Good afternoon. This is C. J. Muse with Evercore ISI, semiconductor equipment analyst. Welcome to day two of our inaugural TMT conference.
Very pleased to be hosting KLA Corporation. We have Brent Higgins, EVP and Chief Financial Officer and Ahmad Khan, President, Semiconductor Process Control. We are going to do just a fireside chat. Hopefully, lots of good Q and A. But first off, just want to say thank you both for being here, and look forward to talking with you.
Thank you for having us, C. J. Good to be here.
Excellent. So I guess I figured I'd start off with the current environment. In your last earnings call, you talked about lead times about a month or two greater than normal. Curious when you think you'll get that back to a more normalized level. And is there an upper limit as to what you could actually ship this year, given this extension of lead times?
Yeah, so I think one of the things that's been interesting about this ramp and the momentum we've seen, if you just go back to where we were in November and what we thought this year might look like, we were talking about a mid single digit type growth year, then we went to earnings in January, and we were talking about mid teens. And then as we've moved through, the last earnings cycle, now we're in the mid-20s. And so clearly, there is a bias, to the upside here, and we've seen continued momentum in the industry. The the the, lead times have been longer. They've extended out.
We do have inherent lead times on a lot of our products that, that can be as as long as a year. And so we do a lot to to plan and work with those suppliers to to hedge our long lead time materials to put us in a position that we can deliver. Generally, all products we you know, on a weighted average basis, right around six months or so. From the time that we we start planning for a shipment to the time that we we actually ship. It's a little bit longer, as you said, and we talked about this at earnings.
We talked about an environment this year that we would see sequential growth through the year. We didn't quantify what that would look like, but we thought we'd see that as we move through. Obviously, that means second half stronger. And that we were adding capacity, I use capacity, I talk about it in the broadest sense. We were adding people, we're adding clean room space in all of our major factories.
We're working with our suppliers. We're really proud of our suppliers for a lot of the work that they've done. They're investing, we're investing in them. And so for all of that, we would expect that we'll be able to deliver to that sequential growth as I mentioned, and we would see some of that capacity to continue to come online. So I expect we'll be able to work that down and we'll be closer from, let's say, eight months down closer to six months as we get to the end of the year.
I think we're pretty well positioned and certainly the momentum has been building in the industry and I would expect that we'll be able to continue to support that momentum moving forward. So I'm not going to quantify second half, I have a lot more to say about it when we get to earnings report out on June at the July. But, I feel pretty good about how we're positioned and how the company's positioned from a relative growth perspective relative in terms of WFE growth.
Excellent. You know, at the same time, you know, you're hearing multiple year CapEx projections from leading manufacturers. And I'm just curious, as it, you know, begs the question, you know, are we seeing a structural change potentially in the market where, you know, your, whether it's backlog or soft backlog becomes much more concrete and your visibility might now start extending much further as companies want to get in line? Or is this just systematic of WFE tracking better and therefore it's just taking some time for the equipment industry to adjust? How are you thinking
I think it's tracking better both in terms of size, but also the pace in which we got here. And so I think that's been part of the challenge. Certainly, the end market dynamics that are driving our customers to talk about long term investment plans. And I think it's a function of A, the strength of the end markets, but also some rising capital intensity. And so for those things, think it's it's good in terms of how we plan.
You always have customer readiness and timing issues that you work against. We have, taken some, you know, I'll call it risks in terms of how we're managing with our suppliers, how we're positioning the company to ensure we have dedicated capacity. Are we putting orders out for longer periods of time? You know, doing those kinds of things, I feel pretty comfortable with that that the goal of being flexible and being able to respond outweighs the risks of having some extra parts, particularly given the, the strength of our service business. And the way demand is has stratified to where there's a number of markets that require trailing edge tools, so tools are living longer.
So we think it's a reasonable trade, and we want to make sure that we're in position for that upside. We're also making investments in, as I said earlier, in facilities to make sure that we have the space to support a higher through cycle growth rate going forward than what we've seen in the past. So we're excited about the opportunities. I I don't think it's it's it necessarily means it it changes the visibility, although I think we're working much more closely with customers and given the nature of what we sell, we've already had a pretty good engagement already. Typically, customers hold their slots with us because the demand for these products is so significant that if you get out of position, it's hard to get back in and somebody else will take that slot.
So I think that that part of the discussion has already, been pretty good, and I just see a continuation in that. I don't Ahmad, do you have some thoughts?
I think the other thing I would say is that there's quite a few inflections in the marketplace that are happening on the device architecture side. And that is really pushing customers to make more investments in R and D. We benefit from that EUV implementation is quite important. It's increasing and KLA participates quite well in both on the mass side and also on the optical inspection side. And EUV and DRAM is getting introduced that of course, requires infrastructure spend for our customers and that puts us in a very good position.
So I think all the dynamics that Brent mentioned, are the right ones. In addition, I would say is that the device infrastructure and scaling that is happening putting quite a lot of investments with our customers where we participate.
So that's a great segue to your process control business. So just as a starting point, you've guided the business to grow 30 plus percent. At least in April, that's when you thought the business would grow in 2021. Curious, if there were to be upside, where would you expect it to come from, from customer base profile as well as from product base? Not saying that this is going to happen, but if any good word to, where do you think the upside could come from?
Yes, so I'll start and I'll let Ahmad jump in later. But I would say that, first of all, the biggest strength that we're seeing in our business is in our patterned inspection business. Pattern inspection has inflected with the introduction of EUV with the Pixablog foundry. We had a strong growth year last year, would expect, Pattern Inspection to outperform the market, again this year. So I think that's an area of investment, driven by the dynamics I talked about.
Reticle inspection is another area where I would expect that to grow faster than the overall market. The reticle qualification, both in terms of mass shop, but also fab requalification in an EUV environment is becoming increasingly challenging. And so we're seeing opportunities there. As you know, CJ, we sell a number of products to support that from the high end mass shop requirements of pattern inspection to all the way to through recall, which is done with reticle tools for requalification, but also doing print check with the high end optical pattern inspection wafer inspection tools where you're printing on the wafer to validate the fidelity of the reticle. Those are two areas.
I think the thin film business is behaves a lot like a a capacity business for KLA. And so certainly, as you've seen this ramp in WFE, you've seen a lot, of strength in in thin film. I would expect that to grow, fast in the market as well. I don't know.
Yeah. I think it's a pretty good summary. I think with the device scaling continuing and implementation of EUV, smaller defects are becoming more and more important. And for that reason, our Gen four and Gen five products, optical pattern inspection products are seeing pretty significant growth rate. We're glad that we were feeling this pressure from the market to build and ship more and more systems and our collaboration with customers is very good.
So we were able to see this demand coming. And for that reason, we're prepared. But optical wafer inspection is doing quite well with the implementation of EUV. And then as more and more EUV layers get implemented, our basket for structure is very, very critical with optical mask inspection, which does all the pattern qualifications in the back shops. And followed by we're introducing new products now with very high resolution capability for for mask shop qualifications.
Then I in 2019, I had spoken about Gen five EUV extension for print check capability for mass qualifications in the wafer fab. That's been a critical product for our customers because there's no other really good solutions that are production worthy today for mass qualifications and we're seeing growth there. And lastly, I would say, metrology has seen quite a bit of growth with number of layers increasing both in the films area, the optical CD area, the overlay area. Then I would say it's to take a segue, I as you see, our customers continue to scale, and they're going to bring new innovative designs for n three, n two, and beyond. And for that, there's a lot of investment being made in research and development with varied PowerRail, with gate all around, EUV implementation and DRAM.
And clearly, it does really well in these areas is because each time we change the transistor architecture, metrology and inspection modes completely change. And for that reason, we have to develop new capability, work closely with our customers to implement that capability for them in r and d and then eventually in production. So those, I think those are the three main areas where we see a pretty large growth.
Excellent. So kind of a good segue to the next question. I guess, I'm not, I was hoping you could kind of speak to, you know, the most exciting tech inflections that you see ahead. You know, you alluded to Gay all around. We have high NAUV ahead.
You know, eventually, you know, still many years out, but eventually three d structures and DRAM, higher NAND stacks. Where are you most bullish from a process control perspective in terms of intensity and growth? And you can define the timeframe, you know, whether it's twelve months or, five years, what are you most excited about?
I'm actually excited about all of them. And the reason is because each time you change the transistor architecture or you do advanced scaling, KLA benefits from it. From a business perspective, but also intellectually, it's very challenging to come up with these new solutions. And one of our strengths really is that we have a very wide portfolio in KLA to offer to our customers. Our customers rely on us to create these solutions.
They come to us and explain all of their metrology inspection challenges in the early part of the engagement. With EUV, we have seen that with Gen four and Gen five growth. We have seen that in reticle inspection. There's quite a lot of growth that's happening there and also film control. Now with gate all around coming in, that changes the front end transistor architecture quite a bit.
And for that reason, there's a lot of growth that's going to show up in metrology. Film control is going to be very critical in metrology for the front end transistor architecture. And we're developing new systems for that. And at the same time, while we saw a huge growth, in Gen five for EUV, we believe that, with gate all around and three d DRAM, Gen four will see growth rate, because Gen four wavelength is very, in line with those types of challenges. And that's for that reason, we're developing a new version of Gen four that's going to come out in the market in the next two years that is going to really focus towards get all around.
Three d DRAM is a little bit further away. It's about, you know, three to five years away. But but for sure, KLA will participate in that. I think the first inflection in DRAM
is going
to be the implementation of EUV. So those are some of the inflections that are happening. Barry PowerRail is another inflection. And for that we are developing number of different tools for overlay control for wafer to wafer bonding and and and those implementations. And I think I'm very excited about those inflections.
In NAND, we're we have developed and released a new product that utilizes X-ray for metrology control for shape and overlay control. And that product is now implemented at several customers as customers go to CMOS under the array and also go to higher stacks. We're going to be enabling them with these technologies. So again, excites me is that we have a portfolio approach that enables us to really do investments in new product development. And ensures that our customers can count on us with each of these inflections.
I'm excited about the fact that the industry is continuing to scale, which brings more challenges for KLA and that we can help serve them.
Excellent. So perhaps we could drill down into each of those. So I guess maybe starting with gate all around, I believe you guys have been talking about both new optical and metrology tools to support that market. I I think you just highlighted Gen four update. Is that the new optical tool we're thinking about?
And I guess, could you elaborate on what is so special with, I guess, nanosheets and why a new tool is optimal?
Yeah, so again, our thinking always is, we have a very good simulation capability, which enables us to work closely with our customers to determine what structures they're going to be printing on the wafers. And we can simulate which wavelengths and which light modes we would need to develop a well ahead of the need, for the customer. And we do that, two to three years, ahead of the implementation. In this case, the wavelength that is required is very, in line with the Gen four architecture. However, we need to add many other additional capabilities in Gen four to be able to do quick data all around.
And we started this development a few years back. And as data all around gets introduced, we will have this gen four a new version of gen four coming out at the marketplace to to to deal with these challenges. At the same time, on the metrology front, there's a lot of sensitive shapes that our customers want to control with very high degrees of freedom. And we're working on new optical technologies and heating technologies to do, that control, and those products will be coming out in line with, with gate all around timing.
You know, CJ, one thing that's that's really interesting about the state of the industry today is the extendability that we're getting off of multiple platforms. Historically, you transition to the next generation. And since it was mostly about linear scaling, you would need the the incremental resolution and sensitivity that the next generation would provide. You still need that, particularly with the introduction of EUV because we are continuing to shrink, and and scale from a litho perspective. But but these other technologies are are that customers are pursuing are enabling us to continue to leverage other platforms to solve some of these problems.
That the problem isn't necessarily just about finding smaller and smaller defects. It's great for our gross margin profile. It's great for our r and d intensity that we can extend these platforms. We still have to invest in them, but but that extendability, allows us to if we didn't have that, we'd have to continue to develop next generation, next generation, newer, newer platforms. We probably have to spend more on it.
But we can take very mature platforms, extend them this way, solve some of these customer problems, and do it with because of that maturity, it it it has good design stability and and a good, you know, cost optimized platform. So it's it's really one of the unique things about this environment, both in terms of of leading edge, the things we're talking about, but even as you take it back into the trailing edge with some of the either the automotive markets, industrial markets, IoT markets, that we're able to serve a lot of those markets with older generation tools that we're making modifications to, but extending platforms that the incremental margin is really nice. And so I think that's a change that for the better that we're seeing going forward, I think is a contributor to the higher levels of profitability the company has seen overall.
Interesting. That's very helpful. So we hit our deal all around. I guess maybe if we could move to EUV, and would love to hear kind of your thoughts around Gen four, Gen five applicability there, as well as, you know, any update in terms of timing for your clinic inspection tool.
Yeah, so maybe I'll start and then you can continue. So one of the things about EUV is that, as you know, that the wavelength of the system is far shorter than the previous generation scanner, 193 nanometer scanner. So at 13.5 nanometers, not only you print smaller lines and spaces, but at the same time, the defects that print are also smaller. So for that reason, we have to, innovate not only in wavelength on the inspector side, but also on algorithms and techniques that will be able to catch these defects. We have seen quite a lot of growth in our optical inspection portfolio as EUV has been implemented year on year.
And these growth rates are well above the WLT growth rates for these businesses. Clearly, because due to scaling and due to EUV, the sensitivity requirements have increased quite a bit and our customers are counting on us with Gen four and Gen five platforms to scale with it. We also have introduced our e beam portfolio, we were not present in e beam inspection for several years and we introduced a new product called BSL10. And this product works very closely with our Gen five product mainly and then also with Gen four, to ensure that we are able to focus on areas that customers really care about, but at the same time provide full wafer coverage for process control. So that's doing quite well.
There's quite a lot of good reception from our customer base for that. So with that, I think that's mainly the EUV introduction and how our optical business is growing. On your second question related to a clinic inspection, I think I'll step back and say, today for N5, most of the reticles, I would say 85% or greater are going through KLA's optical inspection system, a one ninety three system in the mass shop that qualifies most of the reticles. We believe that that continues in entry with our 193 system, where most of the radicals will go through that system. It's a production worthy system, data database capability, which customers really count on to catch the most sensitive pattern defects, which will eventually cause yield limiting problems in the wafer fab.
We are introducing our next generation e beam inspection system. It's a multi column reticle inspector. We have shipped our first one to our customers and that system is focused on pattern inspection. For reticle qualification at the wafer fab, we have introduced Gen five with EUV extension. I spoke about that at the twenty nineteen Investor Day conference.
And since then, we have implemented that tool based system in all of the EUV customers and is doing quite well for recall capability. I think that the final question related to our Atenic inspection system, we believe that introducing the product at the right time is most critical, ensuring that the cost of ownership and the capability matches our customer needs. It's more or less in line with high NA EUV timing of when high NA EUV gets introduced. And we believe that is the right timing for an actinic inspection system that would meet the customer requirements and also, be the right cost of ownership solution. Until then, we have our six forty E system for patent qualification, eight SX system for patent qualification, and our Gen five and six seventy E system for equal.
And we believe that that's what the market needs today.
Yes, CJ, from a competitive point of view, I think one of the things that we offer our customers is a portfolio of solutions that allows them to balance their technical needs with their economic requirements. And as Aman said, whether you're using the optical system, we just put just, shipped our first, EV multi column tool for for EUV, high resolution requirements for for UV reticles. And then the the combination of Gen five and requalification systems for KLA allow them to to optimize their their their use cases in production, both from a technical point of view, but also, from an economic one. So I think that's there are many examples of that across multiple markets. I think that's one of the the unique competitive advantages of KLA.
And, you know, I think we're seeing that, and expect that that will play out in the market. You don't get rewarded for being early, and we think we address, the market requirements with what Ahmad has talked about, what I and what I spent some time on here. And we we have a roadmap that we're confident in in terms of delivery of future capability. I think one of the things around around optical inspection with EUV, the EUV has driven the the a number of new designs at the leading edge. And so that's driven because of the the Moore's Law attributes that that have come from incremental scaling, that's created a a much broader design, environment.
So our customers are managing multiple product, process flows and multiple products that they have to deliver in market windows that are tighter and that deliver volume product. And so you're seeing an inflection for inspection, optical inspection capabilities, the workhorse of production. And, we're able to address that market with multiple products. It's also because of the techno technology drivers of EUV, it's it's it's I think the demand for that those designs is causing the the the use of that capacity, but also that the ability to migrate that capacity to reuse it and try to optimize for those investments at the next generation nodes is harder for customers because the demand is there, but also you now have, these technical challenges. I think that's been an inflection.
Rarely do we see investment at multiple nodes like we're seeing now. And I think that's also a change in the industry driven by, the introduction of of this revenue scaling.
Got you. Very helpful. Well, you gave me to the punch. I was going to next hit on kind of the competitive landscape. And I guess to follow on to your question around portfolio effect, was hoping, you know, you could perhaps attack the benefit of portfolio effect from your market leadership perspective and, you know, the breadth of products that you have, how does that enable you to stay in the pole position in all of process control?
Yeah, I think first part I would say is customer intimacy. Right? We have very, very good customer relationships, where our customers feel that they can share all of their challenges with us. And because we're not a point product company and we have a very wide portfolio, we are able to engage with the customers on all of their metrology inspection challenges first. So we start with very early R and D engagements, where customers give us their designs, where we do simulations to understand what would be the right product needed at the right time, followed by near R and D engagements where customers have the designs on the masks and on the wafers, where we bring in our early engagement systems, and then eventually we work with them on with HPM.
So the idea of a portfolio approach is that a customer can give you all of their problems, you can help first solve them, and then you have a portfolio that enables you to really improve the cost of ownership. So if you think about it, we have e beam inspection system that has the highest resolution in the marketplace to find the most smallest and killer defects. That system enables our Gen four and Gen five system to do full wafer coverage of defects across the wafer, across all the lots, and across all the designs. Then we have radical inspection that takes customers designs into consideration and does data database inspections, which are very, very critical to find the smallest defects that will cause reliability issues or failures in customer designs. Then we have laser scanning systems, which are able to offload layers from our optical high end optical systems over to a cost of ownership capability that our customers would need as they do inline monitoring.
Then we have large defect inspection systems, larger size defect inspection systems that do kind of line monitoring, for non critical layers. So that's kind of like an example of I've gone from radical inspection all the way to very high resolution systems to, optical systems that do, you know, full way for coverage, and then to do cost of ownership layers, and then more cost of ownership layers and helping solve customer problems and yet providing very good cost. That's the portfolio approach that we try to use. KLA at the same time has a very good investment thesis, reinvestment. And this enables us to get into new segments that we weren't participating in before.
ESL 10 is that example, KLA was not present in EVM inspection, but because we had such a large optical portfolio, our customers asked us to be present in e beam inspection, so they can give us all their problems. That's one example. Another example is, participated in optical CD for metrology applications. But as our customers went to three d, customer said, this is very hard to do optically by itself. Can you please invest in EVM inspection and X-ray metrology so that we can see deep into the structure and determine what is the shape of the product and everything else.
The third example I can give you is M and A. We did an acquisition many years back for flatness for wafer manufacturing called ADE. We were able to take that technology and now introduce the same tool for inline shape control, wafer shape control for three d NAND and DRAM. And only KLA is able to do that because again, we have not a point product company, we have a full portfolio, we can see the technology and then reassess the technology in other segments. These are some of the examples of having a very wide portfolio that enables us to serve our customers well.
Very helpful. I guess hoping you can kind of address, you know, the increased potential competition on the e beam side. So if I take a step back and think about, the monopolies that I see in the world of semi equipment, I think of lithography and ASML, think high aspect ratio etch for Lam, and I think of optical inspection for you guys. But with defects getting smaller and smaller and requiring e beam and your market share clearly dominant in optical, less so today, e beam, what does it take for you, for KLA to really drive market share on the e beam side? And what can you tell the audience should assuage fears of rising competition on the e beam side from either AMAT or ASML or others?
So why don't I start, Aman, you can fill in after. So they've always worked in a complementary way. You always have this challenge in with these technologies of balancing resolution and throughput or speed. One one challenge with e beam is e beam can be used for defect discovery use cases, but it is very, very slow. When we talk about slow, we're talking like thousands of times slower than optical solutions.
So because of that, it really doesn't solve a customer's production problem or or challenge that, look, I've got to be able to inspect the full wafer. I've got to be able to do it in in production times and so on. So they've always been complementary technologies. And if you think about the the pattern inspection market, 80% of it generally is is solved by optical solutions and about 20% from EV. And that's been the general ratio.
It moves around a little bit. It can be as high as 85, as low as 80, but generally in that ballpark. So so where we are with that is is is is how do we increase the relevancy of of the optical inspection products? It isn't one where, you know, we're looking to detect, contrast. We're not necessarily looking to resolve defects.
We have to find signal to noise. And we've introduced e beam capability not to have another product in a market that is nice market, but not a huge market relative to the optical market. But can we use through the use of machine learning, can we use the AI tools to train our inspectors to be more relevant in a production environment? So that's how we address that market. I feel very good about the extensions of optical capability.
I think as we introduce more and more e beam capability, it will help augment that. And to the portfolio approach of how we're going to address customer problems, we can use that to drive optical. Optical is the workforce. It's what customers want from a production point of view. And if we can make it more relevant over time, then then we we can create higher levels of intensity for it.
Yeah.
I think that's a excellent coverage. I would say the same thing, which is there's no substitute for optical inspection. Gen four, Gen five laser scanning systems, we will we are investing in Gen six. We will continue to invest in optical and optical resolution and techniques that that will find smaller and smaller defects. I don't think that changes and and we'll continue to do that.
So I think the optical relevance will will continue to to stay there. On evening front, what we are trying to do is really as as Brent said, add portfolio products that'll assist our optical portfolio overall. So that is with e beam inspection. I've talked about ESL 10. We are we're introducing a review product.
We are introducing some products at the metrology front to help our optical metrology systems. So I think we will continue to do that because we have a portfolio approach where optical essentially takes care of the workhorse and then we get assistance from And we we I spoke about that in 2019 at the Investor Day where where we said we had a vision of ESL 10 assisting Gen five, and that's what it's doing now. Then there are other areas, like, example, in reticle inspection, we are introducing a multi column e beam inspection for very, very high resolution and high throughput capability for for reticles. And one of the reasons why why you could do that is because the way reticles are are made and structured and how many designs you have, it is conducive to having a, multi column system that could meet throughput requirements. But in wafer inspection, it's just not possible to do.
So again, portfolio approach, optical is the path and then we introduce point products to assist optical to help our customers overall.
Very helpful. Well, I think we've got thirty seconds left. One last question for you. I think investors would really agree that you're probably going to achieve your 2023 target model at least a year early. And so amidst that as the backdrop, where should investors be focused next for KLA?
Well, it's interesting that maybe it's two years early in terms of you just look at where consensus is and of course we have to achieve that this year, certainly in position to do so. And that's really been driven by the strength of the overall market. There is a number of products that Ahmad talked about that we talked about at Investor Day that we're going to contribute incremental opportunities for share and intensity. So KLA share of WFE to improve as part of our 23 plan. Those products are coming to market, we're seeding the market, but aren't contributors of steady state, revenue yet.
And so I think that's still to come and why we're confident that in our ability to drive KLA share of WFE of 75 to 100 basis points over the next few years. So we feel very good about that. Obviously, the leverage in the business, we've been talking a lot about competition. I think the best indicator of the true differentiation of KLA is to look at the gross margins and the gross margin profile we segment report. So it's pretty clear about how we're performing from a revenue point of view.
Our competitors don't necessarily have to do that, but also the margin position within those businesses. So we're seeing strong margin. I think it's an indicator. Obviously, the volume has been good, which has been a driver of leverage, but also the differentiation of the products in the market. So I think that leverage continues.
Obviously, we've seen some gains from the volume, but I would expect that we'll continue to see high single digit type growth over time. I think semiconductor equipment with rising capital intensity will grow faster than semiconductor revenue. And we ought to be able to drive through, one and a half times EPS growth of the revenue, growth rate. So, I feel very confident about that moving forward. Our capital deployment strategy is pretty clear.
We're big believers in capital getting valued only if it's deployed productively. And so we'll continue to increase our dividend and grow our dividend in line with the growth in our free cash flow, return most of the cash flow that the company generates. So we're pretty excited about the future, both in terms of end markets. I think the revenue opportunity, the product positioning and, the overall financial and operating leverage in the business.
Excellent. Well, I think we've run out of time. Gentlemen, thank you for everything today. Really appreciate it.
Sure. Thank you, CJ. Thanks again for having us.
Thank you.
All right. Next time live.
That'd be great. Looking forward to it.
You too.