After the close last night, semiconductor equipment company KLA Corp
(KLAC 104.11, +3.12, +3.09%) issued solid upside Q2 results, beating analysts' top and bottom line
estimates. However, what drove the better-than-expected result was the pull-in
of approximately $65 mln in shipments that were originally slated for
delivering in the March quarter.
Consequently, KLAC slashed its Q3 outlook as the company also reiterated the same message we have been hearing from other semiconductor and memory related companies like Lam Research (LRCX), Micron (MU), Samsung (SSNLF), and NVIDIA (NVDA), among others. Namely, that significant declines in demand for both DRAM and NAND chips, due to softness in mobile devices and datacenter, is expected in the near-term.
While MU and SSNLF both projected a rebound for the memory markets in the second half this year, fellow semi-cap company LRCX wasn't quite as confident, commenting that it expected the environment to remain challenging throughout the whole year, without much of an improvement. But, KLAC's outlook seems to fall more in line with MU and SSNLF, as it anticipates the March quarter being the low point for the year, with sequential revenue growth resuming in the June calendar, continuing throughout the year.
This is likely the main reason we are seeing the stock up 3% this morning, despite the severely reduced guidance.
For the quarter, KLAC posted EPS of $2.44, easily surpassing the $2.21 consensus, with revenue climbing 15% to $1.12 bln, also eclipsing the $1.07 bln expectation. KLAC's upside report extends its impressive streak of beating the Street's EPS and revenue estimates, which extends back to 4Q16. Furthermore, KLAC generated record quarterly revenue as this was the company's strongest top-line growth since 1Q17, when sales jumped by 29%.
However, as we noted above, the quarter was artificially inflated due to orders being pulled forward into the December quarter from the March quarter. Additionally, KLAC stated that two memory customers shifted their delivery dates late in the December quarter, also negatively impacting its outlook.
Breaking it down by product, memory accounted for 61% of shipments, with DRAM representing 38% of shipments. Meanwhile, foundry related revenue was 24% of total shipments, with logic accounting for 15%.
Gross margin also slipped by 40 basis points to 63.6% as a modest improvement in product mix was offset by higher manufacturing and service costs. Still, its income before income taxes grew by 20% to $416 mln.
During the earnings call, KLAC guided for EPS of $1.39-$1.71 vs. the $2.10 consensus, on revenue of $880-$906 mln, also well below the $1.05 bln expectation. At the mid-point, this would equate to a yr/yr decline of about 13% -- its first drop since 3Q15.
The significant erosion in demand for memory products is the main culprit as KLAC forecasts memory to account for 40% of shipments in the March quarter, as opposed to 61% this quarter.
Regarding margins, KLAC is anticipating further slippage to
61-62%, primarily due to lower volume as manufacturing costs are spread across
a lower revenue base.
KLAC has an optimistic view on the wafer fabrication equipment industry overall as larger and more diversified semiconductor device end market demand and disciplined capacity planning will fuel growth. Furthermore, strength in logic and foundry should help offset the weakness in memory.
Logic or logic gates are essential building blocks of digital circuits. The combination of logic gates can perform complex functions, and arrays of these chips are often found in integrated circuits (ICs). Logic chips are used in a wide variety of applications, but, most especially in consumer electronics. Their higher reliability and lower power consumption make them ideal for that end market.
The term “foundry” simply refers to a factory where devices like ICs are manufactured for other semiconductor or OEM customers. They are quite common in the Asia Pacific region.
Still Investing for Growth in Key Areas
KLAC is not taking the "sky is falling" approach to its investment plans this year, despite the sharp downturn in the memory market. Specifically, the company plans to continue investing in up-and-coming technology like EUV lithography, which will help support the transition to more advanced nodes.
EUV, also known as extreme ultraviolet lithography, is a next-generation technology that uses an EUV light of extremely short wavelength. Therefore, it allows exposure to very fine circuit patterns that otherwise could not be exposed by conventional processes. It also requires a variety of other equipment, including optics and masks -- products that KLAC has been sinking capital into.
The overall advantage EUV provides is that it enables manufacturers to print features 14x smaller, without using many other compensating steps in the process. Put another way, semiconductor OEMs can make smaller, more advanced chips, in a much more efficient way.
Downside guidance from KLAC was all but expected following the cut in outlooks from other semiconductor companies such as MU, NVDA, SSNLF, INTC, and others. However, KLAC's outlook, outside of the expectedly weak March quarter, is pretty encouraging, and that is what investors seem to be focusing in on. Additionally, KLAC is expecting that its significant investments in advanced technologies -- like EUV -- will help compensate for the downturn in the memory markets.