KLAC same triple threat headwinds Supply, Economy & China

-KLA sings same cautionary song as LRCX (with Intel Chorus)
-Sees similar softening of WFE & second half
-Same Government “notice” on China/14NM – Same supply ills
-We remain concerned about share loss in patterning

Deja Vue, all over again- Great QTR & Guide amid caution & softening

KLAC reported a very good result coming in at $2.49B and EPS of $5.81 versus street of $2.43B and EPS of $5.50. Guide is for $2.6B +-$125M and EPS of $6.25+-$0.55 versus street of $2.52 and EPS of $5.81. Management cut their outlook on 2022 WFE to $95B much as we heard from Lam the day before. To a large extent the words on KLA’s call and Lam’s call were almost exact copies…..great numbers clouded by a weakening and cautionary outlook

Its like groundhog day.

Same notice from Government on China and 14NM

KLA got the same memo on China and 14NM. Obviously very lacking in details it sounds a lot like ” be prepared for tougher licensing on China, details to follow”. No details and no commentary other than no impact to numbers (for now…).

Given that China was 29% of KLA’s business we would be very concerned. We think that much like litho tools its important for the government to curtail yield management as they are the learning tools that China needs and much like ASML there aren’t a lot of other sources. This is compared to process tools where there is significant non US competition.

On the positive side we think that most any tools not shipped to China should easily be directly to eager customers not in China so while there may be short term dislocation in the long run the impact from a China embargo will be minimal.

Share loss in patterning remains a problem

Even though management talks about patterning being a lumpy business, we are waiting for a positive lump. The numbers for patterning remain unimpressive and not just due to lumpiness. Patterning was only up 15% year over year and down 20% quarter on quarter while wafer inspection was up a whopping 49% year over year and up 20% quarter over quarter. Wafer inspection was over twice patterning.

We find it very telling that in KLA’s prepared slides they talked about the impressive growth and “leadership” position of wafer inspection but no mention of patterning which is not in a leadership position nor impressive growth.

Demand remains beyond great

Demand is super strong and obviously beyond KLA’s ability to supply. Any holes or push outs or cancelations in the order book can quickly be filled by those customers further down the waiting line. While perhaps not as strong as ASML, KLA is a close second with some product pushing two years out…..

Financials fantastic

It almost goes without saying that KLA has the greatest financial performance in the industry, even better than the monopoly that is ASML. Cash flow and use is great and margins remain super strong.

Supply chain issues appear to be company’s biggest concern

Supply chain issues continue. While they may be getting better they seem more like just constant, ever changing headwinds of one sort or another. It doesn’t seem to have that much if any negative impact on KLA’s numbers but the company obviously is just concerned about getting tools out the door, more or less on time.

We don’t see this issue going away any time soon and will certainly persist for the remainder of the year and well into 2023. Its unclear when will will get back to whatever normal now represents.

Intel cutting spending during KLA’s call

It is somewhat strange that while KLA was on the call talking about potential weakness in memory that Intel was on their earnings call cutting spending. Obviously KLA’s management wasn’t listening to the Intel call but its an interesting contrast in real time.

To be fair, Intel said they were still dedicated to technology spend but we could see delays and/or push outs or other spending changes coming out of Intel and its also likely that those changes last more than a few quarters.

The stocks

If you didn’t listen to the call and just went by the results and guidance, the stock should have been up strongly in the after market, but it wasn’t, clearly the anxiety of the the triple threat of the economy (memory), China and supply chain cast a pall over what should have been a celebratory party on the great results.

The stock market hates uncertainty and we have it in spades. We continue to think that the downside beta far outweighs the upside beta. There is too much to go wrong and we already know how great things are.

There is not a lot that makes us want to go out and buy the stock. The recent bounce seems to be somewhat of a mirage that things will continue to be wonderful and we aren’t headed into a downturn.

In case you think you have seen the the exact same words above before ….you did…you saw them yesterday in our note on Lam. Our feelings on the stock and the stocks reaction are the same as for Lam.

The only difference is the added negative of the Intel bad news which only makes the situation even worse today than yesterday….

If you don’t think we are in a chip downcycle by now you have been living under a rock…..

Yesterday it was Charles Dickens

Tonight its Yogi Berra, “Its Deja Vue all over again”.

About Semiconductor Advisors LLC
Semiconductor Advisors is an RIA (a Registered Investment Advisor), specializing in technology companies with particular emphasis on semiconductor and semiconductor equipment companies. We have been covering the space longer and been involved with more transactions than any other financial professional in the space. We provide research, consulting and advisory services on strategic and financial matters to both industry participants as well as investors. We offer expert, intelligent, balanced research and advice. Our opinions are very direct and honest and offer an unbiased view as compared to other sources.
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