Okay, I think we're live now. We're with KLA-Tencor. Oh, sorry, just KLA. Today, we have Oreste Donzella, who's the head of the newly formed EPC division, Electronics, Packaging, and Components. Welcome, Oreste.
Thank you, Wes, for hosting us today. Hello, everyone. I hope you and your families are safe. I'm particularly excited to be here today at KLA's first investor conference following our strong June earnings report, which included a record quarter for the EPC group, which, as you know, I'm leading with the help of an awesome team. There are a lot of exciting things happening in EPC that I'm looking forward to discussing in the Q&A. KLA's performance in the June quarter, our position in the marketplace, and the progress towards the 2023 target model altogether highlight how the KLA operating model, our long-term strategic objectives provide a dependable framework to guide execution and help us consistently deliver on our commitments. As you know, June results came in at the midpoint to upper end of guidance, driven by strong foundry and logic demand.
We guided up sequentially in September, see growth for the company in the second half of 2020, driven by broadening foundry and memory spending resuming in Q4. Of course, service, which is 26% of our business, is on track for a solid growth year in 2020. EPC delivered record results in June. EPC comprises of the Orbotech SPTS and ICOS businesses, and we are very excited about the strong results we are showing today in specialty semiconductor, packaging, and printed circuit board markets. EPC is leveraged to growth markets like 5G infrastructures, smartphones, high-performing computing, that will create tremendous opportunities for KLA in the next few years. KLA is delivering on our commitments in the middle of a pandemic, which is remarkable, and has given the company an opportunity to demonstrate our resiliency and indispensability to our customers.
Even with all the disruptions of COVID, our team's execution, market leadership, and solid free cash flow have helped KLA successfully navigate through these challenging times. We are looking forward to even more exciting times ahead. With that, let's dive into your questions, Wes.
All right. Thanks, Oreste. By the way, if people do have questions, feel free to submit them on the website. There should be a window that you can click on, and I'll take a look at those questions as well. First, can you tell us about the new EPC division? Why was it created as a separate division, and what do you hope to accomplish?
Yes, thanks for the question. EPC started to comprise, as I said in my introduction, the Orbotech SPTS ICOS businesses. Let me go back to the time we announced the acquisition of Orbotech, and then we finalized the deal. It was February 2019. In February 2019, we completed the deal and we decided to learn as much as we could from these markets. Eventually, during the September investor day, we decided to create an organization that is going to instill the KLA operating model into the new organizations. We see benefits in instilling whatever we have developed for decades in KLA in terms of process, how we develop new technologies, how we interface with the customer, how we efficiently run the operations.
Putting all this work for the new organizations, we see a possibility to grow even further these kind of organizations and business, and meeting the operating targets we outlined in our investor day in September. The creation of this organization is just because we want to make sure that we leverage our operating model and we grow these organizations.
Okay, that makes sense. Can you walk us through some of the moving parts, like specialty semis, the ICOS piece, PCB display, and maybe discuss how you think about the growth opportunities in each of those? In other words, what are the longer-term growth rates that you anticipate?
Yes. First of all, let me start to reemphasize the very strong results in Q2 calendar year of 2020. Three out of the four divisions inside EPC published record revenue. In particular, specialty semiconductor process technology, called SPTS, and the ICOS division that is delivering differentiated technology for component inspection, and finally, printed circuit board. Let me go through these divisions just to give the investors a little bit more of an understanding of what these divisions do. Let's start from the specialty semiconductor technologies. We expect, first of all, a double-digit growth this year from this particular business, and we expect this double-digit growth to continue in the next two, three years to meet our financial goals for 2023.
Specialty semiconductor process technology, SPTS, is a division operating in U.K., and we develop and deliver differentiated solutions for etch and deposition in niche markets such as RF devices, power semiconductor, MEMS, and also we have a pretty good presence in advanced packaging as well. These are markets that are growing quite fast. In particular, I want to talk about the RF, the semiconductor devices that are at the core of the 5G infrastructure right now. This is why we remain very confident that SPTS will continue to grow in the near and long-term future, because it's exposed to very fast-growing markets. Going to PCB. PCB, printed circuit board, also is an exciting market. First of all, let me say that Orbotech is a very broad and comprehensive portfolio of products in the PCB and IC substrate space. We deliver inspection tools, repair machines.
We have design solutions, software solutions, imaging, like photolithography type of products, drilling. PCB is having a very strong momentum driven mostly by 5G, both infrastructure and smartphones. 5G is a long wave. It is not something that it starts today and finish tomorrow. We have a year side of us of very strong investment in this area and the complexity of the board and the substrate is becoming a growth engine for the PCB division. ICOS. ICOS is a company we bought in 2008. We never fully integrated the KLA semiconductor process control organization, so we kept a little bit separated because of the market that ICOS is serving is different. It is assembly and test for semiconductor packages. We are seeing a strong momentum there also.
First of all, because the packaging business is flourishing right now and the technology is becoming more complex. Also because we see a lot of new packages coming in particular in the area of 5G and high-performance computing. Finally, the only division is not growing in my new organization is display. Display is still digesting some inventory of equipment that have been purchased in the last couple of years. Also display is very much exposed to consumer market that is of course not doing very well during this pandemic. For that kind of reason, display is really more of a long-term play in terms of revenue for KLA, because we don't see the market to resume for the next maybe three, four quarters.
We are taking this opportunity to reduce the cost and streamline the organization in such a way will be linear when the market receives.
Okay, that's helpful. You mentioned double-digit growth in specialty. Do you have projected growth rates in PCB or ICOS divisions?
We expect both PCB and ICOS to be high single-digit in the near future. It depends, again, especially for PCB that is so much exposed to 5G, it may be even more than that, depending how the 5G infrastructure will evolve in the next few quarters. Display, as I said, we are not expecting to grow until the end of 2021, and then we will see how pretty much the market receives.
Okay, I see. In these markets, these are outside of KLA's core expertise in some cases, how do you differentiate yourself in these markets?
That's a great question. I would say one of the narratives behind the Orbotech acquisition was to acquire a leader in their space. SPTS is a clear leader in etchant deposition solutions for the markets I mentioned before, that we consider specialty semiconductors. PCB is a clear leader in the PCB and IC substrate market, and ICOS is the leader of component inspection and display as well. We have leading position, although the market is depressed, but we have leading position in our product technologies. We compete by market leadership. We compete by technology differentiation. We compete by customer interaction. These are things that in KLA we know very well, and this seems Orbotech knew already.
Now putting together the companies is giving us the possibility to add even extra value because we are opening, for example, for Orbotech, some markets and some customers they were not engaged before.
Okay, that's helpful. Do you anticipate more M&A in this segment? If so, what would the focus area likely be?
Definitely we are putting our foot in the door right now. We are a much wider participation in the electronics value chain. KLA, of course, has been in the semiconductor wafer front end, the process control business for many years. Now with one acquisition and also the creation of the EPC organization, we have the ability to expand in many different markets. We have the opportunity also to capitalize our effort in the next few quarters to seek more acquisition targets in these markets. Of course, right now, my primary job is to make sure we are successful with the Orbotech SPTS, ICOS, and EPC organization. We would like pretty much to leverage the success of this integration to make sure we connect access to different type of acquisition targets in the future.
You mentioned a goal. I was wondering if maybe you could share some of your goals as the new head of the division. Are there any targets or goals?
Well, the financial goals have been outlined in the Investor Day in September. They didn't change. The goal is to grow the top-line revenue of EPC double-digit pace by 2023. The goal didn't change. Actually, we got even more confident in the last few months since I took the new responsibility to the goal that we outlined in September. We are encouraged to see the continued market leadership in the segments we serve and also, the very good exposure to fast-growing market like the 5G I mentioned before. The goals didn't change. These are the financial goals.
My personal goal as the head of this organization is also to make sure that I have a very strong team supporting the long-term growth strategy of the group and the company, and eventually making sure that everything we do well at KLA is going to be received and implemented in my new organization.
Okay. You mentioned display is soft. You didn't really talk about automotive. Are you seeing any signs of life or recovery in automotive yet?
I believe automotive hit the bottom last quarter. I'm not the only one to say that. We have seen several automotive semiconductor companies calling the bottom of the automotive semiconductor market last quarter. Automotive is an important segment, especially for SPTS. This makes me even more positive about the future, because, for example, SPTS posted the record revenue last quarter without automotive semiconductor business. It's pretty amazing when this business is historically 20-25% of the revenue of the division that has got zero. There is a pretty good upside ahead of us that is great news. I believe automotive will recover. Automotive semiconductor, of course, is less depressed of the automotive industry overall because some strategic investments, for example, in compound semiconductor for electrification of the vehicle, are continuing even during this big crisis of automotive industry.
Again, we see slow recovery in the next couple of quarters and maybe towards the second half of 2021, semiconductor automotive will recover to the normal historical pace.
Got it. Okay. The PCB recovery that you mentioned, how much of that is related to the 5G ramp? Is there some risk that maybe the PCB recovery slows down in the back half of the year?
As I said before, it's very early exposed to 5G. This is not going to be slowed down because if you look at 5G today, we are at the beginning. There are, I don't know, maybe 600,000 base stations being built in China only, and there are going to be many more built in China, built in the rest of the world. PCB is very much exposed to 5G infrastructure that will continue for the next several years. It's also very much exposed to the mobile market, to the smartphone markets. As you know, the smartphone market may go down in terms of units this year, maybe 10-15%. Eventually, first of all, the semiconductor content is going up, especially with the introduction of 5G phones.
The complexity of the board is going up, and in the future, also the units are going up. It seems to be pretty much a great trajectory for PCB to show growth in their market.
Okay. Maybe we could spend a minute on 5G, more broadly speaking. It seems to be a big enabler for a lot of new compute technologies in the space. How's the ramp of 5G factoring into your conversations, your long-term conversations with your semiconductor customers?
Not only semiconductor. It's semiconductor and packaging and the PCB, as I said. Yeah, 5G is pervasive. It is the biggest driver we are seeing right now in the electronic space. Again, it's only the beginning. Let me talk a little bit about infrastructure first. When I look at, for example, the requirement of semiconductor in the 5G base stations today versus 4G base stations, there are really big differences there. For example, the baseband units and the radio units, they have more RF content, much more RF content than 4G. There is more adoption of the advanced technologies, either FPGA or CPU or processors in the base stations are becoming more and more advanced. There are seven and five, 10 nanometer chips right now in the base stations for 5G infrastructure. 5G infrastructure is a very good growth engine for semiconductors and board markets.
The phones are gaining more and more semiconductor content. Transceiver, communication chips, modem, baseband, processor are becoming more powerful. Not only 5G, but they got to also embrace all the AI revolution as well. The processors are becoming more expensive and more complex. There is more memory going to the phone, of course, both the DRAM and NAND. You see, really, when I see one big trend, and there are many trends. The good news about semiconductor indices these days is we are exposed to a very, very much diversified end demand. It's not the same as five years ago when the semiconductor industry was only exposed by mobile phones. Now we have many trends. The 5G infrastructure, the mobile, we have the AI, high-performing computer, the cloud transition to data center, eventually the transition to the edge.
All these trends are very positive for semiconductor. I would say right now, 5G is number one.
Okay. Is there a way to quantify the incremental opportunity that it creates for KLA over the next few years?
It's very hard to say, actually, because it's so broad that it touches many different type of segments and so on. I would say, if I look at the WFE in general, I'm getting more and more positive about the WFE future growth. In the past, we said it's between 4% and 5%. I believe in the next four years, it's going to pass 5% growth. That is way more than a normal historical GDP growth year-over-year. A big part of this is relative to 5G.
Okay. That makes sense. That's helpful. I'll spend a few minutes on semiconductor technology. That's a lot of what drives KLA. Technology is increasingly complex. We've seen some pretty aggressive node transitions over the last couple of years. But it's hard. We even had one big company announce a delay of 7 nanometer. I'm just wondering, your level of conviction in technology roadmaps progressing at a fairly rapid clip over the next few years or do you see that slowing down? How communicative are your customers related to the roadmaps with you?
First of all, let me say, I've been in this industry for almost 28 years. I've never been more excited than today. I remember when I started, I started the transition to six-inch wafers, I was working Texas Instruments on the memory side. That time, we're talking about one micron DRAM. Now we go down in the 10 nanometer space of single-digit nanometer in logic and so on. That is fascinating, exciting. I'm still very excited about this industry. For sure, the lateral scaling has slowed down in the past few years. However, the ability to pack more transistors in a piece of silicon was not affected because the industry found other way to scale. Design technology optimization was one way. The second one way was introduction of new materials, like cobalt in the back and interconnect.
We went to different architectures like, for example, the vertical transistor, the FinFET replacing planar transistor in logic or 3D NAND replacing horizontal. You see, the semiconductor industry has a great ability to reinvent itself. For that kind of reason, I'm very optimistic for the future as well. Now, there are another couple of things happening right now that are very important. One is the introduction of EUV photolithography. For many years, photolithography couldn't catch up with the pace of semiconductor industry. We were using 193 nanometer wavelength in scanner for many years with many tricks like multiple pattern, immersion, and so on. Now it's a time that especially the advanced logic will transition into EUV space. That means the photolithography people need to pattern and pitch.
Need pretty much to get the real value of the wavelength of the illumination scanner in the geometry that you are printing imaging on a wafer. That means, first of all, more complexity, because of course, the geometry are getting smaller. That means more need to use advanced inspection tools from KLA. The second one is more ability to scale to the next node or next technology. The second big trend I see is in the packaging. I remember when packaging was like wrapping a box around a chip. It doesn't work that way anymore. The packaging is becoming more and more complex. Also you see the biggest semiconductor companies like Intel, TSMC, and the other people, Samsung in the company, Micron, putting a lot of effort in making sure that the packaging technology continue to innovate even faster than front-end somehow.
We see all these integration schemes, 2.5D, vertical 3D, heterogeneous integration, chiplet. These kind of packaging technologies are becoming incredibly complex, but give you a lot of opportunity to scale the semiconductor industry in the future. Give, of course, KLA, a great opportunity to contribute more to that being successful.
Okay. That's helpful. A couple of follow-up questions. If packaging becomes more of an enabler than scaling or if there's more of a shift industry-wide in DRAM and logic to 3D structures and less dimensional scaling, does that have a favorable or a negative impact to KLA's opportunity?
As I said, the front end, the semiconductor is going to scale no matter what. Now we have EUV to prompt all this scaling. In the future, we'll have a new transistor architecture. Every time you have something new in the device fabrication process is good for KLA in the front end. I would say packaging is becoming an incremental opportunity for KLA, because we were not in packaging before because packaging was really not a leading technology, not very complex. Now we see complexity there. We see the customers pulling us in.
I'll tell you one thing that I'm very, very proud of the last several months, taking the lead of this organization, is really to have a very open conversation with our packaging customers, top customers pulling us in and say, Hey, we need a KLA in packaging because the complexities are becoming so huge that we need somebody with a front end process control experience to drive us. I see many customers really asking for help there in packaging. I would classify packaging as an incremental opportunity for KLA. Also back to your question about, do you see collaboration with your customer? I've never seen so much openness to talk about technology roadmap, either in packaging or semiconductor front end as today.
Even with their customer, even with the OEM, the people building phones or cars or boards and so on, we see more and more momentum generating from this collaboration because the complexity of what we do is so hard that you cannot do it alone.
That makes sense. Okay. Moving to memory. There's been an opportunity for KLA to expand the share in memory, particularly in 3D NAND. You talked about it a little bit on the earnings call. Can you explain what that incremental opportunity is and how the revenue ramp might look?
Yeah, this is good. Good question because, of course, as you know, KLA is more exposed to foundries than memories historically, because generally the foundry customers spend in inspection and metrology a higher percentage of WFE, we call process control intensity. However, we have seen changes in the memory market, and I want to make an example, the conversion from a planar to 3D NAND, to vertical NAND. At the beginning, was kind of a concern for us because generally when a technology in the front end, like NAND, went from planar to 3D, the geometry tend to relax a little bit. Maybe less need for advanced inspection tool. However, we came out with exactly the opposite outcome. The process control intensity in 3D NAND was higher than 2D NAND. It continues to be higher.
The reason is because when you need to develop a vertical NAND memory, you create new problems. New problems need new metrology, new inspection tools on KLA and others. For example, stacking multiple layers on top of each other create a stress on the wafer. When you create a stress on the wafer, we develop and deploy a wafer geometry metrology tool that is perfectly suitable for the 3D NAND market. There are many, many layers that need to be monitored that have created more opportunity for our wafer inspection tool, so and so forth. We see this to continue, and we are developing new solutions to address new challenges that can come up in the next years in the memory space, in particular in NAND. On DRAM also, we have the upside from the implementation of EUV lithography.
Even if it's limited for few layers only, the volume of DRAM and the wafer output in memory is so big that will create a significant opportunity for us, that we are very much exposed to EUV lithography in the process control area. Just to mention, the last one I want to mention is we just launched our new e-beam inspection tool, eSL10, at the SEMICON West. This was the first new e-beam inspection product in eight years from KLA. Pretty much is bringing us back in the e-beam inspection arena. This is very important not only for logic and foundries to advance their technology node, but also for memory because in the memory you have the need to find very, very small defects, in particular in pathfinding and developing new technologies in very dense areas.
That's the reason why also our new e-beam inspection technology is very well matching the need for the memory market, in particular in EUV.
Okay. That's helpful. We're almost out of time. I would love to ask just one more question that's a little bit open-ended, but you have a really strong ramp in foundry memory, good product lineup, high demand for process control. It sounds like things are going well. What are the top two or three things that you're most concerned about over the next couple of years?
Well, the pandemic is one, eventually, fortunately for us, it's providing an acceleration of our business instead of a slowdown of our business. Eventually, the pandemic is teaching everybody about the resiliency of the semiconductor electronics in general. I mean, without semiconductor, there wouldn't be any idea how to fight pretty much the pandemic and live a pseudo-normal life, connect with Zoom or visual study and online classes and so on. I would say we don't know when it's going to finish, but of course, this is on top of my concern, and again, everyone concern, and not only from business point of view, but of course for health reasons as well.
On the business side, frankly speaking, we keep marching along and make a lot of progress in our technology development, in integration of new acquired companies, and I feel very optimistic and excited about the future.
All right. Fair enough. Well, with that, we are out of time. Oreste, thank you so much. It was great talking with you, and really appreciate your participation.
Thanks for having me. Thank you.
All right. Thank you.