All right. Good morning. And again, welcome to the second day of JPMorgan's forty seventh Annual Technology Media and Communications Conference. My name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst from the firm.
Very pleased to have Bren Higgins, chief financial officer of KLA Corporation here with us. I've asked Bren to kick us off with a few opening remarks, and then we'll go ahead and start the q and a. So with that, Bren, thank you very much for joining us this afternoon.
Thank you, Harlan. Thank you for having me here today. So what I'll do is I'll just we had earnings last Monday, so pretty, not just a few days ago. And so I'll spend a little bit of time on on some of our comments about where we are today and the industry and outlook and so on, and then we'll dive into some of the questions. I will make safe, some forward looking statements today, and those are subject to risk, and you can find those risk factors in our SEC filings.
So I'd encourage you to take a look at them. So good quarter for the March. We had the inclusion of Orbotech for a stub period for about forty days with the closure of that deal in late February. We did some financing to support the transaction, and of course, some shares in the consideration for the transaction. So we had some moving parts in our model.
We updated guidance. And against the guidance that we provided for the March, we had a strong finish to the quarter, beating revenue and EPS margins by solid amount or midpoints by pretty solid amounts. In the core business, our view on industry was very consistent with what we had said back in January. That, of course, we see the WFE environment down 15% to 20% or so from what turned out to be a much stronger finish to calendar twenty eighteen. That puts the WFE levels somewhere in the mid-forty range.
DRAM down a lot, 30% plus, flash down to not as much as DRAM and then some growth in logic and foundry, which has been encouraging. And we're excited about what's in front of us. We see that relatively balanced through the year. For the company, we saw the March as the bottom for us and would expect sequential growth in June, which is consistent with our guidance that we provided for the June and then sequential growth continuing through the second half of the year. So no changes from what we said in January and where we are today versus last week.
Gartner market share data came out for 2018, and so the market share for the company was consistent with the prior year, just above 50%. We don't compete in the entire process control market. And the markets we compete in, our market share is greater than 60%. But for the total market, 52%, 53% or so. So no real change in the competitive dynamics out there.
KLA is about 4x, our nearest competitor, and it's been fairly stable from that perspective. We're excited about the acquisition of Orbotech. I brought Orbotech in this quarter, as I said. And Orbotech, for those who don't know, have three businesses, not exactly equal size, but pretty close. There's specialty semiconductor business, which is a really strong business, had strong growth last year and looks to grow this year in a WFE environment that is down like we talked about.
It has a printed circuit board business, which is mostly around imaging technology, where KLA has a lot of imaging capability and IP in those areas. And, it presents high end PCB boards that are starting to go through transition from PCB boards to IC substrates to advanced packaging, which creates some potentially some opportunities for us moving forward. So we're excited about that. And then it has a flat panel business, which after six years of growth, flat panel business is softer this year, but it's a smaller part of the Orbotech business. So in calendar twenty eighteen, Orbotech was up about 16%.
They weren't filing publicly, so a lot of that data wasn't available. We filed their annual results when we did the debt offering back in early March. But strong year of up about 16% last year. And this year, on a pro form a basis, including the period where we didn't own them, the forty five or fifty days or so of the quarter we didn't own them, they should have a year that's roughly flat, maybe a little bit down. So against on a relative basis, against a broader electronics industry, advanced technology market environment, pretty good relative performance.
Strong growth in the Specialty Semi piece, which I mentioned, some flat environment in the PCB business and the flat panel business down year to year. So see the puts and takes there, but business holding up pretty well, and we're excited about the opportunities. We think there's about $50,000,000 of synergies that we're starting to do the work on now in terms of planning. And we've got I think we'll see that materialize over the next twelve to eighteen months or so. So excited about the opportunities for growth, the opportunities to leverage some of KLA's IP into those markets and positioning the company to do some interesting things out there.
So we're excited about it. I think the environment is pretty stable and consistent with what we thought. We're watching the moving parts. There's still concerns But in the memory at the end of the day, as we've gone through and looked from a risk adjusted basis, we feel pretty confident with the guidance we provided. So with that, I will take your questions.
I'll kick off the first few questions. And so, you know, I think what I wanna focus on is more of the sort of share, statistics that Gartner just recently put out because it actually also does not only drive home the point of your dominance in the process control segment of the market. Right? Like you said, number one in process control, than 50% market share, four times larger than your nearest competitor. But in some of the areas, as you mentioned, which you have clearly a strong leadership position in, for example, I'm throw out some statistics here, but in your flagship, pattern wafer inspection business, I think you grew, you know, you outgrew your your market segment there in in PWI by 500 basis points.
You were 13 times larger than your number two competitor. Bear Wafer Inspection, another flagship segment for KLA. You grew 88%, and you were 26 times larger than your nearest competitor. And then in EUV and advanced mask inspection, had 55% market share, two times greater, than your number two competitor. The interesting thing here is that process control, KLA both grew 16% year over year, which is exactly the same type of growth that the overall wafer equipment spending market grew.
And 2018 was much more of a memory biased year. And typically, in memory biased years, we don't see process control and KLA actually performing in line with the market. And so what drove the higher process control intensity in 2018 that is responsible for that dynamic? And are these trends kind of sustainable on a go forward basis?
Well, you're right. I mean, I think one of the things that you have to understand about KLA is that not every WFE dollar is created equal in terms of how they invest in process control. And if you look at memory investment where it tends to be more lower mix, more commodity, more redundancy in chips, more repair done and so on, they just don't invest as much in process control as you see in logic and foundry. So typically, when memory is spending a lot, it does affect our ability to perform as fast as the market. And most of time, we underperform by a little bit.
But we have seen some changes, and we're pretty excited about it. I mean the market share numbers are, I think, pretty strong and consistent. Sometimes I don't think people really understand. Over time, they haven't really changed much. Mean, it's usually been about 52% for the last three, four years.
It's been hovering around 50% plus or minus a couple of percent going back maybe ten years or so. But we have seen in three d NAND, it's been an opportunity for us. We've seen increasing requirements for metrology, where we're doing more sidewall angle measurements. We're doing more you're doing more than just top down measurements in a device. You've got to actually, as layer counts are going, you've got to be able to make measurements all the way down the stack.
You've seen customers starting to move to double stack structures, and so overlay becomes increasingly important. And then there's all the films. And so you see the film measurement business that has scaled well there, too. So, on the inspection side, defects continue to be a problem for the industry, and they do a lot of destructive techniques to find defects. But one way they can try to control for defectivity is to do to make sure the process tools are running nice and clean.
And so they buy more unpatterned inspection run monitor wafers to make sure before they start process to make sure the tools are running nice and clean. So don't introduce any new defectivity in the process. So that's driven the bare wafer inspection business. Now the growth in memory has also driven the need for more wafers. I mean that's what drives wafer And so on the wafer in the wafer house, but also in the wafer fab, you're seeing more capacity investment to be able to do incoming quality control or outgoing from a wafer house perspective on bare wafers.
Then there's wafer metrology in that you have to do the flatness of wafers and the specs around those flatness requirements is increasing as layer counts go up. So there's a metrology tool we sell into that space as well that's been pretty positive. So when you add it all up, you get a couple of points of improvement in intensity. So historically, in a three d NAND environment, it was 8% or 9% of WFE was spent on process control. And I think today, you're probably in the 10%, 11% range, maybe a little bit better than that.
If we can solve that defect problem, and there's some efforts in the company to try to do that. If we can do that, then that creates additional opportunity for us. And we're investing a lot in a new capability to do channel hole metrology with the channel hole that goes down the stack that's measured currently in a destructive way. If we can do that in line and very complicated X-ray technology that we're using to solve that problem, if we can do that in an in line process, then that creates another opportunity for us. So a lot of focus here given the level of investment that's happening in this space and we're making some progress.
So I feel pretty good about our product positioning and the opportunities that exist in memory over the coming years.
Yes. So thank you for that. So when we think about the profile that you laid out for WFE spending this year, down about 15% to 20%. But within that, the areas where you do have very good exposure, foundry and logic are actually doing reasonably well. And so, for example, WFE down 15 to 20.
I think we have core KLA ex Orbital Tech. I think we have you guys down only about sort of 6% this calendar year, which is consistent with the higher process control intensity there. Help us think about domestic China spending and how is that impacting WFE this year? And how do you think about China domestic WFE spending looking out over the next several years?
So we've had our exposure to China has been pretty good over the last few years. Starting from scratch and small scale fabs and trying to ramp very quickly. They've relied on a lot of process control capability. And so we've helped our customers navigate through that. And so that's been good for us and fairly consistent.
I mean one thing about our business in contrast to some of our more capacity centric peers is there's always a level of investment that's happening as long as customers are pursuing technology transition and pushing their road maps. So there's always something that's happening. Obviously, when they go and start to scale capacity, that's a bigger investment, but there's always something. So we've had a continuous amount of exposure, and I think it's been pretty good for us, probably in the 25% or 30% of our total revenue. This year, China is down about 10% to 15% versus the last couple of years, so about $500,000,000 or so in revenue levels for us.
It's more foundry centric this year. And some of the slowdown we've seen in memory is affecting the pace of investment there too. You've also got milestone progression that's affecting the pace of that investment. So I feel pretty good about the guidance we gave. Again, I'm sort of in that ballpark.
There's been some puts and takes. I've seen some improvement in some of the memory investments. And but at the same time, I've seen some of the wafer capacity planning start to change a little bit and push out towards the end of the year as the slowdown in memory is affecting the capacity planning of the rest of the wafer supply out in the market. So puts and takes, but generally in basically the same place. So it's been good.
I think what you're seeing on the foundrylogic side is sensor and IoT opportunities, which are driving lot of that investment. And on the memory side, it's been much more about advancing technology. They're behind considerably behind relative to the leading edge of memory. And so proving a certain amount of capacity and trying to move on to the next node has been the behavior. So it's steady, down a little bit.
I think, a little bit of digestion, which is probably good. And I think in terms of the impact on global supply, certainly in the memory space, I think that, we're probably a few years out before there's meaningful supply coming out of there at the leading edge, let's say. And I don't think there's a lot of opportunity at the trailing edge generally in memory. So I think that's probably the point we should be watching. So far, I think that progress is okay, but we're probably a few years away from that.
On the foundrylogic side, look, there's pretty between automotive requirements and IoT and communication infrastructure and some of those opportunities, industrial automation and so on, I think there are markets for those products to ship into. So that feels reasonably balanced in terms of the supply and the markets they're targeting.
Before I get into some of the product specific discussions, do we have any questions from the audience? So, in the market share statistics for 2018, I threw out some of the share gains and the strong performance for some of your core beachhead areas. One area of the market though, which was a bit challenged was in metrology, both in film and overlay. And so the question for you is what is what is the KLA team doing in the area of metrology in general to sort of reverse some of the the recent share losses here?
So in films metrology and CD metrology tends to be a little customer specific. So when you think about KLA's broader franchise, we generally are number one in just about all the markets we serve. There are a couple of metrology markets where we share the market, film measurement being one. So, there's a lot of effort in the company to try to leverage not just data more and machine learning on our tools, but also tying the capability and data flow that comes off of the broader portfolio of tools to try to speed time to results for our customers. You see that in film measurement, but you also see it in overlay, where overlay can error can happen in litho process, but can happen in non litho process.
So if you're exposed to the non litho process, you can try to leverage the information you have to influence the correctables that actually happen in litho to improve overlay. So I don't think overlay has been a fairly stable market. We really compete with ASML selling a direct solution there. Our share of the market is still a majority share in that market. And we address it with two technologies.
We also invested and have a lot of this effort that I'm talking about in terms of additional design based capability to try to and nonlitho process capability to try to improve our competitive position there. So I think when they entered that market in 2013, we saw about 30 to 35% of the market or so move that way and it's been fairly stable since then. So, I don't think much has really changed. And I think we addressed it the way that I described.
On the Orbotech acquisition, closed in Q1, obviously, actually, a lot of diversification to KLA, right, flat panel, as you mentioned, advanced packaging, specialty semiconductor manufacturing. And the profile is actually quite similar from a leadership perspective. They were the absolute number one de facto category killer in flat panel in the areas that they competed in AOI, test and so on. In PCB, same thing, automated optical inspection, automated optical repair, the DI segments of the market. And then in their specialty semiconductor business, very, very strong position in things like RF semiconductors, MEMS, advanced packaging, right?
So very, very similar sort of category killer like dominant position in other markets. As you've had them under your belt now for the last, let's say, quarter or so, two questions there. How are you thinking about the integration process for Orbotech? And, what are their customers telling you?
You know, it's a good question. And I think, you know, the the understanding of Orbotech in terms of the different business segments and what where they're exposed and and and how they go to market is not as understood as maybe we assumed it might be. I mean, the specialty semiconductor business, for example, is a very differentiated business. It's designed specifically for the markets you described and has seen those markets inflect. And those are markets where there's exposes us less to the front end leading edge process node shrinks and other aspects of WFE on the more than more we call it at KLA.
And so you've seen nice growth there last year and growth this year. And you're talking about a margin profile in a process business that's in the mid-50s, which gives you an indication of the differentiation they have there. So, we have seen already engagement with customers where they're asking for new capability and incremental capabilities. So as we start to work with them, I think that takes a while for product cycles to play out and create those opportunities. But certainly, it's something we're looking at.
We also think that we, as part of KLA, can get them to the table more often in certain competitive situations where small companies might not be as credible potentially as a larger player in the space. And certainly, our customer relationships are very strong in those areas. From a cost perspective, so that's a top line opportunity. And I think from a cost perspective, we're supporting the same customers. And so we move parts around, we store parts, we manage a service infrastructure for those customers and have to scale that maybe a small player couldn't have.
So when we look at that business, we see lots of opportunity, a, connection back to KLA in terms of go to market and understanding, but then also opportunities for us to improve the operating profile of a business that is already performing very, very well. We talked about PCB. And I think the one thing to keep in mind about all these markets is that they're market leading positions. And those are companies or positions that we know how to execute a KLA. And they all have different margin profiles, but at the same time, their businesses were in that had margins ten years ago that were 10 points lower than they are So we do have a pretty good track record of grinding it out and incrementing product by product, incrementing the margin profile of these businesses as long as we're in a position that we can differentiate.
In PCB, a strong position in Imaging, strong service model, 40% of the revenue in the PCB business is service and 90% contract penetration. So it provides a recurring stream that we can leverage in the cost structure, which will be good for the company. And as I mentioned, I think advanced packaging is becoming a bigger and bigger opportunity. We're doing some things. They're doing some things.
So as we look at how we put that together, our customers are pursuing cost and capability in a lot of ways. They do front end process node shrinks, which we know very well and involved in, but they're doing things in packaging. There's PCB board technology. There's a lot of new and other ways that customers are trying to squeeze out more, and this exposes us to more of that. Flat panel, we'll have to see it.
Again, a market leading position, and we'll see what we can do to enhance those positions. A lot of similar technologies, we'll see if it's applicable and what we can do with it. It's been after six years, it's at a lower level now. But because they're more leveraged to technology transitions, the volatility in the business is not what the broader industry is. So the broader industry is down about 50%.
They're down about 20%, 25% in that business. So I do think it's a little less exposed, more exposed to transitions, less exposed to broader capacity. And we're already starting to engage there to see what we can do with that. So when we look at it all, look at the synergy opportunity we think that exists as we move forward here. We think there's incremental opportunities for us to do things for top line for sure, but also on the cost side.
So we're excited about it. It changed the model, changed how people think about KLA overall from a ratio perspective, probably diluted, while it enables us to grow. I think they've got growth rates in those segments overall. I think the combined will grow faster than our base core semi business, dilutes our margin profile a couple of points, but enables more growth. So if we can drive more leverage out of the business over time and do some of the things I talked about from a product perspective, we feel pretty good about it.
There's a financing component. So the OIE went up. We were able to borrow, I think, attractive borrowing conditions. We borrowed about $1,200,000,000 at blended rate of about 4.4%, including some thirty year notes. And so I think we were able to finance the transaction with very attractive debt.
We have a historic profit position that helps with taxes as well. And so I think when we added it all up, we saw an opportunity for financial return that bested the alternative uses of cash for the company. So good transaction. We're looking forward to the opportunities here moving forward.
Let's talk about the services business for KLA. It's a great story. You know, it's a it accounts for roughly about 25% of your total revenues. And and and you actually put up, your latest investor presentation on your website. But if you go and you look at this, I mean, it's just just really nice sort of stable growth business through cycle.
Right? Bad times and good times, the services business kinda continues to grow. And as far as we could tell, it was growing at roughly a 9% sort of 10% CAGR since 2015, and 75% of the customers elect to go on service contracts after the warranty period expires. That's I think much, much higher than some of your peers out there. Taking everything into consideration, how do we think about services from a growth perspective over the next few years?
Yes. It's a great business and I don't think it's maybe fully appreciated. It's with the growth of the installed base of the company and now what we're seeing extended life of the tools and service in the field. You're greater than 80% of the tools that KLA has shipped over the last forty years are still in service in the field to give you some idea of the useful life out there. The growth rate, if you go back even eighteen, twenty years, has been consistently around that 10% plus or minus a point in And a given in upturns, they run the capacity pretty hot and that drives maybe faster growth and downturns, back off on the tools a little bit and so it brings it to lower end.
But pretty consistent. The general manager runs that business, comes in every year and says, I had a record this year. It's like you're supposed to, right? The installed base is growing. It's supposed to grow every year.
I had one down year. 2009 was the only down year we've had in the last 20, and it was down about 10%. So you go back to that environment we're operating in, where systems business was down 70%, service was only down 10 Why is it contract is because customers only buy what they need at process control and it drives how we price it, how we think about the returns of what we generate for our customers and the discipline that we have around that. And so they want to keep the tools up and they're complicated and all the parts are fairly custom, so they can't service themselves because they don't have a big fleet of tools. They can't build internal capability to do it.
If you have a big fleet of etchers or PVD tools, you can burn it build internal capability to provide that service. Very hard to do with the tools that we sell and the complexity of them is pretty significant. So I think for those reasons, the need to have them up, the need to have the information that comes off them, customers invest in a contract model that has been very consistent, right around 75% show the revenue stream. Moves around in terms of how they do it on newer tools, it's per tool. On older tools, it comes down to fab wide contracts.
There's different entitlement levels of service and support, part stocking levels, and we can customize our offerings to be able to meet different customer operating expense requirements to keep them on contract. And then we can optimize resources around it. And so it's an accretive stream, we believe, to the overall company average in terms of profit and has a nice stability to the growth.
So service operating margins do sit slightly above corporate average?
Yes. We believe it does, yes. I mean it depends on how you're allocating costs and so on. But as you go through the way we've consistently over the years, it's an accretive strategy.
When you think about it from a free cash flow perspective, is it also free cash flow accretive?
Yes. Yes. It. And consistent. And for the longest time, it was accessible, right?
Less of an issue But now from a tax yes, I mean it's certainly given us confidence around the capital return strategy of the company, particularly the dividend, having a growing service stream. And the lack of volatility in that business and expectation for profitability gives us more comfort around the ability to grow that over time. So, it's a factor in how we think about it
for sure. Certainly good to have that stable backbone being a quarter of your business. Maybe more near term, there's been some confusion around the gross margin guidance in the June and the full year outlook. Maybe first, why are the core margin core KLA gross margins depressed in the June? And then where do core embedded within your full year guidance, where do the core KLA gross margin snap back to in the second half of
the year? Well, coming out the Lam transaction, we put a public model out there that at these revenue levels, we'd see gross margins between 6263%. Certainly, in an expanding environment in calendar twenty seventeen and calendar twenty eighteen, we saw our margin profile above that, even above 64%. And there were dynamics in our business that I think created some tailwinds for sure in terms of, a, the leverage on the growth, but also the maturity of the platforms we were shipping, the incremental margins in service and so on. And so I think where we are now, a, we're in a contracting environment.
So we've been because we believe that we're looking at digestion more than downturn, we've been very careful with how we've managed resources. And so certainly, that's a factor. But the biggest factor is probably the transition that we have to new products. And it's been a historic dynamic within KLA, so it's nothing different than what we've seen before. But when you go from very mature platforms that have very optimized cost structures and stable designs or stable designs within the platform itself, we're able to drive higher margins in these markets.
And so when you introduce a new platform, it has a higher price. But generally, the focus from the engineering teams is about use cases, application and ultimately driving adoption. And we will iterate as we go, which drives cost improvement and price inflation over time. If you look at just our broadband plasma business, we have Gen four and Gen five products we talked about, we're on the fifth iteration of Gen four. It has a higher margin than the second iteration of Gen five, which we're just starting today.
Over time, we will see that improve. And usually, we end up getting the margin profiles to be basically about the same. Now the mix of business in any given quarter will affect our results. So I think as we move through this, the June has a mix and under six zero six, what you ship is what you revenue. So depending on the mix is what's out there.
And we will see it improve in the core business in the second half of the year. And I think it's in that ballpark of 63% or so. So I think we need to get an expanding environment if we're going to test the upper limits like we saw in 2018. But I don't have any changes really fundamentally in the business that is affecting the margin performance. And as I said, there'll be periods when we're in an expanding environment, we'll outperform our model and periods that in a contract environment, we'll underperform.
And I think that's kind of where we're at right now. But generally, in the ballpark of that 62% to 63% I mentioned.
In the second half of the year? Yes. Okay.
Got it. And I provided yearly guidance overall for the year blended obviously with Orbotech of 59.5% to 60.5% for the year, inclusive of March and June, which when you work think that's what maybe
confused the market a little bit because it was blended, right? And so we're all used to like pre the Orbotech acquisition, you entered that right in the December with 63% gross margins. And so trying to sort of unravel all of that, given that your core margins are a little bit depressed in the June because of some big opportunities that you had there, but good to see that it is returning to that sort of 62%, 63% in the second half of the year.
Yes.
Your target model combined with Orbotech is gross margins greater than 61%, op margins greater than 3036%. You know, we have you exiting this year kind of 61% gross margins, 34% operating margins. If I take into account the synergies, I can get to 35% op margin. So what is it going to take to get you guys to that sort of 36% plus operating margin levels beyond just synergies? Is it just growth in the business?
Is it mix? What are some of the dynamics there that are going to get you to that kind of 36% op margin level? Yes. No, I
think we're probably in that when I said as we think about next year from a pro form a perspective, which includes some amount of synergy plus some expectations for modest growth in our core business and the Orbotech 2020 plan, we end up in that 60% to 61% type margin level, mid-30s operating margin level. So I think where you are is a reasonable way to think about where we're at as a company. Some of the factors I talked about And, so we'll see how those play out over the next, twelve to eighteen months. Some of the opportunities in COGS from a synergy perspective with Orbotech are related to sort of structural things that you'll do.
We have internal supply for wafer handling as an example. They have a semiconductor business. We have to do internal design to sort of meet those requirements, but those are savings but take a little bit of time to get there. We have the ability to move some products into our global manufacturing operation that we can drive some scale there. Things that we have to go execute on that take a little time, but ultimately, will add value back to the business.
So I think where you're modeling and again, I don't fully understand what your top line assumptions are about WFE growth and all that into next year. But I feel like the dilution that comes from Orbotech overall, probably about two points to the base model. So where we were at $4,500,000,000 for base KLA at 38% or so, so 36%, 35 sounds about right. The growth of the semi business, which is a strong business for Orbotech is could potentially be a factor in that as well.
So once you reach that sort of 36% sort of operating margin target, how do we think about free cash flow margins at that level? Is it kind of like 3231%, 32% type free cash flow margins at
target? We've been for the most part, in calendar twenty eighteen, we were right around 30%. So I think it's probably a little less than that. Part of it is also driven by the fact from a CapEx perspective, we're investing in facilities now. We're expanding our Fourth Floor in our Singapore operation.
We're building a new site in Michigan. Our tools have gotten enormous, and so we need more space in Milpitas. So there's we're under construction now in a new building in Milpitas. And we're expanding one of the Orbotech buildings as well in Wales. So there is a level of CapEx investment that what I expect to be an incremental $50,000,000 or so a year for the next couple of years, maybe longer than a couple of years, two or three years that's going to for all these facilities work.
It will position us for growth moving forward. The last time we had a cycle like this, you got to go back to 2012, 2013. So we're in one of those periods where we're going to invest. So I think because of that, the CapEx part of free cash flow will be a little bit higher than before. But I think we're in that high 20s.
And given the profitability of Orbotech, harder for me to see that we're going to be able to be that far above 30%, but I think we're in that ballpark.
So KLA has one of the strongest capital return programs. You've obviously made a commitment of 75% free cash flow return. 40% of that dividends, 35% share repurchase. Does that mix in your mind kind of change anytime on a go forward basis?
We take a long term perspective. So I don't see the mix changing, although we're spending a lot more on share repurchases right now, including a lot more in the last week than we normally do. But we target 35% to 40% on the dividend payout. We govern it two ways, a, to payout at 35% to 40%, so we can be committed to growing it over time. And we've grown it for the last nine years.
And so that's part of sort of our internal culture is to be able at the company to be able to maintain growth in that. So we govern it. That way, we also govern it that we should be able to grow it. If we grow our operating income greater than 10%, we should be able to grow the dividend payout greater than 10% as well. Then the rest is share repurchase.
It ought to be, I think, at a minimum 70% to 75% of the cash flow we got be able to return. And I think over the next couple of years, we're going to be above that. So we are firm believers at KLA that cash doesn't get valued unless it's deployed productively. And so letting it sit on the balance sheet doesn't do any it doesn't create any value for anybody. So we'll put it to work and we're 1.5 to two times gross leverage.
We're running the cash balance between 1,500,000,000.0 and $2,000,000,000 and then we're meeting the objectives we just talked about. That's how we're thinking about capital allocation.
Well, keep up the great execution and thank you for joining us this morning.
Thank you. I appreciate. Thank you for the time.