KLAC Good QTR with AI and HBM drive leading edge and China is Okay

– KLA put up a good qtr & year with consistent growth
– AI & HBM are the main drivers of leading edge which helps KLA
– China slowing but not too fast, Outlook OK but not super
– Wafer inspection is huge but reticle inspection continues to slip

KLA reports good quarter and OK outlook

KLA reported revenues of $3.1B and Non GAAP EPS of $8.20, coming in above the mid point as KLA usually does.

Guidance is for $3B+-$150M and Non GAAP EPS of $8.05 +-$0.60.

AI & HBM are key drivers and push leading edge

As we continue to emphasize, it is primarily the leading edge applications of both HBM and big AI processors (read that as Nvidia) that are driving the market.

KLA tends to do better when more of the business is at the leading edge as they tend to help get new processes up to speed.

The shift away from run of the mill DRAM and weak NAND continues to push more capacity into HBM which likely has the same unlimited demand driven by AI applications.

Everybody still wants better AI chips & more memory – Elastic demand

KLA clearly supports the view that whether you run Open AI or Deep Seek, you always want better processors and more memory and that semiconductor demand remains as elastic as it ever was.

This clearly implies that KLA is not expecting any drop off in demand for AI applications and neither are we.

We also believe that KLA customers, TSMC and the memory makers , are not taking their foot off the gas of technology improvement.

TSMC is so far ahead of both Intel and Samsung that it doesn’t have to be crazy aggressive but will keep spend for capacity.

The memory market is seeing more intensive competition for HBM dominance.

China is slowing gradually and not falling off a cliff as feared

China came in at 36% of business which seems to indicate that their China business is not falling as fast as others in the chip equipment business as China still needs yield management tools as compared to standard process tools such as dep and etch which saw a huge jump in revenue for domestic Chinese suppliers that compete against AMAT, LRCX, and TEL etc, not so much KLA as yield management is harder to copy.

While China will continue to slow as China digests their binge buying of the last few years that that has warehouses bursting at the seams KLA will slow more slowly than process competitors.

KLA financials are still best in the industry

KLA’s focus on financial metrics continues to be great and they do a great job of managing backlog, costs, cash and most especially margins that have historically been the highest of major players.

Wafer inspection is huge and offsets losses & weakness in reticle inspection

The huge dichotomy between wafer inspection and reticle inspection continues to worsen as wafer inspection gained 14% Q/Q and reached 51% of overall revenue at $1,563B while patterning (mostly reticle inspection) fell 8% Q/Q to $531M.

These two businesses used to be similar in size and now wafer is three times the size.

Its clearly a combination of factors but obviously KLA has lost both leadership and share to competitors both at the high end and low end of the market.

2025 looking at a middling 5% growth Y/Y

While KLA will likely do better than its peers as the leading edge remains strong, overall WFE growth of roughly 5% expected for 2025 does not set the world on fire.

But this expectation is in line with what others are saying

The stocks

Given that chips stocks sold off with the DeepSeek DeepScare, any decent results will see the stocks bump up as investors realize that the AI sky is not falling.

Demand remains strong, the leading edge is still rolling along with strong demand.

China and trailing edge are moderating but not falling off a cliff.

Intel reporting a decent quarter as well should help the whole group.

When Nvidia reports we will likely get a reminder of the strong, sold out growth business expected in AI in 2025.

In short, we expect semis and semi equipment stocks to continue to claw back their valuations after being blown up by the great Deep Seek overreaction ….

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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