KLAC- Past bottom of cycle- up from here- early positive signs-packaging upside

– KLA reported a good QTR but more importantly passing the bottom
– Lead times mean KLA gets orders early in up cycle-just behind ASML
– Potential upside in upcycle as packaging needs more process control
– 2024 2nd half weighted with stronger recovery likely in 2025

A solid quarter as expected with good guide

KLAC reported revenues of $2.36B and EPS of $5.26 versus street of $2.31B and $5.01, a modest beat. Guidance is for $2.5B +-$125M and EPS of $6.07+-$0.60 versus street of $2.42B and $5.68.

So all around a decent report….

Past the bottom in March

The most important comment is that the company has clearly put a stake in the ground as March being the bottom of the down cycle with subsequent quarters being up from here. This is certainly a much more definitive answer than what we heard last night from Lam and sets a much more positive tone going forward. While it does not sound like 2024 will be a barn burner but at least we will see steady recovery from here and a second half weighted year going into a stronger 2025.

The stronger 2025 agrees with Lam’s comments and other comments we have heard as we still have a number of issues that are headwinds in the industry, like NAND over supply, trailing edge weaker etc; etc;.

But it does sound like a lot of the other issues will resolve or reduce by the end of the year. This has been one of the more extended down cycles we have been through and KLA has done a good job through it all.

KLA tools tend to be early in the order cycle

KLA tools tend to be ordered early in the cycle for two main reasons.1) you need KLA tools to get other tools and the overall fab process up to speed in the next node 2) KLA tools have longer lead times than process tools which are typically morte of a turns business where KLA tools have lead times of multiple quarters. The only tools that have longer lead times and precede KLA tools are litho tools from ASML.

We would imagine that the order book will likely start to fill throughout 2024 for delivery starting in 2025 and beyond.

Investors need to remember that there are a lot of new greenfield fabs that need building construction to be finished before equipment can be received

Exiting flat panel business is a good move

The flat panel business sometimes made the semiconductor business look stable by comparison. We never saw flat panel as being strongly inside KLAs wheelhouse. It makes a lot more sense for KLA to focus on things closer to home or adjacent to home. Back end is obviously adjacent to front end……

Packaging finally gets some respect

We have been talking about the back end of the business needing more process control for a number of years now and it seems as if it has been very late in coming but may finally be getting somewhere. The days of rows of “sewing machine” wire bonders under bare light bulbs in an ugly, dirty factory in Taiwan are behind us.

Packaging is now a front end process business with micron level dimensions seen in the front end a while ago.

We think this could be a significant opportunity for growth outside of KLAs core wafer and reticle inspection markets and closer to KLAs wheelhouse than the Orbotech acquisition and is obviously lower cost, organic growth to boot.

While the back end is notoriously cheap and avoids expense we think the complexity has gotten to the point where there is an overwhelming need for front end like process control.

The Stocks

We would expect a more positive investor response to KLA than what we saw and heard from Lam. The only tempering factor may be the Intel earnings report released at the same time which seems to be somewhat underwhelming which may put a wet blanket on the overall industry momentum.

It still clear to us that we are far from being out of the woods of the downcycle but at least KLA is past the bottom and sees upside from here. We would repeat again that this is going to be a long, slow recovery and 2024 isn’t going to be great and probably look a lot like a mirror image of 2023 but its a start.

We still remain cautious that the stocks don’t get too far out over the tip of their surfboard as they had gotten in past months and perhaps the retraction we have seen will keep expectations and stock prices in check a bit more.

On the positive side, we think downside disappointment is likely limited going forward so we primarily have to pay attention to valuation

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- Mediocre, flattish, long, U shaped bottom- No recovery in sight yet-2025?

ASML- Soft revenues & Orders – But…China 49% – Memory Improving

ASML moving to U.S.- Nvidia to change name to AISi & acquire PSI Quantum

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