Alright. Good morning, and good afternoon, everyone. This is Krish Sankar from Cowen. I'm the semi cap equipment analyst.
We are
fortunate enough to have KLA KLAC, the next company presenting, And, we are very lucky to have Oreste Danzela, EVP, and along with it, Kevin Kessel and Ed Lockwood from the IR team at KLA. With that, I'll quickly turn it over for to Kevin for a quick intro. Kevin?
Thanks, Krish. And so Kaylee is very pleased to be here and have the opportunity to speak with you and the investors that are listening. For those of you who don't know us, we're a worldwide leader in process control equipment for the semiconductor industry. We sell products into the foundry and logic manufacturers as well as the memory industry that provides critical inspection and measurement capabilities. Our products help drive the leading edge semiconductor development as it continues to advance through EUV as well as other technologies.
And as you mentioned, I'm very lucky to have Arista Gonzalo with us here today. He's our EVP in charge of our newly formed EPC group, and he'll talk more about that. And he's also our executive in charge of industry forecasts and collaborations. Oreste spent over twenty years at KLA in a variety of different roles of exceeding responsibility. And prior to KLA, Oreste worked for both TI and Micron in their fabs.
His perspectives on the industry are also a benefit to the semi North American organization where he serves on its advisory board. So before I turn it over to Arreste, I just wanted to mention our safe harbor language that can be found on our investor relations website and in our SEC filings, and it pertains to today's discussion in the event that we make any forward looking statements. Arreste, over to you.
Thank you, Kevin, for the introduction. Thank you, Krish, for hosting us today. Hello, everyone. I hope you and your family are safe. In the last few months, we have all been facing unparalleled challenges, and yet KLA continues to perform well and deliver on our commitments, demonstrating strong resiliency under these extraordinary circumstances.
Our market leadership and a strong business performance showcase the company's ability to execute our long term strategic objectives, and then customers and partners advance their technology roadmaps and achieve their financial goals. We remain very focused on delivering differentiated innovative solutions to tackle the technical and cost challenges that our industry is facing. The strength of our growth product portfolio, combined with a strong customer engagement, has been demonstrated by the market share gain that was mentioned in the most recent Gartner Annual Report. We closed the March with a record backlog, and we differentiate among peers in our ability to provide guidance for the June as a further evidence of the resiliency of our business. We felt we feel well positioned for the balance of the 2020, and we are confident relative to the long term targets we articulated in our September twenty nineteen investor day.
As Kevin said, I'm particularly excited to be here today in my first investor conference as a head of the company's newly formed electronics packaging and components group, leveraging the KLA operating system and the new group who brings together the automotive, SPTS, and Dagos organizations targeting growth in new and faster growing markets. I'm thrilled with these opportunities and looking forward to discussing in greater detail with you today. In conclusion, there is no doubt that we'll continue to face significant challenges in this new COVID world. But given the close collaboration with our customers, pipeline of new excite exciting products, and our track record for strong and predictable execution, we feel today is in a good position to successfully execute our growth strategies and demonstrate resiliency in these extraordinary times. So let's start with your question, Krish.
Thank you, Anasti. Thank you very much for that. And, you know, I gotta say since you wear multiple hats, I do have a question on variety of topics. So let me start with one that has been on top of most people's mind. And I understand that there's no real good answer to this, but, you know, the whole China trade commerce department ruling, and I understand a lot of unknowns.
I think the main questions, investors have been grappling with this. One is the civil military fusion between China. The other one is a direct product rule targeting Huawei shipments via TSM. But from your vantage point, how do you see this impact KLA?
Well, you are starting with easy one. Chris, you're right. There are still many unknowns and the potential outcomes of these two. And we previously stated that the KLA will comply with all laws. We are working in concert with our peers and this industry trade organizations, and and we are waiting for additional guidance from US government regarding the scope and the practical applications of these new rules.
Once we have clarity, we can better determine the impact of our business, if any.
Got it. Alright. And then the other common theme we have seen emerge during this earning season, both from you and many of your peers, has been that demand is still very strong. Most of it has been supply constrained. So how is that supply constrained looking?
Has it eaten up? And given what happened in the last few months, does it make you revisit your supplier base, or do you think this is a onetime exogenous that it should not be change anything in the long term?
Yeah. Since the last quarter, we have been able to mitigate the supply chain issues relative to COVID. As demonstrated by our strongest execution in March, we we said also openly that we didn't miss any shipment in the March. It was a a big proof of our ability to manage through these very, very stormy waiters. Longer than industry average lead time and, of course, the hedging strategies provided us with extra flexibility to ensure business continuity.
I believe the supply cost trend is easing right now, but we remain vigilant and maintain a very close communication with our suppliers to identify potential pressure points and make sure we clear any options whenever they are needed. I would say we see the management of our supply chain as a competitive advantage. And one thing that we are doing, especially with me, the new role is leveraging the common process across all KLA divisions, including the former orthopedics subsidiary, is to make sure that we we identify a potential problem that we react very, very quickly to them. So in conclusion on this topic, we remain confident on our ability to meet the shipment demand and success support our customers in the field.
Got it. Alright. And then on the topic of around, you know, the second half and foundry logic strength, On the earnings call, you guys mentioned how second half is still looking balanced on the foundry logic side despite the fact that TSMC spent almost 40% of its CapEx in q one. So I thought that commentary was pretty interesting. So where do you like to see pockets of strength and weaknesses in the second half of this year?
First of all, let me say we will not provide any specific number relative to industry outlook for the second half of the year because of the uncertainties around COVID. However, to the best of our knowledge, we see continuous strength in the foundry logic segment, which leads to our view of balanced CapEx throughout the year of a very strong 2019. At the advanced node, we see a positive of the demand among multiple customers. You mentioned TSMC front loaded, but we have other other advanced customers that are going to make some of my commitment in in the second half to advance to the next design and the successful implement EUV lithography production. And these are on the advanced node.
When you look at the the training edge nodes, we see an increase in option of specialty devices like RF for five g, for example, MEMS for medical applications. The the bottom line, the real story here is when we enter the so called data era a couple of years ago, we emphasized that we were transitioned to a more diversified end demand with expansion of trends with AI, five g across multiple industries. All the industries requiring a higher content of semiconductors. As a result of this transformation, we saw and we said equipment reuse decreasing and the demand of new products increasing. So it was a big a big argument, a big topic maybe three, four years ago about how much of the the existing equipment was going to reuse for next load.
We didn't see that starting from seven nanometer because the diversification, the broadening of end market. So, also, when you look at the particular situation where we are today, work from home, virtual interaction, telemedicine are also requiring faster connectivity, right, algorithmic working, more automation, more advanced computing, storage. So I want to to respond to your question also making a more long term secular statement here. Do have market diversification of assets from drive for equipment demand, especially for foundry and logic, but not only limited for foundry and logic. And as you know, KL is very well positioned to capitalize on this.
Got it. That's very helpful, Rusty. And then along the same path, kind of the thought process on the memory side, especially with DRAM, Kinda interesting because, you know, your own numbers for DRAM seem to be improving. The Micron just positively being announced within a for the conference. But there's also some concern that maybe DRAM pricing might slow down into the back half.
Makenna, how do you look at DRAM spending trends into the second half and into 2021 from where we are today?
Yeah. Let me give you a picture of the entire year. Memory market went through, I would say, six quarters of of inventory correction, resulting in a very steep decline in the 2019 spending, as you know. In the last few months, supply demand appeared to rebalance, and we saw mostly for ASP, for example. So there is an expectation of higher spending in the second half of this year, but the extent of this recovery will depend on the.
So given the highest push into smartphone unit sale, we saw for sure an acceleration of DRAM in the first half of the year because of data center demand. And we believe that the inventory has already been digested in 2018 and maybe the 2017 2019. Sorry. In the 2018. So we expect that the memory will recover.
But, again, it depends on on the number of the smartphone units, and we will see by the end of the year. What we know for sure is that the complexity in both advancing DRAM to the next node and also adding more layers to NAND will need more advanced process control. And KLA is very well positioned to take advantage with the new products pipeline specifically designed for memory customers.
Alright. That makes sense. And then just just sticking with memory, you know, more of a question on the process control intensity. Well, there's a general view that KLA is more probably large focus company, but we tend to forget that you have very good NAND exposure also. So can you talk a little bit about NAND exposure?
And I'm more curious to know how do you think KLA's NAND exposure would evolve this cycle compared to the last three d NAND cycle when you had, you know, your customers spending a lot to get into three d NAND, and now it's gonna be more layer count going to one twenty eight and beyond.
Yeah. It's true that we are more exposed to foundry logic because of the higher process control intensity. However, you are right. I would like to remind that when the name, the technology moved from two d to three d, we saw an increase in process control intensity for a couple of reasons. First of all, there were more number of field layers to be monitored and inspected, and the second reason was the challenges around the profile measure and wafer size.
So we saw a pretty interesting boost in in the metrology business in that transition. And then we we see this process control intensive to remain kind of stable even after the the our customers are starting to ramp and produce more and more of these three d NAND technology and products. So we see we see the the three d NAND process control intensity will not go down because the challenge will still there when you add the more layers. And, eventually, there will be some changes in the architecture of the of NAND that will drive more need for advanced inspection of metrology tools. Also, during the Investor Day in September, we said that we are working on a new new products, new pipeline of interesting products to serve both the NAND and DRAM market.
In particular, we mentioned the X-ray metrology platform to accurately measure the profile of isometric structures. And, of course, we we decided to to launch a couple of tools in the field just to learn about potential applications and value of this platform. The first results have been very encouraging, and we expect this product to to become mainstream production next year. So we see an opportunity in this time frame and also in the future to to increase the process control intensity then and even in DRAM. And I want also to remind you that DRAM is going to increase the utilization of EUV as well, same as logic.
And in that case, even if this implementation of EUV in DRAM is limited But because of the volume, this may lead to a meaningful business in a in a special metrology to control EUV data as well.
Oh, okay. That's very interesting on the EUV angle. And then, you know, on the EPC, your electronics packaging component, basically, we recently took over. Congrats again on that, So how do you think of the legacy Arbotech business? I believe it's part of the EPC.
And within within the I would like you know, I remember it used to have flat panel PCB, more the semi specialty segments. So how should we think of that business evolving over the next six to eighteen months or so?
Krish. Thanks for the congratulations, first of all. As I said in the opening remarks, I'm excited to continue to grow the KLA business beyond the cost of the market with creation of the new EPC group. The organization is a part of the well thought management transition process that we have been planning over the last several months to leverage the KLA operating system. I've been working at KLA for more than two decades, and I was a customer for seven more years before then.
And I have a great appreciation of the system that we put in place to deliver consistent results by cultural accountability and disciplined process to track both financial results, but also the way how we develop innovative solutions. We are at the beginning of this journey with APC. I'm confident that the team will be able to meet the the very aggressive long term goals that we outlined in our September investor conference. Now let me talk a little bit about the specifics of the organization. EPC includes four business units operating in four different, somehow overlapping markets.
SPTS is the specialty semiconductor division, which operates from Wells in UK and is the leader in the position edge process solution in specialty markets like MEMS, RF, power, and also is a growing presence in advanced packaging. Out of the historical automotive markets, we also have two divisions that worked in Israel to sell a printed circuit board and the flat panel display markets. While the display market is showing weaknesses due to highest push to consumer market in this COVID world, PCB is showing resiliency driven by a strong service business and also an expansion upstream into the so called IC subset market that is very, very critical for packaging. So finally, we include an EPC division. This was a company we bought more than ten years ago.
It's the leader of final component inspection asset based test. So we have already seen a strong pull from the top KLA semiconductor customers to partner in these new areas, for example, packaging or substrates. And we see this as a part of the narrative around the acquisition of all new tech. As we said in the Investor Day in New York, one of the reasons why we bought a good company like Orbotech was because we expect make them better. We expect to make them great.
And by applying the KLA operating system or or operating model, we believe that we cannot inject what is good at KLA in terms of financial rigor, in terms of the way out, but we are disciplined to to build new products, new technology, and interact with the customers. And also open the door to the top semiconductor customers because we know that from the front end part of our business. So, again, I'm remain very excited about the Arbotech acquisition, and I'm super grounded, thrilled to be in charge of this organization.
Oh, that's very good to hear, Arbotech. And then, you know, I just wanna ask one more question on the EPC, or I should say, Arbotech, specifically SPTS. You know, the bull argument is that it it gives you a good exposure to the five g side. But if I just wanna play the devil's advocate and look at SPTS, it seems like a low volume product mainly on the ICP, plasma etch, and PVD for packaging, PECVD. These are all typically traditionally viewed as processes that are not KLAs focused, which is more KLAs more on the process control inspection side.
So I'm kinda curious. Do you still think SPD is a strategic fit, And when would you expect this segment to blossom as five g comes on?
I believe it is. And, actually, it gave me the opportunity to go back to twenty, twenty five years ago when I was in charge of process integration in the fab. So now I go back in my past of a process guy, an authority process control first. Thanksgiving co giving me the opportunity to double down on this with yes that I'm very, very the world, I get excited about the potential growth. SPTS is a new cost very unique position.
Position. It's the leader in a plasma based etch and deposition solutions for these markets that are fast growing markets. And we are really at the right time in the right place because with also the the COVID pandemic crisis, we are seeing it in particular, these markets, You mentioned RF that is instrumental for the five g connectivity, but also we have seen in the last couple of quarters a huge increase in the MEMS business. And the MEMS are everywhere because MEMS are sensors you can deploy in the industry, you can deploy in the medicine, you can deploy in many, many areas of our culture and society. So that's the reason why I believe it's strategic because it gives us the opportunity to play in these fast growing markets and also give us the opportunity to enlarge, expand our reach into the semiconductor, not only in the process control, but also in the process solutions where we are leaders in particular in this niche market.
So that's the reason why it's strategically twofold. It's strategically because it gives us the opportunity to double down fast growing market, but also to learn and understand the processes, the tool market from a leadership position. And that's the reason why I expect SPTS to deliver excellent top and bottom line results in the calendar year. I remain very confident in the long term growth of this business.
Very interesting perspective. Got it. You know, talking about you wearing multiple hats. If I remember right, you used to be the former general manager of the e beam business. So can you talk a little bit about update on KLA's e beam product and the competitive situation with Hermes, which is part of the ASML and also Applied Materials?
Yeah. We've been oh gosh. 02/2004, 02/2007, so a long time ago. Yeah. I'm happy to do so.
So we have been very consistent with our message around DP inspection. We said, we have been saying for years that we would have entered this market again only with a differentiated solution, and this is what we did last year. So we believe we have a superior hardware and software technology to tackle the small physical details detection challenge in conjunction with our best in class, the gen four and gen five optical with respection platforms. As you may know, the evening inspection is split in many subsegments. There is a deep physical small physical detection.
There is the voltage contrast, electrical detection, some metrology. The the the space that we are targeting our solution, at least initially, is in those more physical deeper detection because we can leverage these tight coupling between wafer inspection optical based technology and the e beam based technology. So, again, these two technology work very, very close to leverage each other's strength, sharing the advanced machine learning based algorithms, for example. And we are very encouraged by the strong customer's pool for the new EPIM special technology after we successfully demonstrated value and unique differentiation in several data sites last year. So we are excited about to be back in EPB.
For me, in particular, is a is a reason to be proud because I've been there many, many years ago, and I was not happy to see the gap in our report even especially 0% share for many, many years. So last year, we gained a little bit of share and I expect to to gain more share in the coming years.
Got it. That's very interesting. Just one follow-up question on e beam. You know, I think ASML and AI might have publicly spoken about, you know, going the multi beam approach or some people some of them are being multicolumn. I'm kinda curious where you guys take out on that standpoint for EV.
Yeah. Making a multicolumn wafer inspection, EV with inspection is no sense. A multi beam, of course, the people are trying, and they've been they decide for from our competitors for many, many years. There is no proof that a wafer inspection, multi beam or multi column EV technology works yet. My my thing is very, very different.
We would like to have the most differentiated and providing the highest value EV inspection technology to our customer. It doesn't matter which technology you use. We believe our technologies are designed to to differentiate serve the customer needs, and and we will stick to our technology for now. On on the other hand, I want also to mention that on the technical inspection side, however, we are developing a multi column beam reticle inspection tool that will be in the market the next year.
Got it. Got it. It makes makes sense. Then, you know, a couple of questions on the non technology side. You know, one is on OpEx.
You know, clearly, what you're seeing is that, you know, demand is still very strong. There are some people concerned about a recession. So if things do head south from here, how much flexibility is there on the OpEx based on market condition? And within that also, one other question is that you're seeing with COVID, there has been some headwinds in the form of higher freight and shipping costs. There've been probably some tailwinds in the form of lower travel expenses.
So if you roll it all together, how flexible is the OpEx of the margin structure?
Yeah. I'll start to say that we published our business model in the last September investor conference outlining margins for various revenue ranges, as you know. We'll continue to operate our company based on our capital allocation priorities. We have flexibility in managing our construction through variable compensation. You mentioned travel, of course, but also the other bonds payout is another variable compensation level we have.
So I would say, yes, we have room. You asked about flexing the OpEx. We have we have room for flexing our OpEx in this market condition. But, again, I want to make sure that the capital allocation priorities are clear and we start from allocating deploying our cash for r and d in particular, deploying in our business and and the nature of working on doing also in this time frame.
Got it. Good. And then, honestly, one quick question on lead times. You know, with the whole COVID, have you seen lead times stretch for you here because of supply chain inefficiencies? And in that, there is also the assumption that, you know, my view was that part of your long terms for inspection had to do more with actually testing the tool rather than actually just procuring the materials to build it.
So is that true? And given all of that, how do you see lead times today in COVID or post COVID world?
Well, we have a very broad portfolio. So it depends on the products. Some products have shorter lead times. Some products have longer lead time. I I want I don't want to say that the lead time is long because of testing only.
I mean, the lead time is a combination of procuring the parts and building the machine, integrating the parts, and eventually testing the machine before we ship to customers. I don't really see any change, actually. The as I said in the previous question, we have been quite successful in managing the supply chain through these these incredibly painful times. And I don't see frankly, I don't see any change in the future in the way how we manage our supply chain and the way our lead times have changed.
Got it. Got it. And then my final question, given an interest of time, my last question for you is, it looks like you have about a billion dollars left in the buyback. Are you continuing to buy back shares in this environment, or are you slowing it down during this COVID period?
As I said earlier, we did redeploying our business and the eventual allocation for m and a transaction to achieve our top line group objectives at the top priorities of our capital allocation strategy. The rest is returned to shareholders under either forms of dividends or share repurchase. As you know, we have a long history of increasing dividends year after year, And our goal is always to be to return over 70% of the free cash flow. In the in the March, we returned much more than that. We returned more than 100% of the cash flow, including at that time, $116,000,000,000 in repurchase.
It would it was higher than historical average. As you said, we still have approximately $1,000,000,000 remaining under our share repurchase authorization, but we have scaled back the pace of this quarter to be more prudent given the global micro set.
Got it. Well, I think with that, you know, we are right heading up to the time. And, mister, thank you very, much for your time and, you know, input, and hope you guys have a good rest of the day. And thank you. Have a rest of
your day, Kevin.
Thank you, Krishna. Thanks for having us. Thank you.