The paragraph introduces the KLA Corporation's December Quarter 2024 Earnings Conference Call. Todd, the operator, announces that Kevin Kessel, Vice President of Investor Relations and Market Analytics, will lead the call. Kevin welcomes the participants and states that the call will cover the company's earnings for the December quarter and the 2024 calendar year. The discussion will primarily use non-GAAP metrics. He notes that the earnings materials and further details, including GAAP to non-GAAP reconciliations and future investor event information, are available on KLA's investor relations website. Kevin reminds attendees that forward-looking statements are subject to risks and uncertainties. Rick Wallace, the CEO, and Bren Higgins, the CFO, will share comments, with Rick starting the discussion. Kevin also announces the 2025 Investor Day on June 18 in New York City.

In 2024, KLA achieved significant growth and profitability, with a 12% revenue increase to a record $10.85 billion, driven by gains in market share and a strong services business, which grew by 15%. The company maintained leading gross and operating margins and generated $3.4 billion in free cash flow, returning $2.9 billion to shareholders. Growth was fueled by demand in AI, high-performance computing, and advanced packaging. In the December quarter, KLA exceeded revenue expectations despite new U.S. export controls, with revenue surpassing $3 billion. The company's solutions were well-aligned with customer needs in a growing semiconductor market, particularly in leading-edge logic and memory applications.

In the quarter, KLA experienced strong revenue growth driven by advancements in AI and high-bandwidth memory (HBM) technologies, positioning it for success in 2025. Despite concerns over potential reduced demand for advanced semiconductors due to increased compute efficiency, KLA's expertise in AI suggests ongoing demand growth. AI is both a driver and enabler for KLA, boosting demand for more complex wafer designs and advanced packaging, which underscores the importance of process control as chip integration becomes more intricate. This complexity enhances the relevance of KLA's advanced packaging solutions.

The paragraph details KLA's financial performance and growth for the December quarter, highlighting a robust increase in revenue and profitability. KLA's advanced packaging revenue is projected to rise significantly from 2024 to 2025, and its service business has experienced consistent year-over-year growth. The company's quarterly free cash flow reached $757 million, with a 31% margin, marking it as a top S&P 500 performer. Total capital returned was $877 million for the quarter and $2.9 billion over the past year. The results underscore KLA's market leadership and strong execution, with revenue reaching $3.08 billion, surpassing expectations, and solid non-GAAP and GAAP EPS. Operating expenses totaled $596 million, with significant investment in R&D and SG&A, leading to a robust operating margin of 42.3%.

The paragraph discusses KLA's financial performance and outlook. In the recent quarter, KLA reported a 13.7% tax rate, $1.1 billion in net income, $850 million in operational cash flow, and $757 million in free cash flow. KLA ended the quarter with $3.8 billion in cash and equivalents and $5.9 billion in debt, which supports their growth strategies and shareholder returns. They retired $750 million in bonds with cash on hand. The industry outlook shows momentum with expected mid-single-digit growth in the WFE market in 2025, driven by investments in leading-edge technologies and increased demand for AI and premium mobile devices. Demand from China may decrease due to previous high investment levels. Encouragingly, one key customer anticipates greater initial takeouts for the 2-nanometer node than for previous nodes.

The paragraph outlines KLA's financial outlook for calendar 2025, noting an expected $500 million revenue impact due to recent export controls in China, primarily affecting their systems business. Despite potential licensing opportunities to offset this, there are concerns about delays in U.S. licensing processes. Nonetheless, KLA is optimistic about outperforming the WFE market due to business momentum and increased process control needs. For the March quarter, they project $3 billion in revenue, a 27% year-over-year increase, with Foundry/Logic and Memory segments comprising significant portions. Within Memory, DRAM is expected to dominate the revenue mix. The company forecasts a non-GAAP gross margin of 62%, improved by favorable product mix expectations. Looking ahead, they anticipate maintaining similar gross margins through 2025.

In the March quarter, the company anticipates non-GAAP operating expenses of approximately $585 million due to significant investments in product development and scaling for revenue growth. Operating expenses are expected to increase by about $15 million each quarter through 2025 to support these goals. The business model aims for a 40-50% incremental non-GAAP operating margin leverage on revenue growth. The March quarter has a non-GAAP other income and expense, net, of $36 million, with a 13.5% tax rate expected to remain until the June quarter. The tax rate is expected to rise to approximately 14% in the September quarter due to global taxation pillar 2 adoption. GAAP diluted EPS for March is projected at $7.77 (±$0.60) and non-GAAP diluted EPS at $8.05 (±$0.60), based on 133.3 million shares. The company anticipates stable revenue in the near term and growth in 2025, surpassing the WFE market's mid-single-digit growth prediction.

The paragraph discusses KLA's strategy focusing on delivering a differentiated product portfolio that aligns with customer technology needs and long-term growth goals. The company emphasizes customer success, innovation, and operational excellence, which drives financial and cash flow performance, enabling consistent capital return. During the Q&A session, a question from Michael Mani (on behalf of Vivek Arya from Bank of America) inquires about the process control market within wafer fab equipment (WFE). Despite peers suggesting healthy spending, Mani questions if mid-cycle digit expectations for WFE could be conservative given strong growth in certain segments. Bren Higgins from KLA responds to this query.

The paragraph discusses KLA's expectations and confidence in their market share and opportunities in the wafer fabrication equipment (WFE) sector, particularly as they approach 2025. They see growth in advanced DRAM, which benefits from scaling and EUV technology, and high bandwidth memory, which increases process control intensity. Additionally, advanced packaging growth is accelerating. KLA anticipates a higher share of the market, even with a slight shift in memory composition favoring DRAM. Finally, Michael Mani asks for insight into the revenue linearity for the current year, questioning whether revenue might be more weighted toward the first half due to factors like China's market normalization and export restrictions.

In the paragraph, Bren Higgins mentions that he will not comment on the second half projections but feels optimistic about the company's stability and anticipates bouncing around the $3 billion level in the first half of the year. Harlan Sur from JPMorgan notes the strong performance of the company's process control business, which has consistently outperformed the broader WFE market by a significant margin over the past five years. He asks if it is reasonable to expect this trend to continue into 2025, with growth projected in the low to mid-teens. Richard Wallace refrains from providing specific guidance but expresses confidence in the company's strong market position and identifies opportunities for growth due to market dynamics and resumed scaling.

The paragraph discusses advancements and challenges in semiconductor technology, specifically mentioning the evolution of 3D NAND and the favorable conditions for leading-edge technologies like larger die sizes and accelerated nodes. It highlights the transition of HBM to resemble logic with less redundancy and more valuable die, impacting packaging dynamics. The company's focus is on supporting customers with process control and investments in technology ramps. Harlan Sur inquires about the company's 60% growth outlook in advanced packaging, questioning the mix of 2.5D technology and HBM, and the role of process control versus manufacturing systems. Richard Wallace notes that customer feedback 1.5 to 2 years ago indicated that packaging challenges are aligning more with front-end issues, prompting the adaptation of front-end platforms for packaging.

The paragraph discusses the challenges and growth opportunities in the semiconductor industry, particularly in inspection and metrology. It highlights the significant risks involved in manufacturing high-end chips with complex packaging and HBM technology, emphasizing the importance of inspection to minimize yield loss. There is strong growth potential driven by a shift towards 2.5 HB and evolving customer needs. Bren Higgins mentions that the industry is about 65-70% focused on semiconductor process control versus processing. C.J. Muse from Cantor Fitzgerald asks about other growth drivers beyond process control intensity at 2 nanometers and HBM, to which Higgins confirms those as principal drivers, noting product momentum and strong market positions as additional influences on growth.

In the paragraph, Richard Wallace discusses improvements in optical pattern inspection and reticle work, contributing to a gain in market share. He highlights strong performance in optical, e-beam, and packaging areas, which have driven growth. Despite challenges in accessing certain manufacturing sites, likely due to geopolitical factors like the situation in China, service growth is anticipated to be in the high single digits for the year, below the long-term growth model. Wallace expresses confidence in their market position and momentum in these key areas.

In 2024, the company slightly outperformed its long-term model. However, it acknowledges that in the short term, limited capacity in manufacturing facilities is affecting growth rates and resource allocation, creating inefficiencies. The company has had to redeploy staff to support other customers, but remains optimistic about its long-term growth trajectory. This optimism is based on high-value offerings, favorable pricing of new products, and opportunities in packaging services. Additionally, the growing install base and increasing product lifetimes contribute to a positive long-term outlook. The discussion then shifts to Joe Quatrochi from Wells Fargo, who asks about the impact of services in China, specifically whether the impact should be considered primarily in the March quarter or if further headwinds are expected.

In the paragraph, Richard Wallace discusses the capital intensity of process control for DRAM, particularly in the context of High Bandwidth Memory (HBM) compared to conventional DRAM. He explains that HBM devices require more process control due to their larger size, reduced redundancy, and more complex logic circuitry, which increases reliability requirements. This leads to a higher process control intensity, potentially increasing DRAM's share of wafer fab equipment (WFE) by 100 to 150 basis points. He emphasizes that while these dynamics primarily impact new technology nodes, they believe these changes will positively affect the DRAM market. Wallace anticipates having a clearer long-term view by their Investor Day. The conversation then transitions with Joe Quatrochi thanking him and the next question from Timothy Arcuri of UBS.

In the paragraph, Bren Higgins discusses the performance of RPO and EPC for the quarter and outlook for the year. RPO was down by about $900 million, with half of the decline attributed to deep bookings due to December 2nd regulations, and the other half due to higher shipment levels. EPC is projected to grow at mid-single digits this year, impacted by the end of flat panel system shipments. SPTS growth is attributed to advanced packaging, while ICOS is growing in packaging-centric business. PCB growth is slower due to ties with mobility and capacity. The loss of an unidentified segment enhances margin ratios, improving gross and operating margins by 20 and 30 basis points, respectively. Timothy Arcuri expresses understanding and thanks Bren, while the operator moves on to the next question from Krish Sankar.

The paragraph discusses the impact of export controls and market conditions on a company's sales in China. Rick and Bren explain that while China sales were 41% of their business at the end of the previous year, they expect it to drop to about 29% by 2025, translating to a 20% decline. Krish Sankar inquires about why the company's China sales have remained more resilient than its peers. Bren Higgins attributes this to their focus on helping customers qualify processes and speed up yield learning, which leads to higher adoption in new facilities and sustained investment, even if capacity-centric peers see more immediate gains.

The paragraph discusses a conversation about improvements in the NAND and DRAM markets. Richard Wallace notes that while there is some strength and a slight uptick in NAND business expected from 2024 into 2025, it remains at low levels and any growth will be modest. Tom O'Malley from Barclays queries the broad-based nature of these improvements and the potential sources of growth. On the DRAM side, there is an indication of market share changes and a generally positive outlook for the year, influenced by AI-related demand.

The paragraph discusses recent business dynamics and customer demand, focusing on capacity planning for 2025. Richard Wallace notes no short-term changes in their customers' plans, but mentions ongoing demand growth in AI infrastructure, which strengthens the company's position. Despite some critical products being supply constrained, they are in discussions about slot availability. The advanced DRAM market is challenging but favorable for them due to higher process control intensity. Additionally, Chris Caso inquires about the impact of China on the company's performance, specifically looking for any quarterly influences in the latter half of the year, but Wallace indicates a cautious approach overall.

In the paragraph, the discussion focuses on licensing impacts and gross margins, with consistent performance expected throughout the year. Richard Wallace explains that gross margins are more influenced by product mix rather than customer segments. As revenues grow, operating leverage is anticipated to improve, maintaining margins around 60% to 65%. Although some markets like packaging have lower margins due to tool complexity, overall growth in gross margin dollars and relevancy at KLA is significant. Historically, gross margins were around 63% at a $3.5 billion volume level.

The paragraph captures a discussion during a conference call where Srini Pajjuri of Raymond James inquires about the March quarter guidance, specifically about the Foundry/Logic segment's anticipated performance. It is noted that a mid-single-digit decline is expected in that segment, which contrasts with earlier comments about strong short-term demand. Bren Higgins responds, suggesting that the overall revenue guidance hasn't changed much and emphasizing that infrastructure business is not reflected in those percentages. Additionally, Higgins indicates that Memory will form a higher percentage of the mix in 2025 compared to 2024. Richard Wallace adds a point about customer variability, highlighting that some customers appeared in December but not currently. Overall, the discussion revolves around expected segment performance, guiding factors, and year-over-year mix changes.

The discussion focuses on the investment and market share trends related to semiconductor technology advancements, specifically 2-nanometer (N2) and 3-nanometer (N3) processes. Bren Higgins highlights that most new investments are concentrated on 2-nanometer technology, with packaging investments also ongoing. The shift from N3 to N2 is expected to increase KLA's share of wafer fab equipment (WFE) market by 90 to 100 basis points. Srini Pajjuri acknowledges this information, while Brian Chin inquires about logic/foundry chipmakers at the leading edge that aren't rapidly expanding capacity. Richard Wallace responds by indicating that the company has accounted for this in their 2025 plans, suggesting minimal immediate impact from chipmakers not aggressively expanding.

The paragraph discusses the challenges and opportunities in increasing process control intensity as semiconductor manufacturing nodes advance from 2 nanometer to 16A. Richard Wallace notes that the dynamic design environment limits design reuse and necessitates more advanced designs, resulting in a shift to higher value, larger die densities, which poses challenges but also opportunities for process control solutions. Executing effectively on their programs could lead to continued growth. Bren Higgins adds that typically, process control intensity is established when spending in a node occurs. However, new solutions addressing yield issues can lead to revisiting earlier nodes, raising the intensity baseline for future nodes.

The paragraph discusses the company's optimism about their solutions, which are effectively addressing customer needs and driving adoption of new technologies. They mention specific innovations, like the reticle verification on wafer for Gen 5, which has become valuable to customers. The company's strategic focus on increasing operational intensity will be a key message at their Investor Day. In a Q&A, Charles Shi from Needham and Company asks about the company's growth forecast for the second half of the year, suggesting a consistent $3 billion per quarter. He inquires about other factors that could influence growth, aside from the potential impact of export control licenses valued at $500 billion.

In the discussion, Bren Higgins mentions that licenses are not currently part of their plan and expresses uncertainty about future developments. He notes that they are stabilizing around current levels and are cautious about certain market parts, particularly in China, which could present opportunities or risks. When asked by Charles Shi about China's revenue contribution for the March quarter, Higgins predicts a decrease to the high 20% range, down from 35%, due to different revenue recognition policies, depending on whether it's from new or established customers. Richard Wallace acknowledges the conversation, and the operator moves the discussion to Atif Malik from Citi, who addresses investor concerns about foundry concentration.

In the paragraph, Richard Wallace discusses how their company is engaging with all their foundry customers, including two struggling ones, by adding value and improving ramp-up times and yields for new technology. However, the focus and majority of their business are directed towards the market leader, indicating a shift in dynamics. Meanwhile, Bren Higgins clarifies that a $500 million impact from restrictions mostly affected logic projects rather than memory or DRAM sales. The conversation concludes with Kevin Kessel thanking the participants for their time and attention and expressing anticipation for future discussions.

The paragraph indicates that the operator is concluding the KLA Corporation earnings call for the December quarter of 2024, instructing participants to disconnect and wishing them a good day.

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