KLAC. Priced For Perfection In 2025 & Beyond

same Achilles heel as their peers, however

KLAC reported Q124 revenues of 2.36 billion, $60 million above the guided midpoint, down 5% QoQ and down 3% YoY. This makes it now five quarters in a row of almost identical revenues in the range of $2.36 to $2.48 billion.

Non-GAAP gross margin was 59.8%, above the top end of the revised guidance range but down 2.8 points QoQ. This was caused by inventory charges related to their March 18 decision to exit the Flat Panel Display business.

In the March quarter, both non-GAAP and GAAP diluted EPS were negatively impacted by a $62 million charge for excess and obsolete inventory related to the company's strategic decision to exit the flat panel display business announced on March 18.

Excluding the FPD charge, non-GAAP gross margin would have been 62.4%, and roughly flat sequentially.

You can find the details of that decision to exit the FPD business in this SEC filing.

KLA Corporation (the "Company," "we," "our" or "KLA") has made the strategic decision to exit the Company’s flat panel display (“FPD”) business that is part of its PCB, Display and Component Inspection reporting segment (the “exit”). The Company expects to complete the exit through end of manufacturing of FPD products by December 31, 2024. The Company will continue to provide services to the installed base for the discontinued product lines. The decision is based on multiple factors, including the cancellation of a significant new technology project by a major customer, and represents the culmination of our decision to investigate alternatives for our FPD business that was disclosed in our letter to shareholders and quarterly report on Form 10-Q for the quarter ended December 31, 2023. The FPD business accounted for 1.4% of the Company’s total revenue in calendar year 2023.

This decision has no effect on revenue expectations for the March 2024 quarter and the Company reaffirms its revenue guidance range of $2.3 billion, plus or minus $125 million. In addition, the Company expects that it will incur between: $60-$70 million in non-cash expenses to write off excess and obsolete inventory related to the discontinued product lines for the quarter ending March 31, 2024; and $50-$70 million for impairment of goodwill and purchased intangible assets

At just 1.4% of revenue in CY2023, this decision is not a big deal on the surface. However, I wonder if this could be the tip of an iceberg where KLAC (and their peers) gradually start to exit the lower tech end of their markets in the face of competitive threats from other companies entering those markets?

The FPD business sat within the ”PCB, Display and Component Inspection reporting segment” which accounted for just 3% of revenues in the latest quarter. This is by far the lowest tech segment within KLAC’s portfolio. I wonder how long they will continue with the remainder of this segment for. Watch this space…

Looking ahead, KLAC forecasted current quarter revenues of $2.5 billion representing a ~6% QoQ increase and about the same YoY.

Much like his colleague during the LRCX earnings call, KLAC CEO Rick Wallace struck an optimistic note and declared that the March quarter was the trough

We're confident that KLA's quarterly revenues bottomed in the March quarter, as expressed in our prior earnings call. In foundry/logic, simultaneous investments across multiple nodes and slowly rising capital intensity continue to be a long-term tailwind.

However, his optimism was matched only by his caution when it came to the CY2024 outlook. There was no update in their prepared remarks and the best the analysts on the call could get out them was as follows:

Right now, when I look at the overall business first half versus second half, I think the second half is in the high single digits versus the first half in that ballpark. We're not guiding, but I think it's going to end up in that range as we progress through the year.

This is very similar to what we saw from LRCX. Lots of conversations but insufficient confidence to properly guide the year. When you reflect on the lead times for their tools, you get a pretty good sense that there’s a ton of uncertainty out there. Given the current quarter guidance, and the lack lustre H2 versus H1 growth, it’s becoming pretty clear that CY2024 is going to be a lot like CY2023.

At the same time, KLAC’s share price is near all time record highs

We share our concerns about this against the backdrop of what CY2024 looks like, dig into the China numbers and highlight a couple of other key takeaways from the Q&A session. Thanks as always for reading!