KLAC- OK quarter in ugly environment- Big China $ – Little Process $ – Legacy good

• KLA has an OK quarter in an ugly market- bouncing along bottom
• Like Lam & ASML, China was huge at 43% represents more risk
• 2/3 Foundry/logic, 1/3 memory – Process tools were weak
• No change, stable , no visibility on recovery

Quarter and guide were good in continued ugly industry

As expected KLAC reported earnings at the high end coming in at $2.4B in revenues and $5.41 in EPS. Guidance was also positive at $2.45B+-$125M and EPS of $5.86+-$0.60.

Given that KLA usually runs with a significant multi quarter backlog they should always be able to “dial in” their quarterly numbers to hit the target they want.

While we are down from last year we still have a slow upward cadence despite the industry “bouncing along the bottom”

At 43% of revenues, China becomes a bigger risk & savior at same time

Lam saw China at 48% of business and ASML saw China at 46%, KLA cam in third with China at 43% of business. Not as bad as Lam but at elevated levels that raise our concern about exposure risk to China. We remain surprised that China hasn’t been more negatively impacted.

It also remains clear that China is obviously buying anything that isn’t nailed down and perhaps things that are nailed down.

While most of the China exposure may be for legacy nodes we still think this represents a risk although less of a risk than leading edge which has already been cut back.

Like Lam, without China’s money, business would have been very ugly which is not very heartening.

Process tools suffering

It comes as no surprise that the process tool side of KLA is weaker than process control, the historical wheelhouse of the company. We expect that this portion of business will likely lag in any sort of recovery when it does eventually happen.

The $3.4B acquisition of Orbotech 5 years ago has not exactly been a “barn burner” for KLA.

No talk or idea about timing of a recovery

As we heard with both ASML & Lam there is essentially no clue as to when there will be a recovery in the industry. Things will likely be lumpy and bumpy along the bottom with some sectors being stronger or weaker on a quarter by quarter basis with no clear trend that we can define out of the numbers.

Delays in major projects continue to be one of the biggest drags on business. Its clear that TSMC, Intel, Samsung, Micron and others are delaying new construction and major new projects. We haven’t heard much about any change in that momentum or lack thereof.

We remain concern about reticle inspection

As we mentioned in our recent report from the SPIE photomask show, there has been no news about a new leading edge actinic reticle inspection tool coming from KLA. The balance between KLA’s wafer inspection and reticle inspection used to be a bit more even handed.

As KLA has lost dominance in reticle inspection, wafer inspection is almost twice the revenue of reticle inspection. We don’t see this correcting or rebalancing back to more even levels any time soon.

It remains one of the few key weak points in an otherwise dominant story.

The Stock

We were not blown away by the results and the industry still sucks. Risks with China are higher than ever.

There have not been any significant new technology nodes announced by KLA and customers , with the exception of China, are spending very slowly at sustenance levels.

KLA also continues to live off of a very long backlog built while times were good that are helping it get through the winter but we are concerned about how long that backlog lasts.

Overall our view remains not very positive…..its better than it could have been but far from compelling…..

We are not motivated to take a new position and would continue to lighten up if there was an uptick as we see no new reason to own the shares on the horizon.

KLA remains one of the best run companies, with great financial results but the industry still sucks….its just that simple. You can be the greatest in the world but if industry conditions are weak, its hard to outperform in a meaningful way.

We think investors are figuring out this is going to be a longer, colder winter in the semiconductor industry than we have seen in a long while…..

Also Read:

LRCX- QTR OK but outlook mixed- At half of revs, China is huge risk- Memory poor

ASML- Longer Deeper Downcycle finally hits lithography – Flat 2024 – Weak Memory – Bottom?

ASML- Absolutely Solid Monopoly in Lithography- Ignoring hysteria & stupidity

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