Given these worries and the accompanying under-performance of semicap stocks, it's fair to say that sentiment and investor expectations heading into Q1 results were very low for KLAC. This created a favorable scenario for the stock if KLAC was able to deliver a solid, better-than-feared report. Thanks to a few different catalysts, the company did just that, which has shares popping higher by 5% so far this morning.
Taking a look at the headline numbers, KLAC posted EPS of $2.46, easily beating the $2.21 consensus, as analysts had taken an overly bearish stance on the company. It was, in fact, its largest EPS beat since 4Q16, with EPS also jumping by 37% on a yr/yr basis. One key factor in its strong bottom line performance is that gross margin came in slightly above the projected range it provided during its Q4 conference call. Specifically, KLAC generated gross margin of 65.2% versus its 64-65% guidance. The upside was mainly driven by favorable product mix, consistent with recent trends.
Demand was also significantly better than expected for KLAC. Last quarter, the company said that it expected shipments to fall by about 10% to $935-$1.015 bln. For Q1, KLAC posted shipments of $1.007 bln, also at the high end of its expectations. Similarly, revenue growth was also much better than anticipated, up 12% to $1.093 bln versus the $1.074 bln consensus. This was driven by strength in memory and an expected sequential increase in shipments to foundry customers.
Furthermore, during the conference call last night, KLAC downplayed the aforementioned fears about an upcoming down-cycle for the semicap space. For instance, management said that excluding the recent delays in logic spending in 2H18, there are a number of long-term factors that will support demand for wafer fab equipment. These factors include more diversified end markets for semiconductors, ongoing innovation and technology upgrades, which are requiring its customers to invest significantly in capex, and market-driven capacity planning.
Additionally, from a company-specific standpoint, KLAC believes it is better situated than its peers due to its market-leading position in process control, as well as its significant presence in China, which it says is in the early stages of a multi-year investment cycle. And, lastly, KLAC will also be closing on its acquisition of Orbotech this quarter. The addition of Orbotech will expand KLAC's exposure to the 5G, AR/VR, smart mobile, OLED, and automotive markets, expanding its total addressable market to $8.5 bln from $6.0 bln. It will also be immediately accretive for KLAC, providing total cost synergies of $50 mln on an annualized basis within 12-24 months following the closing of the transaction.
The company is expecting these catalysts to help offset the delays in logic spending, as evidenced by its inline guidance for Q2. It is projecting EPS of $2.02-$2.34 versus the $2.23 consensus, revenue of $1.03-$1.11 bln versus the $1.08 bln consensus, and shipments of $985 mln to $1.065 bln.
To conclude, KLAC delivered another impressive quarterly report, demonstrating again that it is a premier name in the semicap space. Its commentary and guidance also helped alleviate fears that an impending cyclical downturn will sink its business in the coming quarters. So, while there certainly is a notable slowdown in growth for KLAC and the industry, KLAC's results at least suggest that fears have been perhaps overblown.