KLA Corp Q1 2025 Earnings Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Vivek Arya - Bank of America - Analyst : I'm curious, there's a lot of excitement about the leading edge, but how do we square that with the fact that only the leading foundry of payers to want to increase spending, but the next two want to cut spending? So is this TSMC spending good enough to drive up leading-edge investments by the double-digit or so pace that everyone is is looking for. I was just curious, this excitement. Is it broad-based? Or is it just based on one foundry's desire to increase spending?

Question: Vivek Arya - Bank of America - Analyst : That's very helpful. And for my follow-up, a question on your China exposure, about 42% in September. Curious what you are expecting or what's baked in for December? And maybe just the broader question is, can you maybe dissect what the exposure is in China? How much is product services? How much is resilient or how much might be exposed to any potential restrictions or overbid. Just how do you think about China for the next several quarters, whether it's on an absolute basis or whether it's on a percentage of sales basis?

Question: Vivek Arya - Bank of America - Analyst : Thank you.

Question: Harlan Sur - JPMorgan Chase & Co - Analyst : Hey, good afternoon. Great job on the quarterly execution. On your qualitative comments on the 2025 view, right, you're calling out growth for next year. You said not much change relative to your new 90 days ago. I assume that in terms of maybe total dollar spending, you did call out lower China revenues next year, right, versus your view on stable previously. So should we interpret the downshift in China as being more than offset by incrementally better spending on advanced foundry and logic and memory on the strong demand trends that Rick articulated earlier?

Question: Harlan Sur - JPMorgan Chase & Co - Analyst : Got it. And then on your process control business, right? If I look at wafer inspection and patterning and metrology, right, up 10% year over year first nine months versus a year ago. Now within this, inspection is up 18% year over year. So very, very strong way for the first nine months of this calendar year. Patterning, metrology, down about 5% right over that same period of time. But looking into next year, right, given the Patterning and metrology sort of intensity increases on things like gate all around, backside power distribution, advanced memory, like would you anticipate your patterning plus metrology business to see an acceleration of growth as we move into next year?

Question: Joe Quatrochi - Wells Fargo Securities LLC - Analyst : Yeah, thanks for taking the question. I was wondering, 2 nanometers as you think about just the capital intensity process control. Is there any color that you can really share there and how we think about sample rates to 3 nanometer?

Question: Joe Quatrochi - Wells Fargo Securities LLC - Analyst : Well, that's helpful detail. As a follow-up, I think in the past, you guys try to help us how to think about like growth half-on-half, second half versus first half? And I guess as we look into the first half of '25, should we be thinking about similar kind of levels

Question: C.J. Muse - Cantor Fitzgerald L.P. - Analyst : Yeah. Good afternoon. Thanks for taking the question. I guess maybe to follow up on that last question and your comment about stability into March. I believe two is moving into HVM in Q1. And you talked about expected strength from advanced packaging. And when I look at your foundry logic business in the current quarter, where Taiwan actually fell sequentially. It looks like you're seeing some good business from rapidness and mass currently Intel. So can you speak to perhaps the breadth of foundry logic that you're seeing early 2025? And I would think that would be a complete offset to a slowdown in China. Would love to hear your thoughts?

Question: C.J. Muse - Cantor Fitzgerald L.P. - Analyst : Okay. Great. And then a gross margin question for you. It looks like semi process control gross margins dropped maybe 150 bps sequentially in September and you attribute that to mix. So as we look forward, how should we think about those margins kind of normalizing? And what kind of run rate should we remodel into and through 2025?

Question: C.J. Muse - Cantor Fitzgerald L.P. - Analyst : Very helpful. Thank you.

Question: Tom O'Malley - Barclays Capital Inc - Analyst : Hey, guys. Thanks for taking the question. I just wanted to ask specifically on the man market. So you guys are coming off a really low base in September, but there's a bit of a debate right now if you look out into calendar year '25 about where normal capacity is for historical NAND and where you're moving potentially to technology transitions and what that means from an equipment perspective. So I guess maybe the broader question is, what are you seeing in the NAND market? Are you seeing intensity kind of pick up there? Are you seeing customers look to expand lines? Or are you seeing that technology upgrade as well any comments on what is driving that NAND growth into next year? And just your take on the market would be the first one?

Question: Tom O'Malley - Barclays Capital Inc - Analyst : Got you. Super helpful. And then the second is just on the advanced packaging side. You guys spent a decent amount of time on the last call, talking on the topic, and I think increasingly, you're seeing the move to hybrid bonding kind of accelerate. So others are kind of saying 2026 time frame. But are you seeing some opportunities in 2025? And could you just try to shape like the size of that business today and some of the opportunities that you're kind of reaching down. Some of your smaller competitors are kind of talking about seeing you in some of those areas already, but any comments there would be helpful as well?

Question: Srinivas Pajjuri - Raymond James Financial Inc - Analyst : So my question is on N3 versus N2 demand. I know you said both of them were strong. I'm just wondering, in terms of the near-term upside you're seeing -- is that more coming from N3? And if so, just curious if N2 is also tracking in line with your original expectations?

Question: Srinivas Pajjuri - Raymond James Financial Inc - Analyst : Okay. Got it. That's helpful. And then maybe you can speak to the visibility, especially as China comes down next year. I'm just wondering if that has any impact on your bookings and RPO, just in general, your level of visibility as we go forward?

Question: Srinivas Pajjuri - Raymond James Financial Inc - Analyst : Right. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 30, 2024 / 9:00PM, KLAC.OQ - Q1 2025 KLA Corp Earnings Call

Question: Krish Sankar - Cowen Inc - Analyst : Grea. Thank you. First of all, I want to clarify something, Brent. You mentioned that China could go from 40% to 30% of sales next year, but dollar value remains the same. A, is that true? If so, then your overall revenue should still grow pretty strongly compared to what WFE is expected to be. I'm just trying to figure out how to think about those two metrics?

Question: Krish Sankar - Cowen Inc - Analyst : Got it. Got it. And then just to clarify one other thing. I know you kind of mentioned about how the foundry demand is improving in the leading edge, which kind of makes a ton of sense also from China. And then on the DRAM side, I think as mentioned in the past, process control incentives going up from 10% to 11%. Is that helping you next year or is most of it already baked in this year?

Question: Joseph Moore - Morgan Stanley & Co LLC - Analyst : Thank you. On the topic of export controls, you sort of said you don't want to speculate until we hear it. I guess, how do you expect that to get conveyed? Have you had preliminary conversations it sounds like there might be more of an entity list focused this time around where you get surprised. And when you're giving a framework for next year, and as we had a much lower framework, is how much of that is informed by what you're hearing that they might do versus just kind of I guess, work at this point?

Question: Joseph Moore - Morgan Stanley & Co LLC - Analyst : That's very helpful. And then within your China business, I know you had kind of catch-up on the DRAM side that were causing DRAM to be elevated. My perception is that fact (technical difficulty) -- is it more driven by foundry at this point?

Question: Yu Shi - Needham & Company LLC - Analyst : My first question. I remember a quarter ago, you talked about not just the 3-nanometer for second half this year but also next year, but we'll look at all the headlines about two, out of your 3-nanometer customers, that doesn't look like there is 3-nanometer upside REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 30, 2024 / 9:00PM, KLAC.OQ - Q1 2025 KLA Corp Earnings Call from done, but the one large customer that actually the leading one they did not rule out more of the 5- to 3-nanometer conversion or even for next year. So my question really is, are you still seeing the 3-nanometer upside for 2025 given the current visibility here?

Question: Yu Shi - Needham & Company LLC - Analyst : The other thing I want to ask you to make a clarification or maybe provide some color, your reported North America revenue for the September quarter seems like pretty high. I go back probably the last 8 years, it looks like it's probably the highest number of revenue you get from North America. Might if you provide some color on what's driving that big uptick in the September quarter?

Question: Atif Malik - Citigroup Inc - Analyst : Thank you for taking the questions. First, on China, is it possible to understand how big your wafer and reticle inspection business in China because I believe that business is a bit different from your peer that are facing maybe restrictions?

Question: Atif Malik - Citigroup Inc - Analyst : Understand. And then, Brent, on the services business, given the scenario of a China demand coming down like you laid out will there be an impact on your services growth expectations of 12% to 14% longer term?

Question: Atif Malik - Citigroup Inc - Analyst : Thank you.

Question: Timothy Arcuri - UBS Group AG - Analyst : Rick, I just want to be kind of clear about how much handicapping you're doing for the export control. It sounds to me like you're not really handicapping much at all, and you're just sort of waiting for it to get announced and once it gets announced, then it will impact your numbers as it does. Is that fair? Because Lam was pretty explosive that they are. They have a base assumption as to what it's going to look like, and that's and that's handicapping our guidance. Is that not the case for you? Or are you making a base assumption for the guidance as to what the exports will look like?

Question: Timothy Arcuri - UBS Group AG - Analyst : Okay, Bren. Then I guess just the math on next year. So you grew revenue like mid-30s this year for your China revenue, it's up mid-30s. Of your films tiers, one grew 20%, the other one is barely going to be up. And I think China WP's up about 20% this year. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 30, 2024 / 9:00PM, KLAC.OQ - Q1 2025 KLA Corp Earnings Call So you're up a lot more than what you're -- so almost peers are. So it doesn't matter what I think China WFE is. But when you think about how fast you grew China versus your peers, do you think there's any pull forward of your China spending maybe because there's no alternative tool that's available from a mastic Chinese company. So why not to some degree stockpile your tools and move them around as these new entities came up consolidate. So I'm just wondering if you think that the hangover for you could be a little more severe than your peers?

Question: Timothy Arcuri - UBS Group AG - Analyst : Okay, Bren. Thank you.

Question: Toshiya Hari - Goldman Sachs Group Inc - Analyst : I wanted to get your thoughts on customer mix going into '25 and any implications for margins. You mentioned China is down next year within leading-edge foundry and logic, TSMC obviously, share and growing share within WFE as well. So does that or could that potentially pressure gross margins? I know your gross margin profile has been remarkably stable over many, many years, if not maybe decades. So I doubt it, but we do get this question quite a bit from investors. So curious how you're thinking about evolution in customer mix and implications for gross margins?

Question: Toshiya Hari - Goldman Sachs Group Inc - Analyst : Got it. And then as a quick follow-up, another one on China. I was hoping you could give us a little bit more context by application or customer type. I know you service a broader range of customers relative to some of your process tool peers. Customer groups like match shops, wafer suppliers more on the infrastructure side. I'm curious what percentage of total China those guys account for this year? And as you look forward into 2025, what kind of trends are you expecting? Thank you.

Question: Christopher Caso - Wolfe Research LLC - Analyst : I guess, the first question is on DRAM, and kind of what you're thinking about for next year? Because it does sound like there's some divergence between different customer groups there. Most are expecting the China part of DRAM to be down pretty significantly. Can you give us a view of generally what you're seeing with regard to DRAM investment and kind of pinning from your customers as you go over next year and how that may have changed over the last quarter?

Question: Christopher Caso - Wolfe Research LLC - Analyst : Okay. Great. My next question is that some investors are starting to ask about. And there's generally implications of what happens if leading edge tends to consolidate more than it has already. And perhaps that could be just because when leading edge customers are just growing so much more quickly than the others. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 30, 2024 / 9:00PM, KLAC.OQ - Q1 2025 KLA Corp Earnings Call It's probably early to make that call right now. I -- that some of your customers would disagree with that. But thinking about it now, what would the implications be if we saw more consolidation? Would that provide some pressure because just more suppliers than simply more suppliers and customers?

Question: Christopher Caso - Wolfe Research LLC - Analyst : Yes. Yes. That's a something we're thinking about. Thank you.

Question: Blayne Curtis - Jefferies Group LLC - Analyst : Hey, thanks for squeezing me in tonight. I feel that would be the last question and giving you this one. But I was just kind of curious to your perspective, you're on in the three that kind of does give an outlook for the market. So I appreciate that greatly. We have had a handful of companies already report, I think, generally, consensus is kind of double digits for everybody. And I don't think people have brought them down below that. I was just kind of curious, as you assess the market, I know I guess I appreciate you trying to put something out there, but a low single-digit growth. It just seems low. So I'm just kind of curious, one, I think your numbers are up double digits. It seems like your tone would suggest that, that's maybe the right trajectory. So I'm just kind of curious where that outlook came from. And I think in general, do people have it wrong, I guess? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 30, 2024 / 9:00PM, KLAC.OQ - Q1 2025 KLA Corp Earnings Call

Question: Blayne Curtis - Jefferies Group LLC - Analyst : For '25, all right? I mean, the WFE forecast that you put out, I appreciate you putting it out, right? But you said high (inaudible).

Question: Blayne Curtis - Jefferies Group LLC - Analyst : I apologize. That was my mistake. I just want to ask on the other one on the China outlook. So thought you were talking about your kind of prospective end markets in China being down. I just want to make sure I heard you. I know you had a couple of questions on this. I apologize for the clarity there as well. But you said December down, I think you said 35% of revenue. So it would be down as a dollar amount, but then you said kind of flat kind of for the rest of the year. And I thought I heard you say that then it still dropped as a percent of revenue, which is another way you can kind of back into, I guess, what you're seeing in growth. So I was just trying to understand if that's the mechanics of what you said. And I guess that's another way you can kind of back into double-digit growth. I know you're trying to put it out there. I just want to understand what you said?

Question: Blayne Curtis - Jefferies Group LLC - Analyst : Thanks, everyone.