The conference operator welcomed everyone to the KLA Corporation June Quarter 2023 Earnings Conference Call and Webcast and introduced Kevin Kessel, Vice President of Investor Relations and Market Analytics. Kessel discussed the company's results released after the market close and supplemental materials available on the company's website. He also mentioned the Risk Factors disclosure in the company's SEC filings and the forward-looking statements made on the call. Rick Wallace, the company's CEO, will begin the call with quarterly highlights, followed by CFO Bren Higgins who will discuss the financial highlights, including the company's guidance and outlook.

KLA's June quarter results exceeded expectations, with revenue of $2.355 billion declining 5% year-over-year and 3% sequentially. GAAP and non-GAAP EPS also finished at the upper end of their respective guidance ranges. Despite near-term demand headwinds, automotive and other legacy node markets remained strong, demonstrating the increasing adoption of semiconductor technology. KLA's process control plays an important role in enabling customers to execute on node and technology transitions, and KLA remains focused on supporting customer requirements while maintaining R&D investments to enable their technology road map.

KLA reported strong financial results for the quarter, with revenue of $2.355 billion and non-GAAP diluted EPS of $5.40, both at the upper end of the guided range. Non-GAAP gross margin was also higher than expected due to product mix and better factory utilization. Non-GAAP operating expenses were slightly higher than guidance due to adjustments to variable compensation. KLA's growth and market leadership in critical wafer and vertical infrastructure is driving relative growth for the company.

KLA reported total operating expenses of $314 million in R&D and $229 million in SG&A, with a non-GAAP operating margin of 38.1%. Net income was $743 million, cash flow from operations was $959 million and free cash flow was $880 million with a conversion rate of 119%. Balance sheet-wise, the company had $3.24 billion in cash, cash equivalents, and marketable securities, debt of $5.89 billion, and investment grade ratings from all three agencies. The WFE outlook for 2023 is still down 20% from $95 billion in 2022. Memory investments are expected to decline by 40%, and foundry/logic investments are expected to decline by 10%, with legacy investments outperforming due to automotive and continued demand for legacy design nodes.

KLA is focusing on enabling innovation through technology transitions and meeting customer requirements, as well as investing in R&D to maintain market leadership. For the September quarter, total revenue is expected to be $2.35 billion, with a gross margin of 61%, non-GAAP operating expenses of $535 million, other income and expense net of $48 million, and an effective tax rate of 13.5%. GAAP diluted EPS is expected to be $5.02 plus or minus $0.60 and non-GAAP diluted EPS of $5.35 plus or minus $0.60.

KLA is well-positioned to deliver strong relative financial performance, driven by better than market performance of their semi PC and SPTS businesses and continued growth in services. They are focused on innovation to support their customers' technology road maps and multi-year investment plans, and will implement their strategic objectives to drive outperformance and maintain their technology leadership and competitive differentiation.

Rick Wallace discussed the strength of the blank wafer business, noting that there has been strong investment from global players and infrastructure in China to provide more domestic supply. He noted that customers are continuing to invest in preparation for future demand and to meet capacity requirements related to hybrid bonding and other wafer-to-wafer packaging. He expects the investment to continue this year, but to moderate in the following year.

Rick Wallace and Joe Quatrochi of the company discussed the unexpected increase in DRAM shipments in the quarter, which was due to a clarification of some export rules that enabled them to ship additional equipment to a Chinese customer. C.J. Muse then asked about the lead times for optical inspection tools, to which Rick Wallace responded that demand is still very strong and that they are booked out through next year. He also noted that while lead times will come down a little bit, they will still remain elevated for some time due to the drivers of the product line.

Rick discussed the strong performance of the company's service business, which is typically utilized in downturns. He also noted that utilization rates are higher than what was forecasted and that memory services are slower. He concluded by stating that the company is confident in their long-term forecast. Finally, Rick was asked about the potential for the US to expand export control on mature nodes, to which he responded that the company's cap is at 14-nanometer and below for foundry logic.

Rick Wallace explains that while they were supply constrained, it was for a different reason than their peers, due to high demand for optical. He also mentions that process control intensity has gone up due to the adoption of EUV in more nodes and layers, and advanced architectures, resulting in a greater need for process control. He concludes by saying that they had forecasted this and it is now being seen in their results.

Rick Wallace explains that WFE had already factored in the delays of EUV tool shipments when they provided their outlook a quarter ago. He states that these delays usually have shorter lead times, and that they are expecting the delays to eventually filter into everyone. He also mentions that China has a big push for self-sufficiency, but that some processes are harder to replace than others.

Rick Wallace states that their market share has remained strong, and they have been competing with other companies for a long time. They offer a variety of solutions to their customers, ranging from older generation tools to recent tools. These offerings benefit them in the Chinese market as much as any other region. Going forward, they anticipate investing more in DRAM for data center and AI applications.

Bren Higgins and Rick Wallace of the leading foundries have noticed an increase in process control intensity due to the introduction of EUV technology and the accompanying infrastructure. However, they have not seen an increase in overall utilization rates in memory and do not anticipate any meaningful investments until their customers improve their profitability and cash flow. The leading foundries have also slowed down their investment in WFE and have seen utilization rates creep back up from what was forecasted a few months ago. Additionally, they are still seeing a high number of design starts.

Bren Higgins reported that the purchase obligations were down by about $500 million from the previous quarter, and the backlog levels are still very elevated. He also stated that 40-50% of the purchase obligations are delivered beyond the 12 month window. He then went on to explain that process control system shipments are expected to be flat in December, while EPC shipments should be up slightly due to the 20% decrease previously reported. The outcome of process control shipments in December will depend on a couple projects.

Bren Higgins states that they are expecting a stabilizing rate going forward, with service continuing to grow. EPC could be volatile, but they are optimistic that it will recover in the short-term. Semi PC is expected to remain relatively flat quarter-on-quarter, but there may be some projects at the end of the year that could cause the numbers to be higher. Overall, they are expecting a stabilizing rate over the next couple of quarters.

Rick Wallace discussed the better-than-expected performance of KLA's process control franchise, attributing the success to strong demand for wafer and optical inspection products as well as the higher percentage of investment in logic and foundry. He also noted the increasing demand for advanced packaging products such as HBM and coleus, which KLA is supplying to TSMC, Intel, and memory manufacturers.

Rick Wallace has seen an increase in demand for their solutions for accelerated compute applications, and the advanced packaging segment is growing this year. He notes that the overall packaging market is down 15-20%, but their packaging business is flattish year-to-year. There is some upside related to AI drivers, and Rick discusses the complexity that is moving into the package. Atif Malik then asks if there are any major product cycles or EV or x-ray that could help offset their exposure to leading edge investments next year, to which Rick responds.

KLA Corporation is supply limited on some of its most critical process control products, such as optical and reticle products, and cannot meet demand. However, there is still demand for the leading edge in the R&D phase, and the company is well-positioned for that. Kevin Kessel thanked everyone for their interest and time, and concluded the KLA Corporation second quarter 2023 earnings call and webcast.

This summary was generated with AI and may contain some inaccuracies.