligning executive incentives with long-term shareholder value creation. This should be viewed positively by long-term investors in the company.

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Proxy Statement Analysis

Proposed 2023 Incentive Award Plan

The proxy statement provides details on the proposed 2023 Incentive Award Plan, which likely includes equity-based compensation to align executives’ interests with shareholders. This information is crucial for understanding how the company plans to incentivize its executive team to create long-term value for shareholders.

Advisory Vote on Named Executive Officer Compensation

The proxy statement also includes an advisory vote on named executive officer compensation. This section should shed light on the rationale and structure behind the company’s approach to executive pay, particularly the pay-for-performance linkage.

Compensation Mix and Balance

The overall compensation mix and balance between short-term (salary, annual bonuses) and long-term incentives (equity awards, long-term cash plans) for the executive team is an important consideration. This information can help assess whether the compensation program incentivizes sustainable value creation over the long run rather than just short-term metrics.

Stock Ownership Guidelines and Clawback Provisions

The proxy statement may also include details on any stock ownership guidelines or policies, such as clawback provisions, that reinforce the company’s long-term focus. These elements can provide additional insights into the alignment of executive interests with those of shareholders.

Without the actual filing document, it is difficult to provide more specific insights. However, the key for a long-term investor is to evaluate whether the compensation program as a whole incentivizes sustainable value creation over the long run.

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News Analysis

Positive Sentiment

KLA consistently beats earnings and revenue estimates, demonstrating strong financial performance. The company is benefiting from secular growth trends like 5G, AI, and increasing semiconductor complexity/capital intensity which drive demand for their inspection and metrology equipment. KLA has pricing power and high profit margins compared to peers in the semiconductor equipment industry. The company returns cash to shareholders through dividends and share buybacks. Analysts are generally positive on KLA’s prospects, with some raising price targets after strong results.

Potential Concerns

The semiconductor equipment industry is cyclical, so KLA’s results can be impacted by downturns in chip capital spending. There are concerns around the impact of U.S.-China trade tensions and export restrictions on KLA’s business with Chinese customers. The company’s premium valuation multiple means high expectations are already priced in. Increased competition from mergers/acquisitions in the inspection/metrology space could pressure KLA’s market share over time.

Overall, the sentiment seems positive, with KLA benefiting from secular semiconductor drivers and executing well operationally. However, cyclicality, geopolitical risks, and valuation could pose risks for long-term investors to monitor carefully. KLA’s market leadership, financial strength and capital return provide reasons for optimism if the company can navigate the cyclical semiconductor landscape successfully.

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Technical Indicators Analysis

Next Week Trading

The stock has seen a recent upward trend, with the 20-day TEMA and RSI indicating bullish momentum. However, the ADX is above 25, suggesting the trend may be losing strength in the short-term. Traders may look for opportunities to take profits or consider short-term positions based on the current market conditions.

Resistance and Support Levels

The 50-day and 200-day SMAs provide potential support and resistance levels to monitor. The stock is currently trading above these moving averages, indicating a bullish longer-term trend. Traders may watch for any breakouts above recent highs or potential pullbacks to the moving average support levels.

Short-Term Investor

The high RSI and overbought conditions suggest the stock may be due for a pullback or consolidation in the near-term. Short-term investors may consider taking profits or waiting for a better entry point if the stock pulls back to the 20-day or 50-day SMA.

Long-Term Investor

The overall upward trend in the 200-day SMA and the stock price trading above this level indicate a favorable long-term outlook. Long-term investors may view any short-term pullbacks as potential buying opportunities to build or add to their positions. The company’s fundamentals and long-term growth prospects should also be considered when making investment decisions.

In summary, the technical indicators suggest a bullish longer-term trend, but the stock may be due for a short-term consolidation or pullback. Investors should consider their risk tolerance and investment horizon when making decisions.

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Chart of Valuation History

"Chart of Valuation History"

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Financial Statements Annual

Financial Statements Annual 2024 Q2

Strong Financial Performance

KLA reported robust financial results, with revenue of $10.5 billion, gross profit of $6.3 billion, and net income of $3.4 billion for the fiscal year 2023. The company maintained a healthy gross profit margin of 59.8% and an operating income margin of 38.1%, indicating strong profitability. KLA generated substantial free cash flow of $3.3 billion, providing ample resources for investments, acquisitions, and shareholder returns.

Balanced Capital Allocation

The company allocated capital effectively, with $341.6 million invested in property, plant, and equipment for capacity expansion and innovation. KLA returned $1.3 billion to shareholders through share repurchases and $732.6 million in dividends, demonstrating a commitment to shareholder value creation. The company’s balance sheet remains strong, with $3.2 billion in cash and short-term investments and a manageable net debt position of $3.9 billion.

Governance and Compensation Practices

The proxy statement provides insights into KLA’s corporate governance, including the composition and independence of the Board of Directors, as well as the Compensation and Talent Committee’s oversight of executive compensation. The executive compensation structure appears to be aligned with the company’s performance, with a mix of base salary, annual incentives, and long-term equity-based awards. The proxy statement also outlines the company’s policies on insider trading, related-party transactions, and the independence of the external auditor, PricewaterhouseCoopers LLP.

Shareholder Ownership and Alignment

The proxy statement discloses the beneficial ownership of the company’s common stock by directors, executive officers, and significant shareholders, providing insights into the alignment of interests between management, the Board, and shareholders. The information on equity compensation plans indicates that KLA utilizes stock-based awards to incentivize and retain key employees, further aligning their interests with those of shareholders.

Overall, KLA’s financial statements and proxy disclosures suggest a well-managed, profitable, and shareholder-friendly company with a focus on operational excellence, strategic investments, and prudent capital allocation. The governance and compensation practices appear to be aligned with the company’s long-term success and the interests of its shareholders.

Financial Statements Annual 2023 Q2

Strong Financial Performance

KLA Corporation reported robust financial results for the fiscal year ended June 30, 2022. Revenue reached $9.21 billion, with a gross profit margin of 61%. Operating income was $3.65 billion, representing an operating margin of 39.6%. Net income was $3.32 billion, with diluted earnings per share of $21.92.

Healthy Cash Flow and Liquidity

KLA generated strong operating cash flow of $3.31 billion. The company had $2.71 billion in cash and short-term investments as of June 30, 2022. However, KLA also had a significant amount of long-term debt, with $6.66 billion in total debt.

Ongoing Investment in R&D and Acquisitions

KLA invested $1.11 billion in research and development, reflecting its commitment to innovation. The company also made $451.5 million in net acquisitions during the fiscal year.

Capital Allocation and Shareholder Returns

KLA returned $4.61 billion to shareholders through share repurchases and $638.5 million in dividends. The company’s capital allocation strategy appears to be focused on a balance between investing in the business and returning capital to shareholders.

Robust Internal Controls and Governance

KLA’s management reported that the company’s internal controls over financial reporting were effective as of June 30, 2022. The report also highlighted the company’s ongoing efforts to maintain strong disclosure controls and procedures.

Overall, the financial statements indicate that KLA Corporation is a well-managed, financially strong company with a focus on innovation, operational efficiency, and shareholder value creation. The long-term investor should be encouraged by the company’s consistent financial performance, healthy cash flow, and disciplined capital allocation strategy.

Financial Statements Annual 2022 Q2

Strong Financial Performance

KLA Corporation’s financial statements showcase robust financial performance. The company reported revenue growth of $6.92 billion, up from $5.24 billion in the prior year. The impressive gross profit margin of 59.9% indicates efficient operations and pricing power. The healthy operating income of $2.52 billion translates to an operating margin of 36.4%, and the net income of $2.08 billion, with a net margin of 30.0%, demonstrates profitability. The diluted earnings per share (EPS) of $13.37 represents a significant increase from the prior year.

Solid Cash Flow and Liquidity

KLA Corporation’s financial statements also highlight its strong cash flow and liquidity position. The company generated a robust operating cash flow of $2.19 billion, allowing for investments and shareholder returns. The free cash flow of $1.95 billion provides financial flexibility. The substantial cash and short-term investments of $2.49 billion indicate a robust balance sheet.

Disciplined Capital Allocation

KLA Corporation’s financial statements demonstrate a disciplined approach to capital allocation. The company continued to invest in research and development (R&D) at $928.5 million, supporting innovation. The company also maintained a balanced approach, including $938.6 million in share repurchases and $559.4 million in dividends paid. Additionally, the company’s manageable debt levels, with a net debt position of $2.01 billion, provide financial stability.

Effective Internal Controls

The auditor’s report indicates that KLA Corporation maintained effective internal control over financial reporting. The critical audit matter related to the ongoing Israeli tax authority matter highlights the company’s proactive approach to managing tax-related uncertainties.

Potential Risks

The financial statements also identify potential risks. The ongoing tax matter with the Israeli tax authority represents a significant uncertain tax position that requires close monitoring. Additionally, the inherent limitations of internal controls, as noted by management, suggest the need for continued vigilance and adaptation to changing conditions.

Overall, KLA Corporation’s financial statements demonstrate a strong, profitable, and well-managed business with a focus on operational excellence, innovation, and shareholder value creation. The company’s solid financial position and disciplined capital allocation provide a solid foundation for long-term growth and investor confidence.

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Financial Statements Quarterly

Financial Statements Quarterly 2024 Q2

Revenues and Profitability

Revenues have declined in the recent quarters compared to the prior year, primarily due to a broad macroeconomic slowdown impacting semiconductor demand. This has led to customers rebalancing their supply chains and reducing capital expenditure plans.

Gross margins have also declined slightly, mainly due to lower product sales volumes and less favorable product mix, partially offset by improved manufacturing efficiencies.

The company has faced significant impairment charges related to goodwill and intangible assets in the Printed Circuit Board (PCB) and Display businesses, reflecting a deterioration in the long-term outlook for those segments.

Operational Challenges

The company is facing disruptions from new U.S. government export control regulations (the “BIS Rules”), which restrict the sale of certain products and services to customers in China. This could significantly impact KLA’s business and operations unless the company is able to obtain the necessary export licenses.

The company’s global operations expose it to various risks, including trade policies, political instability, currency fluctuations, and supply chain disruptions, which could adversely affect its financial performance.

Capital Structure and Cash Flow

KLA has a leveraged capital structure, with $6.6 billion in outstanding debt as of March 31, 2024. This increases the company’s financial risk and could limit its financial flexibility.

The company continues to generate strong operating cash flows, which have been used to fund capital expenditures, dividends, and share repurchases. However, the recent slowdown in customer demand could impact future cash flow generation.

KLA’s ability to maintain its dividend payments will depend on various factors, including its financial performance, capital requirements, and compliance with debt covenants.

Competitive Positioning and Innovation

The company’s success is highly dependent on its ability to continuously innovate and develop new products and technologies to meet the evolving needs of its customers in the semiconductor, PCB, and display industries.

KLA faces intense competition from larger, diversified companies, as well as emerging players, which could put pressure on its pricing and market share.

Maintaining the company’s technology leadership and protecting its intellectual property rights are critical to its long-term competitiveness.

Overall, the key insights highlight the challenges KLA is facing in the current macroeconomic environment, the operational and regulatory risks it is navigating, and the importance of its ability to innovate and maintain its competitive position in the highly dynamic industries it serves. Long-term investors should closely monitor the company’s ability to navigate these challenges and execute its strategic initiatives to drive sustainable growth and profitability.

Financial Statements Quarterly 2024 Q1

Revenues and Gross Margin

Product revenues decreased in Q2 FY24 and YTD FY24 compared to the prior year periods, primarily due to the broad macroeconomic slowdown impacting semiconductor demand. This has caused customers to rebalance their supply chains and reduce capital expenditures. Service revenues increased in Q2 FY24 and YTD FY24 compared to the prior year periods, driven by growth in the installed base. Gross margin remained relatively stable at around 60% in the periods presented.

Segment Performance

The Semiconductor Process Control segment, which accounts for the majority of revenues, saw a decrease in revenues and segment gross profit, reflecting the industry-wide slowdown. The Specialty Semiconductor Process and PCB Display and Component Inspection segments also experienced revenue and gross profit declines, though to a lesser extent.

Goodwill and Intangible Asset Impairment

The company recorded a significant $2.19 billion impairment charge related to the goodwill and intangible assets of the PCB and Display reporting unit due to a deterioration in the long-term forecast for those businesses.

Cash Flow and Liquidity

The company generated $1.51 billion in operating cash flow in the first half of FY24, though this was lower than the prior year period. KLA ended the quarter with $3.34 billion in cash, cash equivalents, and marketable securities, providing ample liquidity. The company has a leveraged capital structure with $5.95 billion in senior unsecured notes outstanding and access to a $1.5 billion revolving credit facility.

Capital Allocation

KLA continues to pay quarterly dividends to shareholders, with the most recent dividend of $1.45 per share. The company has an active stock repurchase program, with $302 million remaining authorized for future repurchases as of the end of Q2 FY24.

Overall, the key insights center around the impact of the macroeconomic slowdown on KLA’s business, the significant impairment charge, the company’s strong liquidity position, and its ongoing capital allocation priorities through dividends and share repurchases. Long-term investors will want to monitor the company’s ability to navigate the industry downturn, the recovery in semiconductor demand, and the integration and performance of the PCB and Display businesses going forward.

Financial Statements Quarterly 2023 Q4

Revenues and Profitability

KLA’s total revenues decreased 12% year-over-year in Q1 FY2024, primarily due to a broad macroeconomic slowdown impacting semiconductor device demand. This led to memory and foundry-logic customers reducing their capacity expansion plans.

Gross margin decreased from 61.8% in Q1 FY2023 to 60.5% in Q1 FY2024, mainly due to lower product volumes, partially offset by a more profitable product mix.

Operating income margin decreased from 37.5% in Q1 FY2023 to 37.5% in Q1 FY2024, as the impact of lower revenues was partially offset by lower operating expenses.

Segment Performance

The Semiconductor Process Control segment, which accounts for the majority of revenues, saw an 11% year-over-year decline in revenues due to the macroeconomic slowdown.

The Specialty Semiconductor Process and PCB Display and Component Inspection segments also experienced revenue declines of 1% and 32% respectively, reflecting the broader market softness.

Liquidity and Capital Structure

KLA has a strong liquidity position, with $3.35 billion in cash, cash equivalents, and marketable securities as of September 30, 2023.

The company has $5.95 billion in senior unsecured notes outstanding and access to a $1.5 billion revolving credit facility, providing financial flexibility.

KLA continues to return capital to shareholders through quarterly dividends and a $345 billion share repurchase program, which could be further leveraged with additional debt financing.

Risks and Challenges

Exposure to global trade tensions and export control regulations, particularly related to China, which could disrupt KLA’s ability to sell products and services to certain customers.

Reliance on a highly concentrated customer base, with the top customers accounting for a significant portion of revenues, making the company vulnerable to changes in their capital spending patterns.

Ongoing technological advancements and the need to continuously innovate to maintain a competitive edge in the rapidly evolving semiconductor industry.

Potential for supply chain disruptions and component shortages that could impact KLA’s ability to meet customer demand in a timely manner.

Overall, KLA’s financial performance remains strong, but the company faces near-term headwinds from the macroeconomic slowdown and ongoing geopolitical tensions. Long-term investors will likely focus on KLA’s ability to navigate these challenges, maintain its technology leadership, and continue generating robust cash flows to support its capital allocation priorities.

Financial Statements Quarterly 2023 Q3

Revenues and Gross Margin

Total revenues increased 6% in Q3 FY23 vs Q3 FY22, driven by strong demand for inspection and metrology products. Service revenues also increased 8% year-over-year. Gross margin decreased from 61.0% in Q3 FY22 to 58.7% in Q3 FY23, primarily due to increases in other service and manufacturing costs, partially offset by higher product and service volumes.

Segment Performance

Semiconductor Process Control segment revenues and gross profit increased 10% and 6% respectively in Q3 FY23 vs Q3 FY22, driven by strong demand. Specialty Semiconductor Process segment revenues and gross profit increased 10% and 6% respectively, reflecting continued growth in the specialty semiconductor market. PCB Display and Component Inspection segment revenues and gross profit decreased 31% and 54% respectively, due to market softening.

Research and Development (R&D) and Selling, General & Administrative (SG&A) Expenses

R&D expenses increased 15% in Q3 FY23 vs Q3 FY22, primarily due to higher employee-related costs, restructuring expenses, and project material costs. SG&A expenses increased 10% in Q3 FY23 vs Q3 FY22, mainly due to increases in facilities-related costs, restructuring expenses, and employee travel expenses.

Cash Flow and Liquidity

Cash, cash equivalents and marketable securities increased to $2.89 billion as of March 31, 2023, up from $2.71 billion as of June 30, 2022. Net cash provided by operating activities was $2.71 billion in the first 9 months of FY23, up from $2.49 billion in the same period of FY22.

Debt and Capital Structure

The company has $5.95 billion of senior unsecured notes outstanding as of March 31, 2023. The company has a $1.5 billion unsecured revolving credit facility, of which no amounts were outstanding as of March 31, 2023.

Shareholder Returns

The company paid $1.81 billion in regular quarterly cash dividends during Q3 FY23. The company repurchased $482.7 million of its common stock during Q3 FY23.

Overall, the financial statements show KLA’s business continues to perform well, with strong demand for its semiconductor process control and specialty semiconductor products, though the PCB and display markets have softened. The company maintains a strong balance sheet and cash flow to support its operations, R&D investments, and shareholder returns.

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Earnings Call Analysis

Earnings Call Analysis 2024 Q2

Stable Business Performance

KLA’s business remains relatively stable despite softness in Memory and leading-edge Logic & Foundry investments. The company is benefiting from strength in legacy node investments globally and industry infrastructure investment.

Positioning for Technology Transitions

KLA is well-positioned to benefit from technology transitions like gate-all-around, 3D memory, EUV lithography, and advanced packaging, as its inspection, metrology, and data analytics systems help customers solve challenges associated with these inflections.

Service Business Growth

The company’s service business continues to grow, with expectations for high single-digit percent year-over-year growth in 2023 and acceleration to 12-14% growth in 2024, driven by tools coming off warranty and moving into service contracts.

Elevated Demand from China

KLA is seeing elevated demand from China customers, primarily for legacy node investments to support industries like EV and infrastructure. This demand is expected to remain at elevated levels, though it may moderate somewhat in Q4.

While the timing of a meaningful recovery in WFE investment remains unclear, KLA is confident in its ability to outperform the industry due to its focus on enabling innovation through technology advancements and transitions, which customers continue to prioritize.

Maintaining Investment and Performance

KLA is maintaining high R&D investment to advance its product roadmaps and market leadership, while also delivering strong relative revenue growth and financial performance, including consistent free cash flow generation and capital returns.

Overall, KLA appears well-positioned to navigate the current industry slowdown and capitalize on long-term secular trends driving semiconductor demand and WFE investments, though the timing of a broader market recovery remains uncertain.

Earnings Call Analysis 2024 Q1

Process Control and Enabling Technology Transitions

Process control and enabling technology transitions remain critical for KLA’s business, even in a challenging market environment. The company’s products are heavily relied upon during R&D and early ramp phases when faster yield is critical.

Diversification of Semiconductor Demand

KLA is seeing strength in certain areas like automotive and legacy nodes, demonstrating the diversification of semiconductor demand across industries. This helps offset near-term pressures in other segments.

Resilience of KLA’s Operating Model

KLA’s services business continues to grow, up 5% year-over-year, highlighting the resilience of the company’s operating model.

While memory WFE is expected to decline ~40% in 2023, foundry/logic is expected to decline only ~10%, with legacy investment outperforming the segment due to automotive and legacy node demand.

Maintaining Critical R&D Investments

KLA remains focused on innovation and maintaining critical R&D investments to enable its technology roadmap and support customers’ multi-year investment plans, even in a down market.

Increasing Process Control Intensity

The company sees process control intensity increasing, particularly with the adoption of EUV lithography and advanced packaging, which could help offset any potential softness in leading-edge logic investments.

KLA’s Strong Market Position

KLA’s strong market position in critical areas like unpatterned wafer inspection and metrology is expected to significantly outperform the overall WFE market in 2023.

Overall, the key message is that KLA is leveraging its diversified portfolio, focus on innovation, and resilient operating model to navigate the current industry downturn and position itself for long-term growth as semiconductor demand and technology transitions continue.

Earnings Call Analysis 2023 Q4

KLA Corporation Earnings Call Insights for Long-Term Investors

KLA is maintaining its market leadership position, gaining around 300 basis points of market share in process control in 2022 to over 57% market share. This demonstrates the strength of KLA’s innovation and R&D investments.

KLA is seeing strong growth in its automotive-focused businesses, with revenue from silicon carbide-related businesses growing 5x since 2019 and now accounting for almost half of total automotive sales. This diversification into new end markets is a positive.

KLA’s service business remains resilient, growing 8% year-over-year, driven by the growing installed base, increased adoption of long-term service agreements, and opportunities in legacy nodes and acquired businesses. This provides stability in a downturn.

While KLA expects overall WFE to decline around 20% in 2023, the company sees its process control systems business stabilizing around current levels through the second half of the year. This suggests KLA may be able to outperform the overall WFE market.

KLA is cautious on the near-term memory demand outlook, but sees opportunities in legacy/trailing edge nodes, particularly in China, as customers seek to support older design nodes. This could provide an upside to KLA’s outlook.

KLA’s consistent execution, focus on innovation, and diversified portfolio position it well to navigate the current industry downturn and continue to outperform the overall market. The company’s strong free cash flow generation and capital return program are also positives for long-term investors.

Overall, KLA appears to be leveraging its technology leadership, diversification, and operational excellence to maintain its competitive edge, even in a challenging market environment. This suggests the company is well-positioned for long-term growth.

Earnings Call Analysis 2023 Q3

KLA Corporation Earnings Call Insights for Long-Term Investors

  1. KLA expects to outperform the overall WFE (Wafer Fab Equipment) market in 2023, despite an expected 20% decline in WFE demand. This is based on KLA’s strong position in critical markets like wafer and reticle inspection, which are expected to be more resilient.

  2. KLA’s services business, which grew 15% in 2022, is expected to continue growing at a mid-to-high single digit rate in 2023, demonstrating the stability and recurring nature of this segment.

  3. The company is emphasizing three priorities for 2023: 1) Continuing to support customers by delivering on commitments and maintaining R&D investments, 2) Stabilizing spending levels while maintaining R&D, and 3) Developing the workforce to ensure long-term strength.

  4. KLA expects memory WFE to decline more than the overall market, with DRAM down more than NAND. However, KLA’s DRAM business is expected to be stronger than NAND, benefiting from continued EUV adoption.

  5. The company is cautious about the near-term demand environment, expecting the second half of 2023 to be weaker than the first half. However, they remain confident in the long-term secular growth drivers for the semiconductor industry.

  6. KLA is focused on maintaining its market leadership through continued R&D investment, operational excellence, and strategic capital allocation – factors that have enabled its consistent outperformance over industry cycles.

Overall, the key message is that KLA is well-positioned to navigate the current industry downturn and continue delivering strong relative performance, supported by its diversified portfolio, technology leadership, and resilient business model.

Earnings Call Analysis 2023 Q2

Diversification of semiconductor demand

The industry is no longer reliant on just smartphones, but is seeing growth in areas like AI, GPUs, HBM memory, and edge computing. This diversification should lead to more sustainable long-term growth.

Advanced packaging

Advanced packaging is a rapidly growing and critical area for semiconductor companies. Techniques like 2.5D, 3D hybrid bonding, and heterogeneous integration are enabling new chip architectures and capabilities. This is a major opportunity for KLA as a leading provider of packaging-related inspection, metrology, and process equipment.

KLA’s positioning in the packaging market

KLA is well-positioned in this packaging market, having made strategic acquisitions like SPTS and Orbotech to expand its capabilities. It is customizing its tools for the unique requirements of packaging versus front-end wafer fab.

Data analytics and feedback/feedforward control loops

Data analytics and feedback/feedforward control loops are a key differentiator for KLA in packaging, leveraging its expertise from the wafer fab. This can help customers optimize their packaging processes.

KLA’s growth forecast

KLA is forecasting very strong growth in its packaging business, potentially doubling revenue in 2024. This suggests the packaging market opportunity is significant and KLA is executing well to capitalize on it.

Overall, the insights highlight KLA’s strategic positioning in a rapidly evolving and critical part of the semiconductor industry. The packaging opportunity appears to be a long-term growth driver for the company.

Earnings Call Analysis 2023 Q1

Demand Outlook

KLA sees continued strong demand across its major product groups, despite some softness in certain end markets like PCs and mobile devices. The company expects the semiconductor wafer fabrication equipment (WFE) market to grow in the high single-digits in 2022, down from previous expectations, due to persistent supply chain challenges. KLA remains confident in its ability to deliver relative WFE outperformance, supported by strong demand for its process control solutions.

Operational Execution

KLA has demonstrated resilient execution in navigating macroeconomic uncertainty and supply chain issues, highlighting the strength of its operating model. The company continues to invest in expanding its global infrastructure and systems to support its growth plans and scale its operating model.

Capital Allocation and Financial Performance

KLA generated strong free cash flow of $746 million in the quarter, up 23% year-over-year. The company announced a $6 billion share repurchase program and a 24% increase in its quarterly dividend, demonstrating its commitment to returning capital to shareholders. KLA has set new long-term revenue growth targets of 9-11% through 2026, supported by strong growth across its major business lines.

Potential Risks and Uncertainties

KLA is closely monitoring the macroeconomic environment and its potential impact on customer demand, particularly in the memory segment. The company is also closely engaged with the U.S. government regarding new licensing requirements for sub-14nm shipments to China, though it does not expect a material impact on its business in the near term.

Overall, the key insights highlight KLA’s strong market position, operational excellence, and commitment to shareholder value creation, which position the company well for long-term growth despite near-term macroeconomic and supply chain challenges.

Earnings Call Analysis 2022 Q4

KLA Corporation Earnings Call Insights for Long-Term Investors

KLA continues to strengthen its market leadership in Process Control, growing its share to over 54% – over 4 times larger than its nearest competitor. This leadership is driven by KLA’s strong portfolio strategy and ability to address critical Process Control challenges.

KLA is seeing broad-based demand across its major customer segments – foundry/logic and memory. Demand remains robust, with KLA expecting the WFE market to grow over 20% in 2022 to over $100 billion.

KLA is navigating supply chain challenges well, but these constraints are limiting its ability to fully meet customer demand. Lead times have extended beyond 12 months in some cases.

KLA’s services business continues to outperform, growing 14% year-over-year, driven by the growing installed base, increased adoption of long-term service agreements, and expansion into legacy nodes.

KLA remains focused on productive capital allocation, returning over 70% of free cash flow to shareholders through dividends and share repurchases. This consistent approach is a key differentiator.

While KLA is seeing some impact from China lockdowns, the company has risk-adjusted its guidance and expects to navigate these challenges. The long-term demand outlook remains strong.

Overall, KLA appears well-positioned to continue outperforming the market, driven by its market leadership, diversified portfolio, and strong execution despite the current supply chain constraints. The long-term secular trends supporting semiconductor demand provide a favorable backdrop for KLA’s growth.

Earnings Call Analysis 2022 Q3

Strong Execution and Market Leadership

KLA has demonstrated strong execution and market leadership despite the challenging supply chain environment. The company was able to navigate unprecedented demand and operational complexities during the pandemic, delivering record growth, profitability, and free cash flow in 2021.

Process Control Systems Outperformance

KLA’s Process Control Systems business continues to outperform the overall wafer fab equipment (WFE) market, growing 46% in 2021 compared to an estimated 40% growth in WFE. This outperformance is expected to continue in 2022, with KLA’s Process Control Systems revenue projected to grow faster than the high-teens growth expected for the overall WFE market.

Strong Demand Across Portfolio

The company is seeing strong demand across its portfolio, particularly in wafer inspection, where revenues grew 54% in 2021. KLA expects this momentum to continue, driven by growth in automotive, specialty markets, and rising design rule complexity.

Diversification Strategy

KLA is successfully diversifying its business beyond semiconductor process control, with its Electronics, Packaging and Components (EPC) group growing 20% in 2021. This diversification strategy is helping the company address fast-growing new markets in the electronics value chain.

Stable and Growing Service Business

The company’s service business continues to be a strong performer, growing 14% in 2021 and now accounting for over 75% recurring revenue in the Semiconductor Process Control segment. This provides a stable and growing revenue stream.

Supply Chain Challenges and Growth Outlook

While the company is facing near-term supply chain challenges that are impacting its ability to meet demand, KLA remains confident in its ability to grow throughout 2022, with total company revenue expected to exceed 20% growth and Process Control Systems revenue to outperform the WFE market.

Capital Return to Shareholders

KLA’s strong financial performance and cash flow generation have enabled the company to maintain its commitment to returning capital to shareholders, with over $2 billion returned in 2021 through dividends and share repurchases.

Overall, KLA appears to be executing well, maintaining its market leadership, and positioning itself to continue outperforming the broader semiconductor equipment market, despite the near-term supply chain headwinds.

Earnings Call Analysis 2022 Q2

Strong Secular Growth Drivers

Strong secular growth drivers are creating tailwinds for KLA’s business, leading to increased industry WFE growth outlook from the mid-30s to around 40% in 2021. This positive industry dynamic is expected to continue into 2022.

Increased Customer Investments

KLA is benefiting from customers increasing investments in leading-edge development, fab utilization optimization, and regionalization for future fab construction. This is driving demand across KLA’s product portfolio.

Optical Metrology Business Growth

KLA’s optical metrology business is growing meaningfully faster than the overall WFE market, leveraged to critical next-generation architectures like EUV and gate all around.

Semiconductor Process Control Segment Growth

KLA’s leadership in the largest and fastest-growing segments of the process control market, like optical pattern wafer inspection, is fueling strong relative growth in the Semiconductor Process Control segment.

Services Revenue Growth

KLA’s services revenue, which has over 75% recurring subscription-like contracts, is on track for another year of strong double-digit growth in 2021, driven by the growing installed base and higher utilization rates.

Strategic Investments for Growth

KLA is making strategic investments in R&D, global infrastructure, and volume-dependent resources to support its business expansion and growth outlook, which may lead to sequential growth in operating expenses through 2022.

Outperformance Outlook

KLA is well-positioned to outperform the WFE industry in 2021 and 2022 based on its strong bookings momentum, backlog, and market leadership, though supply chain challenges remain a risk.

3nm Transition Impact

The transition to 3nm is expected to drive increased process control intensity, which should benefit KLA’s higher-end tools and allow it to continue gaining market share.

Overall, the call highlights KLA’s strong execution, market leadership, and ability to capitalize on the robust semiconductor industry demand environment, while also managing supply chain constraints and investing for long-term growth.

Earnings Call Analysis 2022 Q1

Strong Demand Across Segments

KLA is seeing increased customer demand across its major product groups, driven by strong secular semiconductor industry growth trends. This includes simultaneous investments across multiple technology nodes in foundry/logic and a broader set of memory customers.

Process Control Leadership

KLA’s market leadership in optical pattern wafer inspection is driving strong relative growth, with this segment forecasted to be among the fastest-growing in wafer fab equipment (WFE) in 2021. Its flagship reticle inspection business is also on pace for a record year.

Expanding Services Business

KLA’s services revenue, which has high subscription-based contract rates, is on track for another year of strong double-digit growth, outpacing the growth of its installed base. This highlights the recurring and sticky nature of KLA’s business model.

Commitment to Shareholder Returns

KLA announced a 17% increase in its quarterly dividend and a new $2 billion share repurchase authorization, demonstrating its focus on delivering predictable and compelling capital returns to shareholders.

Investing in Innovation

KLA is prioritizing investments in artificial intelligence and machine learning, leveraging its large data sets to drive further differentiation and performance improvements in its products and services.

While facing component shortages and inflationary pressures like others in the industry, KLA is managing the situation well and expects to maintain its strong margin profile going forward.

Positive Outlook

KLA has increased its WFE growth forecast for 2021 to the low to mid-30% range, and sees continued strength and sustainability in demand trends extending into 2022, supporting its ability to outperform the overall market.

Overall, KLA appears well-positioned to capitalize on the robust semiconductor industry environment, leveraging its technology leadership, diversified portfolio, and strong financial position to drive long-term value for shareholders.

Earnings Call Analysis 2021 Q4

KLA is benefiting from strong secular demand trends driving semiconductor industry growth across a broad range of markets and applications like 5G and cloud computing. This is leading to increased strategic CapEx investment by customers.

Market Leadership Position

KLA maintains a strong market leadership position, with over 53% share in process control according to Gartner data. This leadership is driven by KLA’s continuous innovation and investment in R&D to address critical customer needs.

Growing Services Business

KLA’s services business is growing faster than the installed base, demonstrating the value customers place on KLA’s support and solutions. The services business provides a large and growing recurring revenue stream.

Expanding into New Growth Markets

KLA is expanding its reach into new growth markets like automotive semiconductors, RF, and advanced packaging through its EPC group. This diversification strategy is paying off.

Managing Supply Chain Challenges

Despite supply chain challenges, KLA is managing to meet strong customer demand by adding capacity across its manufacturing footprint. The company believes it can continue supporting elevated industry spending levels.

Exceeding Financial Targets

KLA is well-positioned to exceed its 2023 financial targets earlier than anticipated, driven by the strong industry demand environment and KLA’s market leadership and diversification efforts.

Focus on Capital Returns

The company maintains a strong focus on capital returns, with a track record of consistent dividend growth and share repurchases, which is a key part of the KLA investment thesis.

Overall, KLA appears to be executing well on its strategic initiatives and benefiting from favorable industry trends, positioning it for continued outperformance.

Earnings Call Analysis 2021 Q3

Secular Demand Drivers

KLA is benefiting from strong secular demand drivers in the semiconductor and electronics industry, including high-performance computing, AI, 5G, and automotive electronics. This is driving increased investment and innovation in advanced memory and logic devices, as well as new packaging and PCB technologies.

Market Leadership and Diversification

KLA is well-positioned to capitalize on these trends, with market leadership in process control and growth in new markets like specialty semiconductor process equipment, PCB, and finished die inspection. The company’s diverse portfolio and focus on innovation are enabling it to gain share.

Services Business Strength

The services business is a key strength, growing to 25% of total sales in 2020. The high attach rates and recurring revenue streams provide strong operating leverage and cash flows.

EPC Group Success

The newly established EPC (Electronics, Packaging, and Components) group is demonstrating success, with revenue growth and synergy capture exceeding expectations. This diversifies KLA’s business and expands its addressable market.

Capital Returns to Shareholders

KLA is committed to delivering strong and predictable capital returns to shareholders, with a track record of dividend growth and share repurchases. The company aims to return at least 70% of free cash flow to shareholders.

Overall, the critical insights are that KLA is well-positioned to benefit from secular industry trends, is diversifying its business, and is focused on driving shareholder value through operational excellence and capital allocation. The company’s guidance suggests continued strong performance in 2021.

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The information provided on this blog is for informational purposes only and should not be considered as financial advice. You should consult with a qualified financial professional before making any investment decisions. Past performance is not indicative of future results. Investing involves risk, including the potential loss of principal.