Afternoon, everyone. I'm Stacy Rasgon. I'm Bernstein's senior research analyst covering US semiconductors. Before we start today, wanna take care of a little bit of housekeeping. I just wanted to mention if you have questions that you'd like to get asked during this presentation, you should have a link to something called Pigeonhole.
It should be on the left of your screen. You can submit those questions there, we'll have time for q and a like that at the end. We're also doing some live polling during the session through Bernstein's partner of ProSensys, and you should have a link available for that on the right side of your screen as well. With the housekeeping out of the way, it gives me great honor to introduce our guests today. Rick Wallace, the President and CEO and Bren Higgins, the Executive Vice President and CFO of KLA Corporation.
Now the semiconductor capital equipment industry has been joining a bit of a renaissance over the last several years. Even given some of the current cyclicality, total WFE spend remains well above prior peaks. The much anticipated end of Moore's Law far from reducing the need for customers to spend on equipment seems to have in fact made the contributions from companies like KLA are more important than ever. And in particular, KLA's focus areas like inspection, metrology and analytics are becoming increasingly challenging and increasingly critical toward maintaining the roadmaps that we have. Now, don't cover KLA.
It does come up in our conversations fairly frequently with the firm playing a particularly key role within semis and semi cap with virtually every electronic device in the world made possible in some way due to their products and technologies. And and we'll hear a little bit about that today. Now as some of you may be unfamiliar with KLA, are going to start today with CEO, Rick Wallace, giving a presentation that highlights some of the unique aspects of KLA's business operating model and long term strategy. And KLA's CFO, Bren Higgins, will join Rick in the Q and A session with me afterwards. With that, I'm going to turn it over to Rick.
Rick, thank you so much for being with us here today. I really appreciate it.
All right. Thank you so much for having me, Stacy. Let me start by sharing my screen. And go to Slide Show here. It's great to be here virtually, of course.
I wish we could do this in person, but I'm really happy to have this opportunity. I'm going to share KLA. Let me start with safe harbor. A lot of things have changed, but this has not. We're still covered by our safe harbor, and you can obviously look to details on our website for any changes.
I'm going to start, as Stacy said, a little bit about who is KLA. And even if you knew the company in the past, things have changed a bit for us given some of our recent activities and our acquisitions. I'm going talk about our operating model, how we run our competitive positioning and then, of course, talk about capital returns and what the future looks like for us. Let me start with this. I think one thing that COVID-nineteen has taught us is a lot of things have changed, but one thing that has accelerated is digital transformation.
And at the heart of digital transformation is the semiconductor industry, and KLA is critical to that because we enable people our customers to make the semiconductors that are enabling all the change that's going on. And our field has never been more important and never been more transformative. Also, KLA has been around over forty five years, and I'm fortunate to have a very seasoned executive team that's been in place for a number of years, has seen a lot of trends. Two things that does is it allows us to work incredibly well together. And the second thing is we've got a lot of history with customers and through this industry.
And I think one thing that COVID-nineteen has also taught us is the relationships we have throughout the industry are incredibly important. And maintaining those virtually is something that we've been doing and continue to do as we go forward. As Stacy mentioned, there's not a device made in the industry that doesn't go through inspection or measurement or some process that KLA is involved in. And of course, the semiconductor industry started really, if you think about it with the space exploration projects in the first needs, but the first consumer device was the PC. You look today and virtually everything is using semiconductors, and we're part of that.
Our focus as a company has been to make sure we're very clear on our mission, our strategy and our objectives. And we've always been focused on the data era, but never has it been more prevalent and critical than it is now. We focus on leading technologies with differentiation, and we can back it up. We measure differentiation by gross margin. And years and years ago, when I was at KLA, had a CFO at that time that said, you can tell me your gross margin, I'll tell you how differentiated your products are.
And so we've always focused on that. We do it by working closely with our customers, driving innovation and then, of course, executing. At the core of what we do is we inspect and we measure. Now that might sound simple, but it's anything but that, especially today with the complexity that is part of the semiconductor industry as we see it today. And just to touch on that, a leading edge factory today costs $15,000,000,000 And at the beginning of that, there's no product coming out that yields.
So the most advanced devices, when they're first manufactured by our customers, don't yield yet. They don't work. And this is the only industry in the world where you'd spend $15,000,000,000 and not be assured to have an outcome. So the question for our customers is how quickly can they come up to speed. The process is incredibly complicated.
There's over 1,000 steps, so you have to get it right. And then the costs are incredibly high. We know of customers that have lost wafers, tens of thousands to hundreds of thousands to tens of millions of dollars because their devices didn't yield. And in many of those cases, they've come back to us to provide more capability so they can see what's going on, so they can understand how their fab is operating and what changes they need to make, how they need to fix things. So what we're looking for are things that are anomalies.
We're looking for differences as we compare the die that's in the semiconductor, and we're measuring things to make sure that the device is operating properly so that customers can get revenue from those devices and that they can do it quickly. The speed in which our customers ramp their fab from low yield to high yield has tremendous leverage. So often with our customers, it's never been about the value of the inspection. It's can you really do it? Can your inspection and measurement really enable me to climb the yield ramp faster?
And as Stacy mentioned, one of the challenges for our customers is every generation of devices, this gets harder. And so the percent of the wallet, the percent of investment that our customers spend on inspection and measurement goes up in order for them to be able to achieve these outcomes. So where are we as a company? We were founded in the 1970s. At this point, we have 56,000 tools installed base.
And what's important about that is I'll get to our service business because a large part of what we do is service those tools for a long period of time. We're, of course, global. We have, at this point, over 10,000, about 11,000 employees. One thing that might differentiate us from a lot of companies is the percent of Masters and PhDs that we have. And that's because what we're doing is solving some of the most challenging engineering problems in the world, and we're able to attract and retain talent to do that.
We invest heavily in R and D, and that's what enables our competitive moat to continue to be present and enables us to solve the problems that the industry needs. Our revenue and our up quite a bit last year. As Stacy said, we're a bit of a renaissance, and it's split between the systems that we sell and the service that we do. So we'll sell a system and our customer might use that system for fifteen years, and we'll provide service contracts to support it. So our revenue is roughly three quarters from the system sales and one quarter.
And of course, the services are a bit of an annuity. We're a profitable company, 35.6% operating margin, and we pride ourselves on our financial performance. We also generate a lot of cash and we return it to our shareholders. That's why we think we're a good fit with the investor profile for this conference. Talking about the operating model, and this is really critical to our success.
It didn't just happen. It evolved over time, and it evolved as we became more complicated. We recognize that as a company who grew up in an industry which was full of start ups, we had to have a way to codify what we did and how we did it. But some core aspects of our business have always been true. We've always focused on leadership.
Market leadership, making sure we're technological leaders and market leaders. We want to make sure that we have the technology to solve the problems of the industry and to maintain our lead. We invest heavily to make sure that we have a competitive moat, but more importantly, in many regards, is that we're able to allow our customers to achieve their objectives by solving their problems. We have a great management team, and we have a lot of talented engineers that love what they do because for many great engineers, the biggest attraction when you solve a hard problem is you get a harder problem to solve. And in this industry, we're never lacking for challenging problems.
And then lastly, we learned a while ago that the key to our success financially was to generate cash returns and to return those to shareholders, and I'll talk about that as well. As I said, we evolved over time. I joined the company actually, I was a customer of KLA back in the early 1980s or mid 1980s, and I joined in 1988. And a lot has happened since. I became CEO in 2016.
And at that time, we were evolving this operating model and it evolved because we became a company with more and more divisions, more and more businesses. And And we realized if we wanted to have common success across all these different entities, we had to figure out how to codify and how to run our businesses in a similar way because we have many product divisions. And so that's where the operating model came from. And then last year, in 2019, following our biggest acquisition of Orbotech, we outlined our plans for 2023, our financial model, knowing that our operating model was going to enable that success. And I'm happy to report one years point into that acquisition, we're very confident, more confident than we even were one years point ago about our success, driven heavily by this operating model.
We focus on strategic objectives. Every business has these. There are four fundamental ones. I'm going to start with the operational excellence because I know this is an interest to investors in this conference. Free cash flow.
Years ago, I remember I'd first become a CEO, it was 02/2006, and one of the directors said, don't apologize for generating cash. Because many companies at that time, especially in tech, chased growth almost at any cost. And for KLA, we found that in order to achieve our desire to have market leading positions in relevant markets, growth wasn't going to be 25%. Growth was going to be more steady, but cash was there. And so we realized that, that was our secret weapon as we could generate free cash flow, reinvest that business and then return it to shareholders.
So we targeted back then, and we'll talk about our history of starting we were the first company in our space to do a dividend. We also took on leverage a little bit just to have a more effective cash flow and a more effective balance sheet. So we returned that and we generated it, and we're proud of our ability to generate cash. We're also proud of our corporate social responsibility. This has always been a focus for our company.
In fact, in many ways, what we're trying to do is enable customers to invest less in other business, other investments so that they can get more out of them. So we focus on sustainable initiatives. Obviously, we have a lot of community focus and we have strong corporate governance. I've found over the last few years, this has become more important to investors, certainly more important to some of our customers who, too, also are focused on it and increasingly important to the candidates that we're hiring as they come out of school. So CSR is something we've been doing for years and something we've been spending more time talking about as it's very consistent with our mission.
Let me talk about our competition a bit. When we look at where we are in terms of the industry, I think nothing kind of tells us like the process control market share. We're 4x our nearest competitor across many years, and we've sustained that. And we do that, it's not an accident. We do it by collaborating with our customers, driving innovation and executing.
And we also invest. We invest heavily to make sure that we're figuring out what problems are coming and we're providing those. And as a result, we've maintained this market share. And what comes with high market share is gross margins. So when we compare ourselves to our peers, we're proud of our gross margins.
Our people are proud that we're able to get paid for what we do, and we're able to get paid differentiated from our peers. And that drives operating margin as we drive efficiency throughout the business. And this is something that we're also focused on. Every business manager, every leader, every general manager of KLA is probably an engineer, but they've learned about the importance of driving gross margins and operating margins as part of the operating system of KLA. Looking at the last ten years and we think about the history of our operating margin and we compare it to other indices, and we're pretty proud of where we stand, higher gross margins than the S and P, the Dow Jones, NASDAQ and even the stocks.
And of course, it doesn't come without investment. So our R and D continues to go up, and we focus on making sure that we're working closely with our customers. We're working ahead in two generations to make sure that we have the products they need well ahead of time and that we continue to bring out new products. It was going to be an interesting test this year in COVID to see how we would do. And I'm very pleased to report we've continued to drive this, be successful in spite of the challenges that we faced with COVID-nineteen.
If you look at our revenues and we compare that with our peers, our competitors in this space, and they're significantly higher even than some very big companies, but this is in process control, the market that we're in. And one of the factors we like to point out is we spend more in R and D than our biggest rival gets in revenue. So this is something that I don't think R and D is the only thing that matters. You have to effectively deploy it, but it certainly matters. You have to be able to invest to be able to be successful.
When it comes to cash flow, we definitely look at how fast can we get cash generated. And that's one of the every new product we look at, every acquisition, we think about what are the returns going to look like and how do we return that to shareholders. So we look at this gross margin and free cash flow conversion. And as you'll see, we're very asset light as a company. So we can drive 70% of our free cash flow back to our investors through both dividends and buybacks.
And we don't have to do a lot of buybacks because we don't dilute our stock very heavily. So most of that can actually be focused in dividends. Our dilution rates are very low, especially when you consider for Teck because we realized long ago that for many of our employees, long term rewards and cash are more efficient and more effective than diluting our shareholders. So here's our free cash flow margin in the last ten years, and you can see how it compares to the same indices we showed before. Again, we're very proud of it, and there aren't that many places, I think, where engineers are proud of free cash flow generation like they are at KLA.
I mentioned asset light, if you look at our percent as compared again across the same indices and then our capital returns, we're very proud of this. Most of our investment is in people and in our R and D workforce, we do invest in that, as I mentioned, but it doesn't take a lot of assets to continue. Mostly, it comes in buildings and some labs in terms of where we spend our money. I mentioned early on that we have the services business that we recognized it was a growing business. If you look back for twenty years, it's grown every year and it's accelerated growth.
And one of the things that's happened is customers have kept these tools in service much longer than they originally anticipated. So service can actually grow faster than the rest of our businesses because of this installed base and the attach rate from the subscription like contracts that we have with our customers. So we've seen 10% CAGR over this, and we're expecting we'll model that for the future to be at a high level. And this drives free cash flow. And it's a virtuous cycle as our service revenue grows, our efficiencies in services grows as well.
A couple of years ago, services for many companies were kind of an afterthought for tech companies. But a few years ago, we highlighted the importance and put it on the executive staff and drove it with some really committed leadership. And now the services group is very proud of their performance and their ability to generate returns. Talked about repurchases. And here, you can see over the last years, the one year we didn't, we're in an M and A discussion.
But other than that, we've been consistent purchasers of our stock. And we've increased the dividend every year, you can see, since we initiated in 02/2006. As I mentioned, we are the first company in our space and largely driven by our recognition of the services business being somewhat of an annuity and not one that could support our returns. One of the questions we've had, and Stacen mentioned this, is one of the things that's changed in the industry, two things really. One is the demand for semiconductors has become much more ubiquitous than it was, and that's reduced the cyclicality.
Wafer front end is really the term that people use for all the equipment that's used for making semiconductors. And you can see the volatility of that. KLA is already less volatile than the rest of the industry, but the last several years has become far less volatile. And the reason for that is the proliferation of devices that drive the demand for semiconductors. So that's reduced the volatility and made our business much more predictable.
As I mentioned, we have taken on debt, and we're proud of where we are in terms of liquidity. We recently refinanced some of our debt, and the next that we have due is until 2024. So we feel good about where we are and how we're positioned. Talking about the model. We laid out the 2023 model when we looked at the post acquisition of Orbotech.
And we talked about it last year at our Investor Day. We said we can envision a growth rate that's higher than what we had prior anticipated because of the changes in the growth that we've seen for our overall markets, the 4% to 5%, but also the fact that we've gained share and as we continue to invest, and we also see growth in services. So now we have a long term model, 2023, of 7% to 9% driven by industry growth, our ability to continue to hold and gain share in our services business. And what's really exciting about that is that translates into this model. So 2023 targets.
Right now, we envision $7,000,000,000 to $7,500,000,000 at 36% operating margin of 14,500,000,000.0 to 15,500,000,000.0 and we'll return over 70% of free cash flow. When we laid out this model over a year ago, September 2019, we were confident then, but we're more confident now. Even though we've had a year of COVID, what we've demonstrated is our ability to execute on the acquisition that we did at Orbotech, and we've seen the strength in our business and the interest from our customers in continuing to partner and build on our success that we've had in the past. So we feel great about where we are and our ability to continue to drive success. So just wrapping it up.
Semiconductor is more important now than ever before. We're certainly in a data era. And if anything, COVID-nineteen has accelerated digital transformation across our customer base and across the industry. So for that reason, we're in a great position to continue to We've also got this amazing service business that augments the rest of our business. And we believe we've got a lot of qualities that should be appealing to investors that are looking for steady growth, profitability and consistent returns.
With that, I'd like to turn it over to Q and A and thank you all for spending this time with us today.
Got it. Thank you, Rick. Super helpful. I want to get started a little bit on some of those broader longer term market questions. Now near term cyclicality and virus and everything aside, semi cap industry as it does appear to be coming around to a structurally higher view of industry away from fab equipment.
Mean, it's unaware it is now 50,000,000,000 a year give or take at the current level. I mean prior peaks were like 35. Now, the same time, if I look at your longer term model, you sort of were looking at sort of industry wafer fab equipment capital intensity, at least maybe flat to slightly up, call it flattish. But you also had a point of view for new product introductions from KLA themselves coming in, which to me would suggest that you saw the intensity of process control itself actually increasing relative to overall wafer fab. Is that logic correct?
And maybe could you give us a little more color around how to think about the growth of like process control in the areas and metrology in the areas where you play relative to the overall capital equipment or capital intensity of the overall sector going forward?
Yes. Let me start and then Bren can, of course, add in. Yes, that is what we see. However, when we modeled it, we weren't sure what WFE growth was going to be. We actually modeled WFE, which is the equipment was going to be roughly consistent with semiconductor growth because our view was that the capital intensity was going to stay the same and we were going to see we create a model where we'd see marginally similar process control.
But what we've seen is that on top of that, as you said, new products. So we feel pretty good about that. And in fact, we think there's room for growth in process control intensity. But when we set that model out, we didn't really want to count on it. And as you said, we have some new products that will add to both our share and process control intensity overall, and Bren can quantify some of those.
Yes, Stacy. So the way we thought about it is you're right, is we really wanted the story to be more about what we thought was happening within our space and also some new products that we were introducing. So our view overall was, look, capital intensity is no longer declining. There's a lot of efforts in the industry to keep it from going up, but we're going have a flattish assumption. And so WFE going forward would grow mostly in line with semiconductor revenue.
And certainly, we've seen and I think that was reasonably conservative, but at the same time, we didn't necessarily want to make judgments about that. But as you look back over the last year or so, we've seen a lot of growth there. And I think one of the wildcards that initially and we wanted to see it play out was the growth of foundry logic, which has now for a number of years, it wasn't growing or certainly wasn't growing as fast as memory was growing. And over the last few years, we've seen strength there and mostly enabled by the introduction of new lithography capability in the industry, which has driven scaling, which has increased the Moore's Law attributes of devices in logic and foundry. And so you look at the broader end market demand plus the EUV effect.
And so that's driven more investment than in that part of the market. And that part of the market is more process control intensive. So that's been encouraging for us. We also were looking at new products that with the introduction of EUV that we would have products that would enable us to get customers to spend more on process control and improve our share position. And there were a number of new products that we talked about at Investor Day that would be an adder to that industry growth.
Service continues to do what it's always done. It's been a 10% growth business. And yes, it's larger numbers now, but our view on that is that it continues to grow at that level. A lot of the installed base is still in service. It's being run harder today than customers have historically.
In fact, 85% of the tools at KLA and TENCORE have shipped going back to the 70s are still in service at some level by customers out there. It doesn't mean we're servicing all of them, but customers are still using them, but it is an indicator of the useful life of these products. And so that would be an underlying driver or contribute another couple of points to the overall growth rate. So when you add up the pieces, you get up to the 7% to 9% longer term through cycle view of top line growth for the company.
Got it. To touch on services for a minute, I mean, would it make sense that and I get where you're coming at, like, know, historically, it grew 10, your modeling math, you know, kind of going forward. But as the installed base grows and and the tools themselves become more complex, would it be underlying to think that services actually could grow faster than it could in the past? I mean, I would just think overall, as you've got more and more tools building in the installed base and especially with the longer life of them, services could be an even bigger driver. Like what would be wrong with that kind of logic?
Well, we keep telling our team that we use that same logic with them. Yes, absolutely. And given the strength we're seeing in the overall business over the last couple of years, that's adding more to the installed base. And our customers buy our tools. And with process control, they tend to buy what they need.
They don't necessarily buy a lot of extra tools. And then so what they do is, is that they rely on them and so they run them pretty hard. In a lot of cases, they're very complicated. They don't have huge install bases like they would have process tools, where they can build their own capability to service the tools. So they rely on us to keep the tools up.
And so it is a driver for us in terms of just broader install base and more growth there. So I think that we feel pretty confident about the 9% to 11%. And I do think for the reasons that you mentioned that there could be some upside there. We have to execute. We've got to keep customers and continue to deliver value on some of the offerings we have, particularly on trailing edge products, and the ability to continue to service them, which is not always easy just given supply chain challenges and so on.
But there is an opportunity there, and if we can execute and deliver value, for sure.
Got it. And one more question on services. What drove the inflection over the last couple of years in services? I mean the chart was doing this and then it did that.
Yes. Most of that has been the there's a couple of factors. A, it's just we've seen a lot of growth in the business overall, all right? The business will grow systems Process Control Systems will grow 15% this year. So that's been a driver of it.
We've also added in the Orbotech services businesses. And so that's been a driver as well. So if you look at our overall service, I think external reported is somewhere between 1,300,000,000.0 and $1,400,000,000 About 300,000,000 to $350,000,000 or so of that is related to the Orbotech businesses. The rest is the semi process control. The other point about services, customer consolidation has been a big driver for leverage We've in the business, been able to invest in infrastructure.
And so we're able to drive good operating leverage on the revenue growth today because fabs are closer together. We can get leverage on our resources. We've invested in capabilities to support them. And so that's been a good driver for the from a profitability point of view for the Service business as well.
That's interesting. I would have thought the customer consolidation in general would be a negative for you and for semi cap broadly in terms of profitability, just given the better bargaining power and negotiating power of the customers.
Well, so Stacy, think about it like this. If a lot of service time is not actually in the fab because there's transport time, there's time to go in. So if you go back long enough, you could have a person service one system, and it could take a fair amount of their time. Now if they can go into a fab and they can service 10. So yes, you might have customer power in terms of negotiating, but you have efficiency based on the density.
And so you have a lot more systems to be serviced, and you have the ability to the downtime, the utilization, which is something we track of the service engineers, goes up. So that's an area. Now one thing that's been interesting in COVID is a lot of interest in remote and tele so we brought a lot of technology to bear in the last year, both for installations and also service, which is something customers had to do because of IP, but I think we're working through that. So there are there is reason to believe it can get more efficient as we go forward.
Okay. Got it. Now the other aspect one of the other aspects of the longer term growth model was new product introduction. You talked about like an accelerated pace of new product introduction. I know you talked about a few of these at the Analyst Day, but in general, if I were to broaden the question, like what are some of the most difficult technical challenges that you're now helping your customers with that are going be rolling into the model over the next several years?
Like where are you actually really leveraging your know how to help the customers? What are the toughest things that they're dealing with right now that you're helping them with?
Well, I'll start, and then again, Brent can add in. EUV if you think about EUV, EUV has presented a number of additional challenges for our customers that heretofore have not really been solved. And as they scale in production, there's more opportunity there. So that's one area. The other area is in memory.
There has been more opportunity for memory inspection and measurement than there have been solutions. And that's because the problem by memory going vertical, it's gotten new technologies how to deal with that. So we have products in both of those areas that are enabling customers to solve more problems and provide growth. And as I said in the opening comments, we're making progress on that. There's certainly a huge customer need for that, two areas, and maybe Bren can quantify some of those.
Well, the other part about it is and it really covers to Rick's point about both segments is an e beam inspection offering, right? So a new offering that is part of our inspection portfolio. And we're really the only provider out there that can offer multiple technology solutions to our customers to balance their needs in the facility, both from a sensitivity and yield learning point of view, but also from a volume and production efficiency point of view. And so the introduction of e beam capability allows our customers to do some of their high end defect discovery work. And we use that information that comes off those tools and with AI algorithms to do machine learning to train our inspectors.
Signal to noise is a huge challenge for our customers in trying to speed yield learning in fab. And so using these capabilities enables them to help find that noise or find that signal through the noise and to accelerate that process. Most of our competitors offer point products, but by being able to introduce a solution that allows us to leverage the portfolio. And then we have metrology strategies that are similar to this, but on the inspection side, that's also a factor in our model. So we had opportunities around reticle and reticle qualification, new high end pattern inspection tools, we call it our Gen five product, the second iteration of that memory metrology opportunities, but also a new product offering to leverage the inspection portfolio with e beam technology.
Those are the biggest sort of new product opportunities. We thought that based on our assumptions on the market that when you aggregate all of it, it would create a $500,000,000 type opportunity for the company by 2023. Now we have to execute and seed the market and get some of these capabilities out there in a blend of intensity and share improvement. So that was an upper above the industry growth that we had modeled there where we talked about 1% to 2% of incremental CAGR coming from that.
Got it. And I guess across the two private like within inspection and metrology, do you see similar growth opportunities in trajectory for both of those businesses? Or are there differences between them?
Well, are definitely differences, but there are things that are driving both of them. And now that scaling is back on, one thing that EUV did on advanced nodes is we went through this period where there was no new lithography technology. So scaling had really slowed for a number of years. So EUV is driving both things. One, you're driving the defect level has to go down because smaller defects matter.
And so that drives our inspection business. The other thing that's driven is the registration from layer to layer is more and more critical. So businesses around overlay, around the measurement of that have gotten increasingly important in the places where people sample goes up. So that's a driver. Then the other one we've talked about is memory, and memory just capacity is going up, and that drives it too.
So we really have several segments that are all driving it. But I'd say in aggregate, there's not a huge difference between what we're seeing out of metrology growth and inspection growth.
Thank you. I'm sorry, Brent, were you about to say something?
No, for some reason, I had some technical difficulties I dropped off. So and I don't know what's going on now with my camera, but I'm sure Rick
covered it. If we can't see you, it's okay. Yes. I'm
sure Rick covered it well.
Yes. I want to touch again, if I can like go back to E2, e beam commentary for a moment. There are other players that are already doing the e beam. Your ASML, I think, is already doing multi beam. Can you give us maybe a little more color on what the e beam road map that you have looks like versus the competition?
Yes, I'm happy to do that. I just sat through two days of reviews on programs. So I'm very update updated. So we had some we have a fundamental approach to e beam that's different architecturally than our peers, but we have the added benefit of having the leading optical inspectors. So for those of you who aren't following this in great detail, optical inspection is much faster than e beam.
E beam, in theory, finds more or finds the defects that are more critical smaller. So we're the benchmarking that we've seen so far as we've rolled out our e beam product, we're getting very good feedback from customers. We're getting a sense that we're not just finding what the other guys are finding or measuring, but we're doing more based on the architecture that we've driven. So we have a road map to continue that. We also have it for both reticle inspection and wafer inspection.
As Bren mentioned, we've always used the thought that they were complementary because one of the successes KLA has had, and we had this when we merged with Tencor, and I came from KLA, I realized there's a huge benefit in giving customers a portfolio and the choice of how they want to implement the best strategy for them. So on the one hand, have the road map, we have the linkage with our optical. On the other hand, customers not feeling like we're forcing them to adopt a system. So we feel pretty good about our differentiation in e beam, but also in how it ties to the other products. There are other things that are going on.
One and I'm sure this wouldn't be a surprise to people. There's a lot of efforts in machine learning and AI in inspection. But what we've noticed is we've been able to leverage our approach that we use across multiple products and multiple divisions. And that's enabled us to leverage the algorithms and the groups that we're doing there, including what we're doing in eBEAM, and we think that gives us an additional advantage. The pictorial that's behind me, that's the building that we're building in Ann Arbor.
And it just finished. We've put the last steel in. We'll be fully up in Michigan, and we're about two fifty people. But that's one place we've added a lot of AI capability to address centrally these challenges that we face across our product portfolio. So we're really proud of where we stand in both algorithms as well as core e beam technology.
Got it. Thank you. That's helpful. I want to ask about some of the longer term like share targets. So like currently you put up that chart which I thought was fantastic showing your market share at least especially in process technology is 50% much higher than peers.
The long term I think you said you thought the TAM would be $10,000,000,000 plus and the revenues would be $7,000,000,000 plus which is more like a I don't know if I'm like doing apples and oranges or not, but it seems to me like you're seeing market share like overall leases as a percentage of the TAM going up. Can you talk a little bit about what's driving that? I know if that's the Orbotech acquisition or if it's something else, but like how do I what's the bridge from where we are now to where we're going there?
Sure. What we laid out in our plans 2023 plans that we laid out in 2019 was we're going to our goal was to gain half a market share, half of per year. So 2.5 points over four years, that was the two to 2.5 percentages, not 20%. But we actually gained 2.5% in 2019. And so now we're continuing on that pace to gain about 05% per year.
So I think you've seen different data, but we know that customers are always it goes back to this consolidation. We're always going to have competition in every market segment that we have. So we don't want to make plans that are counting on huge inflections in market share, but rather continuous gaining in share as we bring out new products and we continue to invest. So the 2023 plan that we talked about has pretty modest market share improvements over time. And part of that is we don't compete in every segment of process control.
We only compete in the ones where we feel we have differentiation and we can have a significant lead in the market. So there are some markets that we don't play in. So our 50% is inclusive of some of the ones, for example, CDSIM is a market we don't compete in. But our plans are to continue to gain share but modest gains over time given how dynamic our customers can be and they're tough. We're going to battle them for share all the time.
Okay, got it. I want to ask a little bit about M and A and inorganic growth because I know your model also has opportunities like for inorganic growth and know you've just done Orbotech and so this maybe could you talk a little bit I guess for now, what is Orbotech actually bring to the table? What was that for our investors on the line who aren't familiar with it? What does it do for you? And then what are some of the areas you may be looking for if you are seeing like opportunities for like tuck in or other types of technology going forward to fulfill the profile?
Yes. Of course. So Orbotech was an acquisition of an Israeli company that had essentially three product divisions. It's dramatically increased our participation in five g because it's part of the market that it serves as the printed circuit boards themselves, not just the semiconductors and some of the specialty processes that make more devices that are more power devices or RF devices. Devices.
So it's really got a specialty semiconductor as well as packaging as well as display. So we were confident when we did that, that we could leverage those businesses and run them more efficiently over time. But more importantly, couple them with the other efforts we're doing in packaging, and we've already seen that. So that gives us new TAM and new ability to grow. When we laid out our 2023 plan, though, we said it's a modest it's a placeholder for additional revenue.
We put somewhere between 200,000,000 and $300,000,000 in additional revenue. And the way we did that, we just looked back and said that's nominally what we acquire per year integrated over five years. No major deals are assumed to be in there. And what investors should know is our alternative every time we look at a deal is should we buy back our stock or buy a target. And so we'll get to the earnings target either way through buybacks acquisitions.
But our view is we've been successful with Orbotech. We'll be opportunistic in there, but there's nothing in our current plan that says we need to do any more M and A. If we were going to look for M and A, it would probably be in things that are more related to Orbotech than are related to the process control, simply because our process control share is high enough that the truth is it'd be challenging to get regulatory to do more there.
Got it. Got it.
Yes, Stacy, one aspect of that for us was really important for us to expose ourselves to more of what our customers were doing to pursue capability and cost. And obviously, we've been very exposed to front end semiconductor manufacturing, and we understand that well. But the Orbotech acquisition through the businesses that Rick talked about provided a platform for us to get more exposure to the packaging world, what was happening in specialty semi, to develop a channel in that space. And then going forward, as we bring new market and new product opportunities into those markets, that we could expose ourselves to more of those areas where we're seeing customers investing. And so it gives us a broader footprint.
It's Moore's Law driven dynamics, but also the more than more areas of opportunity, they're becoming increasingly more challenging and more value add opportunities for our customers. So Orbotech enabled that. Market positions are very good. We believe that with the operating models, Rick talked about that we can get more out of those market leading positions and early evidence so far one years point in suggests that we believe we can in terms of the operating leverage. So those businesses bring lower margin profile lower margin ratios to the company, but we believe over time, we can drive similar levels of incremental operating margins out of those businesses as our core or our Semiconductor Process Control business.
So it's worked pretty well. We feel pretty good about where we're at. They also have service businesses that we can integrate over time into the service model we talked about earlier. So we're pretty happy with where we're at there and what the opportunity is going forward.
Got it. And that's a good point, I guess, around the whole more than more thing, especially as you've got major players who are now going much more to things like chiplet architectures and advanced packaging. Orbotech actually gives you more of a play into that as that becomes more important.
Yes. And beyond that, because a lot of the big semi guys are playing there, it was challenging for Orbotech to get a seat at the table with them on their own because they want to deal with bigger companies. And so I think we opened up some doors, and we're seeing some upside and some revenue synergy that they couldn't have achieved on their own simply because some of these guys can hold they know they can hold KLA accountable, and it's harder to do with smaller players. So as we talk to the teams, they're very excited about it. We said the reason they let us at the table, there's an expectation we're going to execute.
And so from a KLA standpoint, we've added some of the rigor of the operating model to make sure that we can continue to do it. But we had they're very well positioned. And as I mentioned, five gs is something we weren't sure earlier in this year if there was going to a slowdown in five gs because of COVID. But if anything, it's accelerated. And so that's been part of what we're seeing in terms of the penetration of that.
So very encouraging. And I think for other thing we're seeing is some technology synergies as well, where there's areas that as a company, we can do better together than we would have on our own on their own too.
Got it. Okay. We've got about five or six minutes left. We've got some questions from people on the line. Would like to go to the lightning round.
Sure. I
guess the one on the top, how would you think about competitive dynamics and process control versus other end markets like etch or dep or litho? And does KLA's higher share or higher relative share generate higher ROIC?
Yes. Go ahead, Rick. So let me start by saying, fortunately, I don't have to think about a lot of the dynamics in the other segments. But I think that what's different about what we do fundamentally different. In DEPA and Etch, there are specific requirements that you have.
And so I think they become more competitive simply because the problem is easier to determine. And therefore, I think when you look at it, the margins are lower. They just are. Ours, we have more room for differentiation. Bren mentioned the BBP or the Gen tool.
There's no other Gen5 tool in the world. There's nothing comparable. There are alternatives to it, but I think that's part of our differentiation. So our justification for our systems is more can we demonstrate value. So our dynamics are a little bit different.
In Dep and Etch and process in general, you have to demonstrate lower cost of ownership, better performance than the other guy. Ours, we have to demonstrate value. So I think that helps us. And we talked about the level of investment. In Depth and Edge, they're closer in terms of size, so the level of investment is closer than in our space.
Got it. Yes.
And I think on the returns question, Rick talked a lot about differentiation, what that margins. And so we introduce products faster, we invest more, and we have a pretty good understanding of value we create, and we have to share in that value with customers. And so that margin profile allows us to have pretty good drop through. The asset base is fairly light. Rick showed a chart on CapEx.
What we really invest in for the most part is inventory. And certainly, we need with the kinds of products we build, we've seen our inventory grow. Some of that is just the customization of what we have to do and the lead times associated with it. But also the long service tail of business requires us to carry a fair amount of parts that we do into life buys for long periods of time. It's an investment we make.
We think it gives us flexibility and to be responsive to customers. But it's really the one thing that in terms of just the overall asset base we're investing in. Obviously, in ramping environments like we're in now, we're investing more. Things slow down a little bit. You're able to recoup a fair amount of that because these products live.
So the risk profile is pretty low. And then there's the general AR and things like that. So for the most part, I think the ROIC is there because the numerator is strong from the overall differentiation that drives the higher margin profile relative to the peers.
Got it. Thank you. Can you give us an update on export control reviews and domestic China customer revenue impact from those?
So at our earnings call, there were questions about one of our customers that was added to the list that would require licenses for certain products. And in that situation, we've applied for licenses, and those are pending review, and we don't have any update to that. Part of our guidance was also that we didn't think the result of the license review would have a material impact on our Q4 guidance. And so it was frankly immaterial to the Q4 guidance. So there was no adjustment made to guidance for whatever that outcome would be.
So that's the only customer that we have where there is licenses required, and we've applied for them where appropriate, and we're waiting to see how that plays out. But as I said, we'll get to our Q4 guidance with or without it.
Okay. If I were to follow-up on that, like for a longer term question, what do you think about the prospect of kind of, like, more localized Chinese equipment? I mean, like, presumably, if they're not gonna be fully dependent on The US, they're gonna have to do something. But from everything else that you've said today, I have to imagine that if I'm picking one process that it'd be difficult to duplicate, process control will be pretty high up on that. So like what do you think about the prospects of the Chinese developing more of a localized equipment industry, particularly around process control?
Well,
so I'll just go back to Japan had a pretty big process control industry years ago, and we've managed to be successfully compete with them. And they had a much stronger base to build from. It really doesn't change our dynamics. I mean, the end, we have to innovate, we have to execute and we've got to stay ahead. So there's unlike other industries, it's just not enough to have your home market.
You have to be able to compete internationally to be able to afford the R and D and to have the learning. And I think that's been the challenge. I mean, if you think about why the industry got formed in the beginning, it was to allow people to essentially invest in equipment so they could serve the whole market. I think it's a tough road. And I think what you've seen is there have been equipment companies there for a long time.
There are many in Korea as well and it's pretty minimal the amount of share that they've taken. But it certainly compels us to keep investing, that's for sure.
Got it. So we're running up on the end of our time. Ordinarily, would finish this session by asking you, giving you a soapbox and I can still do it. And the question typically is why should investors buy your stock? I feel like you started with that, but I'll give you if you'd like to sum up, I'll give you your thirty second soapbox.
Bren, I'm going to give it to you because I started this thing.
Well, yes, so we do. We spent twenty five minutes on the front end I talking about think it's a business that has really good growth drivers, which Rick talked about at the beginning. We have a strong position, differentiated position. We have market shares for ex our competitors. We deliver best in industry margin profile.
We have a belief in the company that capital and cash needs to be productively deployed to be valued. And we try to put it to work in terms of whether we're investing in our business, looking at opportunities on the outside where as Rick said, we have a pretty fine filter on or returning it
to our
shareholders. We have an assertive capital structure in terms of how we finance the business. We believe that we've made some decisions on that front and recognizing changing characteristics and to put the company in the right place to leverage that as part of our overall strategy. The Orbotech acquisition exposes us to broader market opportunities, a broader SAM in markets where technology is increasing. And we think that there's opportunities for us to try to leverage those positions, both from a technology and market position point of view, but also from a financial point of view.
So we think the company is in a really good space. I think there's a good opportunity here going forward on growth. We've talked about our 2023 targets, and we think we're well on our way in terms of our confidence level of achieving those targets in that time frame, 7,000,000,000 to $7,500,000,000 revenue and 14.5 to $15.5 in earnings.
Got it. Super helpful. Guys, I've truly appreciated having you here today. Thank you so much. With that, I think we'll close it out.
If anybody on the line has any questions, please feel free to reach out. Everybody have a good day. Thank you.
Thank you, Stacy.
Stacy, thanks for having us.
Take care.