KLAC – OK Qtr/Guide – Slow Growth – 2025 Leading Edge Offset by China – Mask Mash

• KLA put up an OK Quarter & Guide with modest growth & outlook
• 2025 remains slow growth as leading edge offset by China slowing
• China sanctions remain a “great unknown”- impact unclear
• Reticle biz getting squeezed from both high & low ends

OK quarter with slight beat as always- Guide is OK as well

KLA reported revenues of $2.84B and EPS of $7.33 (Non-GAAP) slightly above guide an expectation (as always). Guidance was for $2.95B +- $150M and EPS of $7.75+- $0.60.

The slow and steady recovery continues as the fortunes of the semiconductor industry remain mixed with leading edge foundry (read that as TSMC / Nvidia) remains super strong while trailing edge is weak with China moderating.

In memory NAND continues to be very weak while the only bright spot remains HBM-DRAM (again related to AI)

The leading edge strength appears to be strong enough to drag along the weaker sectors into positive growth territory.

Expectations for 2024 WFE spend is now estimated to be in the high $90’sB up from prior views of mid $90’sB.

China moderating as expected

As we heard from Lam last week, China continues to moderate and was down to 42% of business with expectations that China will fall to somewhere in the 30’s in the December quarter with expectations of “digestion” of the binge buying slowing further into 2025

China sanctions remain a “great unknown”

Management did not estimate the potential downside of any expected tightening of China sanctions that would impact the semiconductor industry, taking a more “wait and see” attitude about the potential downside

Leading Edge (TSMC) is strong enough to offset the rest of industry weakness

With Samsung and Intel both moderating spending on the foundry side, the clear winner and big spender remains TSMC which is quickly becoming (perhaps already is ) a monopoly in foundry.

Everyone else continues to fall further behind and the disparity in spend will only increase the gap.

TSMC’s spend is further multiplied by additional locations, such as Arizona, coming up to speed.

Given the revenue they are getting from Nvidia they certainly have the cash flow to keep up the spend rate.

KLA reticle inspection getting squeezed at both high and low ends

Looking at the numbers that KLA reported, wafer inspection grew a whopping 36% year over year and up 17% sequentially.

Reticle inspection (patterning) grew a paltry 6% year over year and coincidentally 6% quarter over quarter.

The disparity has grown huge with wafer inspection for 48% of revenues and reticle inspection (patterning) accounting for a paltry 20%.

For most of KLA’s existence it was a more evenly balanced share of revenues between both segments that grew up as the twin pillars of the business. Indeed, reticle inspection was the first product KLA ever produced.

KLA has lost the technology leadership position, ACTINIC inspection, to Lasertec in Japan. Now we have heard that KLA has lost the low end reticle inspection business in China to a Chinese upstart that has only been in business since 2016.

KLA is losing its China reticle inspection business to a company that is competing with a product that costs a small fraction of KLA’s price offering with good enough performance.

We think KLA will have a solution to compete at the high end with a new approach but it will likely take a few years to come to fruition.

On the low end there really is no solution to a lower price, only a walk away from the business which appears to be the case.

So much as the leading edge (TSMC) business market segment is driving the overall business, from a product perspective it is wafer inspection that is carrying the day for KLA.

The Stocks

Much as we saw with Lam, last week, we would expect a bit of a relief rally in KLAC as the quarter was OK and not a disaster.

Growth and expectation of growth remains modest with 2025 a great unknown, and there is still significant downside in potential sanctions on China that are yet to be accounted for but investors seem to be ignoring that and focusing on the fact that it wasn’t a bad quarter.

We would expect KLAC and other equipment stocks to continue to recover, albeit slowly, from the drubbing they all got on the ASML news.

Investors will likely continue to be more cautious this time around on valuations, however, as most have figured out that this is a long, slow recovery, with many potential pitfalls and issues in front of us

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.

Also Read:

LRCX- Coulda been worse but wasn’t so relief rally- Flattish is better than down

ASML surprise not a surprise (to us)- Bifurcation- Stocks reset- China headfake

SPIE Monterey- ASML, INTC – High NA Readiness- Bigger Masks/Smaller Features

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