Good afternoon. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation September Quarter 2021 Earnings Conference Call and Webcast. All participant lines have been placed in a listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question at that time, please press star one on your telephone keypad. If you wish to remove yourself from the queue, please press the pound key. Please limit yourself to one question and one follow-up. Lastly, if you should need operator assistance, please press star zero. Thank you, and I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead.
Thank you, and welcome to KLA's fiscal Q1 2022 quarterly earnings call to discuss the results of the September quarter and the outlook for the December quarter. With me on today's call is Rick Wallace, our Chief Executive Officer, and Bren Higgins, our Chief Financial Officer. During this call, we will discuss quarterly results for the period ended September 30, 2021, released this afternoon after market close. You can find the press release, shareholder letter, slide deck, and infographic on the KLA IR section of our website. Today's discussion is presented on a non-GAAP financial basis, unless otherwise specified, and whenever we make references to a year, we are referring to calendar years. A detailed reconciliation of GAAP to non-GAAP results is in the earnings material posted on our website.
Our IR website also contains future investor events as well as presentations, corporate governance information, and links to our SEC filings, including our most recent annual and quarterly reports on Forms 10-K and 10-Q. Our comments today are subject to risks and uncertainties reflected in the risk factor disclosure in our SEC filings. Any forward-looking statements, including those we make on the call today, are also subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. Let me now turn the call over to our Chief Executive Officer, Rick Wallace. Rick.
Hello, and thank you for joining us today. KLA September 2021 quarter continued our track record of consistent execution and commitment to outperformance.
The company's focus on delivering on top and bottom-line goals remained at the forefront of how we run our business. During the quarter, revenue grew 8% sequentially and 35% year-over-year to $2.08 billion. non-GAAP earnings per share was $4.64, representing 5% sequential growth and up 53% compared to the prior year. These results demonstrate growth momentum in our core markets and the operating leverage in the KLA financial model. Customer demand across KLA's major product groups continues as secular trends drive growth across a broad range of markets and applications in the industry. This growth is putting pressure on the semiconductor industry supply across multiple technology nodes. In parallel, leading-edge customers are increasing their strategic CapEx investments to improve their ability to address market's demanding new semiconductor capabilities.
Against this intense demand backdrop, we are navigating evolving customer needs and supply chain challenges. Still, KLA continues to outperform expectations by operating with purpose and precision and keeping our focus on creating value for our customers, partners, and shareholders. Now, turning to the industry demand environment, KLA remains in an excellent position when we look at the industry demand landscape. Strong secular growth drivers are creating important tailwinds that translate into momentum for our business. As a result, we are increasing our outlook for the wafer fab equipment or WFE industry. Last quarter, we estimated WFE growth would be in the mid-30s% range. We now estimate that WFE will grow to approximately 40% in 2021. With sustained demand trends, we expect positive industry dynamics to continue into calendar 2022 and fuel another year of growth.
Along with increased demand due to digitization across multiple categories, KLA's business is benefiting from customers increasing their focus on investment in leading-edge development, optimization of fab utilization for established production nodes, and regionalization for future fab construction. To address this growth, we continue to invest high levels of R&D to ensure we're constantly improving and remaining indispensable to our customers. For example, we're prioritizing investment in R&D for software that enhances the value customers extract from KLA systems. Data analytics, advanced simulation, and machine learning technologies are driving adoption of process control. KLA's data analytics platforms connect, centralize, and analyze the data produced by our systems in the field. This creates a network effect that enhances performance across a product portfolio and for customers. KLA's breadth of products is uniquely positioned to speed time to results for our customers.
We're making investments in these critical technologies as process control intensity increases. KLA's market leadership in the process control markets remain an impressive level, at an impressive level of four times the nearest competitor. Thanks to focus on execution and the industry demand backdrop, we remain on track to achieve our 2023 financial targets well ahead of expectations. Let's now move along to the top highlights for the quarter. First, we continue to benefit from strength across all major end markets, with overall company revenue expected to be up in the mid-30s on percentage basis year-over-year based on the midpoint of our guidance for the December quarter. While we're not immune to the unprecedented supply chain challenges affecting the electronics engine, industry, we are navigating them as well as can be expected.
In Foundry/Logic, simultaneous investments across multiple nodes and rising capital intensity continues to be a tailwind. In memory, demand remains broad-based across multiple customers, with growth in 2021 led by DRAM, and 2022 setting up to be a relatively strong year for NAND. Second, our optical metrology business continues to stand out. KLA's metrology revenue is on track to grow meaningfully faster than the WFE market in 2021 after experiencing similar levels of absolute growth in 2020. The optical metrology market is strongly leveraged to EUV and its critical next-generation architectures, including Gate-All-Around and multi-stack 3D NAND. Third, KLA's leadership in the largest and fastest-growing segments of the process control market is fueling strong relative growth in our semiconductor process control segment. Optical patterned wafer inspection is forecasted to be among the fastest-growing segments of WFE in 2021 for product segments over $1 billion in revenue.
KLA's cadence of innovation and new product introduction continues to outpace the competition. Just last month, we introduced our new Voyager 1035 laser scanning patterned wafer inspector, the latest in an extensive portfolio of in-line defect inspection tools for critical process monitoring application in advanced chip manufacturing. Coupled with a Gen4 and Gen5 broadband plasma portfolio, KLA's laser scanning systems help comprise the most comprehensive optical patterned wafer inspection portfolio in the marketplace today. Fourth, our services revenue was $454 million in the September quarter, up 15% year-over-year. For the quarter, it was 22% of revenue. More than 75% of service revenue in the semiconductor process control segment and over 90% of services in the PCB business comes from recurring subscription-like contracts. Services is on track for another year of strong double-digit growth in 2021.
This is driven by our growing installed base, higher utilization rates, and increasing expansion of service opportunities in the trailing edge. Finally, the September quarter was exceptional from a free cash flow perspective. We generated record quarterly free cash flow of $795 million, which helped drive last twelve months free cash flow up 42% year-over-year to $2.29 billion. We also have remained focused on returning capital to shareholders via our dividend and stock repurchase program, both of which are up materially year-over-year, including $563 million in share repurchases and dividends in the quarter. In addition to executing against our strategic objectives and disciplined capital management, KLA delivers enduring value through corporate stewardship.
KLA's values are reflected in efforts to reduce our environmental footprint, provide for a safe and healthy workplace for employees, advance inclusion and diversity, and make positive contributions to the communities where we live and work. We published our latest global impact report in August 2021. It highlights how KLA delivers lasting values through corporate citizenship. Our journey on this path began when we opened our doors in 1976. We are now expanding our efforts to be more holistic across environmental, social, and governance topics most relevant to our business. We've also broadened our tracking and reporting to be inclusive of our full global footprint and acquired companies. We continue to build our long-term ESG strategy to focus on reducing climate impact, increasing disclosure, and deepening the positive impact we deliver through our business and community engagement.
With that, I will pass the call over to Bren to cover our financial highlights, outlook, and guidance.
Thank you, Rick. KLA's quarterly results highlight the soundness and strength of our ongoing strategies. We continue to demonstrate our ability to meet customer needs in a robust demand environment while expanding market leadership, growing operating profits, generating strong free cash flow, and maintaining our long-term strategy of productive capital allocation. Total quarterly revenue was $2.08 billion. Non-GAAP gross margin was 62.9% as the various components performed mostly as expected, with upside coming from the higher-than-expected semiconductor process control systems revenue, which enhanced the product mix for the quarter. Non-GAAP diluted EPS was $4.64. Our performance reflected the mark-to-market of an equity position in a strategic supplier that negatively impacted non-GAAP earnings per share by $0.06.
Without this adjustment, which is reflected in other income and expense on the income statement, non-GAAP earnings would have been $4.70. GAAP diluted EPS was $6.96, due primarily to a one-time tax benefit of $395 million, resulting from changes made to our international structure to better align ownership of certain intellectual property rights with how our business operates. Non-GAAP operating expenses were $432 million and included $252 million of R&D expense and $180 million of SG&A. Technical applications is a competitive advantage for KLA and drives demand for our products by helping our customers develop solutions that address their complex process challenges. Technical applications is included in SG&A and was $47 million in the quarter.
The combination of R&D and technical applications represented approximately 70% of total operating expenses. Given the rapid growth of the business over the last couple of years and our revenue expectations for the business going forward, we expect the company's operating expenses to continue to grow as we invest in global infrastructure, systems to scale the KLA operating model, new product development programs, and volume-dependent resources to support our business expansion. Furthermore, we, as most companies, are seeing a strong labor market driving cost pressure across our global workforce. As a result, we expect operating expenses to grow sequentially to approximately $470 million in the December quarter, and we forecast sequential growth in operating expenses to continue through calendar 2022.
While operating expenses are trending higher, going forward, we will make the necessary investments to scale our business while we continue to size the company based on our target operating model, which delivers 40%-50% incremental operating margin leverage on revenue growth over a normalized time horizon. Non-GAAP operating income as a percentage of revenue was strong at 42.2% in September quarter. Other income and expense net was $52 million, compared with guidance of $43 million, with the variance from guidance reflecting the impact of the mark-to-market of the investment discussed earlier. For December, we forecast other income and expense net at approximately $44 million. The quarterly effective tax rate was 13.9%, just above our guided tax rate of 13.5%. Non-GAAP net income, $712 million. GAAP net income was $1.07 billion.
Cash flow from operations was $864 million, and free cash flow was a record $795 million, resulting in a free cash flow conversion of 112%. Turning to our reportable segment and end markets, revenue for the semiconductor process control segment, including its associated service business, was $1.78 billion, up 40% year-over-year and up 13% sequentially. The approximate semiconductor process control system customer segment mix was tilted slightly more towards Foundry/Logic than we forecasted at 61%, above our 59% estimate. Memory was 39%, and within memory, the business was split roughly 61% DRAM and 39% NAND. Revenue for our EPC group continues to be driven by strength in 5G, mobile, and infrastructure, as well as continued demand in automotive.
More specifically, the specialty semiconductor process segment, which includes its associated service business, generated record revenue of $102 million, up 15% over the prior year and up 4% sequentially. PCB display component inspection revenue was $203 million, up 12% year-over-year, but down 18% sequentially after a record quarter in the PCB and the component inspection businesses in June. For a breakdown of revenue by major products and regions, please see our shareholder letter or the earnings slides. Moving forward to our balance sheet, we ended the quarter with $2.63 billion in cash, bonds outstanding of $3.45 billion with no maturities until 2024, and a flexible and attractive bond maturity profile supported by strong investment-grade ratings from all three agencies.
Over the last 12 months, KLA returned $1.73 billion to shareholders, including $581 million in dividends paid and $1.15 billion in share repurchases. While circumstances can change, current expectations are that capital returns for calendar 2021 will exceed 85% of expected free cash flow generated in the calendar year. For the quarter, we generated a record $795 million in free cash flow and repurchased $400 million of common stock while also paying $163 million in dividends. Moving to our outlook and guidance, our overall semiconductor demand in WFE outlook continues to increase from our views earlier in the year. At the start of this year, we characterized the expected growth of the WFE market to be in the low teens ± a few percentage points.
In April, we revised that view to the low- to mid-20s% with a bias to the upside. In July, we revised our WFE outlook upward again to the mid-30s%. Today, we see continued strengthening and expect the WFE market to grow approximately 40% to the mid-$80 billion range in 2021, growing from approximately $61 billion in calendar 2020. This reflects the broad-based strengthening demand across all customer segments. KLA is in position to deliver strong relative growth this year, with the semiconductor process control systems business now expected to grow in the mid-40s% over calendar year 2020. This growth profile is driven by our market leadership and strong momentum in the marketplace across multiple product platforms. Looking ahead, we remain encouraged by the strength and sustainability of our current demand profile across all customer segments.
For the total company, we expect that the first half of 2022 will grow in the high single digits% versus the second half of 2021. It is abundantly clear today that demand is constrained by the industry's ability to supply. This pent-up demand should enable another year of solid growth in 2022. While it's too early to put a fine point on our growth expectations for next calendar year, early indications point towards the WFE industry maintaining its growth momentum. Given our bookings momentum and strong backlog, we believe KLA is well-positioned to outperform WFE. As in calendar 2021, we are adding capacity strategically across our global manufacturing footprint to drive this outlook and to enable us to support our customers' process control requirements. Our December quarter guidance is as follows.
Total revenue is expected to be in a range of $2.325 billion ±$100 million. Foundry/Logic is forecasted to be approximately 74%, and memory is expected to be approximately 26%. Within memory, DRAM is expected to be about 53% of the segment mix, and NAND is forecasted to be 47%. We forecast non-GAAP gross margin to be in a range of 62%-64%. At the midpoint, gross margin is roughly flat sequentially as revenue volume and product mix improvement is offset by higher expected service and manufacturing costs. Other model assumptions for December include non-GAAP operating expenses of approximately $470 million, other income and expense, net of approximately $44 million, and an effective tax rate of approximately 13.5%.
Finally, GAAP diluted EPS is expected to be in a range of $4.69-$5.59, and non-GAAP diluted EPS in a range of $4.95-$5.85. The EPS guidance is based on a fully diluted share count of approximately 152 million shares. In conclusion, the tailwinds driving semiconductor growth and investments in WFE continue to remain compelling. Broad-based customer demand and simultaneous investments across multiple technology nodes are strong and resilient trends. We have confidence in the leading indicators of our business, including our backlog and sales funnel visibility, which is spurring us to invest in expanding our business infrastructure and the required capabilities to support our outlook. Our customers' multi-year investment plans provide an element of stability in the demand outlook for the future.
KLA continues to execute exceptionally well and is on track to exceed our 2023 financial targets well ahead of expectations. The KLA operating model positions us well to outperform our industry and guides our important strategic objectives. These objectives fuel our growth, operational excellence, and differentiation across an increasingly diverse product and service offering. They are also the foundation of our sustained technology leadership, wide competitive moat, leading financial performance, long-standing track record of strong free cash flow generation, and capital returns to shareholders. With that, I'll turn the call back over to Kevin to begin the Q&A.
Thank you, Bren. Ashley, can you please queue up for questions?
Certainly. At this time, if you would like to ask a question, please press star one on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing the pound key. We'll remind you that please unmute your line when introduced, and if possible, pick up your handset for optimal sound quality. In the interest of time, we do ask that you please limit yourself to one question and one follow-up. We'll take our first question from John Pitzer with Credit Suisse. Please go ahead.
Yeah, good afternoon, guys. Thanks for letting me ask the question, and congratulations on the solid results and outlook. Rick, I'm wondering if you can talk a little bit about your optimism around the NAND market. You know, whether it's the December guide specifically where it's moving up as a mix or in your prepared comments, you said that next calendar year is setting up for a strong year in NAND. To what extent is that just being driven by technology transitions that might be a little bit more insulated from, you know, the overall market conditions in the NAND market overall?
Hey, John. Yeah, thanks. It is for us more driven by technology transitions than overall capacity. As you know, mostly that's what drives the early adoption of our leading technologies. What we're seeing with NAND is as the design rules or the complexity continues, we're seeing a larger adoption of process control. As you know, the design rules aren't as advanced in NAND as they are in DRAM, but they're getting more challenging, and so that's driving a larger amount of inspection requirements, but also quite a bit in metrology as well, so it's really both.
Hey, John, it's Bren. I mean, it is ticking up off of pretty low levels, right? I think overall, if you look at the growth over the year for the market, the NAND market grew considerably.
It was growing, but considerably slower than the overall market. There's some optimism there in terms of we are seeing some tick up, although the percentage is, you know, as I said, it's the absolute value is not a lot. I think as we move into the first part of 2022, I think we'll see a little bit more investment there.
That's helpful. As my follow-up, Bren, just going back to your commentary around OpEx. It makes sense given the opportunity ahead of you that you guys are making the investments. I'm wondering if you can just put some guardrails on growing sequentially every quarter from that $470 level. You know, where might the exit trajectory be next year? I guess, is there any flexibility around a revenue environment that might become a little bit more volatile in the second half of the year?
It's a great question, John, and we're in the middle of our strategic planning process right now, and assessing not just our top-line expectations, but how to size the company relative to program demands, but also some of the volume dependencies that we've seen. We're also making significant investments in infrastructure. As you've got the world coming back from travel, you've got programs, you've got infrastructure investments, those are all driving what we're seeing. We're certainly feeling pressure as most companies are, as we said in the prepared remarks around compensation. That's also a big part of it. I'm not going to guide 2022 because we're going through that process, but what I would say is that based on how we size the company, we're going to size.
We do expect growth in the company, and we'll size the company based on our incremental margin model, which is 40%-50% incremental operating margin leverage on revenue growth. That will be a driver for us. Certainly, some of this investment is a catch-up, if you will, in terms of the revenue growing so fast over the last couple of years.
It's been hard for us to catch up in terms of just being able to support the business in the way that we'd like. We're also encouraged by the growth opportunities over time. I'll call it the through cycle or normalized long-term growth, and we wanna make sure the company's positioned right for that. I'll have more to say about how to size it. I would say that we're gonna be consistent with our long-term model. We've been way ahead of the model, over 50% over the last couple years. I would expect us to be in the target range as we think about 2022. Hopefully that helps.
It does. Thank you.
We'll take our next question from C.J. Muse with Evercore. Please go ahead, your line is open.
Yeah. Good afternoon. Thank you for taking the question. I guess a similar question on the gross margin side. As you think about the investments that you're making now, how should we think about the trajectory for gross margins into calendar 2022? I guess as part of that, would love to know mix wise, you know, what would enable you to hit the higher end or 64% in the December quarter, as well. Thank you.
Yeah. C.J., you know, one of the challenges, all the things I mentioned that there is a COGS component to it. I think one of the other challenges we're facing is pressure on cost in the supply chain. As I think about 2022, I do see an impact from incremental cost, probably somewhere in the 75-100 basis point level. I do think that that's implied in the guidance that we provided. I'll have a firmer point on it as I think about 2022, in the next call as we start to just lay out a more comprehensive plan around the year.
I do think we're operating in the 63% range, and I'll put a little bit wider range than I normally would today of maybe ±75 basis points on that based on our early expectations for next year. Absent those pressures, I think we'd be very consistent with the kind of trajectory we've seen. Certainly, the mix is more process control centric given expectations for next year right now. But I do think we'll continue to operate within our longer term expectations of trying to drive somewhere between 60%-65% incremental. But certainly these cost pressures are real out there and we're trying to navigate our way through it.
I don't think it'll change much from current levels in terms, but I don't think it's gonna go up much either. I think we're gonna be operating and hovering sort of in this area with mix affecting performance in any given quarter.
That's very helpful. As a follow-up, on the revenue guide for first half calendar 2022, that implies roughly, you know, I think $50 million higher each quarter. Curious, is there any seasonal, you know, impact we should be thinking about Orbotech, you know, lower in the March quarter? Otherwise, should we be thinking about really process control being the key driver of that uplift?
Yeah. It's a good question. Right now, again, things could change, but I don't see any seasonal impact into the Q1 . I think process control will be above, obviously, the high single digit commentary. I think we'll see process control systems higher than that, for, in terms of the first half expectations.
Thank you.
Thank you.
We'll take our next question from Vivek Arya with Bank of America. Please go ahead.
Thank you for taking my questions. On the first one, you know, the industry is about to start making this transition to three nm, and I was hoping you could contrast what that move means for process control intensity, right? The move from five to three versus the change you saw when the industry moved from seven to five. Can this transition from five to three change the competitive landscape in any way?
Well, I think yes. I think the it's a more similar change, I think, as traditional ones because EUV has already been introduced. What you're seeing is an increase. It's less of a revolutionary one in the sense that EUV is in five, and so you're gonna see expansion of EUV layers as part of three. In that way, I think the mix phenomena will change towards some of the higher end tools. For example, Gen4 for us is significantly outselling Gen5 in this calendar year because the bulk of the layers that can be done on a Gen4 system. As you move to three, you're gonna have more leverage toward a Gen5 and
Now it turns out we'll also be improving the capabilities on Gen4 , but I think you'll see it slightly shift. Remember, customers are always looking at the most cost-effective inspection strategy that they can have, so you're gonna see it there. It'll show up in metrology as well because there'll be more points that'll have to be sampled, and that'll drive utilization and the throughput requirements on tools. Process control intensity at the advanced nodes does get pushed harder, and we're definitely getting that feedback from our leading-edge customers, the need for more capability and capacity to support that. I think if anything, you're gonna see a shift towards some of the higher ASP capability. At the same time, we're improving it.
In terms of a KLA market share perspective, we think it's actually positive for our market share because most of the time when we have competitive situations, we tend to be in price competition at the lower end of most of the competition. This will push things toward higher ends, which are the tools that we're really well positioned in, and that'll allow us to continue our march towards higher market share over time.
Vivek, I'd also-
A high number of design starts. You're gonna see customers adding capacity at N5, which means it's much harder for them to try to migrate any of that capacity to N3. They're gonna be investing in N3, but also adding capacity in N5. The technical drivers make that harder already, based on a lot of the things that Rick just talked about. But also the design start activity will also be a factor in that. There's a lot of new capacity that comes in to support that node.
Right. Very helpful. For my follow-up, you know, at the risk of pushing you a little more on the calendar 2022, 'cause you were so nice to give us what you're seeing in the first half. Usually, the second half of the year, calendar year tends to be better than the first half. To the extent that you have visibility, right today based on bookings and whatnot, is there any factor that could prevent that from happening, next year? Thank you.
You know, look, I'm not gonna guide the second half. It's pretty far out. Yes, we have seen that phenomenon over the last couple of years play out. I would say and part of why we felt comfortable with the first half guidance is that we do have very high levels of backlog. Given the fact that the WFE number this year is clearly a supply number and not a demand number, there's certainly evidence of visibility through our customers and how they're lining up for tools into the first half of the year.
We feel pretty comfortable about what we see there, hence the guidance we provided, and are driving the business and in particular the capacity we have to be able to support, you know, long-term growth in the industry. I'm not gonna give you the second half, but I don't see, you know, any reason why things would fall off given the nature of what we're seeing and the demand and conversations we have from customers.
Terrific. Thank you so much.
We'll take our next question from Krish Sankar with Cowen and Company. Please go ahead. Your line is open.
Yeah. Hi. Thanks for taking my question. I have two of them. First one, you know, Rick or Bren, looks like your China sales has been really strong. When I look at the industry, it looks like both you and your peers are all, you know, getting demand from a long tail of smaller customers, many of them are focused on things like IoT. I'm kind of curious, what is the split between MNC and domestic, and how durable do you think the China business from these smaller customers who seem to have cropped up recently and maybe don't have the scale, how durable do you think it is? I had a follow-up.
Well, just in terms of overall percentages, I would say our semi process control is pretty consistent with the overall this quarter for the company. Sometimes EPC tends to be heavily weighted to China and does pull the overall company up a little bit. But this quarter, it's pretty close. It does tend to be lumpier though, so it you know, I think overall, if you look at the business, we probably expect overall China to be somewhere around in the low 20s% for calendar year 2021. Of that, I would say 15% or so, maybe 20% is multinational, so 80% of that would be native.
The second part of that, when it comes to sustainability, these are, to your point, they're smaller scale, but they're also lagging in terms of when people were thinking about leading edge technologies. They're not leading edge. They're supporting domestic demand. If you think about the EV industry, for example, the car, there's quite a bit of activity in China around that. They're trying to have more control over their own supply chain for those trailing edge parts. It's actually quite sustainable when you look at the amount of demand there is for specialty semiconductors in the China market. I think that's something that you'll continue to see, and it's a long way away from some of the concerns people have about leading edge in China.
I guess the final point on that also is that when you think about our business, we do have exposure to wafer and to mask. If you look at what's going on in terms of domestic capacity for infrastructure to support the semiconductor business, we do have some exposure to that overall.
Got it. Super helpful, Rick and Bren. A quick follow-up. Just wanted to see what is the status on the E-beam tools. I remember last quarter it was about 15 or so tools in the field. Can you give us a status update on that, and where do you think your market share is today on E-beam? Thank you.
Well, I don't know if things have changed all that much. I mean, certainly we're confident in the product roadmap that we have for E-beam, and I think it's complementary with our optical tools. Now, when we say E-beam, it's a broad term. It covers not just metrology, but also inspection and review. There's a lot of efforts that are happening across the company, including in reticle inspection. You know, our strategy around EBI, which is I think you're referring to, inspection, is really to try to leverage and use the EBI technology and the machine learning that we have to drive the inspectors and add more value or more relevancy to the inspection tools. It's more of a portfolio strategy than a point product strategy.
I think it's going pretty consistent with our overall expectations today.
Yeah. I would just add to that. I think, the team has done an outstanding job of developing this capability and delivering it. We're getting very positive feedback from our customers. They really like the idea of some of the capabilities. They also like the idea of the leverage that we have between some of the algorithms we've developed in our other systems that they're familiar with, being able to apply those to E-beam, and also, as Bren said, the interoperability. We're where we are, anticipated and planned from a revenue standpoint on these. There are really multiple applications which we're serving with E-beam, so we feel very good. Just as-
The overall cautionary reminder, E-beam as a % of optical wafer inspection continues to be right about where it's been for the last 20 years, and we know that. We're providing this capability because there are some special applications where customers need it, and there are actually some expansion opportunities in things like some of the increased demands of overlay that require more people are looking at for E-beam in order to control the very advanced design rules. It's meeting what we planned. We're happy with our execution, and the market share is climbing, but it's a long haul to gain share in many of these markets, and we know that.
Very helpful. Thank you.
We'll take our next question from Joe Moore with Morgan Stanley. Please go ahead.
Yeah, thank you. I wonder if you could just talk about, you know, the mix this year in Foundry/Logic seems to have shifted more to the legacy nodes a little bit, or at least those are stronger than they've been. You know, can you talk about, you know, maybe where that mix is? I know you've given that sort of qualitative color on that in the past, and what does that do for KLA? Does that sort of a headwind for you relative to WFE or, you know, and if that rolls off, could it help you the other direction?
Yeah, no, it's interesting this year. You know, I think last year was a little bit more heavy in trailing edge. In 2021, it's been very leading edge centric for our business. I think 2022 probably expands a little bit more in terms of the trailing edge. It's about 20%-25% of our foundry revenue I'd classify as below 28 nm. I'd call that, you know, leading edge. 28 and above is about, you know, 25% or so. 75% is below 28. I think as we go into next year, I think we'll see a little bit more of the trailing edge activity.
Yeah. One of the things that it's done for us, I mean, versus I think if you go back long enough, you know, we have a Gen5 and Gen4 we talked about in detail. We also have different variants of BBP, which are even more suitable to some of the lower end, and those customers often are familiar with the higher end tools, and they want some of that capability. We're seeing that these products actually run quite a bit longer than they ever have. We have another product we call the C205, which is targeted for the auto industry, and we're able to sell that, and we're seeing that it really leverages a lot of the R&D that we've done for years.
The platform even, you know, we talk about a portfolio of products, but the truth is we have a portfolio of BBP products, and it is not just across the different technologies. It's one technology across the different generations, and we're really leveraging that. What's really surprising when we look at it is the Gen 5, while it's doing quite well, it's actually one of the smaller relative to the Gen 4. It's significantly smaller in dollar volume this year, and that will grow over time, which makes us feel really good about the sustainability and the overall potential for us to continue to be able to invest and provide capability for our customers across all nodes. It's pretty exciting to see.
It's very helpful. Thank you very much.
We'll take our next question from Joe Quattrocchi with Wells Fargo. Please go ahead.
Yeah, thanks for taking the question. You talked about the increase in your manufacturing capacity, but how do we think about the ability of your supplier partners' capacity to grow, in order to support your growth, given some of your components I know are several months for lead times?
Yeah, it's a great question, Joe. When I say capacity, I mean people, parts, and space. I'm covering all of those things. Certainly, supply chain tends to be the longest pole in the tent, if you will, in terms of our ability to add capability. We've been doing that for a long period of time and going back to the middle of or towards the end of 2020. We have around the key components and subsystems where there are long lead times. We have very strong partnerships with those suppliers, and we've been working with them. We've been investing where appropriate to ensure that they're able to increase their capacity. That capacity comes online over time.
You know, our volumes are lower around a lot of those parts, and so, you know, getting, you know, single digit upticks sequentially quarter to quarter in terms of units can have a pretty big impact on the company's overall revenue. We continue to make those investments and work with those suppliers. Obviously, you never know what the future is, but we do have this belief that with semiconductor revenue growing the way that it is, capital intensity rising, that this will be a demand for the company going forward. Whether it's near term or longer term, I'm willing to make the investments to ensure that we can be as flexible and responsive to customers as we need to be.
We're also keep carrying more inventory, and that provides a little bit of extra buffer as well around some of these components. Because our volumes are where they're at, you know, some of the more fungible or more commodity-like parts that are out there, our challenges are probably a little less than some of the other folks out there, just because I don't need as many of them. I need them, but I don't need as many of them just because of the level of volume we have. I think it's across all those things. You know, we feel pretty good that, look, ultimately our customers would like things sooner if we could deliver to them.
We are managing our way through it and I feel pretty good about the guidance that we provided here this today.
Yeah. Let me just add one perspective where I think actually it differentiates KLA in a positive light relative to our peers in the industry. Because we've always been high mix, low volume, and we have several strategic relationships with key suppliers, as Bren, we've actually always been working the supply chain and making sure we invested in our suppliers so that we had capability, because in many cases, we've been for years inextricably linked to them. When this thing hit, I think we were able to navigate it better because to Bren's point, we don't need as many, we don't need as big as volume, and with the critical ones, we've had historically strong relationships which we maintained through the different cycles.
That's why I think, again, it's another example of KLA being less volatile in a dynamic market. That is part of it. It comes with a lot of work, a lot of hard work with our supply chain. But I think we have the trust and relationships with them that when we make commitments, we can follow through on them. It has taken work to do, but I think that's part of why we've been able to scale. You know, we went through the whole period, we didn't stop guiding, we hit our numbers. We haven't, you know, missed our performance expectations, and I think largely it's because of those things.
Got it. That's really helpful. Just as a follow-up, in the prepared remarks, you talked about increasing expansion of service opportunities in the trailing edge. I was curious if you could double-click on that and maybe also, you know, how do we think about that from a margin profile, just given seems like maybe some of those opportunities are maybe a little bit more hands-on?
Well, I'll take the first part and Bren can speak to the margin opportunity. I think that as you well know, a lot of these fabs are running a lot longer than historically. Some of them have relied on some version of third party or their own service. As those factories have been upgraded with more recent KLA technology, it's really been falling on us to support that. So I gave you the example of the C205 product line. That's not something that they're gonna be able to readily get a third party to service or do it themselves or just wait. So we're engaging when we sell some of the newer capability into these more, I guess, traditional or trailing edge fabs, we provide more services and capability, and that's been part of the value proposition.
The other factor, of course, that is helpful is they're all quite profitable enterprises for our customers, so they're willing to make that investment to secure their capabilities.
I don't think the margins are any different than other parts of the service business that we have. You know, look, we serve to an entitlement. We serve to what our customers purchase a certain service level and we optimize the organization to be able to support that. Certainly, the utilization rates are higher, and so that's creating a revenue stream. Also, the demands on that capacity in terms of not just incremental volume, but also demands in terms of reliability is also increasing. That's creating opportunities for us to sell more capability, but also to introduce some of our newer products that have, you know, roadmaps and have the ability to have an upgrade stream to it.
Thank you.
We'll take our next question from Timothy Arcuri with UBS. Please go ahead.
Hi. Thanks a lot. I guess, Bren, you gave guidance, you know, first half versus the second half of this year for the, you know, whole company. It seems like process control systems could be up like low teens first half of next year versus the second half of this year. Is that a reasonable number?
I said high single digits, and I would think that process control systems, based on what we see to date, will be higher than the company average.
Higher than the company average. Okay. Got it.
Yeah. If it's, you know, eight-ish%, I expect it to be higher.
Yeah. Okay.
You know, high single digits, right? 8%, 9%, whatever that is, so.
Yeah. Yeah. Okay. Got it. Then on EPC, I know that the long-term outlook is for EPC to grow double digits, but you know, you're growing more than 20% this year, and that's kind of even before the big you know, packaging stuff from the big guy who has this huge you know, project has even really hit your orders yet. Can you just talk about the timing of that? Do you think that you know, you can grow double digit next year, even off this elevated level? And you know, maybe when do you expect that big project to start to positively impact your EPC business?
Well, we would expect growth next year in EPC. I'm not gonna get into the specific sizing overall, but we are encouraged by what we're seeing here for next year. I don't wanna get into the specific timing for customers. They're pretty optimistic about the opportunities that exist there and some of the product offerings that we have. We'll have to see it play through, but I am encouraged to think it's another year of growth. I think EPC will have solid growth into next year.
Yeah, Tim, just to give a little more color on that. I do think if you thought about these big programs, they're pretty early stages. I think by the time that that'll result in significant accelerant to that growth, we're in 2023. It's not really 2022. I think 2022 rises with some of the industry and programs and partnerships that we already have. 2023 is a result of some of the newer things that are being worked on now. I've mentioned before, and we've talked. We are very excited about what we're hearing and seeing in terms of both the opportunity and the desire for these bigger players to engage with KLA. So but that's not as much of 2022 as it is of 2023 phenomenon.
Awesome, Rick. Thank you so much.
We'll take our next question from Patrick Ho with Stifel. Please go ahead. Your line is open.
Thank you very much, and congrats on the nice quarter. Rick, maybe first off, on a big picture basis. You're seeing a lot of changes in the DRAM industry right now from a process technology standpoint as you go to 1Z and 1A. From a process control intensity standpoint, it's likely to increase. What are the biggest process challenges that you're helping customers address? Is it the new materials? Is it you know, the deeper vias? Maybe if you could give a little color of the applications that are driving increasing intensity in DRAM.
I think the biggest thing for what we're seeing in DRAM, and this was a question I think for quite a while, was EUV gonna be simply for advanced logic devices, advanced foundry. Now we're seeing it, as you know, starting to happen in EUV. Everything that comes with that, all the infrastructure that goes with that, all the work that's gonna go on to make sure that you can qualify the reticles. Even though they have redundancy, there's still a huge fear of throwing away. You know, this is very expensive infrastructure. There's a lot of work going on already with Gen5 to make sure that we can help qualify. Of course, you mentioned the high aspect ratio devices.
You know, you're gonna see more. I think they've been in a honeymoon period for actually several years. I would say that some of the DRAMs historically, and you didn't see the process control intensity grow. This is a real chance for it to increase as a result of the new capabilities just EUV, what that brings on. You also have a lot of metrology applications as well. So I think we do see it broadly. I don't think it'll ever get to the levels of process control intensity we see in leading edge foundry logic, but it will increase probably at a faster rate in terms of growth of process control as we go forward, assuming the successful deployment of EUV, which right now is certainly what they're working on.
Just one example of, you know, that is in what we're hearing now is for DRAM is that there seems to be no pellicle gonna be used in the lithography. That's the belief right now. If so, that puts a lot of pressure on print check, which is a very high intensity application for Gen 5. There would be an example of a new application. I can't remember. I can vaguely remember, but it wasn't in any, you know, decades since we've been doing an equivalent of print check at DRAM. This would be a whole new application for those customers. As you know, some of them have experience in advanced logic, so they know what that means. At least one of them does. There's gonna be, you know, some crossover from that.
We're feeling pretty good about where that's coming in terms of shaping up to be yet another driver for intensity.
Just as a quick follow-up maybe for Bren. You guys have been posting really strong services revenues, which is not a surprise. Do you believe any of this incremental pickup in services is related to, I guess the shortage situation with chips, it's driving probably higher utilization rates and probably the need to keep these tools running. Do you feel like any of this incremental pickup in services is related to, the current market situation involved with semiconductors?
Sure. Sure. That's driving the higher utilization rate, so that's certainly a factor. One of the large factors is you're starting to see tools that were shipped in 2020. As we've seen the systems business grow and ramp, those tools are coming out of warranty now as we move into the second half of 2021. That is also a driver of incremental service revenue. I think that, you know, contract penetration's been good in this environment. You know, customers rely on us to keep their capacity up, and so we've also seen, you know, some incremental benefit from a contract renewal point of view. I think there's a number of factors that are driving it.
Great. Thank you.
We'll take our next question from Mehdi Hosseini with SIG. Please go ahead. Your line is open.
Yes, sir. Most of my questions have been answered. Just a quick follow-up for the team. Your December quarter revenue implies a wide range, up 7%-16%. I would like to hear whether the key variables that would drive the low end versus the high end.
Hey, Mehdi, it's Bren. Our typical revenue guidance range is ±$100 million. Typically for that it tends for us to be more about, look, we have very large integer tools. We can have systems that can cost upwards of $40 million a piece. At times, depending on, you know, dynamics around, you know, supply chain dynamics around customer readiness. In some cases you have to go to customer accepting it or customer acceptance. There are always those factors that could influence our, you know, where we could land in a certain range. Our range has been very consistent over the last several quarters. I don't think anything's really changed on that front. It really gets down to our assessment of where we're at.
Some cases we have evaluations, assignments that have to be bought out, so there's always some fluidity to our expectations and our revenue plan as we build it up. But I wouldn't say that there's any one issue or another that is driving you know, how we're thinking about the overall range.
Got it. That's fair. One quick follow-up on WFE. Given your view on the first half of calendar year 2022, it seems to me that your share gain could be in the 50-100 basis points. You're not providing absolute dollar value of WFE. If I just take your commentary, it seems like a minimum of 50 basis points share gain is actually very conservative. Do you have anything you can share with me?
Well, we feel very good about the relative performance this year and to our prepared remarks also next year. When we were at our investor day in New York back in 2019, we laid out a plan that we thought would drive KLA's share of WFE up 75-100 basis points between 2019 to 2023. Part of that was market share gain, part of it we thought were intensity opportunities related to the introduction of some new products. We feel pretty good about the trajectory we're on. I don't wanna, you know, provide a specific number there, but our goal is to hit our plan, and I feel pretty good about where we are relative to that plan.
Got it. Thank you.
Thank you, Mehdi. Operator, we have time it looks like for one last question.
Okay, our final question will come from Harlan Sur with J.P. Morgan. Please go ahead.
Hi, good afternoon, guys. Great job on the quarter execution and strong results. You know, EUV adoption continues at a pretty aggressive pace, and EUV mask layer counts continue to expand with every new technology node. Additionally, you have the one large logic customer that is now back on an aggressive technology cadence leveraging EUV. How are you guys thinking about the growth of your reticle inspection business relative to overall process control for this year? How are you thinking about reticle inspection growth into next year?
Yeah, when I look at reticle inspection, I think it's a market growth kind of number this year, probably will be a record for us this year. But I think on a go-forward basis, you're right. The introduction of EUV and the increasing layer counts are driving growth in that overall market. As you know, we support that market with multiple products that help our customers optimize around some of the technology challenges, but also the economic objectives that they have. I do think that there's an inflection in that market. We've seen nice performance this year, and we expect to see it continue to grow over the next few years.
Yeah, appreciate that. One of the big growth drivers for next year in terms of WFE is more of these mature and specialty nodes, and you guys talked a bit about it. I think the team actually did recently introduce four or five new tools which are primarily focused on mature and specialty inspection and metrology, like the C205 broadband plasma inspection platform. Can you guys just give us a sense of early adoption curve? What's the differentiation of these tools versus customers just buying like refurbished older generation KLA tools?
Sure, Harlan. I mean, I think that, there was, I mean, historically, a view of trying to leverage the older technology, but as you can imagine, those tools are quite aged at this point. We definitely saw a step up, plus it was harder for us to service it. We're seeing a lot more capability we can offer now in some of these, and I'd say the C205 is like a derivative tool of a BBP tool. That's one where you get a lot of capability and certainly take advantage of all the work we've done in the algorithm area. You know, we can offer it at lower cost because of the configuration and all that, but has a lot of capability. We're seeing much more interest in newer capability.
Remember, these guys are getting pushed very hard by their supply chain, especially in automotive, because there's such a focus on, you know, preventing some of the defects, liability issues. As you know, those are incredibly expensive if they're caught later. We're seeing pretty good adoption and growth, and it's kind of a little bit countered overall WFE cyclicality. We think that is a steady area of investment. What we laid out at the investment day a hundred years ago, feels like 2019, we're still on track, actually ahead of plan for that in terms of automotive, and we anticipated bringing on some of these products at that time.
I assume that you're getting what, higher dollar capture value for these new tools relative to, let's say, purchasing a refurbished tool?
Oh, much higher. I think it's a better deal, frankly, for everybody. I mean, the capability that's offered, they can do more with them. We can service them more effectively. They have a longer life. I think a lot of upside for them to do that. In fact, in many of these older fabs, this might be the one area where they are bringing in new capability.
Great. Thank you.
Thanks, Harlan.
Thank you. Thank you, Harlan, and thank you, everybody, for your time. This will conclude the call. I'll pass it back to the operator for any final instructions.
This concludes the KLA Corporation September quarter 2021 earnings call and webcast. Please disconnect your line at this time, and have a wonderful day. Goodbye.