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KLAC- Foundry/Logic Drives Outperformance- No Supply Chain Woes- Nice Beat

KLAC- Foundry/Logic Drives Outperformance- No Supply Chain Woes- Nice Beat
by Robert Maire on 11-04-2021 at 8:00 am

KLAC Tencor SemiWiki

KLA- great quarter driven by continued strong foundry/logic
No supply chain hiccups- Riding high in the cycle
Wafer inspection remains driver with rest along for the ride
Financials remain best in industry

A superb quarter
There was little to complain about in the quarter. Revenues of $2.1B and EPS of $4.64, both nicely beating street estimates. Guidance is perhaps even better with revenue of $2.325B +- $100M and EPS of $4.95 to $5.85.

Free cash flow and return to shareholders remains very high as do gross margins which came in at just shy of 63%. Basically the usual great KLA ATM performance with little to complain about.

Process control continues to outgrow overall market for semi equipment
Process control remains one of the best segments of the equipment market. Even though KLA does not have a monopoly like ASML does in the EUV market, they have a near monopoly in some of the more critical areas of process control as they re several time the size of their nearest competitor with relatively few threats in the wafer inspection space.

Size matters
One of the reasons that KLA has outgrown the market is the pace at which new and improved products are brought out which is due to the huge R&D spending that they are doing and are continuing to ramp up. R&D spend was $960M over the last 12 months closing in on the billion dollar club.

Foundry/Logic is the biggest driver
We continue to live in a market dominated by foundry/logic spend as logic devices remain in tight supply and require the highest process control spend. While memory, and DRAM in particular continues to spend, this is a foundry/logic driven cycle.

Since KLA is the “poster child” for foundry/logic spend they are obviously the biggest beneficiary. We don’t see this changing any time soon, and if anything we are more concerned about memory slowing first as compared to foundry logic. This suggests that KLA will see both a stronger and longer benefit of spend.

China remains big at 33%
China continues to ramp its aspirations in the semi business and the best way to learn and ramp production is with a lot of process control tools and it makes sense for them to go with the industry standard.

We see China continuing to spend and will likely continue to spend even as supply and demand come into balance as China is not as driven by the near term shortage . This longer demand cycle bodes well for KLA.

Few places to complain
Wafer inspection is so great it overwhelms the good but not as great segments of KLA. Reticle inspection while good has been less stellar than wafer inspection because reticle inspection has lost share to Lasertec which has taken some of the wind out of its sales. The ex Orbotech business lines while OK are not much as compared to wafer inspection. But we knew that going into the Orbotech acquisition that anything KLA bought would likely be lower growth and certainly lower margin

The stocks
The stock will obviously have a strong positive reaction. A solid beat and guide coupled with zero supply chain impact that has haunted other names in the space from ASML on down.

Growth metrics are unlikely to slow any time soon though we could see moderation in 2022, the last quarter of 2021 is in the bag and likely just as strong as the quarter just reported.

KLA remains the stock to own in the process control space and remains a very solid and likely more defensible player in the semiconductor equipment space going forward.

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