Alright. Good afternoon, everyone. I am Sydney Ho. I cover semiconductors, semi cap equipment, and IT hardware at Deutsche Bank. The next company we have here is KLA.
KLA is a market leading provider of process control and yield management solutions for the semiconductor industry. Today, we're thrilled to be joined by KLA CFO, Bren Higgins. Welcome, Bren. Thank you.
Thanks to me.
Before before we start, for those investors who are listening to the webcast through our portal, if you want to ask a question, there is a box on your screen where you can type in your questions. I will try to ask those questions as we go through our discussion. And before we jump into Q and A, Brent, I know you want to make a few comments to set the stage. So why don't I hand it over to you?
Thanks, Cindy, for having us. I'm glad to really be here. It would be great if we could have done this in person. Hopefully, we'll get a chance to do it soon. As and I'll just start with the safe harbor statement.
I'll make some forward looking statements today. Those statements are subject to risk. Those risk factors you can find in our SEC filings, and you can access those via our website. Well, 2021 is just a very strong robust business environment. It seems that every quarter going back to the 2020, we've seen updates in terms of just revisions of growth estimates for our industry.
At the last earnings call at the July, we talked about an industry environment that was up somewhere between 3035% off a base of about $61,000,000,000 for WFE, so it puts it in excess of 80,000,000,000 With strength for KLA across our semiconductor process control business of growing year over year somewhere in the high 30s to low 40s. So well positioned business overall. We're very pleased with how we're positioned both in terms of the products that are driving the business, but also with new product offerings that will support the business in the future. Our service and EPC businesses, EPC stands for electronics components and packaging business, which is our more than more business are also doing well this year with mid teens growth. We're certainly getting most of our questions about the semi process control business.
And we've got businesses that are growing in the mid teens and their diluting your growth rate gives you an indication of the strength of the overall business and the semi PC part of the business. Overall for the company based on consensus, 2021 estimates look like their revenue growth rate in excess of 30%, EPS growth rate given the leverage that we drive out of our business, greater than 50%. So very strong performance. I talked about the second half of this year for the company being somewhere in the mid teens of growth versus the 2021. And then I also said in the call in response to a question that I have a hard time seeing how the 2022 wouldn't be at least as strong as what we're seeing here in the 2021.
So some sustainability in our business, really the strength across all the markets. We're excited about that. Competitively, I think we're well positioned and certainly reflected in the gross margins of the company. And so, we're excited about what's in front of us. As we were talking before the the presentation here started, some of these problems are high class problems trying to keep up with demand, but but they're problems or challenges.
And I'm really appreciative of our suppliers and our employees, with how we've executed through this year. Sydney, I'm sure you have some more questions, so fire away.
Sure. Thanks for the overview. Well, maybe we'll just start off with some near term industry questions. You talked about WFE growing 35% in that range, so called low 80,000,000,000. What are the main variables for the rest of this year and that that determine where where WFE ends up?
And what are some of the key trends that you are monitoring going into next year?
Yeah. No. It's a great question. And as I said earlier, it seems like each quarter, it strengthened. And even if you look at today, given what we're seeing from customers, I think we're probably biased towards the higher end of those ranges, more so than the lower.
So I would say just across the board, confidence is pretty strong right now as we head into the second the last second half of year, last finishing this quarter and moving into Q4. Capacity constraints are probably the biggest challenge. Certainly for us, we've been adding capacity through the year and I guided that we would see sequential growth as that capacity comes online. So we're seeing a step up in capacity virtually every quarter as we go forward. These are investments we think that are prudent to make given the through cycle growth expectations over time for our business.
So I think that the biggest drivers for us is our ability to continue to execute against that business that our suppliers continue to perform and that capacity and that supply comes online. Certainly, have customers also that are ramping facilities. In some cases, they have new facilities. And so there's always customer readiness challenges whenever they're adding a lot of equipment and adding it into a new facility. So sometimes infrastructure requirements can slow things down a bit.
But in general, the environment is pretty healthy. And I think that the trend that we've seen through the year is that it's gotten better. And so I think that I don't see anything that signals a different trend than that.
That's good news. But in terms of the current current environment, strong demand, supply constraints and potential for some disruption from the from the pandemic, I would assume customers are looking to put in orders earlier, and you should have better than typical visibility into the future demand. Can you talk about any changes in customer ordering patterns and your visibility into demand, say three, six, nine months out? What are your lead times right now versus what is considered normal?
Yes. I guess that's one factor I left out too in the last question was, does the pandemic and the effects of the pandemic around the world cause any issues with supply disruption? I think we've managed around it pretty well, but there's always the unknowns. Yes, backlogs are high and customers are giving us orders to get into the queue. It's important for them to secure their slots.
And so we need orders for that. That certainly does provide more visibility overall. And I think that that supports the statement I made about our views into the the first half of of twenty two. It is, you know, I think in an environment like this, I think given the pressure that their customers are putting on them and and some of the shortages that are out there that that that are well chronicled. Customers are trying to secure those positions.
Our lead times are not coming in. Earlier in the year, I thought we would be back down to a normal lead time for KLA. Normal lead time for KLA tends to be around five to six months or so, even though the intrinsic lead time on a number of our products is much longer than that, but we do a lot in terms of inventory and supply chain management to pull that in. And we're running somewhere around eight months today, and it it hasn't come in partly because, a, we've added capacity, but we've also seen demand strengthen. And so we're maintaining where we are.
I expect to see that continue as capacity comes online, but but demand continues to strengthen as well. So I think it's, you know, it's been a combination of those effects. But, we'd like to pull that in and get something closer to our historical model. We're making investments in our suppliers to be able to do that. I think in the long run, when you're investing in a through cycle growth environment that we expect of sort of mid to high single digits, then, you know, I'm willing to make those investments in the long run to make sure the supply chain is is is continuing to prepare to support a growth outlook that's, you know, much different than it was historically where you had a lot of cyclicality in the industry, but not a lot of through through cycle growth.
So I think that the environment is different here, and and we're we're managing our suppliers in a way to make sure that we have the supply and we can react to to inflections in demand quicker and and and and faster from a lead time point of view.
When I when thinking about supply constraints, and the higher logistical costs, in the near term that you you are facing, do you think these issues would mostly resolve themselves as we move past the pandemic? Or is it something structural that maybe demand is stronger that they won't resolve just because the pandemic is over?
Well, it depends. Something like freight, it's a little hard to tell. I'm not planning on it to be transitory. But, of course, you know, how the the market responds and how the how the freight market changes in terms of supply relative to this demand is is a is a question mark. But, typically, what I've seen in my experience is usually when price increases go up, it's it's a little hard to get them to go back down again.
And, so whether it's in in freight and while I'm planning on it to to continue or whether it's in some of the components, you know, at some levels, some of them were commodity components can have more variability. But for KLA, those are smaller percentage of our cost structure. For the things that drive our cost, it you know, we have very transparent and deep relationships, comprehensive supply agreements with our key suppliers. And so it's pretty clear about what what the drivers of cost are, how we will pay for them. There are also volume incentives that and some of that has been balancing, against each other, some of those forces.
Labor is is clearly you know, there is pressure on labor. It seems like everything costs more, so so why not labor as well? And so we're feeling those pressures in different pockets around the world and different functions, and so we're reacting to that as well. So I'm planning on it being mostly permanent. We'll we'll we'll see what happens as we go forward.
As I'm modeling based on our expectations for for top line in in '22, I'm modeling somewhere around 50 basis points in our gross margin line of of some of those headwinds as they play through. It's embedded in the guidance that I provided. I think based on our expectations for top line, we're kind of operating somewhere in the 63% gross margin range plus or minus 50 basis points or so. And I think we're going to continue to be there and variability quarter to quarter will be more mix driven than anything else. But there's some effect there.
There's certainly some headwinds there, and I think we're doing a pretty good job of managing through it. But I don't think it's going to change anytime soon.
Okay, that's fair. Brian, I understand you run operations at KLA as well. Can you talk about how KLA manages the supply chain maybe different than when compared to some of your peers? And would that help you better handle the component shortages that we're seeing right now?
Well, I don't you look at the businesses are different. Right? And and the complexity of the products are different. Some of the as as I mentioned, the lead time on on some of our components can be, you know, twelve months. And so in some ways your lead times are governed by those realities, but also the nature of those subsystems requires us to have deeper relationships with those customers and those relationships governed by pretty clear supply agreements that cover not only performance and warranty and technical specifications, but also capacity requirements and so on.
And so a big chunk of, I would say, of our cost structure generally is in these kinds of components. And so those agreements are pretty clear. As I said, they're pretty transparent. And we can plan pretty consistently around what we expect to happen and those suppliers have a history of delivering to our requirements. That being said, we continue to push them and we're looking for ways to try to add more capacity to support the demand environment.
But in general, around those products, I think that, that's working okay. And I say okay, but we're managing it every day. Some of those some of the other components are a smaller piece of our cost structure. So the changes in costs don't have a huge impact on the overall margin profile. But we're having to be very reactive.
I have people every day where we're trying to resource and source in different ways to post components that we need. We do carry a lot of inventory supporting our service business. United had inventories about 1,600,000,000.0 So we do carry a lot of inventory of parts, and that's certainly one way that we're able to mitigate some of these risks. We're also putting out demand a little further out than we might otherwise do to ensure that our suppliers are investing in this growth and we're making our commitments to support them. So I think in some ways, some of the things we buy are a little unique to us and our requirements and that helps a little bit.
And then I think we do run with longer lead times in general and that probably helps us sort of manage through some of the short term variability that happens in supply. It takes us, you know, anywhere from 60 to, you know, 100 or so to build our system. So usually when we start a quarter, we have a pretty good idea of in terms of the parts that are required. We usually have those in house, to to be able to meet meet our requirements. Of course, we have to execute and everything has to work right.
But but in general, I think, you know, that that gives us a little bit more predictability to the business overall.
Great. Maybe just one more question on the near term. Clearly, we talk about demand is so much stronger than supply can handle. Just curious, if I from a supply point of view, what are you doing to ensure you have enough capacity to address the upside, not just near term, but also longer term? I know you talk about increasing capacity every quarter, but is there a way to think about maybe a CapEx as a percentage of revenue?
What is the right amount of investment to ensure you have enough capacity?
Yes. So the right way to think about capacity is people, parts and space, I think is the simplest way to think about it. And and what tends to be the long pole? Obviously, from a space point of view, you've gotta have some clean room space, and you've gotta make sure that, you know, that the you're making those decisions further out. In some cases, you know, we're we're expanding existing facilities or or we're taking office space away and converting it into clean room space.
In other cases, we're we're finding new space. You also get efficiency on space by running more shifts. Right? That's one way that you can get space efficiency or facility efficiency. On the supply chain side, that's probably the longest pull, particularly around certain components as I talked about earlier.
And so what we're doing there is we're making longer term bets. And as I said, you know, I believe on a go forward basis, we're looking at growth rate in this business that's, at least in line with semiconductor revenue growth rates and with rising capital intensity perhaps a little bit faster. So I'm willing to make those investments to assure that we have the right capacity. And it does add a little bit more risk into the system if all of sudden you end up with some sort of revenue correction out there that I have to carry that excess capacity. But I think in the long run and I think history has shown is that in the long run the business responds, the excess capacity gets consumed.
If we have excess parts, we consume them or excess systems, we always sell through them. So we're making decisions like that. Now what it turns out is it's not so much CapEx. Sometimes it's we're buying CapEx for our suppliers for dedicated capacity. And so those are in some ways, you end up with like a big prepaid or something like that that gets decremented over time as you as you start to receive parts.
And so the economic effects outside of, I guess, an opportunity cocktail are pretty consistent with with our current relationships, but we get more responsiveness and to the environments that we're in. So we're looking at our relationships in that way in a lot of cases. And I think so that ends up, you know, sort of helping us, you know, manage through it all, but also make sure that we're positioned in the long run to be able to to respond. On the people side, we're adding people across all of our factories, but I can usually add people and train them inside of of the window of some of these optical component lead time challenges that that we're facing. So but that's how we think about it overall.
Okay. I have an inbound question. In calendar twenty one, your revenue growth is probably five to six points above WFE growth. It seems like a lot of these growth drivers are sustainable or even stronger in calendar twenty two, which should again allow you to outgrow the WFE. Is that a reasonable assumption to think about that delta in calendar twenty one can continue into calendar twenty
Yeah. I think, you know, if you look at calendar twenty, we were mostly in line with the market. I think some of that had to do with the the market starting to grow towards the end of the year and back to what we've spent so much time talking about our ability to actually ship those systems has it took us a little bit more time maybe to get that going. We're really pleased with the overall demand environment, particularly around logic foundry and logic foundry as an overall mix of WFE is probably somewhere in the mid-50s. And you're seeing a nice demand environment across multiple technology nodes, of course, significant leading edge investment with the introduction of EUV and a of design start activity at the leading edge.
Development on the next generation node, but then also a lot of trailing edge activity, which is supporting not just communications infrastructure for five gs, but obviously the automotive shortage that's well chronicled out there, industrial and IoT applications. So there's a lot of investment in those areas as well. So you've got demand that's stratified across multiple technology nodes and then also a breadth of investment across different customers across all those nodes. So it is really a really good environment. I think because of that we're seeing the usual leading edge demand and EUV has been a big driver for that around certain products specifically, but really across the entire portfolio.
But also in the trailing edge, you're seeing not only new facilities and some new customers, but customers coming back and investing that haven't invested a lot in the past. And so there's upgrade opportunities in the nature of reliability and performance of certain products is changing, which is causing them to think differently about the process control requirements. So I think it's even in the trailing edge areas, it's not just the usual stuff that we've sold or older versions, but they're buying newer capabilities platforms that give them an upgrade path over time and even thinking differently about the process control strategies because of changing demands from their customer. Of course, that's good for the service business as well. So I think that environment has been really good.
DRAM has been very solid this year. We expect market growth to be, you know, in line, maybe a little bit better than the overall market for us. Flash has also been strong this year, less overall than than the overall market. But, you know, if you were to think about, you know, logic foundry a little faster, DRAM kind of in line with the market, flash a little less, and that's how you end up this 35% or so WFE outlook.
That makes sense. Maybe just to follow-up with the since we talked about calendar twenty twenty two, one of the pushback we've been getting from investors that the foundry logic spend has been so great in calendar twenty one and possibly in 2022 that the spending in this area has to go down or has to be a peak. So 2023 has to be a down year. What would you say to those skeptics other than the the answer to your last question?
No. It's it's a good question. I guess we've been hearing that for since 2019 when foundry logic started to invest again. And then you have to look back and look to from 2013 to 2018 or so, there was really no growth in foundry logic investments with the timing of EUV and some of the other challenges that were out there. So certainly the last few years have been strong.
Think as I said in the last answer, think that if you look at the broad set of demand is compelling and certainly driving that investment. We're seeing our customers in an environment where capital intensity is increasing. We're seeing very healthy profitability levels. And I think that's coming from you know, pricing and ASP discipline, but I think it's also coming from the mix of business and the and the business that comes from those trailing edge nodes. And the profitability model in the trailing edge nodes, we've got depreciated equipment is higher, and so you're seeing a greater percentage of revenue from those nodes that is fueling or at least contributing to our customers' profitability levels.
As I look at 2022, as we started earlier today, I think most of the demand is continuing to be strong. It gives us certainly confidence as we think about the first half relative to the 2021. And we've had customers that have made multiyear commitments in terms of or statements in terms of overall CapEx plans. So I think if you look at that and you look at the breadth of investment particularly with more competitive dynamics potentially at the leading edge, we feel very good about that. Some of these trailing edge opportunities from customers that haven't spent a lot in the past, a lot of that business which is next year.
So we feel very good about that. There's been a lot of activity in logic in China. I'm not sure what the growth rate is, but I don't see that abating anytime soon. So as far as that part of the market, I feel pretty good as we head into next year. I don't you know, beyond that, look, I'm I'm a believer that in the long run that semiconductor equipment or WFE is gonna grow a little faster than semiconductor revenue.
Capital intensity is gonna increase a bit. And, you know, so so what do you think about semiconductor revenue over time? And, you know, that you're probably you know, with WFE a little faster than that, you're probably looking at somewhere between, I don't know, 68% sort of through cycle growth over time. And I think that's where we that's where ultimately industry normalizes to understanding that, we'll have years that are way above that like this one and you can have years that are a little bit below that. But I think given the strength of demand that we're seeing across those markets, the discipline and spending, I think some of the other indicators that we've talked about, I feel like, you know, absent some macroeconomic event that the industry seems pretty healthy right now.
Great. Speaking of the longer term for the WFE, so capital intensity for should say, equipment capital intensity is roughly 15% this year. So that's quite a bit higher than the past few years. Do you think that trend is sustainable, or does this continue to increase over time? More specific to KLA, do you see process control opportunity within WFE growing?
Yeah. So the the the to to the last question, I think, you know, I look at capital intensity I look at as a percent of profits. I look at some of these other dynamics that we've talked about. And while we're seeing an increase, we're also seeing an increase at a time when our customers are also extremely profitable.
They're spending more, but they're also making more too. In terms of process control, I think the introduction of the EUV has allowed linear scaling to begin again after a period of time where it wasn't, and that's driving a lot of end market activity at the leading edge. We talked a little bit about what's driving the trailing edge, but that leading edge activity is there's a lot of demand that's driving a lot of design starts through fads. All these design starts have different process flows and test design rules in different ways. So all that drives customers have a deeper or a broader process control strategy and sampling strategy.
And so we are seeing again our customers investing as a percent of WFE at a much higher level than what we saw in the past. Customers also have to they don't have the ability to move capacity given the strength of demand in some of the earlier nodes. The design starts if you go back to the middle of the last decade or so, 2014, 2015, you had very limited new design start activity at those nodes, the 20 nanometer node, the fourteen and sixteen nanometer nodes. So as the higher volume products moved through, there wasn't a lot of follow on business that came in to consume that capacity. EUV was delayed and so the technical driver wasn't there as much to to for for customers to have to buy new equipment as they move to the next node.
And so they were able to take a lot of that equipment and reuse it. And so if you look at where we are today, you've got linear scaling and technical drivers that are forcing a technical upgrade, but you also have this capacity that has to stay in place to support all this follow on business. There's over 200 design starts, think, at at seven nanometer somewhere between two hundred and two hundred and fifty design starts. You've got, you know, significant number at five nanometer and, you know, you're starting to hear some of the activity that's coming at three. So all this is keeping our customer forcing our customers to have to deploy new capacity.
And so that's been a driver for process control intensity. Overall, as a share of WFE, we would expect in our 2023 plan was to see from 2019 to 2023 to see KLA share of WFE to grow somewhere around seven fifty to or 75 to a 100 basis points or so. And, you know, I think we're on on on pace for that. And I think the mix of the business and then some of these dynamics that I talked about has probably been the biggest driver of that. So we're encouraged by it.
I think share is our shares have always been strong. We're Forex our nearest competitor. I think there's opportunities for us with the right products to gain a little bit more care as we move forward. So it will be a combination of share and intensity. But I think that as a share of WFE, there's 100 basis point opportunity for us over the next couple of years.
Great. Staying with process control here, when we look out to the next few years, we're going to have a number of inflections like data around the nano sheets and the logic side, the three d DRAM, more layers, three and three d NAND. How should we think about the opportunity for process control when we start going through these transitions?
Yeah. So change in in complexity are have always been good drivers for process control. And if you look at not just what's happening on the on the the lithography front, but also in chip architecture and some of these other, design changes that we've talked about, those are all great opportunities for us. It will drive certain businesses. You know, certain businesses, we have a portfolio approach.
You'll see inflections in certain businesses and and less reliance on other product lines. But when you have the full portfolio, you're positioned to be able to really effectively take advantage of those trends when they materialize. You're a point product competitor, like some of our competitors, don't necessarily have that ability to do that. So I think it's back to my earlier statement that the opportunities we see over the next few years will be fueled by some of these technology changes that are coming in the industry and will drive an opportunity for us to to grow our share of of the overall market. The mix is the biggest factor.
I say mix, foundry mix versus memory mix in terms of process control intensity because roughly two times as high in logic foundry versus memory. But if you look at the way the markets are forecasted to grow, I would expect that we'll see this sort of 55, 45 logic foundry mix going forward and that's embedded in these assumptions. But I think it creates opportunities. Mean certainly nano or nanosheet to gate all around, another term for it is a huge opportunity for film measurement business. You know, you're seeing significantly more layers.
There's an intensity opportunity there. It's driving, you know, different because of the the the Gen four and Gen five. We think that, you know, some of the materials and and architecture issues in gate all around is more conducive to the wavelengths of the Gen four product lines. But we think that having both there creates opportunities for us. So I think it's, you know, given, you know, change in in complexity is the biggest driver for our business.
I think it creates an opportunity for us to see the share of WFE grow.
Got it. Maybe one area that I feel like I don't think a lot of investors pay too much attention is the optical metrology. Can you talk about why that's an important segment and how is KLA positioned there?
Yes, it really is. It's a business that in the last couple of years has almost doubled. And so we do have businesses in KLA. Sometimes I get questions from investors about, well, KLA isn't as capacity levered. It's much more about R and D and fab ramps.
And then in capacity environment, customers don't buy as much processing coal. And in some businesses, that's true because they're they're doing their fab, their their yield learning, they're ramping a fab to entitlement, they're maturing processes and then they get to a level where they know what they're looking for, they know what they're monitoring for. And so they'll change their sampling strategies or use tools that are more volume weighted versus sensitivity because they're always managing of these trade offs. But we do have businesses in KLA that scale with capacity. Film measurement is clearly one of those.
And so we've seen that market grow in share over the last few years and also grow much faster than the market. I like to say it's the biggest market in KLA that nobody ever asked me about. But it's been a great opportunity. I think, you know, as I said, we've seen it double sort of thin film metrology $700,000,000 revenue level for KLA this year. And so it's inflecting in these areas and the gate all around given the incremental layers that come with that will be another opportunity for it.
We also are introducing new X-ray technology into that space to create intensity opportunities in memory. So it is one of those businesses. Unpatterned inspection is another one of those businesses that scales with capacity. And so we're seeing nice growth in that business as well across weather. And that's inspecting bare wafers, but also as customers are running process.
And so as they're ramping the fab, they do a lot of unpatterned inspection to do process tool monitoring to make sure the environments are clean and there's no particle introduction through some of the wafer transfer, some of the in the processing steps. So there are some businesses that inflect with the overall market behave a lot like capacity businesses and we're seeing nice growth from those.
Excellent. I want to switch topic to talk about the EPC business, which we have a few minutes to talk about this. Is it an area that I feel like investors continue to underappreciate? It has now been over two years since you closed deal. Can you talk about any surprises, positive or negative, that you have seen from the deal?
And secondarily, what are the areas within the EPC that you are most excited about or most likely to see an inflection point in terms of growth trajectory over the next few years?
Yeah. You know, one of the the sort of the investment thesis behind the acquisition of Orbotech and creation of EPC was was that we wanted to make sure that we were ensuring and increasing our exposure to the areas our customers were going for capability, cost, performance. But certainly we have lots of exposure to wafer front end and that's an area of that. But they were also investing in things like advanced packaging and what we call the more the more opportunities. And we already had a business in finished component inspection, our IQOS business.
We paired that and put that with the Orbotech businesses in the creation of this group. And so it's, I think, worked very well if you look at the specialty semiconductor part of the business, which is making specialty semiconductors for RF, for power semiconductors, but also for advanced packaging. These were products that are uniquely designed for those applications. Those were nichey markets for a long time and they've inflected because of five gs, also automotive on the power side. And so that's a very strong business, a very differentiated business in terms of its performance.
We do segment reporting. We run mid-50s gross margins. Most process tool gross margins are in the 40s. So it gives you an indication of the differentiation we have in that market. So we're really pleased with the performance there.
We have future plans for some new product offerings in that space for other segments within that those markets that we think will create some opportunities for us. The PCB business within Orbotech has a great service attach rate, but also you're seeing the PCB board evolve into the advanced package through IC substrates, and so that's increasing our exposure there. And we've been able to take some of the KLA know how and technology and try to deploy those into into these businesses in terms of new capability for future products. We've been able to engage with customers, I think, at a higher level as a bigger supplier. It's you know, we carry more weight in those relationships, and, course, it carries more risk too.
We have to make sure we we succeed and we don't put our customers at risk. But but sometimes customers are are not don't wanna deal with small suppliers that may not have the scale to support the broader effort or make big bets. And I think as you're you know, with KLA behind these businesses, I think it's helping drive much stronger relationships there. I mentioned components. I mean, you've had mobility driving that, but that's but you also have high performance computing and data center applications with more complex packages.
And so that's been a driver for that business. And then we have a flat panel business, which we've done a lot of work on sizing that business to make sure we had a cost structure that matched the top line and tried to position that business to be able to grow when that part of the market recovers. Certainly things like micro LED, which have semiconductor like processes, are opportunities we think to leverage some know how within KLA in terms of how we capture or think about those market opportunities in that business going forward. So we like it. I think one of the other things that we thought a lot about was these were market leading positions and we could get more out of them than they could on their own in the past.
And we've been able to drive incremental operating margins, the operating leverage in the business consistent with the overall leverage of KLA. And that was an important aspect of our thesis as well. So I think overall, there's some very interesting opportunities. We're excited about them and we're making a lot of progress on integration. We'll have systems completely integrated in the 2022.
And I think that will drive, you know, further efficiencies out of the the operating model there.
Okay. Maybe we have one more we have time for one more question. So I'll I'll focus on the target model. You're tracking well ahead of the 2023 financial model. Obviously, the WFE environment has improved since the twenty nineteen Analyst Day.
But can you talk about other company specific factors that have allowed you to be tracking ahead of your model? And is there a certain framework that we should use to think about your earnings potential down the road if we have to come up with our own estimate?
Yeah. So I don't know if I'll give you a whole new model here today, but it's certainly something that I'm not sure. If you go back and look at what the assumptions underneath the model, part of the assumptions were as assumption on industry growth. And at the time, we didn't spend a lot of time defining what the market growth would be because part of that story was much more about some new product offerings that we thought would drive intensity and share opportunities for the company going forward. And that, that was going to drive some changes.
The market forecast will be what it is. And so if you think we're conservative, then fine, go model it because we will get our fair share of that like we always do. So certainly the strength of the market environment around WFE growth has been the one assumption that's been very different than what we were forecasting. And because of that and because of the profitability profile of those products, that's driven the excess model performance. That coupled with the fact that we've seen such significant revenue growth, teens last year, talking about 30% or more this year, that it's very hard for your cost structure to keep up with that type of revenue growth.
So I think because of that, the mix has been more favorable and that's driven us to where we are. I think that, you know, a lot of what we've been doing is sustainable. Certainly, as I mentioned earlier, there are cost pressures in the business, and so we'll have to invest in that. So there'll be some catch up spending that will happen. Certainly, there's volume dependent activities that we need to invest in and to support the business at these revenue levels as well.
So our model is, is there's a few ways to think about it. There was the profitability level at certain revenue tranches, but then there's also to think about how you think about the leverage in the model. There's two ways to think about that. One is the growth rate of revenue relative to the growth rate of earnings. And we've said that we're going to grow our earnings 1.5 times the revenue growth rate.
And the other is we're going to deliver 40% to 50% incremental operating margin leverage on our revenue growth. So we should drop through 0.4 to zero five zero dollars on every revenue dollar. Certainly, over the last couple of years, we've outperformed that. We've been in excess of mid-50s in terms of the incremental leverage. But so I think on a go forward basis, I think there'll be some catch up to that given some of the pressures I talked about.
At the end of the day, though, we believe it's the right model to think about leverage 40% to 50%. And in a normalized revenue environment, as we move forward, I would expect us to perform within that range. Maybe depending on what happens with revenue growth next year and beyond, the lower end of the range versus the higher. But I do think it's still the right model for KLA, and we should be able to perform in line with that.
Okay. Well, I think we're out of time. Thanks for, spending your time with us, Brent, and, enjoy the rest of the, of the day.
Thank you. I appreciate it.