Great. We'd like to get started. Good morning, everyone, and thank you for, coming. I'm Toshiya Hari. I cover the semiconductor and semi cap equipment space at Goldman Sachs.
Very excited to have Brent Higgins, Executive Vice President and Chief Financial Officer from KLA. And with that, Brent, kick us off.
Thank you, Toshiya. Thanks for having us here today. Looking forward to our discussion. So just quickly, from a safe harbor perspective, right, I'll make some forward looking statements today, and those are all subject to risk. Plenty of risk factors in our SEC filings.
I'd encourage you to take a look at them, and you can get them on our website, kla.com. Not kla10core anymore. Kla.com. Kla10core, by the way. Did you?
K
Well, I guess legally, it's still Kelly
l Tankor a ten for another few months. But anyway
so, you know, calendar eighteen was a
a very strong year for the company. We had a very nice finish in the December. Revenue was in excess of 4,300,000,000.0. Operating margins greater than 39%, a very strong memory investment year. So 70% of the spend in our core industry was was was memory.
For us to to do as well as we did in a memory environment, like 13% growth year over year where the industry was somewhere in the mid single digits is, I think, you know, testament to a few aspects of our business that that are doing very, very well. First, obviously, you know, memory intensity has been something that's improved for us. We've certainly seen more metrology opportunities in vertical NAND, which has been good. We've had controlling deep activity by utilizing our bare wafer inspection, new specs that are affecting bare wafer metrology has been good for our business, not just with the memory ICs, but also with the the wafer manufacturers. Reticle inspection has been inflecting as a business for the first time in a while.
There was a lot of capacity, but as we've seen more and more multi patterning, it's consuming that capacity. And then on the foundry side, you're seeing a lot of new tape out to seven nanometer, is, you know, in contrast to the last couple of nodes, see a much broader market adoption of this node. And so the level of tape outs there has driven and tape outs reflects, you know, reticles and number of designs is an encouraging part of our business that I think has momentum into into this year. Certainly, you know, the the investments in strategic investments in China have been good. There was more memory last year of that.
And those fabs, you know, starting from basically starting from scratch and smaller facilities, there was an opportunity to provide a higher level support and engagement. And, certainly, our market position is when you're starting from beginning, you you tend to wanna buy from the market leaders. And so that was really good for us as well. So a very strong finish to the year. As we look at the calendar '19 after three years for the company, mid teen growth rates, you know, as we look at this year.
This year seems to be a year of digestion for the memory space as we talked about in earnings just a couple weeks ago. You know, we see a a first half is, you know, weaker than the second half for us. And as we look at, you know, foundry logic being growth in the year, which is is encouraging to see, and that being relatively balanced for us through the year, that we would see a draw this drop off in the March where we guided, you know, about a $920,000,000 revenue level and no change to any of the guidance that that we gave both from shipments revenue, EPS, and then see second half or or revenue growth, sequential growth for Zoom in beginning of the June. So a little bit stronger second half than the first half. Industry environment, we believe, is pretty healthy, pretty disciplined spending.
Foundry logic investment, is encouraging. A lot of momentum I talked about earlier that we think continues. And, so, in a pretty good position here as we head into, head through this year.
Great. Thanks for that. To to level set us, Brent, can you talk a little bit more about the overall environment in 2019? I think quite a few of your peers are pointing to a mid to high teens decline for overall WFE. Where are you guys today, and how do you think about the different applications?
Yeah. So I guess
from where we each sit, we see things a little bit differently and we're exposed to different things. Right? I mean, ASML has a, you know, capacity sort of centric I mean, they have capacity, but they also technology enabled the EUV investment that's happening. That's kind of independent of supply and demand. You have, you know, players like Lam are more memory centric, more of a capacity player, so their view is, you know you know, perhaps a little bit different.
We we know as a technology enabler, you know, we we kinda see things. You know, foundry logic is a a stronger market for us. I think we all see things a little bit differently. If I were to size it, and I think given the visibility this year, certainly in the first half of this year, it's probably down 10 to 15%. You know, 15 to 20 or whatever seems a little bit weaker than we see it.
But, you know, I think we probably had different views, you know, this time last year too. We are in February. So, I wouldn't say our views are are that different, but, you know, I think, you know, it's maybe it's a a risk profile as much as anything. But when we look
at the business, we look at the
way we see it. I described the trajectory through the year that we see. It feels like it's lining up in that sort of down 10 to 15% range. Okay.
Great. And then specific, to to KLA, you guys talked about 2019, your revenue being down less than the overall market, obviously. Is that purely a function of the the bigger declines in memory and and that sort of working in your favor from a mix perspective, or are there product cycles or share gains at at play as well?
Yeah. No. It's it's a good question. I mean, look, foundry logic is growing for the first time in in a number of years. And so, foundry logic, because of the nature of the mix in the fab, the the complexity of devices tends to spend more on process control.
And it's not exactly twice as much, but it's more. So if memory is in the sort of 10% of their wafer fab investment gets invested in process control plus or minus, you know, foundry logic is, you know,
in the high teens mid to high teens.
And so as a result of that, when you have a shift and you see growth in those segments, it's gonna there's gonna be a higher level of of spending and process control. I think that's one factor. The other factor is I talked about this tape out activity driving radical inspection investment. I would expect that business to grow year over year for us. So despite the the overall industry, it's been a down year, down, you know, mid double digit, if you will, you know, 10 to 15%.
We're gonna see growth in that business. The the bare wafer inspection and metrology business looks to be flattish year over year. So I think a combination of the diversification, the exposure we have to those other other opportunities, I mean, it's all part of WFE, but it's a little different than the way the IC guys invest plus the the exposure to foundry and logic is driving that view for us. Certainly, service is part of it. I mean, our service business is growing.
You know, grew over ten ten or 11% last year. It's almost a billion dollars, and, you know, we would expect that to to see continue to grow in that growth rate range of, you know, nine to 11%. So so, you know, service will continue to grow next year at its historical trajectory, if you will. So I think because of those factors is why we have, you know, a confident more confident view of, you know, a better than industry performance in '19.
Okay. Great. In memory, you talked about vertical NAND driving higher cost control intensity. Just given the fact that, you know, your customers have have, you know, evolved towards, you know, progressed towards three d NAND for its most part. Do do you think that growth in intensity is is something of the past, or is there sustainability going forward as the layer counts continue to grow at your customer base?
No. It's a good question. So certainly, we've seen, you know, the metrology requirements intensify. There's a lot of defect challenges, and, you know, we've been trying to solve those, and we talked publicly about our ability to try to solve those problems. And it's kind of a challenging one, to do defect inspection in stacks because it's a different defect problem trying to penetrate the more opaque film structure and identify the z coordinate within the the stack.
So there's a couple of ways customers are working around that problem. I mean, they're they're buying more their wafer inspection to run more monitor wafers to make sure the processes are cleaner. And so we've seen that business inflect. The metrology I talked about, we're trying we're spending a lot of money in on product development to do new metrology capabilities that that are, you know, some of the challenges in the industry around channel home measurements where disruptive techniques are used to to try to do those metrology measurements are opportunities for us. And so I and I bring that up because as we think about the go forward, I think these are sustainable opportunities for us to maintain that increase that we've seen if we can solve that defect problem probably even more.
So I think it continues as long as customers are continuing to drive, you know, more layer counts and progress their technology curves, then it should be good for KLA. And if we can develop the right products to solve some of these problems, then that creates perhaps even a little bit more opportunity Okay.
Great. And and then logic and foundry, you mentioned as obviously the an area of strength for the industry as well as KLA. Is it primarily the node transitions that are occurring at your leading, you know, microprocessor customer as well as the foundry, or is there anything beyond that?
So I think that I mean, that's part of it is what we're seeing, you know, net net investment both in, you know, at, you know, the mainstream node plus the new node and and as they're moving forward here. And that was a delay in the second half of last year that that brought that second half view down for for for the industry. So we're seeing that come through this year, and I think that momentum's consistent. I talked about what's happened seven We're a lot of five nanometer, development activity happening with plans to try to do risk production on that into next year.
So we're seeing more activity from from the leading edge foundries as well. I talked about the the the tape out, so that should drive a certain amount of capacity at seven as as customers design more there, and that should be a bigger node. So those factors the other thing is is you're still seeing pretty healthy levels of of demand at the lead the lagging edge and the more the legacy segments, certainly automotive and IoT type end markets are driving that business. So if I went back ten years ago when I gave a mix of foundry logic leading edge, it would have been of of our orders, let's say, 75% or so. I gave you the same metric today, probably 60%.
So there's a fair amount of activity. There's, you know, $2,027,000,000,000 dollars of WFE that gets spent with those customers every year, and it's, you know, it's pretty healthy business level on here. So it's driving some unique requirements as they start to try to deal with higher levels of reliability. For example, in automotive, it gets demanded from their customers. These other applicators are trying to run the install bases they have.
It's trailing edge stuff, but they're looking for upgrades to that capacity. We've restarted older products to support some of that. We sell used equipment into those markets. And then the service demands on those markets is is also much stronger too. So, you know, that's a piece
of the business that's that's continuing to to
maintain some momentum here as we move through this year. So, obviously, the biggest part of the two things we talked about upfront, but this is a a meaningful part as
well. Okay. You've been a beneficiary of EUV adoption. Based on what you know and based on what customers are telling you today, where is the overall industry from the EV insertion standpoint, and where do you see adoption going over the next two to three years? Well, I don't think things
have changed all that much. I mean, yes, we've in and around controlling reticle fidelity has been the biggest opportunity for us both in terms of, you know, in reticle inspection itself, and we have some features on our current product that that we sell that help customers with that that development work. And then they're also using the our gen five wafer inspectors to do process qualification and and reticle fidelity qualification as they print the the wafers and use inspection full wafer inspection to validate fidelity of reticles. And so all that's been been pretty good for us. You know, there's a timeline around a a few layer adoption in in, foundry, you know, towards, you know, the seven nanometer plus maybe, you know, end of this year, and then you'll see five nanometer have a a higher level of adoption.
And I don't think you see, you know, crossover to, you know, 50% of the layers, greater than 50%. Our EUV layer is probably until 2022, 2023 time frame just given the, you know, the the throughput requirements and some of the other challenges that are there. But I think it you
know, the the for the I
would say over the last year or two, we've seen that road map hold pretty constant. I mean, you can go back for years, and it was, you know, almost constantly pushing. Right? Decades. Yeah.
So, customers have are taking deliveries. They have the tools they're gonna use. And so I think that that's why we've seen, we've seen that road map hold pretty pretty solidly.
And did you see EUV proliferating, across segments, just not Foundry, but also in Logic and DRAM over the next couple of years?
Or I I think you think you will. I mean, there's there's some challenges around reticles and pellicles and some of the other things that are driving the pace of how people adopt. And then DRAM, you know, maybe there's, you know, some contact layers and things like that. So I think that probably comes after. But, you know, you'll see it in Foundry first.
And and according to the kind of rollout that that, that I talked about. I mean, I think as you move into high volume production, it's a big opportunity for for KLA both in terms of anytime we've seen significant transitions in technology. It's probably the biggest one the industry has ever gone through. Been good for process control, processes are mature, and we tend to to to participate in that because customers sample more. But then there are certain parts of the market that become even more, you know, challenging in and around the the the litho ecosystem, if you will.
And we're spend a lot of our development dollars to to try to have the right products position for that when it goes into production. So it's one of the I think, you know, few opportunities that we think there's a sustainable opportunity for us to see process control intensity actually start to increase, and it hasn't increased much over the last number of years. You know, it's gotten better in in memory, but it's maybe gotten a little weaker as road maps have extended out in foundry logic. But I actually think as we move forward, there's an opportunity to see some some increase there there, plus, you know, increasing relevance around memory with some of the issues we talked about. Alright.
From a regional perspective, China continues to be a big focus. And I think on your call, you guys talked about calendar nineteen being flat to down or down year over year Yeah.
Yeah.
Which is slightly different from some of the process tool tool tool companies' comments. Is is that purely a function of you guys seeing it early in in 2018 and just, you know, your customers taking a breather in 2019 from a process control perspective, or is there something more to it?
It's probably part of it. I mean, certainly, we participated. We had two very strong years, in China, both '17 and '18. And '16, you know, was there was a start up, so there's a meaningful level of business there. And as, you know, as I said earlier, they're starting up these fabs.
There's a lot of engagement early on. It's still a healthy level of business for us. It's down, you know, maybe 15% year to year. But, you know, if you go back just a few years, you know, we were sizing the opportunity and we went through a lot of announcements and a lot of big numbers thrown around because because sort of worked our way through the different projects. We saw, you know, over a five or six year time frame of, you know, five to seven hundred kind of million dollar opportunity for KLA or for process control.
And we didn't know exactly how it fall in the in the in the years, but, you know and I think we're kind of operating in that level. It was closer to in excess of 600 last year. This year still seems like it's around 500 back down to 15% or so. So I think, you know, lead time and lead time is probably a factor in some of the w three forecast that that people were talking about too. Right?
And some of the discrepancies in terms of, you know, few points here or there could be related to just timing of of certain products. So what were know, the first phases have happened in a in a lot of cases. Second phases are what we kinda thought would happen where you would see milestone and funding and other things become in progress against technology. Road maps would be factors in the next phases of investment. And, you know, we've certainly seen that, I think, play out.
So it's a little weaker than we thought it would be, but I think it's related to those things more so than, than anything else.
And I guess, collectively, we're all trying to figure out when your local Chinese, memory customers start to impact global supply demand, both in NAND and DRAM, based on what you know, what you see. If you had to guess, how much more time do you think they they need to to start? Yeah. I mean, the focus
the focus is is right now is is on technology development. And it's sort of there's a risk production component that can we produce it? Can we actually get to the, you know, get to the nodes? Can we ramp it? Can we manage defectivity and all of that?
And and then there's then movement to the next the next node. So there's no meaningful supply that's coming out of those customers now. And I think on the memory side, given where they are relative to where, you know, leading edge memory is, I think there's probably a ways to go. So, I think we're a few years out from from any sort of meaningful contribution to supply from my perspective. Okay.
Great. The the services business, it's it's a great business for you guys. I think you guys talked about 2019 revenue exceeding a billion dollars, and you threw out a long term growth rate, I believe, nine to 11%. Yep. Can you kinda walk us through the math that gets you to that nine to 11% long term growth rate?
Yeah. I mean, you know, as the install base continues to grow and a couple dynamics have played out, you know, a metric I started throwing out, I heard one of our recent reviews is, you know, about 87% of the tools that KLA 10 core has shipped from its beginnings are still in service. So it gives you a view of the useful life of these tools. They get run for a very long time. And customers, you know, need in in contrast to some of the process tools, first of all, there's no consumables.
So it's all mechanical parts. And, you know, the parts generally, given the complexity of what we do, is mostly custom, so you can't go buy them. And our suppliers can't sell them to our customers. We usually have, at least in the key components, you know, exclusivity kind of structure. So so we're we're able to sort of manage through that.
The other thing is they can't offload capacity. Generally, they don't buy a lot of extra tools. So they buy what they need, and they need to monitor their processes closely so they can keep their fabs moving. So in contrast to process, their tools go down, they might be able to offload on the other tools. When tools go down, they they need to get keep them up, and so they tend to to buy contracts.
So 75% of the revenue is service contracts, and it varies whether it's tool specific or fab wide and varies in response levels in terms of, you know, and stocking levels of parts and all those kinds of things and, you know, different pricing increments related to all of that. But, it provides a pretty predictable stream. You know, I have a pretty good idea what service is gonna be. Irrespective of what they're spending in CapEx, they still invest in in in keeping the fabs up. So the OpEx part of it is still, is still solid.
It doesn't really matter what's happening at the overall market level. And if you look at the business in 02/2009, it went down about 10%. So you had the, you know, the entire industry falling apart. Right? Significant reductions, but the service was only down about 10%.
You know, it's probably the worst year
The worst year ever. Right? And the only down year we've had. So, it's it's a very resilient business. It has the contract base, which allows us to optimize around it.
Consolidation of customers and smaller geographic footprints is is another area for efficiency, and we've been able to to leverage that as well. So I think it's it's it's a part of the business that it's it's a meaningful part today, and it's a a profit stream that's accretive to the company average. And so as it grows, I think it provides a, you know, this this anchor that, you know, irrespective of what happens in in the CapEx environment that a solid contributor of cash flow and predictability to the business. That's that's, you know, pretty pretty good to have now. I mean, you know, I think if, you know, you go back years ago when we didn't have that where the industry was much more cyclical, service was a smaller part of it.
Now it's a much bigger part. So you have, you know, a billion dollars that I wouldn't say is guaranteed, but but it's pretty predictable that it'll be there and growing at a rate that's faster than systems business.
And given the point about exclusivity from a margin perspective, it's it's positive for your business.
It it it is. I mean, you know, we believe it is as we as we do, do the accounting for it. So it it helps with that, but also, you know, the the capability of our people to service this stuff. It's very hard for our customers to develop their own internal capability. They don't have enough sort of mass across number of tools to to make that investment.
So it's it's a significant investment and to keep those resources as they tend to rely on us to keep the tools up. You know, the demands are pretty significant, and so, you know, getting that sort of predictable outcome and result from us is pretty important to us.
Okay. Can you talk a little bit about the competitive landscape? You know, your market share and process control holistically has been very, very stable. You've got big companies, small companies, you know, coming after you and they've been coming after you for a long time, but you've held on to share. So what's been sort of secret sauce?
How paranoid are you about competition?
We're very paranoid about it, and and we you look at the way we invest in the company. We invest to make sure that we can protect our position. You know, process control is one of those businesses that it's an ROI for customers. Right? And and that, you know, we don't make wafers, so they've gotta get a return on it.
They've gotta find defects and and and, you know, relevancy of of that and and make measurements and so on to be able to ensure that they can keep their production lines moving. They can advance their road maps. And as a result of that, we invest to support it. We have a broad portfolio because you need to be able to to to leverage different technologies and different phases of a production ramp, but also as architecture and design changes, some and materials change, some products become more meaningful than others. So having the wide portfolio of products is also a competitive advantage for the company.
We introduce products at a pretty fast rate. You know, sometimes they're new platforms or significant new products, but also upgrades to products so we can be a moving target to competitors. We can also provide either new capability or economic improvement for our customers, which drives customers to want to to to buy, you know, new products and not reuse what they have. So I think all those are factors for us. I mean, you look back over time, I mean, our our market share is four x, our nearest competitor.
I think it's probably an underappreciated part of the market position of KLA or the value proposition KLA as an investment. We've been able to maintain, you know, 52% of the markets where Gartner has it and actually grown it over the years despite entry from from larger larger competitors. So you got smart competitors, got larger competitors, but we've been able to maintain our position. I think it comes back to those dynamics I talked about. And and we're pretty disciplined about understanding that value and and and holding to it.
We share it with customers, and it's it's worked out for the comp for the company. K.
Anything on Orbital Tech? Expect to close it this quarter, in
the March. So the conversations we've had with with, the regulatory authorities in China, which is the last remaining region, has moved along. It's taken longer than than we thought it would, but, we expect to get through it this quarter. We'll have a lot more to say about it, after we close the transaction in terms of strategy and and and where those businesses are and how we're thinking about them. But for now, we're excited about it.
I think, you know, it's an opportunity for us where you've got market leading positions, you've got technology that's becoming more complex in their end markets. And those are businesses that we know how to run, and we think we can drive, you know, better, higher levels of profitability out of them over time, gives us another stream of cash flow that we can deploy, exposes us to a broader the broader electronics market. We can leverage the infrastructure of the company around service and support. So we think there's a lot of opportunities for us to take this and and, contribute to our our through cycle growth rate targets of six to 8% on top line and drive operating leverage, you know, greater than 10% on that on that revenue growth. So excited to get there, and I'll have more to say about it once we're closed.
And
you sort of touched on my next question, but, it's it's been a while since you published your most recent long term financial model. I think since then, you've executed really well on gross margins. You've continued to grow OpEx. What are your thoughts on overall profitability of the of the business today and where you can take it from here?
Yeah. I mean, back to your competitive question, if there's ever, you know, the one metric that stands out about whether you differentiate or not, you can look at the gross margins. And, you know, to be able, despite, you know, pressures in the market and consolidation and everything else, to see gross margins grow over the last few years, I think, reflects the strength of our competitive position in the market. We've you know, we set these models up to give investors a perspective on performance at different revenue levels, and, you know, we've outperformed where we were over the last couple years in the expansion environment. You kinda look at where consensus numbers are right now.
It's probably a little bit below that model. So we think about sort of through cycle expectations. So I kinda look at it like, you know, over time, that's the right model to have. There will be periods of time where I'll be on it, three times I'm not performing it, maybe periods of time where an industry's contraction might be under it, but generally where it's at. So, mix the mix factor is probably the biggest factor that affects the gross margin profile of the company, depending on the types of products we're shipping.
They do have, you know, we have big portfolio of products, you know, 18 different products or so, and and and the margin profile is not exactly the same across all of them. And then service growing as a percent and growing faster is a dilutive factor to that. So I gave guidance in '19 given, you know, these expectations around sequential growth, second half, first half, and so on that we'd probably be around 63% plus or minus 50 basis points. As I look at things bottoms up and look at what we're where we were sized to and, in terms of, you know, factory utilization and so on. So I don't see any any dynamics that's necessarily changing our our, you know, our view on on where gross margins should be.
And I think, you know, the mix of our business will be a will be the probably the factor that drives it, you know, with variability around the percentages I talked about.
Okay. Got it. We've got about three minutes left. I wanna see if, you have any questions from the audience. Right from You
zero on the competition, especially metrology for vertical NAND wafers. Are you guys happy with your position? Or is that a big sounds like maybe that's a big focus. There's an opportunity for us to get customers to invest more in metrology. You know, we do have competitors in in in vertical man in metrology.
The competitive environment in metrology is probably higher. Problems are becoming more complex. We've seen a a nice improvement in the process control intensity. How much is spent on process control for metrology in vertical NAND? And I do think there are opportunities.
There's overlay, but then there's also this this inch inch channel or channel home metrology opportunity. If we can solve that problem, it creates another tailwind for us. So, it's a competitive environment, and we have to compete for for this business. And, there are lot of competitors that that that like these opportunities and tailwinds for growth of the SAM, but also, you know, the profitability of of this business as well. So I like our position.
Feel pretty good about it. And I think we've you know, the history has shown that we've been able to to to maintain it and grow it.
No. One in front. No.
Just back to EUV. So like for like photography ten years time versus now, you say this is good for you. How do you think about the the TAM for you and the focus for you just to talk to you alone, with a fully EUV world versus a a double platinum world?
The the TAM for litho or the tamper process control?
The process control.
Yeah. I think it I think it's higher. I mean, one thing about multi patterning is you have more multi patterning steps and more process steps, but repetitive steps of similar process. Right? And so in an EUV environment, in in HVM EUV environment that, you know, you've got anytime we've seen significant transitions of of litho technology, and this is the biggest one, that it's been good for process control.
So the challenges in particular around the reticle create, I think, a unique opportunity for us to see some expansion in our TAM, and we're investing, we're investing in that. So I feel like it's it's good for process control. You know, certainly, as litho replaces some of the multi patterning that was happening, it affects other markets differently. I think process control is is at minimum neutral, and some of the options around the radical creates some opportunities to see it see it grow. I I am con confident we can do that.
You know, the the ASML has become a bigger competitor over time as they've entered the space, but the competitive dynamics have been fairly stable over the last four or five years. And given our product road maps, where I think that opportunity is in our current position in that market and some of the unique capability we bring to it, I feel very good about, about our position when we get there.
K. We're out of time. Thank you all for coming, and you're welcome, Ryan.
Thanks, Absolutely. Thanks for having me.