The operator introduces the KLA Corporation December Quarter 2023 Earnings Conference Call and Webcast. CEO Rick Wallace and CFO Bren Higgins will discuss the results and outlook. The discussion will be presented on a non-GAAP financial basis and a detailed reconciliation of GAAP to non-GAAP results is available on the company's IR website. The call is subject to risks and uncertainties, and forward-looking statements may not come true. Rick will provide highlights for the December quarter and set the company's view for 2024.

In 2023, KLA's revenue was $9.7 billion, which was 8% lower than the previous year. However, the company exceeded expectations due to strong performance in legacy node customers and semiconductor infrastructure. The service business also grew by 7%. KLA maintained high margins and saw a 6% increase in free cash flow. In the December quarter, revenue grew by 4% and there was sequential growth in all three business segments. The 8900 Series platform for high throughput macro inspection and AI technology were key factors in KLA's success. The company continues to use advanced algorithms to improve signal and noise recognition and reduce process learning cycles for customers.

KLA's service business grew 1% sequentially to $565 million and is expected to resume 12-14% annual revenue growth in 2024. The company is preparing for a return to growth and expects business levels to improve throughout the year. Despite challenges, KLA's global team showed resourcefulness and adaptability in meeting customer requirements. Revenue was slightly above guidance, non-GAAP diluted EPS was above the midpoint of the guided range, and non-GAAP gross margin and operating margin were also above expectations. Non-GAAP net income was $839 million and cash flow from operations was $622 million.

In the fourth quarter, KLA recognized a goodwill and purchased intangible asset impairment charge for their PCB and display reporting unit due to a weaker long term outlook for the flat panel display business. They are currently exploring strategic alternatives for this business, which accounted for 1.4% of total revenue in 2023. KLA ended the quarter with a strong balance sheet and a flexible bond maturity profile. The exact timing of a resumption in WFE investment growth remains uncertain, but KLA's overall demand is stabilizing at current levels. They expect revenue to bottom in the March quarter, with sequential growth returning in the June quarter and continuing for the rest of the year. For 2024, they anticipate WFE demand to be flat to slightly up from 2023, with a stronger second half of the year.

The WFE estimate for the semiconductor industry reflects expected growth in memory and foundry logic investments, with a decline in legacy investments. KLA's March quarter guidance includes a revenue of $2.3 billion, with a mix of 60% foundry logic and 40% memory. Non-GAAP gross margin is forecasted to be around 61.5%, with expected stability in 2024. Operating expenses are expected to be flat in the March quarter.

KLA's operating expenses for 2024 are expected to increase by $5-$10 million per quarter, with a consistent tax rate of 13.5%. Other model assumptions for the March quarter include other income and expenses, with a projected GAAP diluted EPS of $4.93 and a non-GAAP diluted EPS of $5.26. The company remains optimistic about the improvement in end markets and is focused on supporting customers, executing on their product roadmap, and positioning for growth. The timing of a sustainable demand recovery is uncertain, but KLA is running the business to meet customer requirements and achieve long-term growth. The company's operating model and strategic objectives are geared towards outperformance and delivering industry-leading financial and free cash flow performance. The importance of process control and technology advancements in optimizing yield for high volume production environments is expected to drive long-term growth for KLA.

KLA's business is stabilizing and the long-term trends in the semiconductor industry are driving demand for their products. The March quarter came in lower than expected due to a customer project delay, which is expected to last 12 months. This delay primarily affected a leading edge customer and resulted in a higher percentage of business from China in the quarter.

The company's revenue recognition policy requires them to demonstrate that their tools meet specifications before recognizing revenue from new customers. This could cause a delay in revenue recognition for shipments made at the end of the previous quarter, but the company is confident about sequential growth in the June quarter. In the previous year, the Process Control Systems business outperformed the WFE business, but patterning was down almost 20% due to customer pushouts and lumpy shipment trends. The company expects the Process Control Systems business to continue outgrowing the WFE business in the current year.

The speaker explains that the Inspection business is more tied to new technology development, while the metrology business is more impacted by capacity. They also note that their relative performance in 2022 was 4x the market, but in 2023 they were mostly in line with the market. The pushout of a couple hundred million into the June quarter may result in the first half of the year having a similar run rate as last quarter.

The speaker discusses the performance of the business in the previous quarter, stating that it was generally in line with guidance but was impacted by a significant adjustment. They expect the second half of the year to show improvement. The RPO was down by $200 million and customer deposits were just under $800 million. When asked about domestic China, the speaker states that they expect the market to be relatively flat, with some benefit from infrastructure investment. They anticipate a decrease in wafer inspection but an increase in reticle inspection.

The company expects to make up for any potential losses in the foundry sector through higher foundry revenues. They anticipate some fluctuations in the memory sector due to changes in customers, but overall expect a consistent performance throughout the year. The second half of the year is expected to see stronger growth, with both leading edge foundry logic and DRAM driving this growth. China revenues are expected to remain flat, excluding any impact from the EPC.

Brian Chin asks about KLA's outlook for WFE, which is expected to be flat to modest based on their 2023 base level. They anticipate a pickup in revenue and WFE in the second half of the year, but it will be modest.

The speaker is discussing the expected growth in WFE for the year and the impact on process control intensity. They predict a slight improvement in memory and a flat process control intensity. They also mention the benefits for KLA in memory investment, particularly in DRAM with the introduction of EUV technology.

The speaker discusses the potential for increased process control intensity and investment in leading edge development due to the introduction of EUV into DRAM. They also mention conversations with customers about a potential turn in 2025 and the company's engagement in R&D and pilot programs for advanced logic ramps. The trend of more designs is also mentioned.

The company believes that advanced designs are a good indicator of the strength of the business and are preparing for growth in this area over the next 24 months. They expect to see some growth in their foundry logic business this year, driven by new node deployments and technology upgrades, as well as some expansion of capacity. However, they also expect the legacy business non-China to decrease in 2024. The company is having conversations with customers and planning for this growth.

Joe Moore from Morgan Stanley asks about the trend of low memory utilization and its impact on KLA's services revenue. CEO Richard Wallace confirms that there has been a steady trend in memory utilization and that customers are now more optimistic about it. KLA's utilization rates on their equipment are higher than before, and they expect this growth to continue. Customers prioritize driving yield and do not have redundancy in their purchases from KLA, which leads to a focus on efficiency and driving yield.

The speaker discusses the consistency of process control and the impact of AI drivers on DRAM and flash. They also mention the stability of the flash market and improvements from customers who previously cut back. The questioner asks about strategic alternatives for the display business, which accounts for 1.5% of the company's revenue. The speaker also mentions the strong performance of the specialty semiconductor business, which has outperformed WFE and is expected to remain flat with some mix shift.

The company has a diverse range of end markets, including automotive, mobile, and advanced packaging. They expect to see a shift towards more investment in advanced packaging if the automotive market weakens. They are optimistic about the improvement in their IQOS business and expect it to translate into other parts of their business. The PCB business has been weaker due to its focus on mobile markets, but they expect it to improve this year. They also have new product offerings that will take advantage of opportunities in high-end PCB and substrates. There is uncertainty in the leading-edge market due to potential push-outs, but this does not affect their business in Japan.

The speaker is confident in the growth of the service business for the company, which is expected to be higher than the 12-14% target range. This is due to improving utilization and profitability of customers, as well as the transition of tools from warranty to contract. However, the speaker notes that this growth may have a slight impact on overall margins.

The speaker discusses potential impacts on revenue and margins, including pressure on margins due to accounting practices. They also mention the trend of customers reusing their capacity and how it may affect growth, but note that this is not expected to have a significant impact going forward. The speaker also mentions how they are continuously working to provide incentives for customers to upgrade to new technologies. A question is then asked about the potential negative impact of customers converting to a new technology, to which the speaker responds that they do not anticipate a significant impact.

Timothy Arcuri asks about the book-to-bill ratio, which has been below one for five quarters in a row. He notes that there is now $5 billion worth of bookings or RPOs parked beyond 12 months, which was not the case before. Bren Higgins explains that this is due to customers giving orders for facilities that are planning greenfield projects, with schedules driving the orders. This is a new phenomenon that started after a massive ramp in 2019 and has been consistent, with roughly 50% of the backlog being tied to these schedules.

In the previous quarter, the deferred systems revenue was higher due to shipments being higher than revenue levels. This drove down the RPO, but the book-to-bill ratio was positive. The trend line was slightly better and consistent with expectations. The advantage for Chinese customers to book orders far in advance may be to demonstrate credibility and ensure that their fab opening is not hindered by delays or lack of resources. This may also involve deposits for a portion of the orders.

The speaker discusses the impact of High-NA technology on KLA's business and states that their views on its timing have not changed. They are encouraged by the increased adoption of EUV and the broadening of its applicability to memory, which creates more opportunities for KLA. However, they have not changed their view on when High-NA will turn into pilot and high-volume production. The speaker also notes that the increased adoption of EUV will require more capacity and tools with higher sensitivity, which is a positive for KLA.

During the KLA Corporation's December quarter earnings call, Toshiya Hari asked about the progress of High-NA and the potential profitability of the display business. Bren Higgins stated that High-NA is on track with the schedule and that the display business accounted for 1.5% of revenue but less than 1.5% of KLA's profitability. The call ended with Kevin Kessel thanking everyone for their time and stating that they will be in touch with more updates in the coming days and weeks.

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