The operator, Chelsea, welcomes everyone to the KLA Corporation September Quarter 2023 Earnings Conference Call and introduces the speakers, Kevin Kessel, Rick Wallace, and Bren Higgins. Kevin Kessel provides information about the company's earnings and upcoming events, as well as a disclaimer about forward-looking statements. Rick Wallace addresses the situation in Israel before discussing KLA's September quarter outlook.

The paragraph discusses KLA's response to the recent acts of terrorism in the Middle East and their efforts to support their employees and provide humanitarian aid. It then goes on to discuss KLA's financial results for the September quarter, which exceeded expectations due to the strength of their process control portfolio. The overall business environment for KLA remains stable, with strength in legacy node investments and industry infrastructure. KLA's market leadership and product success in areas such as unpatterned wafer, optical, and macro inspection are also highlighted.

In the third paragraph, the article discusses the rapid growth of AI and its role in enabling KLA's differentiation and driving industry growth. The company has a track record of utilizing AI in its core technologies and is now able to deploy it more broadly across its product portfolio. KLA's service business also saw growth, and the company had a strong quarter in terms of cash flow and capital returns. The company attributes its success to its process control leadership and resilient operating model. The paragraph concludes by mentioning the financial performance of the company, with revenue, non-GAAP diluted EPS, and GAAP diluted EPS all coming in at the upper end of the guided ranges.

In the fourth quarter, KLA reported a non-GAAP gross margin of 62.4%, which was above the guidance range due to a richer product mix and better service cost performance. Non-GAAP operating expenses were in line with guidance and the company had a strong free cash flow conversion and margin. KLA has a strong history of free cash flow generation and has returned $2.4 billion to shareholders in the last 12 months. Additionally, the company announced an increase in the quarterly dividend level, marking the 14th consecutive annual dividend increase.

KLA has been steadily increasing its quarterly dividend and has announced a $2 billion share repurchase authorization, showing confidence in their business model and growth strategy. They have adjusted their wafer fab equipment outlook for 2023, expecting a decline of 16% from 2022 levels. However, KLA's overall demand is stabilizing and they expect this to continue into the first half of 2021. Their primary focus is on enabling innovation through technology advancements and transitions, which customers prioritize. They will continue to invest in R&D and expect strong revenue growth and financial performance. Their December quarter guidance includes an expected total revenue of $2.45 billion, with foundry logic accounting for 68% and memory for 32% of semiconductor process control systems revenue.

The company is forecasting their segment mix for DRAM and NAND in the upcoming quarter, as well as their non-GAAP gross margin and operating expenses. They also mention their focus on innovation and customer success, and their confidence in their long-term growth outlook despite current demand trends.

KLA is expected to perform well in the near term due to strong performance in its semiconductor process control and specialty semiconductor businesses, as well as growth in service. The company is also benefiting from investments in wafer and reticle infrastructure. The business is stabilizing and the long-term trends in the semiconductor industry remain positive. The company is not providing specific guidance for the first half of the year, but overall expects stability at current levels. The performance of different regions and customers is uncertain, but the semiconductor PC business is expected to remain consistent.

The company expects its services business to grow by high single-digit percentage this year, despite low customer production activity. This growth is expected to accelerate to the target range of 12% to 14% next year, driven by tools and systems coming off warranty and onto contract. The company also anticipates other factors to contribute to this strong growth outlook.

Bren Higgins and Rick Wallace discuss the assumptions for industry manufacturing utilization, including long-term drivers for service growth and the impact of tools coming off warranty and moving into contracts. They also mention the high contract percentage of service revenue, the lack of dependence on consumables, and the potential for increased utilization in both memory and foundry sectors.

The company's utilization rates are stabilizing and increasing in certain areas, indicating potential growth for their service business in 2024. The strong lineup and aggressive cadence of tech transitions, particularly in foundry and logic, are driving demand for the company's metrology products. While there has been R&D development in areas such as backside power distribution and advanced packaging, many customers have delayed expansion. However, the company expects this to change in 2024 and beyond. The RPO was not mentioned in the paragraph.

In the paragraph, Bren Higgins and Joe Quatrochi discuss the financial results of the company, specifically the decrease in revenue by $500 million quarter-to-quarter. They also mention the demand for optical inspection and the long lead-times for certain products. The operator then introduces the next question from Chris Caso about the company's business in China. Rick Wallace responds by saying that they are seeing strength in their China business, but investors are concerned about its sustainability.

The CEO of KLA discusses the company's exposure to China and how most of their investments are on legacy nodes to support industries like EV. There is a fair amount of inspection and measurement projects in China, as well as infrastructure investment in legacy nodes. The company does not see any changes in the size or intent of these projects and expects the demand to remain elevated in the near term. The CFO also mentions that they have a backlog and deposits for shipments from these customers, indicating sustainability of demand in the future.

The speaker discusses the growth potential for their business, which they expect to remain flat in the coming year due to factors such as greenfield projects and construction dynamics. They mention having booked orders from strategic and larger customers in the past few years, which has created availability for shipments. The backlog visibility is consistent and not changing much, with construction issues being a potential factor for project delays. They also mention new customers who may not be as affected by economic supply and demand factors.

The speaker discusses customer behavior in terms of capacity and demand, and mentions a potential drop in China market activity in Q4. They also touch on the potential impact of gate all around architecture on KLA's business, and how they have made investments to support it.

The company is well-prepared for the inspection challenges in metrology and is seeing big opportunities in this area. They have a head start in this technology and are well-positioned to support customers as it expands. The strength in DRAM is a main source of revenue upside in the quarter, with shipments to China being a driver. In the next quarter, there may be a slight decline in DRAM, but this will be offset by investments in AI demand.

The company's R&D investment is currently low, with the bulk of it coming from catch-up related to a China customer. They are also seeing some growth in packaging-related fees. The SPC systems revenue is expected to be down 5-7% in calendar year 2023, compared to the previous expectation of 10-12% decline. This is due to strength in optical, process control, and wafer being strong. However, there may be some moderation in areas like overlay and films. The company also mentions strength in technology inspection and infrastructure.

The demand profile for KLA is expected to remain similar to its current levels in the first half of next year, with uncertainty about the industry's WFE and revenue profile in 2024. The company's customers are also unsure about future demand.

The company is seeing indications of improvement in the memory market, but they cannot predict the future with certainty. They are well positioned for when the market does ramp up, and they are closely monitoring their customers' business models and profitability. The company is also focused on maintaining flexibility to respond to potential surprises in the market.

The speaker explains that their company is focused on being able to meet future demand and does not anticipate any significant impact from recent export regulations. They also mention that they do not have expertise in predicting WFE (wafer fab equipment) numbers, but have estimated a figure of $80 billion based on industry peers and customer statements. The speaker notes that the inclusion of ASML and fast shipments may affect this estimate.

The speaker discusses the performance of their company in late 2022 and how it will affect their performance in 2023. They mention that they are down in terms of market position and their guidance for the year. The speaker also addresses the increase in inventory and explains that it is due to long lead times for parts and commitments made for future growth. They mention managing suppliers and investing for future growth.

The speaker discusses the company's investments in their suppliers and their commitment to honoring those commitments. They believe that their positioning in the industry is strong and will lead to growth in the future. They also mention the growth of their service business and the impact it has on demand for parts. They feel confident in their margin profile and believe it has contributed to their success. The speaker then addresses a question about potential weakening in the mature foundry and logic market, stating that they have not seen this in their business.

The speaker responds to a question about non-China legacy exposure in the automotive and industrial markets and states that their expectations for legacy in the near term have been consistent. They also discuss potential OpEx growth for the next year, driven by modest improvement in EPC and long-term investment requirements. The speaker mentions a possible uptick in OpEx in 2024 but not a significant change. They also mention some weakness at the cutting edge of foundry/logic.

The speaker explains that while there is aggressive investment in gate all around and backside power technologies, there are limited wafer requirements in the first year. This helps KLA in terms of percentage of WFE, but the speaker clarifies that most of the investment comes during the ramp phase, not the development phase. The speaker also mentions that the balance between foundry/logic and memory investment is changing, but overall the process control intensity remains relatively stable. The speaker concludes that the road map schedules have held up well, but customers may adjust their capacity plans.

In 2024, there will likely be more activity in the N3 and N2 nodes, but not much investment from major customers in legacy parts of their businesses. However, there is still some investment in production due to the introduction of EUV and the progression of scaling. The foundry/logic segment was flat, with potential growth in China, but leading edge is currently weak and expected to stabilize in the near future. Adjustments have already been made to plan for this year's challenges.

The speaker discusses the potential for growth in the industry in the coming year, with an expected increase in utilization and new tools coming into contract. They also mention the importance of High-NA technology in enabling continued scaling and driving growth for KLA.

KLA's High-NA technology will drive higher performance requirements and play to the company's strengths. While there may not be a lot of High-NA happening before 2026, there will be early stages of it that will provide more opportunities for KLA. This could potentially lead to Gen 5 being extended to high-NA, as KLA is still using Gen 4 and will continue to do so this year. KLA is also working on extensions for Gen 5 that will extend its use into high-NA. The company feels confident about its optical product portfolio. In terms of China, KLA's mix is getting closer to 50% and there could be potential for KLA to see more opportunities as new players with higher entrances and yield issues enter the market.

Bren Higgins, a representative from a company, discusses the investment in process control for customers in early stages of development. He notes that there may be a higher level of adoption in these early stages, but as companies mature and have a limited number of designs, the intensity of process control may decrease. The last question from Brian Chin asks about the strength of the infrastructure bear wafer and reticle inspection business in China, and if it will subside in the upcoming year.

Bren Higgins believes that the wafer infrastructure investment will flatten out next year, but China's growth will not change much. This applies to both silicon wafers and reticle capability. The call then concludes with a thank you from Kevin Kessel and the operator.

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