Kevin Kessel :

Welcome to our earnings call to discuss the June 2024 Results and the September Quarter Outlook. I am joined by our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results released after the market closed and available at ir.kla.com, along with supplemental materials. Today's discussion and metrics are presented on a non-GAAP financial basis, unless otherwise specified. All full year references are to calendar years. The earnings materials contain the detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future Investor events, presentations, corporate governance information, and links to the SEC filings, including our most recent Annual Report and Quarterly Reports on Forms 10-K and 10-Q. Our comments today are subject to risks and uncertainties reflected in the disclosures of risk factors in our SEC filings. Any forward-looking statements, including those we make on the call today, are also subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. Rick will begin the call with some introductory comments followed by Bren with additional financial highlights, including our outlook. Let me turn the call over to our CEO, Rick Wallace. Rick?

Bren Higgins :

Thanks, Rick. KLA’s quarterly results demonstrated our market leadership combined with the consistent execution of our global team. KLA continued to show resourcefulness and the ability to adapt to meet customer's changing requirements. Quarterly revenue was $2.57 billion above the guidance-based midpoint of $2.5 billion. Non-GAAP diluted EPS was $6.60 and GAAP diluted EPS was $6.18, both above their respective guidance midpoints. The gross margin was 62.5% at the upper end of the guidance range as a richer product mix than modeled and higher revenue volume drove upside to guidance. Operating expenses were $553 million. Operating expenses were comprised of $324 million in R&D and $229 million in SG&A. Operating margin was 41%. Other income and expense net was a $32 million expense and the quarterly effective tax rate was 12.6%. Quarterly non-GAAP net income was $893 million, GAAP net income was $836 million, cash flow from operations was $893 million, and free cash flow was $832 million. The company had $135.3 million diluted weighted average shares outstanding at the end of the quarter. The breakdown of revenue by reportable segments, end markets, major products, and regions can be found within the shareholder letter and slides. Turning to the balance sheet, KLA ended the quarter with $4.5 billion in total cash, cash equivalents and marketable securities, debt of $6.7 billion, and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three major rating agencies. Moving to our outlook, we believe our business is transitioning from a period of stabilization to a resumption of growth, which began in our June quarter and we expect to continue through the remainder of Calendar 2024 and into 2025. For calendar 2024, we remain encouraged by the improvement in our customers revenue and profitability over the course of this year. This improvement will ultimately translate into new investment in capital equipment to support semiconductor growth over the medium-term. Our high-level outlook for the industry remains largely unchanged. Our expectation is for the WFE market to be in the mid $90 billion range and that the second half of the calendar year will be stronger than the first half. While it's too early to be overly specific on expectations for calendar 2025, we do expect a year of growth, fueled principally by growth and leading-edge investments in both Logic/Foundry and in memory. Given KLA's business momentum, we are confident in our relative performance opportunities moving forward. KLA's September quarter guidance is as follows. Total revenue is expected to be $2.75 billion plus or minus $150 million. Foundry/Logic revenue from semiconductor customers is forecast to be approximately 80%. And memory is expected to be approximately 20% of semi-process control systems revenue. Within memory, DRAM is expected to be about 83% of the segment mix and NAND the remaining 17%. Gross margin is forecasted to be in a range of 61.5% plus or minus 1 percentage point as higher revenue volumes offset by weaker anticipated product mix. Consistent with our comments last quarter, based on the current industry outlook, top-line growth expectations for calendar 2024, higher forecasted growth in services and expected system product mix, we are still modeling non-GAAP gross margins to remain relatively stable around the mid 61% range. Variability quarter-to-quarter is typically guarded by product mix fluctuations. Operating expenses are forecasted in September quarter to be approximately $565 million as we continue to make important R&D and scaling investments to support expected revenue growth. Looking ahead, we expect approximately $10 million to $15 million incremental growth in quarterly operating expenses for the remainder of calendar 2024 and into 2025. This is supported by our revenue growth expectations and in-line with our 40% to 50% incremental operating margin business model. Other model assumptions for the September quarter include; other income and expense net of approximately $34 million expense, GAAP diluted EPS is expected to be $6.69 plus or minus $0.60, and non-GAAP diluted EPS of $7 plus or minus $0.60. EPS guidance is based on a fully diluted share count of approximately 135 million shares. In conclusion, our business has transitioned from a period of stabilization to one of growth. We remain optimistic that the indicators of improvement we have seen will continue throughout the remainder of calendar 2024 and into 2025. KLA is focused on delivering a differentiated product portfolio that anticipates customers' technology roadmap requirements and drives our longer-term growth expectations. With the KLA operating model guiding best-in-class execution, KLA continues to implement strategic objectives which are geared to drive outperformance. KLA's focus on customer success, delivering innovative and differentiated solutions, and operational excellence is what drives industry-leading financial and free cash flow performance and allows us to return capital consistently. The return of scaling and increasing complexity has solidified our confidence in the increasing importance of process control in enabling technology advancements. This is not just an improving time to results in process integration and fab ramp, but also an optimizing yield across a volume production environment with high semiconductor device design mix. This bodes-well for KLA's long-term growth outlook. The near-term industry demand trends are continuing to improve. In alignment with this, KLA's business is improving, and the long-term secular trends driving semiconductor industry demand and investments in WFE remain compelling. That concludes the prepared remarks. Let's begin Q&A. Kevin?

Operator:

Absolutely. [Operator Instructions] We will now take our first question from Vivek Arya with Bank of America Securities. Please go ahead. Your line is open.

Richard Wallace:

Thanks for that. Yes, we're definitely having those same conversations with our customers in terms of in the reticle world, of course, when there are more design starts we see activity in the reticle market in terms of inspection for those reticles and then early lots. We're still early in N2 and in terms of your question, it's really going into 2025 and then 2026. But the other thing we've seen is strengthening in N3 as well. So I think both of those factors are being driven by some of the same drivers we talked about in the prepared remarks in terms of what we're seeing from AI driving that. So it does lead us to believe that our goals to increase our percent of WFE continue to be supported by the opportunities afforded by the additional process control challenges. So I think we're in pretty good shape with that. The other thing, of course, is being driven in some of these advanced AI chips as larger die size, which as you know are a bigger challenge from a yield perspective and creates more incentive for more inspection, especially as these processes are brought online and ramped up. So mostly what we see is it's 2025 leading into 2026 in terms of when they reach HBM. Bren, anything to add?

Richard Wallace:

Remember, Vivek, earlier in the year, we talked about a more positive tone we were seeing from our customers and it was related to the early demand that they were starting to sense from their customers. That's why we believed and that's how it's playing out that we would see strengthening our business. Maybe what's new, a little bit new is the strength, additional strength in N3 which wasn't as forecasted as the rollout of N2. So I think both of those are adding to our belief that we're in a good period for consistent acceleration and demand on the leading edge.

Richard Wallace:

Yeah, It's a good question. So that's our expectation for the business level in 2024. So it isn't a run rate necessarily, but what we expect to do, which is significantly above what we did last year, which was closer to $300 million. So a mid-60% growth rate with continuing momentum. I would think that we would continue, at least through the first half of next year, to see strong demand around packaging. So, it's really an opportunity for us. Certainly, we're seeing a lot of customer interest as we're seeing more and more focus on broadband capability moving into the backend. So it's an encouraging opportunity moving forward. I think the growth rate relative to the growth rate at WFE will be higher over the next few years. So one of the things Vivek, I'm sure you've heard is that, one of the bottlenecks now for AI is silicon is part of it, but the packaging come off is also part of what we're seeing. And we had customers for the first time in my career from the front end start pulling us into packaging conversations because they want front-end capability, as Bren said being used in packaging to assist. So I think, we talked about AI being a driver, it's really driving not just the silicon but also packaging and also of course, HBM for -- you need all three of those to fully execute on the plans people have. So to your question on mix, about, I'd say 60% of it is process control. And then you have the remaining 40% is in our process -- specialty process business and also some exposure in terms of chemical process control as well. About 60% of it in the classic semiconductor process control part of our business.

Operator:

We'll take our next question from C.J. Muse with Cantor Fitzgerald. Please go ahead. Your line is open.

Bren Higgins:

Well, 2024 is really a transition year for memory. We're not seeing a lot of growth overall. Some in the DRAM front and some investment that's happened in China. So I think from a WFE point of view, 2025 is when we expect to see more growth there. I think that you talked about the drivers, particularly around DRAM and HBM being drivers into next year. I think, as we see our customers' business models improve, and we are certainly seeing the financial performance improved with pricing going up, so significantly over the course of this year. But that will translate into investment as we move into next year. I think on the flash market, we're less bullish into next year, although it is operating off a pretty low level. We'll see as we get closer to it. But right now, we do see a recovery in both parts of it, but certainly led by more DRAM than flash on an absolute WFE basis.

CJ Muse:

Very helpful. And then as a follow-up, again in the prepared remarks, you talked about confidence in your relative performance. And obviously, no question around the foundry/logic side, given the complexity and larger die size. But curious, as you see increased memory into the mix, is there enough share of wallet on the logic/foundry side to kind of mitigate that and allow that relative outperformance? Would love to hear the kind of puts and takes around that.

Richard Wallace:

So CJ one of the things that we're seeing, and we haven't seen in many, many years, if you remember part of the reason memory had lower adoption was because of repair. And it seems that on leading DRAM, repair is less effective than it's been. And so that is a factor that's driving some of our customers. Obviously, they are going to try to get through that. But that's -- they're expecting that they are going to have larger [need] (ph) for -- a greater need for process control because of that. And as Bren said, you also have -- because of EUV, you get the introduction of print-check into memory, and they have issues associated with pellicle. So I know it's very much into the weeds, but it drives more print-check. So the process control adoption is setting up to maybe be better than historical, while most at least for the advanced DRAM.

Operator:

And we'll take our next question from Harlan Sur with JPMorgan. Please go ahead.

Richard Wallace:

Harlan, I'll start here. First, we do expect sequential growth in the December quarter, as we discussed last quarter when we talked about the March quarter being the bottom and expectation of sequential growth through the year. So that's how we see things into the December quarter. We'll see how things play out in terms of what that looks like. I would say on the margin, we are incrementally more bullish certainly when you look at the funnel in terms of opportunities into next year. As we've seen that fill out, we have seen strength in the funnel to support our outlook into next year.

Bren Higgins:

Yes. It's a good question, Harlan. And you did cover all the advancements that have us pretty excited in terms of opportunity moving forward. We have seen intensity improve over the last couple of years or so. But what we are waiting for to lean in, if you will, into those -- to that improvement is to see a full cycle in terms of investment by our customers. And so I think as we look into next year, I think that where we are today is probably we're historically around 10% that were probably in excess of 11% today. And I think moving forward, if we can execute and deliver some of the products and capabilities we have in development here, I think it creates a number of opportunities covering the things that you talked about and some of the other things we talked about in the last question or two.

Harlan Sur :

Perfect. Thank you very much.

Operator:

We'll take our next question from Harlan Sur -- I apologize from Atif Malik with Citi. Please go ahead. Your line is open.

Richard Wallace:

So let me unpack that a little bit. I think that -- it is definitely the case for gate-all-around that it creates new integration challenges and so we've seen, and we've talked about this for some time now, the adoption of Gen 4 to support that in a new configuration to be able to resolve the issues around that. So there is -- that's a driver. It is also a different approach than what customers have to use for the -- because of the architectural [change] (ph). There's more metrology intensity being used and largely an increase in the need to control voltage threshold. So VT control becomes more important. And so that's also a part of it. You also just have film thickness measurement and management hire. So overall, we would anticipate but that's all kind of rolled into how we model the increasing process control intensity that we've outlined before there is really nothing that's different than when we model that going forward toward our 2026 plan in terms of overall process control intensity and our share performance there.

Atif Malik:

Great. As a follow-up, Bren, the revenue guide is a bit wider than usual plus minus $150 million versus $125 million. Is that just a function of higher revenues? Or is there something else?

Atif Malik:

Thank you.

Christophe Caso:

Yeah, thank you. Good evening. I guess first question is on the trends that you are seeing in mature node. And specifically -- well, I guess, China revenue in general I think your prior comments were an expectation for China about flat in the second half. You talked about if that's still your view and what you are seeing outside of the leading edge?

Christophe Caso:

Got it. And then following on, you made some comments about the impact of high NA in the past. I mean, one could you remind us a little bit about the impact of high NA on process control? And then secondly, with regard to timing for that, there's been some noise around that about sort of implementation schedules? Anything different than you see on your side? And I recognize that you folks would probably be a little bit earlier in seeing that given the timing of when you install process control?

Christophe Caso:

Got it. Thank you.

Krish Sankar:

Thanks for taking my question. I have two of them. First one is actually on China and Rick and Bren thanks to the insight on the China revenues. I just kind of wanted to ask a question in a different way. One of your peers ASM International today said that China mature nodes are in a digesting mode and calendar Q1 was the peak. I'm kind of curious, are you seeing that? And how to think about China sales into next year, especially given a long lead time you might have a better insight than others? And also, is that a factor in your gross margin down just a smidge in September quarter? And then I have a follow-up.

Krish Sankar:

Got it. Very helpful, Bren. And then just a follow-up on the advanced packaging. Thanks for the color, like the $500 million run rate from $400 million like three months ago. Is this really a function of the advanced packaging market growing? Or -- are you like targeting markets like macro inspection, which I feel like your peers or your competitors are doing better than that? Are you like targeting those markets that's also helping some of this incremental revenue growth [indiscernible] this year? And also kind of curious if you can extrapolate that into like panel-level packaging, which is probably a few years out? Thank you.

Bren Higgins:

Most of our growth has been more on the logic side. And I think one of the things we are excited about moving forward is that as you move in high-bandwidth memory to hybrid bonding techniques, they do increase the complexity of the process of fair amount. And as you know, the KLA position in the market is one of higher value offerings, supporting more complexity. And so we're encouraged by what those opportunities might look like as we get out into the into the '26 and '27 time frame. Obviously, the industry is thinking a lot about what's next in terms of panel level packaging and so on. And so there is obviously R&D that goes into that. But -- so that's work that we will be doing in the company. And so I think that those opportunities, to Rick's point, are just showcasing, I think what's the opportunities that are available in this part of the market over the next several years.

Krish Sankar:

Gotcha. It’s future proofing. Thanks Rick, thanks Bren. Very helpful. Thank you.

Operator:

We'll take our next question from Joe Quatrochi with Wells Fargo. Please go ahead.

Bren Higgins:

Yes. So on those fronts so again, I don't want to guide December, but I think high single digit, low double digit is probably the right way to think about our performance for the year overall. So I think that as we saw in June relative to the expectations we had a few months ago, we did better than we thought September guide was higher, certainly higher than what consensus was. So I think the incremental optimism I talked about earlier in the funnel is revealing and some incremental growth here through the second half of the year. When I look at the overall mix of business, I think that foundry/logic is likely closer to 75%. So last year 70%-30% or approximate semiconductor process control shipments -- or revenue to semiconductor customers is closer to [75%, 25% and 24%] (ph). But we'll see how it ends up.

Bren Higgins:

Well, we are seeing more capacity come online. Those are products where we've been supply constrained certainly around Gen 4. So as new capacity comes online. I think it's one of the challenges for us frankly, back in 2023 as we were limited and as we move through this year, from a quarterly run rate point of view, we are getting incremental supply and that -- given the supply constraints and the level of demand, we are seeing growth there and would expect to see that continue into next year. So I'm fairly bullish on that part of the business growing faster than the overall market, both this year and next year. So I think that's one of those areas that I said earlier about our relative confidence in terms of share of the overall market is our presence in certain markets that are growing extremely fast relative to the overall and certainly high-end wafer inspection is one of those.

Operator:

We'll take our next question from Toshiya Hari with Goldman Sachs. Please go ahead. Your line is open.

Bren Higgins:

DRAM was stronger in the first half and will be in the second half. I would expect that wafers probably a little weaker. I think on the reticle side, it is a little bit stronger. And then foundry/logic is stronger offsetting the weaker memory.

Toshiya Hari:

Got it. Thank you. And then as a follow-up on your services business, you guys grew 14% year-over-year. and you are outperforming your peers, and I think that's off of a higher base relative to your peers, too, so really good to see that. You talked about growing toward the high end for the remainder of the year, if I'm not mistaken. Is that just simply utilization rates across your customer base improving? Or is there more to it? And as a quick follow-up, is 12% to 14% still the right range?

Toshiya Hari:

Thank you.

Joe Moore:

Great. Thank you. I also had a couple of China follow-ups. At one point, you had a pretty sizable multi-national business in China is the business today mostly dominated by the China sovereigns, I assume?

Joe Moore:

Okay. And then on the China sovereign side, I mean, having seen that business shift to more of a trailing edge focus, what's happened to process control intensity? And you seem to be keeping pace with all of your competitors in terms of China exposure. So you seem to be doing quite well. I might have thought that the process control intensity would drop off given the focus on lagging edge technology.

Bren Higgins:

And Joe, on the multinational question, I mean, most of that business is service, right? We're not really -- there's no real equipment business that's happening with our multinational customers there, but there is sort of this activity supporting those fabs.

Operator:

And then we'll take our next question from Srini Pajjuri. Please go ahead. Your line is open.

Richard Wallace:

Yes. Our forecasts are entirely independent of any [ChipPAC] (ph) money. There's no dependence on that. That if our customers receive that, it's going to be -- they're going to be getting it what they tell us is to offset cost of building fabs in places that are more expensive. But it's not contributing to that they are going to build capacity based on demand. The demand is just going to be based on their market, the overall market and then they'll buy equipment accordingly. But we are not counting on our customers get ChipPAC money to make our plans.

Richard Wallace:

Yes. We have not -- we're heavily involved in the reticle market. It's a market that really we started comparing with, and we're still involved in it heavily. The question on, do you need actinic inspection for reticles. It's been a long debate that we've had in our conclusion based on all the analysis that we've seen is the real market need for that is when high NA gets introduced because of the existing technology nodes, there's really three ways to deal with the problems. One is the challenges of reticle quality. One is the flagship product line that we've had for a long time, the 6xx accident extensions to that. The other one is an e-beam product that we've talked about that's being used for very high resolution. And right now, it is the highest sensitivity reticle inspection tool still in where -- with our customers, we are still in the characterization of that tool, that's the 8xx. And then the last one is printing onto wafers and verifying the goodness of the reticles and that's what we're using basically using the Gen 5 print check application for. When it comes to investment in the actinic or the product that we've identified for high NA, we're pretty confident of our ability to intercept the high volume manufacturing of high NA, which is still some years away.

Operator:

And we'll take our next question from Brian Chin with Stifel. Please go ahead.

Richard Wallace:

So we'll have all the specifics on that in the 10-K that we'll file here another week or two. It was pretty close to flat, down about $70 million quarter-on-quarter, so pretty flattish compared to last quarter. I think given what we're seeing in the funnel, I would expect it likely to probably over the next few quarters, we'll start to see it increase. But yes, just slightly down from last quarter.

Richard Wallace:

I'll let Bren deal with the specifics. This is Rick. But it's not just process control for us. It is also process tools because of the SPTS acquisition we did about five years ago.

Brian Chin:

All right. Great. Thank you.

Blayne Curtis:

Thanks for taking my question. I want to ask you on the outlook for EPC. I think you were looking for growth last time. Might came in a little bit below. Just curious since we're going through all the calendar '24 forecast, if you could update that one.

Blayne Curtis:

Thanks. And then I just wanted to ask -- I know there's been a couple of questions on China. I hear from others that you're hearing less new names, and I think the thought was maybe it would be more build-out of facilities that were already in process. You talked about greenfield there. And obviously, there's another slug of money potentially coming in. So as you look out a year more. I'm just kind of curious how you think about that frenzy we had before of all these new names that you never heard of before, creating companies. Are you seeing any view that, that might come back?

Blayne Curtis:

Got it. Thank you.

Timothy Arcuri:

Thanks. I had two. So Bren, my question on China. So there's been some recent news. Obviously, the US diplomatic commerce is trying to use the [foreign reticle] (ph) against some of the non-U.S. suppliers and it would kind of suggest that maybe there's some forthcoming news that there is a reason why they would want to use the FDPR, like maybe some entity-list addition. So how do you think about that? I know it's kind of hard for you to even handicap your guidance for that? And I assume you're not accounting for that at all because you don't even know like whether that's going to come. But how do you kind of think about that and what the likelihood is and how do you even handicap for it?

Richard Wallace:

Well, one of the things we talked about a lot, Tim, and I know you know this, is the because of where we are with the AI drivers, we're seeing an acceleration at the leading edge. So if we think about what's really going to propel our business going forward, it's not so much the legacy, which has been may be overrepresented on historical levels the last few years. But it's the stuff we are seeing right now, especially at the leading edge in terms of leading-edge foundry, and that's been driving a lot of our business in our expectations around what we are seeing in N3 and N2, plus the packaging plus we're seeing in HBM. So if I think about ‘25, ‘26, those are going to be the things that drive KLA drive our performance and should drive good opportunities for our investors.

Timothy Arcuri:

Okay. And then last thing. So book-to-bill based on the RPO, book-to-bill was just a touch below 1%. So this is the seventh quarter that it's been below one. And it sounds like you think book-to-bill is going to start to drift up actually that we are going to finally start to be above one. So is there some dynamic where it seems like there was this massive slug of bookings that happened back in mid-'22 and we've been kind of shipping off of that ever since. And are we kind of getting to a point now where you think that customers are kind of coming back in and there and we could begin to see book-to-bill start to drift above one, where we can start to not just be shipping off of this big slug of orders in the middle of 2022?

Richard Wallace:

Thank you Tim.

Kevin Kessel:

All right. On behalf of KLA, we appreciate your time and your interest. We'll be seeing many of you through this quarter at different conferences. If you have any follow-up questions, please do reach out to the KLA Investor Relations team. With that, I'll turn it back to the operator to conclude the call.

For calendar 2024, our high-level outlook remains unchanged. We still expect WFE demand to be roughly flat to modestly up from 2023 and that the second half of the calendar year will be stronger than the first half. KLA's June quarter guidance is as follows:

revenue of $2.5 billion, plus or minus $125 million, foundry/logic revenue from semiconductor customers is forecasted to be approximately 82% and memory is expected to be 18% of semi-process control systems revenue. Within memory, DRAM is expected to be about 78% of the segment mix and NAND the remaining 22%.

Operator:

[Operator Instructions] We'll now take our first question from Harlan Sur with JPMorgan.

Richard Wallace:

Great. Harlan, thanks for the question. This is Rick. Absolutely, we are having different kind of discussions now than we've had for a while with our leading-edge logic and memory customers. As they prepare for the ramp and we're seeing increased demand for -- they are seeing increased demand, they're talking about tool availability, scheduling of resources, making sure that they don't get behind, really conversations we haven't had for a while.

Harlan Sur:

Great. And did you see the continued growth in the services business with industry utilizations clearly on an upward trajectory. You've got record number of tools coming off warranty customers, I think, wanting more value-added services and offerings just given the complexity challenges ahead? Has the view on the services growth profile improved relative to the last earnings call? I know you talked about being at the upper end of that sort of 12% to 14% sort of target range this year on the last call. Has that changed?

Operator:

We'll take our next question from C.J. Muse with Cantor Fitzgerald.

Richard Wallace:

Yes. I would say as far as China memory goes, it's more first half heavy than second half, while we're having very positive conversations with our customers on the memory front, as Rick indicated, in terms of long-term plans, we're seeing their businesses now improve. We're seeing profitability and cash flow starting to improve. But we don't expect any significant investments as we move through the rest of the year. Nothings could change. But I think that the profile, it might tick up a little bit in the second half overall, non-China but I don't see it changing in a real meaningful way.

Christopher Muse:

Excellent. And then in terms of your commentary around accelerating top line revenues throughout the remainder of calendar '24. I guess, can you speak to the main drivers there as it relates to perhaps 2-nanometer pilot logic in Arizona handset-related EPC. What's really driving that? And is there sort of a percentage growth rate we should be thinking about half-on-half?

Sreekrishnan Sankarnarayanan:

I have two of them. One is, Rick or Bren, last quarter, you kind of said that for KLA, the overall calendar '24 revenues could grow mid-single digits based on WFE. And obviously, some of these expectations that mid-single digits [indiscernible]. Given that you do have some exposure on that side, I'm just kind of curious how to think about your overall revenue profile for this year -- year-over-year? And then I have a follow-up.

Sreekrishnan Sankarnarayanan:

Got it. Got it. That's very helpful. And then a quick follow-up on China. Given your long lead times, I'm kind of curious how do you think about China? You did say memory would be first [ uprated ] overall China revenues? And along the same path, if I back out the FPD gross margins from March to June is down 90 basis points Q-over-Q. You said it's product mix? Is it mainly from China? I'm just kind of curious on this.

Sreekrishnan Sankarnarayanan:

Is China [ shipment ] for the rest of the year, similar range or?

Operator:

We'll take our next question from Brian Chin with Stifel.

Richard Wallace:

Well, yes, there have been many announcements. It's exciting to see. But when you look at the timing for those projects, even, for example, the one that was announced today in New York, that one's quite a ways out. So I think the approval of the funding relative to the timing, the customers we talk to, they're excited about this, the chance to reshore under the U.S., but they're still building their capacity based on market demand.

Brian Chin:

Got it. That's fair. And then maybe I did notice that in the shareholder letter and on the call, you highlighted advanced packaging revenue could be around $400 million in calendar '24, what growth rate does that represent versus calendar '23? And then how would you size your served addressable market in advanced packaging, which I know certainly crosses, I guess, boundaries across your portfolio?

Richard Wallace:

Yes. And I think for opportunity, there's a couple of factors that are at play. One is the speed with which customers are accelerating their packaging efforts. The degree with which those are requiring leading edge. Our ability to make it make sense from a business standpoint, the packaging challenges really need to be leading edge. So there's still a number of packaging applications that are in markets that are served by lower-end competitors that we're not really competing for. So it has to do with how quickly the new technologies come on, but this has been an increased conversation in meetings that we've been having with leading customers for the last year or so. It was already talked about, but it's accelerating.

Timothy Arcuri:

I'm going to ask about N2, Rick. So -- there has been a lot of talk recently about the big volume in for N2 is not going to be probably until '26, although there will certainly be some customers -- crypto customers and whatnot that will ramp in '25. So there will be capacity that gets installed next year. So I guess my question is, how much of a driver do you think N2 will specifically be for your business? Are you seeing any of that yet? Is it more in the back half of this year thing? Is that -- so I'm just asking about like timing, when that starts to help your business?

Yu Shi:

I want to ask a question to build on what was discussed with the team earlier. So TSMC definitely said that the revenue is going to ramp in 2026 for N2. And you kind of alluded to that, that you think the '26 volume for you will be higher than '25. But if I look at how the 3-nanometer ramps look like, and it occurred to me that 2022, which was minus 1 year in terms of production time line for the 3-nanometer was a higher volume for you guys compared with probably 2023. So I just really wonder the fact that you said you think that '26 will be a high volume for you compared with '25? Was that coming from some discussion with the customers? And what's changed this time, why they want, kind of I mean, move the capacity to a little bit closer to the high volume at the point of entry to the high-volume production?

Yu Shi:

Maybe a second question, I want to ask you about the advanced packaging capability you're building there, it sounds like you're having more of the constructive conversation with your customers maybe to put more of KLA's more advanced process control capabilities into the packaging side of the process control. So I get the overall idea, but just really hopeful you can provide a little bit more color. What kind of areas do you think the customers are facing challenges in terms of maybe ramping up CoWos, maybe wrapping up SoIC. And where do you see from process control perspective, the biggest opportunities for KLA?

Christopher Caso:

This is a follow-up question with regard to memory. And I think I understand what you're saying with regard to this year, perhaps some improvement in non-China memory, but nothing significant. I guess, what are your customers telling you to be prepared for perhaps as you're going into next year. We're starting to see some prices go up, utilization up. What's your expectation for the potential improvement in '25?

Bren Higgins:

Well, it's certainly a factor in the growth that we're seeing this year. So I've been pretty open that I thought that we'd be somewhere between $250 million to $300 million of incremental service this year versus in 2023. And I think we're closer to the top end of that range than the bottom. So it is a factor. And given the nature of process control and the complexity of our systems, the mix and the relatively lower volume, our customers tend to rely on us to ensure that they're optimizing their capital, particularly in environments when capital is constrained, yields matter a lot. And so our utilizations never drop as much as process tools where they have more redundancy, but we are seeing it continue to improve. And so I think it's a good sign in terms of the overall market health and our confidence about some of the growth drivers into next year.

Joseph Quatrochi:

Wondering if you can tell me, obviously, you seem pretty positive in terms of just the opportunity looking into next year and thinking about the size of N2 and recovery in the memory market, I guess, how does the conversation with your customers over the last several months and just thinking about your lead times to give you confidence in your ability to reach that 2026 target model?

Bren Higgins:

It wouldn't be a quarterly conference call without your question, Joe. So [ 9.9-ish ] we're going to file the Q in the morning or sometime tomorrow, I think, $9.9 billion. It was down about $750 million quarter-on-quarter. Deposits are about $677 million.

Thomas O'Malley:

I think there's been a lot of discussion on the call about advanced packaging, and you guys have talked about how you had conversations already about potentially bringing some of your solutions from the front end to the back end. There's obviously some adjustments to those tools to get them ready. Can you talk about the timing of bringing those solutions there? Obviously, you're seeing a big growth rate in the back end. But from the moment that you say, hey, we want to take a tool and address the back end to when you're actually selling that to a customer. Can you talk about how long that takes?

Thomas O'Malley:

Super helpful. And then my second one is just kind of on the [indiscernible] that you've given for the year. So you said second half over first half, high single digits and you talked about kind of the mix of foundry/logic being similar to calendar year '23, about that 70%. If you take those clues, you obviously see some really strong growth in memory in the second half. Could you just help us with any color, obviously, from March to June, your DRAM percentage went down a bit in terms of its contribution to memory. But in the second half, how should we be thinking about the DRAM and NAND growth profile?

Operator:

[Operator Instructions] I'll take our next question from Srini Pajjuri with Raymond James.

Bren Higgins:

Yes, it affected the March quarter as we had some shifting around, frankly, affected a little bit the December quarter and the March quarter, but the shifting around to make the December quarter work, obviously, the shortfall was in March. So I don't think anything has really changed. I don't expect to see much activity from that customer until we get into '25. I mean, look, things could change, we could see some surprise. But right now, at least from a planning point of view, we put it in '25, and if it pulls in great, we can support it.

Richard Wallace:

It's an event. I mean, our customers are definitely -- so you think about the dynamic, our customers don't want to add process control intensity if they can avoid it, they also want to ramp and yield. So those are the -- that's the trade-off. So in the prototyping stage or the early pilot, they inspect more and they measure more in order to debug the process, if you will, and ramp it.

Operator:

We'll take another question from Krish Sankar with TD Cowen.

Richard Wallace:

Yes. I'd be making it up, Chris. I mean we haven't -- we don't really look at it that and we do think about what is the node requirement. So from that standpoint, if you think N2, you'd attribute it all to gate-all-around. So we think about node intensity for process control and blended. And as I said in the prior answer, that's slightly up, but we don't have a specific number specifically around gate-all-round. But obviously, that's the big driver for the change and why customers are pushing for N2. And we don't know yet, but that's consistent with the 2026 model that we've had where we see rising process control intensity corresponding increase per share for KLA.

Bren Higgins:

Gen 4 is highly demanded across nodes. It's a very configurable system. And in fact, we recently introduced a non-upgradable version specifically for gate-all-around. So, it's a product that has a lot of extendibility. It's been challenged in terms of supply -- the ability to get supply to meet demand. I would say -- and we will see some increase this year in revenue from that system, which it hurt us last year just because we weren't able to get any incremental supply around key components.

Richard Wallace:

Thank you, Krish. And I do think, Krish, you were referring to what we said about Gen 5, the 7 to 9 months a quarter ago, Bren. So I don't know on Gen 5, if there's any change there, but.

Richard Wallace:

All right. So that brings us to the end of our call. We want to thank everyone for your time and attention. We know it's a very busy day. With that, I will pass the call back over to our operator, to conclude.

Kevin Kessel:

Thank you for joining the earnings call to discuss the December 2023 results and the March quarter outlook. I'm joined by our CEO, Rick Wallace, and our CFO, Bren Higgins.

Richard Wallace:

Thank you, Kevin. I will briefly summarize KLA's performance for 2023 calendar year and the December quarter and then set up our view for 2024. For 2023 KLA revenue was almost $9.7 billion, down 8% versus the prior year. This was higher than our expectations coming into the year as strength from legacy node customers and semiconductor infrastructure offset weaker-than-expected leading-edge investments in both logic and memory. While overall WFE spending was down for the year, there were areas of growth in the KLA business segments, including the infrastructure business supporting wafer and mass manufacturers, automotive and specialty semiconductor process equipment.

Based on current [ vast ] schedules and our June quarter shipment plan, we expect sequential growth to return in the June quarter and continue for the remainder of the calendar year. For calendar 2024, we currently expect WFE demand to be in the mid- to high $80 billion roughly flat to modestly up from the anticipated level in calendar year 2023. We expect that the second half of the calendar year will be stronger than the first half for WFE investment. This WFE estimate reflects our current top-down assessment of industry demand as follows:

In memory, we expect WFE investment to be slightly up from low levels with investments focused on high bandwidth memory capacity and leading-edge node development.

Operator:

[Operator Instructions] We'll take our first question from Harlan Sur with JPMorgan.

Bren Higgins:

Harlan, it's Bren. So yes, as we said in the prepared remarks, over the last couple of months, we had a project that we were planning to ship roughly a couple of hundred million dollars of business, too, that had a pushout that's extended, I think, somewhere around 12 months. So could we see it at the end of '24, maybe could be early '25 as well. So it was more leading edge centric. And as a result of that, as we backfill that business with other business, we did see the percent of China go up a little bit higher than we had thought we would see when we were giving guidance at the beginning of the quarter.

Richard Wallace:

Yes. Great question, Harlan. I think -- if you think about our business and the composition and how it moves with customers, Inspection, especially the leading-edge Inspection is much more tied to development of new technology, whether it's in pilot or even ramp. And some of the metrology business is more tied to capacity. So when you see a falloff of capacity, it impacts metrology more than it would impact Inspection. And that's what we saw in '23.

Joseph Quatrochi:

I just wanted to go back to the pushout. So that I just sort of understand, if we were to adjust for the couple of hundred million that's now pushed into the June quarter and assumed it was still in the March quarter, I guess, would you still expect that the June quarter would be up quarter-over-quarter? Or would it be more flattish like we were thinking or talking about last quarter, just the first half kind of still being a similar run rate of the business?

Joseph Quatrochi:

That's helpful. And then just as a follow-up, I know you're going to -- you'll file your 10-Q probably tomorrow, but any color on where the RPO stood exiting the quarter?

Operator:

Our next question comes from CJ Muse with Cantor Fitzgerald.

Richard Wallace:

So for China -- C.J. I think overall, for China it looks pretty flattish year-to-year. We did benefit from the infrastructure investment that I talked a lot about over the course of the last year or so. I would expect that part of the business to come down some as some of the digestion is happening more so on the wafer side than the reticle side. And so that obviously will get made up by what I would expect to be slightly higher [indiscernible]. I think the memory piece will shift to -- potentially shift to another customer. So I could see that being flattish overall.

Christopher Muse:

No, you covered it. I guess, for my follow-up, as you think about kind of second half stronger than first half, how would you kind of rank order leading-edge foundry logic versus DRAM in terms of the key drivers for you?

Operator:

Our next question will come from Krish Sankar with TD Cowen.

Richard Wallace:

Well, Bren just covered that, but -- in the last question, but essentially flattish. I mean that's the general view for China this year. Flattish, little less infrastructure than we saw, especially, in wafer and reticle continues to remain basically level at this current run rate.

Bren Higgins:

Yes. I'll start on that. On optical inspection, so we're still constrained on Gen 4 in terms of demand relative to our supply. I would expect to see supply increase this year. And that's part of our business, I would expect to do better than overall market as we move into '24. We have -- right now, I think we've seen some normalization around Gen 5 lead times, which tend to be somewhere between 7 and 9 months. But Gen 4 is still out over a year or so, but new capacity coming online. I think not enough for what we expect over the next year to 1.5 years. But then we have another tranche of capacity that will come online as we move into the '26 time frame.

Operator:

Our next question will come from Brian Chin with Stifel.

Bren Higgins:

Yes. No, you're right in terms of the math, right? As we look at the first half of this year, which is we'll call maybe slightly down versus the second half of '23 and then an acceleration in the second half would put you somewhere in the, I'll call it, high single-digit growth. That assumes that WFE is marginally up more or less from 2023. And so against that backdrop, with slight improvement in memory, I would expect our process control intensity to be roughly flat. So we were in the 7% depending on your WFE number, but assuming you're $87 billion to $88 billion in WFE in '23, about 7.6% or so. So I would expect it to be similar as we move into '24.

Brian Chin:

Okay. And then just given that emphasis this year on memory conversions and upgrade activity, can you comment on the areas where KLA benefits and how meaningful a benefit that this sort of spending represents?

Operator:

Our next question will come from Chris Caso with Wolfe Research.

Richard Wallace:

It's a great question. And we have definitely had those conversations. I think that customers are looking at from a couple of perspectives. One, we do have long leads on the most advanced optical tools, but there's also a lot of development that we're doing right now to make those tools even better for the advanced logic ramps that are coming. So we're actually engaged quite a bit in R&D and in pilot with those customers. So we have a pretty good sense. They're all bullish about '25. I can't think of a customer that we have on a leading edge that isn't bullish about '25. But as you say, we're not going to see the orders for those yet. But we're certainly having those conversations.

Richard Wallace:

It's a little bit of capacity, too. I mean '23 was down, right? And so we're seeing some expansion in our capacity. The big node ramps aren't really happening as much this year, which is part of why the WFE gets driven up. And you heard TSM's call, and I think they are fairly bullish on their forecast, but we'd have to see what happens in the early parts of '25 for those ramps on, especially, the newest technologies.

Operator:

Our next question comes from Joe Moore with Morgan Stanley.

Richard Wallace:

Yes. But having met with a number of memory customers recently, there's a marked difference in their tone right now. And so when we talked to them last year, it was -- there's a lot of [indiscernible] looks about -- because they had been ready for a much bigger consumption of memory. And now I think they're starting to turn the corner on that. We do see conversion technology, but utilization is -- hasn't really changed much. Service continues to be higher than -- historically, we -- our utilization rates on our equipment are higher than historically, but because I think customers, even those that have the ability to flex down the utilization on our systems have chosen not to.

Bren Higgins:

The customers don't have the same level of redundancy with what they buy from KLA versus a lot of process equipment. And when you're focused on trying to be as efficient with your capital as you can, you'll tend to really focus on trying to drive yield. So the way they buy process control, they don't buy a lot of extra. So they take capacity offline for a process, they tend to run process control much more consistently. The customers that cut more in terms of utilization earlier have come back more. I think overall, to Rick's statement, it's been fairly flat overall.

Operator:

Our next question will come from Atif Malik with Citi.

Bren Higgins:

You're breaking up a little bit there, Atif. So in regards to the comments on display, it's about 1.5% of the revenue of the company. And there are parts of display they are more commodity based and there's aspects of that industry structurally where profitability is more challenged. And then there's some interesting parts of it, too, in terms of some of the future road map opportunities and where some of the higher-end customers are moving. So we will have more to say about that as we assess the alternatives we're considering.

Atif Malik:

Great. And then as my follow-up, Rick, you talked about uncertainty in leading edge with some push out. If your foundry customers decide to focus more in putting these investments of fabs in Japan versus U.S. Is there an impact to your business?

Yu Shi:

First off, I really just want to ask for some clarification about the service business expectation for calendar 2024. I think that you talked about higher forecasted growth in service. Is it higher than what you thought at the 12% to 14% this year? Or if you're just talking about higher growth than compared with your systems business? Just a quick clarification.

Yu Shi:

Maybe another question, maybe a little bit longer term. I think in the past, you talked about particularly some of your leading-edge customers reusing their capacity in the past and may put a little bit pressure a few cycles ago on your overall growth. Your largest customer, I think, last week, talked about maybe converting some of the 5-nanometer to 3-nanometer. We don't know whether they're going to continue to do that. But any thoughts there and looking a little bit ahead, do you expect any sort of negative impact going forward?

Operator:

Our next question will come from Timothy Arcuri with UBS.

Timothy Arcuri:

Yes. Yes. I mean it was up, definitely. But I guess just my follow-up on that is what's the advantage? If I'm that customer and if your lead times are well inside of that, what's the advantage if I'm a Chinese customer to booking something that's kind of sit in your backlog it's -- but parked beyond 12 months? I mean, unless I'm worried about export control and maybe, I think, because I have something I've given you a down payment that entitles me to get the tool, like is that part of it? I still don't know why I would park something like way, way beyond your lead times?

Operator:

Our next question will come from Toshiya Hari with Goldman Sachs.

Richard Wallace:

Our views haven't really changed in terms of the timing for high NA. We're encouraged to see the shipments of the tools that were well publicized. And I think that's great. It is going to take a while of course, as with any new technology to get those up and into production. So really haven't changed in terms of our view of when that turns into pilot and then when it turns to the high volume. But one thing that's clear is the increased adoption of NA -- of EUV is good for KLA and the broadening of it, as we see it being more applicable in memory also creates more opportunities, not only just in the reticle space, but because we're now dealing with -- the deep activity challenges are greater as they start printing smaller features.

Toshiya Hari:

That's very helpful. And then as my follow-up, maybe one for Bren. Just on the display business, so it's 1.5% of revenue last year. I'm curious if you could speak to the profitability of that business. I mean, to the extent you do end up, say, selling the business, how should we think about accretion to gross margins and bottom line earnings?

Operator:

[Operator Instructions] And we have no further questions in the queue. So I'll turn the floor back over to Kevin Kessel for any additional or closing remarks.

Operator:

This concludes the KLA Corporation December Quarter 2023 Earnings Call and Webcast. Please disconnect your line at this time, and have a wonderful day.

Operator:

[Operator Instructions] Our first question will come from Vivek Arya with Bank of America Securities.

Bren Higgins:

Vivek, it's Bren. So we are -- I'm not going to guide the first half of the year in terms of what regions or customers might be driving. As we look at the overall sales funnel and look how we're sizing the factories, our stabilization comment is at the total company level, we see the business roughly operating at about the guided levels here over the next few quarters. So we'll see how it plays out. Obviously, it's a fluid and dynamic environment.

Vivek Arya:

And anything on the potential recovery in memory, like if, let's say, memory were to be recovering in Q1, Q2, Q3, is that visibility you would necessarily have? Or if I ask it in a different way, what is kind of the difference between when you start to see it and when it actually starts to show up in your sales numbers?

Operator:

Our next question will come from Harlan Sur with JPMorgan.

Bren Higgins:

Yes, Harlan. So there have been drivers or long-term drivers around service growth that are implicit in our modeling and are continuing, right, in terms of the level of utilization of the installed base customers using tools for longer periods of time and so on. But, you did hit on the biggest driver in terms of our expectations for growth into next year, is that we will have a number of tools that we shipped in 2021 and 2022, where we significantly outperformed the market. Those tools will be coming off of warranty and moving into contract and our attach rate is pretty high.

Richard Wallace:

Yes. One other thing, Harlan, is that, as you know, our services isn't dependent on consumables. And so customers want to keep these tools up and going even when they have slower utilization in other parts of the fab, but then they definitely want to ramp them as they're bringing on new nodes and starting to ramp new technology. So it's kind of the best of all worlds in the sense we don't slow down that much when it goes down, but then they're going to want to ramp as activity continues, whether it's on new technology or beginning capacity ramps on new technology nodes.

Harlan Sur:

Great. That's hugely insightful. Given the strong lineup and aggressive cadence of tech transitions, right, especially in foundry and logic and that's obviously driving more EUV layer adoption, right, which is driving demand for both your optical inspectors, reticle inspection, your entire portfolio of metrology products as well. If we look into next year with more tech inflections, gate all around, introduction of backside power distribution, next-gen advanced packaging architecture, is that wave of new tools, systems adoptions to support these transitions. Is that still in front of the KLA team? Or are you actually starting to see quite a bit of that now?

Operator:

Our next question will come from Joseph Quatrochi with Wells Fargo.

Bren Higgins:

It came down a little over $500 million quarter-to-quarter. So you'll get the specifics in the 10-Q, which we'll be filing here in the next few days, but somewhere just north of $500 million. So still pretty high levels, north of $10 billion overall, but did come down a little bit quarter-to-quarter.

Bren Higgins:

Because we've got some new supply coming on related to some extremely long lead time parts, I would expect that we'll ship more in '24 than we have in '23. And so we still have a fair amount of imbalance here between where our customer demand is and our ability to supply. But there is some catch-up that's happening there. But those lead times are still pretty long. The rest of the company somewhere around various across different products, more capacity-centric products. Lead times are very normal today and around some of the unique products that are critical in terms of industry requirements, those are still a little bit longer.

Christopher Caso:

I wonder if you can speak a bit about the China business right now. A little more color on the strength that you're seeing and you obviously heard this from your peers as well. And I think the investor questions right now are about the sustainability of the China revenue at these areas. I wonder if you could address that.

Christopher Caso:

Just as a follow-on to some of the other things you said with -- as you're starting to fill some of those orders for, say, some of those Chinese customers that were -- you weren't able to fulfill because of some of the shortages before, what effect has that had on the backlog? And is your backlog visibility going out in time about the same as it was last quarter, a quarter before? Or is that backlog visibility is starting to shrink as you catch up on some of those orders that you weren't able to fulfill before?

Christopher Caso:

Right. So about the same.

Operator:

Our next question will come from Atif Malik with Citi.

Bren Higgins:

Yes. I'm not -- I don't have that detail here. There's another piece of that that's also related to the infrastructure investment that Rick talked about, the wafer infrastructure and reticle infrastructure. So there's also a component of investment that's happening there. I don't -- I'm not -- we guide at the company level customer-specific activity, I'm not going to get into that.

Richard Wallace:

Yes, great question. It means a couple of things. One, obviously, gate all around has been in development for a while. So we had start in terms of some of the architectures that we need to modify to support it. Specifically, we're leveraging Gen 4 technology instead of Gen 5 because of the nature of the contrast, ability of Gen 4 to see the defects that are relevant to gate all around architecture. We've made those investments and seen those results, and that's been one where we've leveraged existing technology but also leverage the work we talked about with AI, to provide capability. So we're well prepared for that when it comes to the inspection challenges associated.

Sidney Ho:

I want to ask about the DRAM strength that you guys are seeing. It seems like that was the main source of revenue upside in the quarter, and it looks to be -- based on your comments, down slightly in the next quarter in [ calendar ] Q4, how much of that strength is coming from shipping to the DRAM customers in China that you alluded to in the past? And how much of that is tied to advanced DRAM technology, high bandwidth memory and whatnot. And when you look at Q4, which part of that segment is going to come down?

Richard Wallace:

One other area, we are seeing some when it comes to the interposer in terms of packaging-related [ HDM ]. So that is also a driver -- smaller at this point, but the growth projections are good. Remember, as DRAM is going to leverage EUV as the investment resumes, that's going to be a great opportunity for us to continue to penetrate when it comes to the R&D, but that's not what's driving it right now.

Richard Wallace:

I'm sorry, for EPC or that was SPTS?

Richard Wallace:

Okay. Got it. Look, we had some strength -- we continue to have strength, kind of the same things we talked about strength in optical. I think the process control intensity hasn't slowed across our customers, and we continue to see wafer being strong, we talked about macro being strong. So it's really across the portfolio of leading-edge. The thing that's falling off the most when it comes to capacity has been the product areas that are most linked to wafer starts and those would be things like overlay and films. But when it comes to the technology inspection, continued strength there.

Sreekrishnan Sankarnarayanan:

Rick or Bren, I'm curious, you mentioned like the demand profile stays in the first half of next year. But some of your peers have called calender '24 like a transition year. And how do I overlay the fact that memory could rebound in the back half of next year, how to think about these industry WFE or KLA revenue profile next year?

Sreekrishnan Sankarnarayanan:

Got it. Got it. And then a quick follow-up. As you said, the recent export control work has no material impact to your outlook?

Operator:

Next, we'll have Timothy Arcuri with UBS.

Bren Higgins:

Yes, Tim, we're not experts on this. What we do is we take a look at what -- we look at the universe of peer companies and how they report. If you look at what our customers say, we have some modeling that we do. And we come up with an estimate for that. So this year is a little hard because of fast shipments, and I don't even really understand all the nuances in that and that's for you guys to figure out. But also some of the issues that affected some of the other providers in late '22 in terms of their ability or inability to deliver in '22 and how that shows up in '23.

Timothy Arcuri:

Okay. All right, Bren. And then I guess my second question is on inventory. It's now up to almost 300 days. It's up like $500 million over the past 6 months, but we're not really sure when WFE picks up inside of next year. I get that you still have this huge $10.8 billion worth of PO that you're kind of working off. But why is this stuff parked so far out in the future? Is it -- and if so, why hold the inventory now? What's the bottleneck? Is there something on your side still that's a bottleneck? Or is it more that the orders have been placed and maybe waiting for the fab, to be ready to take the equipment and that's why you're building up the inventory. I guess I'm just not sure why you would build the inventory if this stuff is still parked so far in the future.

Operator:

Our next question will come from Charles Shi with Needham.

Bren Higgins:

Not really. Look, we're watching for certain parts of, I'll call non-China legacy exposure to automotive, industrial, some of those markets to see if that has an effect on customer demand. But right now, our expectations around legacy in the near term has been fairly consistent.

Bren Higgins:

Run rating at the current level does give you a little bit of growth into next year. And as I said, we would expect to see growth in Service. I actually think EPC probably has some modest improvement off of pretty depressed levels. Our incremental operating margin model drives how we're running the business in terms of expectations for leverage on incremental revenue. So I would expect to see a modest uptick in OpEx. We're also balancing sort of near term in terms of how we're sizing for the current environment, but also our long-term investment, requirements.

Operator:

Our next question will come from Joe Moore with Morgan Stanley.

Richard Wallace:

Well, so we still -- we do get investment at the front end, but for more for development, but the ramp phase is really where you see -- that's where you see more of it. So you get it at the front when they're doing development and then this starts to ramp to get more. And we get less incrementally across the portfolio as you are in high volume. So yes, it would help us in terms of intensity around those new nodes, but often, those companies are also expanding the trailing nodes at a similar time, one or two generations. So on balance, doesn't look that different overall as most of these companies ramp up at if that makes sense.

Bren Higgins:

Yes. The roadmap schedules have held pretty well together. What we've seen is customers adjusting some of the capacity plans. So as you look at 2024, you're more likely to see, for example, more N3, you're going to see N2 activity and we'll start to see some of that soon. And -- but most -- the bulk of it will be more at N3. What you likely don't see is you probably won't see a lot of investment from our major customers and some of the more legacy parts of their businesses, where they pull back.

Operator:

Our next question will come from Blayne Curtis with Barclays.

Bren Higgins:

So I feel like where we are today, I think your stabilization comment is the right one. I think we've derisked it and given that we tend to be more of a long lead-time provider. I think we've made a lot of the adjustments that we needed to make already in terms of how we're planning for this year. And as we move into next year, right, I think if you just sort of aggregate leading-edge activity, we'll see as customers start to provide a little bit more insight. But again, back to the stabilization comment, I don't see it declining from here.

Bren Higgins:

Yes, it's the latter. I think we're expecting utilization to slowly improve, but the bulk of it will come from new tools coming into contract. I think to expect to start to see overall industry improvement into '24, the first thing you'll see is utilization start to improve. So we would expect that and then once you see that, and then eventually, utilization gets to a place where customers need new capacity and then those decisions happen.

Mehdi Hosseini:

Yes. Just a quick follow-up. As you think about the R&D price, especially you highlighted gate all around at some point, we have to change the narrative to High-NA. And I want to just get an update, how do you see kind of opportunities as it relates to High-NA specifically on the patterning? And I have a follow-up.

Richard Wallace:

For sure, absolutely. We're still using Gen 4. We're using Gen 4 now because of the extensions that we made in the platform, not just in terms of wavelength but adding more processing capability, the leveraging of AI, the use of both Gen 4 and Gen 5, actually Gen 4 will out-ship Gen 5 this year, and we'll continue to see that adoption.

Mehdi Hosseini:

Okay. And then the second follow has to be on China, it seems like for KLA and the peer group, the China mix is getting closer to 50%. Could there be a scenario where opportunities for KLA would actually step up given the fact that many of these customers are new, and they have yield issue. And I understand China is mostly for [ trading-edge ], but with new entrants, new players, with the higher entrances and improving yield by these new players, have a higher mix of China for KLA relative to the peer group?

Brian Chin:

I'll just ask one question then get us out of here. But -- and you can correct me if I'm wrong here, but I've gotten a sense maybe that given how strong the infrastructure bear wafer and reticle inspection business into China was this year that it could subside a little in the calendar '24 relative to its strength again this past year. Is that sort of implicit in your outlook in the first half next year? And also, do you think that is proportional in any way to sort of the rate of China fab bill out activity that you can maybe observe for next year?

Kevin Kessel:

Thank you Brian and thank you Chelsea. I just wanted to thank everyone again for their time and turn the call back over to you for any final instructions.

Oreste Donzella:

Perfect. Thank you very much. Happy to be back in London after a year. And this is really a dream come true. I mean people talk about semiconductor like there is nothing more important in the world to talk about it. And after 32 years in semiconductor industry, 25 at KLA, seven years working in the fab in TI and Micron for me is like a dream comes true and [a revenge], I guess, my children, they always question me why I'm so excited about semiconductor industry. And I'm still excited, as excited as I was day one in my career. So today, I'm going to talk about a new topic, advanced packaging just because after many, many years, semiconductor, you need to learn something new. But four years ago, we decided to start investing in advanced packaging, packaging overall. It was mostly driven by acquisitions. So we made several acquisitions in the space. We bought a company in Belgium called ICOS. We bought a company in Israel called Orbotech. We bought a company in the financial transaction of Orbotech in the UK that is called SPTS that is doing extremely, extremely well. In a market space that KLA didn't have much knowledge about this real process tools, PVD, etch and CVD, and I'll tell you a little bit the story of the evolution of our journey in packaging since 2020 when we started the journey actually in EPC Group at KLA. So this is, of course, forward-looking statements here. KLA overall, I just have a couple of slides on KLA organization structure. Almost 15,000 people, 2023 revenue was $9.7 billion. We got a little bit of decline in 2023, 8% year decline last year. In a year, it was supposed to be a catastrophe where we got like 8% only down. And this year, of course, we expect the market to stabilize and probably being a little bit up. So these are all the metrics that you care about. And one thing that we are very, very proud because it's the [measurement, our differentiation], our gross margin. So we can command a pretty good gross margin in the company because of our differentiated technology. My CEO, Rick Wallace, all the time, he tells me that the best proof of how differentiated our product portfolio and the solution portfolio is just pretty much to do command high gross margin. This is what we are proud of. So we are in many, many spaces in electronic ecosystem. Of course, in the wafers, logic, memory, specialty legacy, wafer-level packaging and component is particularly available packaging that is going to be the main topic of my speech. But also, we are in printed circuit board and IC substrates, and this is something that we acquired with the Orbotech transaction. And it will become more and more important because some of the advancement in advanced packaging will become a substrate in panel level, and we can leverage at that point our presence in the PCB market as well. Didn't change organization, it has been stable for a few years. So you can feel – you can see KLA is really a combination of three different business groups. One is our core business, the Semiconductor Process Control, Ahmad manages this organization. This is our inspection and metrology for wafer front-end fabs. Then we have a service organization under Brian. And my organization, the spaces across the edition spaces, not really core semiconductor process controlling wafer fab and mostly packaging, components, PCB subset and the specialty semiconductor process with the acquisition of SPTS. Okay. Now let me talk a little bit about market drivers that are going really to lead into packaging and why it's so important, so critical these days. So first of all, one thing that is absolutely a change in the semiconductor demand is diversification. I put this slide together actually four years ago and it becomes more and more true with all these big emphasis on AI and GPU and HBM, everything that is connected. So when you look at the stagnation years that I would say they were like after the smartphone introduction until probably when the first data center cloud and the hyperscalers started to invest in semiconductor. There was like a decade that the semiconductor industry was not really driving fast growth. It was a time that we said the semiconductor was growing as a GDP, probably semiconductor capital keep GDP plus, but no more than that. Now nobody, I believe in this room has any doubt that semiconductor will grow, a semiconductor capital equipment will grow much faster in GDP in the next five, 10 years because the huge infusion and pervasive participation of semiconductor in everyday life. And it's all about diversification. So and on top of that, of course, AI is the big driver. So I tried just to put together this chart to show how different the GPU package is between 2015 and 2024. So of course, the B100 chip, the GPU introduced a few months ago, and this is not enough because Jensen has already introduced the next generation of GPU last week. And you can see the difference. So was just memory, it was 12 gig now we have 192 gig done in HBM. HBM High Bandwidth Memory means memory that are stacking on top of each other. Nothing changed in the wafer fabrication of these DRAM versus a standard DDR DRAM that goes into the PC or smartphone, the secret sauce is in packaging. So the way our HBM differentiates itself versus the other DRAM chips. It's because in the package, you need to stack all this DRAM on top of each other because you need a lot of DRAM together with the GPU in a package, and you need to be on the same package because you want to have a proximity between the DRAM and the processor inside the same package. That's what HBM is all about. We will talk about HBM, HBM, but from wafer fab point of view, it didn't change much. What changes the way how you package the HBM in the wafer level package assembly line. And you see very, very stunning difference in terms of the area. So we move from 2 by 800 millimeters square. Of course, we are now surpassing 200 billion transistor in a single device memory type is different the size, the package type. Of course, this is another big, big change. Everybody is talking about. If I look at the buzz words, AI is the number one buzz word, everybody talk about AI. And then when you go one level down, what are the other buzz words? One is CoWoS, one is HBM. And by the way, HBM is integrating to CoWoS. CoWoS is real package. And this is what is limiting the capacity of GPU right now. It's not a wafer fab. It's really the ability to stack all this HBM, ship to TSMC. TSMC is packaging on CoWoS, CoWoS package. And then the entire packaging gets assembled generally through OSATs like Amkor, ASE, SPIL and so on. And of course, as I said, there are many things happening in the AI entire device. So starting, of course, the GPU needs a very advanced design from wafer fab point of view. We talked about memory that gets start in packaging and eventually, the CoWoS that put all this together. And when I look at the momentum of AI, and by the way, we are really at the tip of iceberg right now. Think about AI getting all this press, all this CapEx spend, and we are talking about cloud AI. We are talking about really AI in the hyperscale in the cloud. But AI will be implemented the edge or hybrid devices in the future, you will get a ton of demand for AI devices and eventually requiring a lot of semiconductors and a lot of advanced packaging. So this is what we are betting right now in KLA. So semiconductor is going to grow. We are in the right industry. And we have some other segment of these industry that were very, very small, like packaging that is growing even faster than the entire semiconductor market. Okay. Let me go through a little bit of technology slides here. So now you know the driver. I'm talking mostly about AI. I'm talking mostly about advanced packaging. But before advanced packaging because I've been in this industry for a long, long time, I've seen so many technology node scaling. My first job was 1 micron product engineer on a DRAM fab 32 years ago, 1 micron. Now we move from micron to nanometer. Now we are moving angstrom very, very soon. So we see really how pretty much the technology was able to invent itself and make huge progress just scaling the density of the devices and the number of transistors. And this was what, what more lows. So how we can pack double number of transistor in the same piece of silicon every 18 or 24 months. And lithography drove all this. But at a certain point, it always started to slow down, becoming more expensive. EUV scanner is a state-of-the-art tool and the high-NA EUV definitely is going to be the most incredible product that human being has ever produced. But is not enough anymore and it's too expensive. So people are thinking more and more ways how to deliver the performance and required power because it's not only performance. It's not only computing as Lisa Su said many, many times, the NBC or other important players in this industry the computing going to come together with power consumption because power consumption may become the biggest enemy of computing road map in the future. So you see on top of lithography scaling that is happening with the EUV or high-NA EUV, we see transistor architecture changing. So we have seen the transition between planar transistor to finFET. We will see it all around coming, it's coming already. We will see other transistor architecture later. The way how we distribute the power the so-called backside power delivery network right now is pretty much in the road map of the most advanced customers. The way it works is instead of delivering the power on top of your transistors, you deliver from the backside of the wafer, saving space, efficiency and eventually consuming less power at the device level. And then, of course, the topic of my speech is packaging, how you integrate multiple functions coming from different wafers on the same package in a cost-effective way. And this is what heterogenous integration or chiplet is all about. Okay. I'll skip this. Just I want to make sure that on top of 5G, of course, the semiconductor industry is progressing well on front end as well. Package is complementing whatever the front end wafer fabs is doing a lithography level, a transistor level and the power distribution level. So let's talk about packaging and all these vibe around heterogenous integration. So many years ago, there was a concept called SoC, system on a chip. So the big CPU producers at that point, they figure it out and say, I can have multiple functions on the same wafer, on the same chip and everything is getting connected each other. The problem with this approach is you were building a 3-nanometer wafer, for example, with some functions like control logic chips that they don't need to be a 3-nanometer. So why you are wasting 3-nanometer wafer space on functions that don't need to be a 3-nanometer that can be cheaper. So the idea about the heterogenous integration is two ideas really in one. One is I can have a mass cost-effective way to integrate multiple functions in packaging instead only wafer, number one. Number two is because of the computing and power requirement, I need all these functions to be very, very close to each other. And this is what generated the need for the so-called heterogenous integration. So putting more functions of a chip inside a pretty much a package. So building on a different wafers and then cut the wafers and then building this lego block that people call chiplet in packaging. And we have seen many of examples already, all the CPU and GPU right now are made with heterogenous integration packaging, the most advanced one. And there is – there are many, many ways to package multiple chips at the packaging level together. And from low bandwidth to ultra bandwidth depending on the applications, depending if you are stacking for example, DRAM on DRAM or SRAM on logic or logic on logic, there are multiple integration schemes of these heterogenous functions in a package in a wafer-level packaging architecture. So let me say – let me give you a couple of examples. One is what we call 2.5D, that is, of course, a CoWos package. This is the NVIDIA chip goes into CoWos packaging architecture and then I'll talk a little bit about 3D hybrid bonding later. And eventually, the way the packaging technology road map is evolving is to get these two together. So the next generation of packaging architecture will have a 2.5D configuration with 3D hybrid bonding on top. So even there are so many flavors of CoWos today that are going to that direction. And eventually, they may find application not only in the very, very expensive cloud high-performance computing ships, but also mobile in the future with different flavors in PC and so on. Whenever the AI is going to implement it on the edge. So that's the reason why the beauty of this packaging technology road map is, we are just at the start. When you talk about CoWos is just a start. When you talk 3D bonding on HBM memory is a start. There are infinite numbers of a potential combination of heterogenous integration architecture in packaging that can be done in the next five, 10 years. So this is the 2.5D here. Of course, you see the HBM on top of each other, connected with the bumps. And then you see the GPU landed on a silicon interposer and the silicon interposer is landing on a substrate. I'm not talking about substrate today much. But as I said, the substrate will become an important component of packaging and substrate is nothing else than very advanced PCB. And now you go back and say, why KLA invested in Orbotech? Well, at least we felt that PCB may evolve in something more technologically advanced. In packaging, we were right. It didn't come yet, but we believe the substrate will become more and more important next – in the near future and it's going to be much better growth engine for KLA as well. For now, we'll talk about what is happening on top, okay, the substrate? And then of course, you have the big ball connected to PCB. And when you look at 3D packaging, now you talk about two other names, one is Foveros Direct. This is what Intel is trying to build in their foundry market and foundry supply. So this is a big better Intel, of course, is playing to become a foundry, and they become a foundry if they are successful in delivery, this particular package is called Foveros Direct, it is a 3D integration with hybrid bonding. No bumps, but copper-to-copper direct bonding. And then SoIC, of course, is a packaging architecture that TSMC has already built for some premium chips for AMD. So this stuff is already in the market, a very limited, limited, limited volume and is going to grow exponentially if the market will demand more computing at power in the future for AI. So this is the case where you can see the 3D, you don't see bump anymore in the upper part of the graph, and you see chiplet connected to silicon and eventually in this case, copper-to-copper bonding in [die-on-die and die-on-wafer]. Many challenges, and this is where KLA plays a role. Let's start from inspection. I remember four years ago, I was talking to customers and they say, KLA wanted to enter the packaging business in inspection. And this guy said, I don't need you. I mean, I need one micron defect sensitivity. KLA is so advanced and is a front end now. And now we get pressure by the most important customers, they want 100-nanometer defect inspection sensitive packaging. They want 15-nanometer. Just to give an idea, how pretty much adding tools from front end and of course, customized for back-end because remember, the tools that you have in front end not necessary are good for packaging. You need to do a lot of work in customizing the handling, in customizing for the noise source, in customizing for warpage thickness. So everything in package is different. It's not standardized. In front end semiconductor, everything is standardized, in packaging it's customized. So we need to bring this capability from front end customizing for packaging, and we did it. And now people are looking for KLA because on this sophisticated type of packages, they need a front end like inspection capability or metrology capability. That's one big requirement coming up in packaging. The second requirement is that it's important for KLA in the sense that we not only have a process control, as you know, we bought SPTS here in the U.K. that I'm very, very proud to manage in my group. And SPTS is not an inspection metrology organization. It's a PVD, CVD and etch organization. And the good news about SPTS is we don't bring solution from 3-nanometer that are too expensive for packaging in that particular field, we customize and we build a solution for packaging. So our plasma etching tool or our plasma dicing tool is number one in the world because it was developed exactly for the need of packaging technology road map. And that's the reason why you see a lot of challenges here and KLA is working all these challenges inspection, metrology, but also process challenges like etching, or silicon, or plasma singulation of wafer and so on. And as I said, substrate is going to be the next engine for growth. Right now, this is what we did with Orbotech acquisition. We see a little bit of growth momentum there. I believe the real momentum will come in the next few years on the substrate and panel type of inspection and metrology. Okay. And I have a couple of slides to wrap this up again, as I said, a lot of challenges with the new architecture of packaging, heterogenous integration base. And we have a full suite of products, a process tool from SPTS on the wafer side, the plasma etch, dicing CVD and PVD. On the panel side, we have photolithography tool. Basically, in Germany, actually, this is another company we acquired under the Orbotech financial transaction. In Germany, Jena, of course, we have all the inspection and metrology tools coming from semiconductor front end customized for packaging or something that we developed in the last four years probably for packaging. And not only. Another thing that is important about KLA is when I want to – and I have been exposed to this company for a long, long time as an employee and before then as a customer. I believe, KLA, if I want to define a KLA, I would say KLA is a data company. So we produce an insane amount of data out of our inspection and metrology tools. Now the question is what do you do with the data? Many, many years ago, KLA invented a new way in semiconductor wafer fab to analyze – collect, analyze and manipulate the data in the wafer fabs. And 95% of the fabs in the world use our data analytics hub what we call Klarity. And the beauty of this is all the data in the fab regardless if – this is an open architecture software. I don't care if the data come from this software, doesn't care if they come from KLA tool or competitive tool, they get integrated and connecting our data analytic hub. And then eventually, you can produce feedback to correction loop that can improve the process based on the data you collect from the inspection metrology tool. It's a feedback, feedforward loop. So we are doing this for packaging right now. And I got to tell you there is a huge enthusiasm to have the same capability that KLA developed in the front end wafer fabs now driving data analytics and correction loop in packaging. It's a massive opportunity because, as I said, packaging is not standardized. And there is no concept of really monetize and materialize and capitalize on data and we are building this infrastructure right now. So not only tools but also developing data analytical software and algorithms and so on. And that's my final slide, and I think speak by itself. This is what we are forecasting this year revenue packaging, huge leap. So you can see we are almost doubling the revenue in 2024. We just gave – actually four weeks ago, it was $400 million. And then in the last four weeks, we got a lot of orders. And then Bren, Kevin and I were talking about or maybe we should say pretty much keep updating because in reality, especially for silicon interposer and CoWos, heterogenous integration architecture with HBM memory there is incredible appetite right now for demand and of course, for demand of capital equipment to develop these kind of packages. And we expect pretty much to land in $450 million, $500 million of revenue this year as a packaging revenue for entire KLA. And this is my last line.

Oreste Donzella:

Yes. I didn't check.

Oreste Donzella:

By the way, thank you very much, and I'm – again, I'm very, very glad to be here last year with a different topic. Actually, last year, I talked a little bit about silicone carbide in automotive. That was a huge wave last year. Now it's kind of flattening a little bit. Packaging is the new one. Probably next year, I'm going to talk about something else. Thank you.

Kevin Kessel:

Thank you for joining us for our earnings call to discuss the results of the June 2023 quarter and our September quarter outlook. Joining me is our CEO, Rick Wallace, and our CFO, Bren Higgins. During this call, we will discuss our results released today after the market close, along with supplemental materials that are all available on our IR website.

Our 2023 WFE estimate reflects a tops-down assessment of industry demand as follows:

in memory, we expect WFE investments to decline by approximately 40%; foundry/logic to decline by about 10% overall, with legacy investment outperforming the segment overall due principally to automotive and continued demand for legacy design nodes.

Operator:

[Operator Instructions] Our first question will come from Joe Quatrochi with Wells Fargo.

Bren Higgins:

Joe, thanks for the question. This year has been a strong year for that. We have a very strong market position there. So that's been good for us. And you're seeing investment from the global players, but also investment in infrastructure in China to provide more domestic supply. It tends to invest according to a different cycle. I wouldn't exactly call it countercyclical.

Bren Higgins:

Sure. We had some movement across a number of our customers, and the number overall is, frankly, pretty low. But that was part of it. The other part is we also had some shipments that we weren't expecting to make in the quarter related to 1 of our Chinese DRAM customers. And a clarification of some of the export rules enabled us to ship some additional equipment there. So that was a factor in the upside on the DRAM side.

Christopher Muse:

I guess first question, can you update us on where optical inspection lead times are? And given the importance of that tool set for R&D lines, is that something that you expect will sustain at elevated levels? Or do you think that should normalize over time?

Bren Higgins:

Yes. Lead times will come down a little bit. I don't know if they'll come down all that much, given the drivers of that product line. But as new capacity comes online as we move through '24 and beyond, we'll see it -- we'll see them come down a little bit, but I think you'll still see them remain elevated for some time.

Christopher Muse:

Very helpful. And I guess as my follow-up, encouraging to see your Semi Services business grow sequentially. Can you kind of comment on how you see that playing out in the second half? And what kind of potentially negative impact are you seeing from lower utilization from your memory customers?

Sreekrishnan Sankarnarayanan:

I chose -- the first one, Rick, obviously, you have like very strong revenues from China. There's been some chatter that the U.S. might expand export controls, even maybe mature nodes. I know right now, you're capped at 14-nanometer and below for foundry/logic. Is there any commentary you can give on that? And how to think about it, like, let's say, for example, 14 goes to 28, the restriction, or 28 goes to 40. Is there a way to quantify the impact to your sales? And then I have a follow-up.

Operator:

Our next question will come from Sidney Ho with Deutsche Bank.

Bren Higgins:

Yes. It's -- it's a good question. And it's something that we had already factored in to our plans as we looked out. What you're seeing is the adjustments to some of the ramp plans. And so while there's still some shipments going into some of these facilities, fewer tools.

Sidney Ho:

Okay. Great. That's helpful. As a follow-up, speaking of China, I know the revenue is now back to the 30% level. You talked about some of the shipments that came in a little earlier. But I want to ask a little bit different angle. It's clear that there is a big push for self-sufficiency in China, but certain tool sets are harder to replace than others. Can you give us maybe a little bit of color on the competitive dynamics there, that some of your process control clients could be satisfied by domestic companies?

Brian Chin:

I guess understanding again that memory investment in general is reduced, and it sounds like the China memory shipment might have hit there in the June quarter, but if I were to assume that some of your DRAM activity in coming quarters will be more geared toward DDR5 and applications for high-performance, high-density DRAM for data center and AI applications, are you noticing or anticipating a higher level of process control intensity for that kind of spend?

Richard Wallace:

Well, I mean they've slowed down. I mean for sure, we've seen and heard the reports on forecast for their investment in WFE going down. So I think that's been the main one. What the leading indicators that we are looking at that are encouraging, as I mentioned earlier in this call, we've had utilization rates creep back up from what was forecasted just a few months ago.

Operator:

Our next question comes from Tim Arcuri with UBS.

Bren Higgins:

So the specific details will come through when we file our K here in another week or so. But it was down about a little over $500 million quarter-to-quarter. So book-to-bill was a little less than 1. We still see some activity in terms of new orders. So the backlog levels are obviously very elevated. So it's come down. It seems like it's been coming down right around that $500 million or so per quarter for the last few quarters, but still close to $11.5 billion overall. And the beyond 12 months is between 40% and 50% of it, which we deliver beyond the 12-month window.

Bren Higgins:

Yes. I don't want to get specific on guiding December. But certainly, consistent with the prepared remarks, we see a stabilizing rate moving forward. And obviously, that's plus or minus, given the integers of some of our ASPs, that can be plus or minus $20 million or $30 million generally overall across the businesses.

Harlan Sur:

Maybe as a follow-up to Tim's question, your prior view was for process control to be down roughly kind of mid-teens, right, relative to WFE, which was down 20%. Now off of the better June quarter results and if I flatline stabilize that process control for the remainder of the calendar year after the June quarter, it looks like your process control franchise is actually going to be down only 10% to 12% for the full year. So even better outperformance versus WFE.

Bren Higgins:

Yes. Yes, your math is consistent. So yes, that's how it will play out, assuming the December quarter comes through the way we expect today. We talked about bare wafer obviously being a strong driver, optical inspection. Reticle inspection is also a business that isn't declining as much as the overall market.

Harlan Sur:

I appreciate that. Is that advanced packaging demand is kicking off quite strongly, right, driven by all these accelerated compute workloads like AI, right? You have HBM, CoWoS packaging, multichip stack-die configuration. TSMC, Intel, all the memory guys, the old stacks, right, you guys supplying to all of them. Are you seeing the demand pick up for your solutions for accelerated compute applications? And is the advanced packaging segment growing this year for the team? Or is that sort of AI accelerated compute demand being somewhat offset by some of the more consumer-focused end markets?

Operator:

Our next question will come from Atif Malik with Citi.

Kevin Kessel:

Thank you very much, Chelsea, and I wanted to thank everyone again for their interest and their time. We know it's a very busy earnings season. It's also a very busy day. This was a later call in order to try to accommodate as much as we could. So we look forward to speaking to all of you in the weeks ahead. And with that, I'll turn it back to Chelsea for any final remarks.

Kevin Kessel:

Thank you, Chelsea, and thank you for joining us for our earnings call to discuss the results of the March 2023 quarter and our June quarter outlook. Joining me is Rick Wallace, our Chief Executive Officer; and Bren Higgins, our Chief Financial Officer. During this call, we will discuss our results released today after the market closed. All materials can be found on our IR website.

Bren Higgins:

Thank you, Rick. KLA delivered on our quarter guidance and commitments, demonstrating consistent execution in a challenging marketplace. Our continued focus on meeting customer needs while expanding market leadership, growing revenue, sustaining industry-leading gross and operating margins, generating strong free cash flow and maintaining our long-term strategy of asserted capital allocation is what makes us successful.

Our WFE estimate reflects our current top-down estimate of industry demand as follows:

in memory, we expect WFE investments to decline by 35% to 40% as memory customers continue to respond to lower consumer demand by adjusting production to bring device supply in light of demand. We expect foundry/logic to decline by about 10% overall with legacy investment declining less than the segment overall due principally to automotive and continued demand for legacy design nodes in China.

Kevin Kessel:

Thank you, Bren. Chelsea, can you please provide the instructions for Q&A, and then begin the Q&A?

Harlan Sur:

And great to see you had another year of strong share gains from the team last year. You reiterated your full year WFE outlook at down 20%. You also talked about your process control business remaining stable at the June quarter levels through the remainder of this year. I'm wondering if the stable outlook also reflects the stabilization of cancellation and pushout activity from what I assume has been a pretty volatile bookings environment over the past 6 months?

Bren Higgins:

Yes. It's a great question, Harlan. And certainly, over the last few months, we've seen a shift in our expectations for that business. It tends to be short lead time and very consumer sensitive, if you will. And so as the consumer markets have yet to really recover, we were expecting to see a bounce back in the second half. And while I expect the second half to be a little bit stronger than the first half -- and this is really regarding the PCB business, flat panel business and the ICOS component inspection business because SPTS has a different profile, I'll talk about that in a second.

Christopher Muse:

I guess first question, surprised you haven't changed your foundry WFE outlook for 2023 at all. Many of your peers discussed modest adjustments there. So would love to hear your thoughts as to what's offsetting that? And as part of that, can you speak to the lead times for optical inspection, which I still think are well beyond 12 months? So is that the kind of the key to the story for KLA where you're finding this sustainable level at the June level in the second half?

Christopher Muse:

Great. And then maybe just to follow up on the legacy part. You talked about native China being 25% of process control. How much of that is silicon wafer versus just traditional front-end equipment?

Vivek Arya:

I'm curious what's giving you the confidence that sales have bottomed when many of your memory customers still appear to have a lot of inventory and are unclear when the utilization will pick up. So specifically, how is your visibility to the memory demand for the back half of this calendar year? Do you think it will be about this level, it'll be lower, above this level?

Bren Higgins:

Sure. It's a good question. If you look at the March quarter, it was pretty low, right, at 14%. So -- and I look back -- and you go back in any of our recent history hasn't been that low really ever. So -- and even as you see it progress through the year into the guidance, sort of the 23% that we talked about in June and -- even as it sort of stays in that range as you move through the second half of the -- for the year, it's still -- while second half might be a little bit stronger than the first half, given how low the first half was, it's still pretty low overall in terms of our forecast and expectations.

Richard Wallace:

Yes. Just to add to that, if you look at the business that we have, it's more tied to capacity and memory, that's not really showing up. What's showing up, as Bren said, is more on technology. So even as those customers or not -- or even have a low utilization, not adding capacity, they are very motivated to continue to work on technology development that plays to -- as Bren said, it's a relatively small number, but there's some stability in that.

Richard Wallace:

Yes. Obviously, just to start off with the obvious, we don't have a lot of visibility into next year. But we can tell you about the conversations we're having with customers, which have to do a lot with their view that things are kind of stabilizing at this level for the most part. And in some cases, it's because things are down quite a bit, but there's a lot of activity still in, for example, advanced logic nodes or advanced foundry nodes, of design starts and a lot of work going on there.

Operator:

Our next question will come from Krish Sankar with Cowen.

Bren Higgins:

Yes. Krish, so we expect to be somewhere greater than $200 million in terms of the opportunity in the second half. And we're working with the customer to make sure that we have what we need to be able to support that activity. But that's how we're sizing it right now overall. So look, I think on the technology question is that not everyone is at the leading edge. And so there's activity that's happening in legacy markets, and there's some market opportunities out there from an end market point of view to support some of these investments. So that's what's driving that investment. And like I said, we see it somewhere in that couple of hundred million range.

Richard Wallace:

Yes, this is Rick. So yes, we should see growth in Service. And I think this is one of the differentiators for KLA is how our Service behaves and slow down. We're seeing a lot of interest from our customers to keep that capability. So even when capacity might go off, what customers want to focus on is yield and making sure that they're continuing to develop new technology.

Bren Higgins:

Yes. And for the Semi PC part of the business, given the reduction or the softening in the industry environment, some [indiscernible] capacity, the dynamics around the memory business that people have already asked about, I wouldn't expect Service to grow in line with the long-run target of 12% to 14%. As we said last quarter, we see it somewhere in the mid- to high single-digit growth rate this year, obviously some headwinds from the export controls as a factor in that.

Operator:

Our next question will come from Joe Quatrochi with Wells Fargo.

Bren Higgins:

Never came out. Because it was a clarification issue, so we were -- as I've said in prior quarters, until we had certainty, we weren't going to scrub out anything out of our backlog. In this case, we required a clarification. And so until we have certainty, we left things in. So no change from that point of view.

Bren Higgins:

Yes. I think the last couple of quarters, we've had some meaningful adjustments from what we were driving the company to the current demand levels. And if you recall back in '21 and '22 given the supply chain shortages that were out there, we were making fairly significant commitments in our supply chain that in a lot of ways, drove the performance that we saw in '21 and '22 from a growth point of view, and particularly from a relative growth point of view.

Operator:

Our next question will come from Atif Malik with Citi.

Richard Wallace:

I wouldn't say higher, no. But there's a lot of projects.

Atif Malik:

Okay. And then on multinational companies in China, Rick, in your discussions with these companies, how are they looking at their future capacity expansions given that the license period for the export restrictions is coming due in September, October? I mean, how are they looking strategically on investments in China?

Operator:

Our next question will come from Timothy Arcuri with UBS.

Sidney Ho:

I want to follow up with the previous question about -- you talked about the stabilizing demand and maybe a similar profile for the rest of the year. Are you expecting your revenue for the back half of the year to be roughly flat quarter-over-quarter, inclusive of that $200 million of recoup revenue? Or are there other factors to consider whether it's on the service business on the EPC side of things?

Richard Wallace:

It's a good question, Sidney. I think that those are always conversations customers have had in terms of when they look at their utilization. And they look at the differences from node to node. I think it is something that is always being evaluated. They're always trying to optimize the portfolio. The work that we've done in modeling our 2026 plan and the work that we do even looking through the rest of the year and next year, have contemplated all of that.

Operator:

Our next question will come from Toshiya Hari with Goldman Sachs.

Bren Higgins:

Well, look, Toshiya, we -- process control intensity has been very strong for the reasons you talked about, if you think about the number of design starts and what that means in terms of our customers managing a number of different designs that test design rules in different ways and then having to deliver yielded wafers in fairly tight market windows. It all drives a higher level of inspection and metrology.

Bren Higgins:

Yes. Most of the reticle infrastructure -- new infrastructure is being added in China to support legacy activity, and that's probably a driver of an incremental couple of hundred million or so of revenue for us. Overall wafer -- and I'm separating this way because I don't want to double count. But overall, wafer should grow meaningfully this year compared to last year.

Operator:

Our next question will come from Joe Moore with Morgan Stanley.

Bren Higgins:

The utilization rates have clearly come down, particularly in the memory space. It seems like they are fairly stable at this point. We don't see them continuing to decline from where they are. So -- and that's why we see the overall revenue because customers are not running the tools to start or in some cases, idling capacity. So you don't have the opportunities -- the Service opportunities we would have in a higher utilization environment.

Joseph Moore:

That's helpful. And then separately, on China, you guys have talked to the sort of China trailing-edge logic opportunity a couple of different times here. Your sense for whether there's building ahead there -- I mean I would assume you have customers there that have anxiety about future export controls, could they be putting in capacity? I guess maybe a different way of asking the question, do you see utilization that kind of validates the requirement of the spending? Or do you worry that it could be a building ahead of supply?

Blayne Curtis:

I was curious, I mean, you talked about in the outlook, legacy growing faster than leading edge. Just curious if you could give us a perspective where that mix is within foundry/logic today? And maybe a perspective of where it's come from?

Richard Wallace:

Yes. And I've said this many times, but we're not the company that you look to for asset velocity as it relates to inventory. And there's a reason for that is it starts with the business model the KLA has around driving innovation and differentiation and that drives a fair amount of custom componentry into our systems and very unique supply relationships where our suppliers are trusted partners more than a transactional supply chain.

Operator:

Our next question will come from Brian Chin with Stifel.

Richard Wallace:

Well, I think that -- a couple of ways. One is it depends on the applications for the fabs. So if you're an automotive fab, you actually have a different kind of need for process control than you do if you're just a traditional legacy fab. So that's 1 thing. The -- that actually process control intensity can be a little bit higher. And then depending on the scale and the size of the fab on a relative basis, it's harder to have -- you get more efficiency on a large fab.

Richard Wallace:

Yes, I think it's more of the latter. I wouldn't characterize it as anything other than just some investments that some timing of -- I think tool deliveries with our customer base, and it's very technology-centric. So I wouldn't characterize it as given the level of it. It's been a while since it's been this low even with the uptick quarter-to-quarter. It's pretty technology-centered with the exception of -- some of the China opportunities we get early.

Mehdi Hosseini:

Just 2 follow-ups for me. If I just take your commentary regarding the revenue trend first half and second half of the calendar, it seems to me that the peak to trough decline in revenues in the 25% to 30% range. And I'm not asking you for a guide. But what I wanted to better understand if you did close to $3 billion in December of '22 with a WFE in the $90 billion to $95 billion. Can you go and hit those revenue run rate without WFE -- if not WFE having to go to $90 billion? Does your diversification looking forward, especially with semiconductor material and others, would enable you to hit [ $3 billion ] without having WFE to go to $90 billion plus? And I have a follow-up.

Mehdi Hosseini:

Okay. And then just 1 quick follow-up. If any of your customers were to reuse some of the equipment, how should we think about price diagnostic content for that application?

Operator:

Thank you, ladies and gentlemen. This does conclude the KLA Corporation March Quarter 2023 Earnings Call and Webcast. Please disconnect your line at this time, and have a wonderful day.

Richard Wallace:

Thanks, Kevin, and thank you all for joining us today. I will summarize KLA's performance in the quarter and summarize calendar 2022. I'll also provide a brief perspective on the overall semiconductor demand environment as well as outline KLA's priorities for 2023.

Kevin Kessel:

Thanks, Bren. Chelsea, if you could please give instructions to queue for questions.

Christopher Muse:

I guess, first question, you talked about expectations to outperform WFE again here in calendar '23. So curious, can you kind of walk through, is that a comment on total revenues? Or just process control? And within that, how should we be thinking about the benefit from backlog/deferred revenues, particularly into the March quarter? Trying to make sure I calculate that right in my model.

Bren Higgins:

Yes, I think we could stay above 60%. Look, there could always be quarter-to-quarter dynamics in a given quarter depending on the mix of the business that could drive us beneath that level, but our expectation is that for the year, we'll be better than that overall.

Operator:

Our next question will come from Joe Quatrochi with Wells Fargo.

Bren Higgins:

I think my statements earlier were more -- were KLA-centric, but I don't think we're going to deviate that much from overall WFE. Obviously, that gets into the other businesses and markets that we don't participate in. But generally, I would expect that we're at a higher run rate, a WFE run rate in the first part of this year than we are in the second. So yes, I would think that it's probably down. I don't know how much it's down, but it's probably lower in the second half than the first half.

Richard Wallace:

I think that it's much more -- it's baked into our assumptions on the overall reduction in WFE that they're going to be shifting. But I don't think the mix between our products is really going to change for that period if you think about where logic is positioned.

Bren Higgins:

Yes. If 7-nanometer capacity demand falls off, right, and we don't expect to impact, you would expect to see wafer starts maybe come down at that node, most of the investment we expect to see is at the more advanced nodes. Customers are always looking to optimize the productivity of their capacity. Depending on their views, it could be temporary, in which case they'll idle some of that capacity or run it at a lower utilization rate.

Operator:

Our next question will come from Harlan Sur with JPMorgan.

Bren Higgins:

Yes. Yes, you're right. We do have some puts and takes. But if you look at the -- and just for some history, right, if you look at our service business overall as it relates to Semi process control, we've only had 1 down year going back at least the last 20, maybe 25 years, and that was in 2009, where we're facing an extremely challenging macroeconomic environment.

Richard Wallace:

And the other factor, Harlan, when you consider our business, our service is pure service, as we talked about. And also it's really not about consumables. So from the standpoint, their capacity goes down, some of the consumable related service business will go down as a result. Ours, because of the nature of what we do, and often, even if customers are constraining capacity, they're trying to optimize yield, and so that's why I think our service fares pretty well in this kind of environment.

Richard Wallace:

Well, I think you're right in some regards. And certainly, when it comes to technology transitions, a lot of what's driving the metrology is related to those tech transitions such as [ data ] all around, right? The work that's going on there is driving it. But there is a part of that business that's tied to capacity. So that's really puts and takes inside of that business. So it's not entirely just related to the tech.

Operator:

Our next question will come from Vivek Arya with Bank of America.

Bren Higgins:

Yes, Vivek, it's a good question. Not much has changed, frankly, in terms of how we've looked at it. Obviously, we had the strength of Q4, which contributes to the marginal weakness in the March quarter, where we had $184 million in incremental revenue above the midpoint in December. And so that clearly came out of the March quarter. So that puts a little bit of pressure on the March quarter. But as we look at the overall year, it generally looks very similar to what we had 3 months ago. So I don't think that much is different. It feels pretty consistent.

Vivek Arya:

Got it. And for my follow-up, if I'm hearing you, March is perhaps not the trough quarter for the year that -- I don't know, maybe it's June or September. Any way to gauge what that kind of conceptually, the trough quarter could be? Because when I look at memory, I think it's only, what, 15% of process control in Q1. Is that the trough for memory? Or can it get even lower than that?

Operator:

Our next question will come from Brian Chin with Stifel.

Bren Higgins:

So we're going to report -- we'll likely file our Q sometime in the next day or so, so you'll have the specifics on it. But your math is about right. It's a little bit higher than that, and we'd still expect 45% to 55% beyond 12 months. And as I said, some of the adjustments that were made were related to some more clarity around China export restrictions, so that was a factor in some of our adjustments.

Brian Chin:

Okay. That's fair. And this is probably just digging into a question that was recently asked. But I mean, I think the math might suggest that in the March quarter, the memory system revenue could be something like $250 million, maybe $250 million to $300 million. Maybe that's not trough, but it seems pretty low comparable to recent periods and going back a little ways. And so maybe not trough, but not too far off. Is that kind of an unfair conclusion?

Operator:

Our next question will come from Sidney Ho with Deutsche Bank.

Bren Higgins:

Sidney, it's a great question, and you're absolutely right. It pulled in into the December quarter. When we started the quarter, we had risked out some of the…

Bren Higgins:

So Sidney, let me just start again. Your question was about just the quarter-to-quarter changes. And you're absolutely right that we did see the strength in Q4, and that was a pull forward from the March quarter.

Bren Higgins:

Yes. I think the gross margin guidance we gave earlier stands for itself and reflects some of the actions that we're taking just to deal with. One of the challenges in our factories is we're coming off, which drove our inventory issue that we had this quarter as well as we're coming off pretty high growth expectations in a pretty short period of time.

Operator:

Our next question will come from Atif Malik with Citi.

Kevin Kessel:

Yes, we can hear you.

Atif Malik:

All right. So I have a question on the memory investments. Are you expecting memory CapEx reduction to be broad this year? Or just 1 or 2 memory makers?

Atif Malik:

Got it. And then on China WFE, are you expecting China WFE to be down as much as overall WFE? And what's holding China WFE? Is it the trailing edge investments? And what's driving higher investments on the trailing edge? Is it also end market or maybe higher process control intensity?

Timothy Arcuri:

There was a question before about EUV, and I'm wondering if you can sort of help give a number in terms of how much of your revenue attaches directly to EUV. There's not a ton of inspection in the litho cell, but you certainly get pulled along with anything that helps sort of horizontal scaling, so. And obviously, EUV does that. So I'm kind of wondering if you can handicap how much of your revenue gets carried along with EUV, and then I had a follow-up.

Timothy Arcuri:

Awesome, Rick. Super helpful. Bren, I had a question for you on process control systems. It seems like the guidance -- well, actually, it's a 2-part question. It seems like the March guidance implies something in the 16.5% range for process control segment -- systems. So I wanted you to confirm that, first of all.

Bren Higgins:

Yes. So your first question about margin, and of course, we don't guide the individual segments. But your assumption of where we are in March is about right. Obviously, we're going to manage the whole company to the top-level numbers that we provided and not necessarily focus on the individual pieces.

Operator:

[Operator Instructions] Our next question will come from Krish Sankar with Cowen and Company.

Richard Wallace:

Yes. I mean, I think it is the case, the process control, our business, in particular, is tied both to capacity, but also to tech transitions, and it's certainly not just a tech transition. So I think you'll see the people that are more tied to capacity coming down more in this environment, and people that are tied more to pure tech holding up, and we're kind of in the middle of those 2. Obviously, we have capacity businesses as they relate to, say, metrology that gets added as you add wafer starts. But the work that's going on in reticle and in advanced patterning inspections will be related much more to the Gen 4/Gen 5 stuff, which won't see as much of a decline.

Richard Wallace:

So the actual useful life of equipment has been going up for years, and we showed that in some of our service work. Part of why our service business is growing is because the life extends well beyond the typical -- the historical view of that. So I don't think that this is anything other than some recognition. There are different practices around the world with how customers choose to amortize or depreciate their equipment. So no, it has no effect.

Bren Higgins:

And you're seeing demand rise in the legacy parts of the market, and that's been good for, not only the service business and extending useful life, but we're also restarting older generation tools. It's allowing us to extend the life of existing platforms that we're selling. Some of our challenges around supply chain has been restarting some of those older generation tools to meet those demands.

Kevin Kessel:

Chelsea, I believe we're coming close to the bottom of the hour, top of the hour. We probably have time for one more question.

Toshiya Hari:

I just had a couple of housekeeping questions, if that's okay. The China impact, the export restriction impact in the December quarter and what you're assuming for calendar '23, Bren, sorry if I missed this, but if you can remind us how big the impact could be -- or was in Q4 and how...

Toshiya Hari:

Got it. And then on DRAM versus NAND, I think when you were going through the WFE assumption, you mentioned your expectation for DRAM to be down more than NAND. But when you think about your own business, KLA's business, I would expect DRAM to be a little bit more resilient given EUV adoption insertion and the benefits there. Is that the right way to think about your business in calendar '23 on a relative basis?

Kevin Kessel:

Great. Thank you, everybody, for your time. We know it's a really busy day of earnings. We also apologize for the technical difficulties we had during the call, but we will be catching up with all of you here afterwards. So I appreciate the interest and speak soon.

Kevin Kessel:

Thank you, and welcome to KLA's Fiscal Q4 2022 Quarterly Earnings Call to discuss the results of the June quarter and the outlook for the September quarter.

Richard Wallace:

Thank you all for joining us today. I'd like to begin with a few comments about the quarter. First, KLA continues to benefit from multiple growth drivers reflected in our June quarter results. Specifically for this quarter, our revenue of $2.5 billion was at the top end of our guidance range and up 29% year-over-year and 9% sequentially.

Our September quarter guidance is as follows:

Total revenue is expected to be in the range of $2.6 billion, plus or minus $125 million. Foundry/logic is forecasted to be approximately 64%, and memory is expected to be around 36% of Semi PC systems revenue. In memory, DRAM is expected to be about 40% of the segment mix and NAND, 60%.

Operator:

[Operator Instructions] We'll take our first question from Harlan Sur of JPMorgan.

Bren Higgins:

Yes, even to add to that, Harlan, one of the things we have seen because obviously, we've been talking with customers recently and they're -- they know we're aware of some of the talk is that they're telling us basically 2 things. One, keep our slots. And two, if somebody else's spot opens up, could you please give it to us. So what we're seeing for process control feel like we're probably a little bit in a different position than the process players are.

Operator:

Our next question comes from Krish Sankar of Cowen.

Bren Higgins:

Well, specific to that question. And of course, there was some -- I know some of our peers have gotten this question as well. But we did receive a notification from the U.S. government about new licensing requirements for China related to sub-14-nanometer development and production.

Richard Wallace:

Yes. That's still true. The multinational activity in China is more mature. And so most of our business is in China, it tends to be native China as it relates to Semiconductor Process Control. So within Semiconductor Process Control systems, about 25% or so of our shipments are to China.

Operator:

Our next question comes from Joe Quatrochi of Wells Fargo.

Bren Higgins:

Yes, it pretty much played out the way we expected. We had more EPC revenue quarter-to-quarter as we had a record quarter in EPC, and that was a little dilutive from a mix point of view. Certainly, the challenges related to supply chain and what that means in terms of factory efficiency is also a bit of a drag on our margins. But we had modeled that in for the most part.

Richard Wallace:

Yes. So 45% was memory, and the mix was 2/3 DRAM.

J. Ho:

Congrats on the nice quarter. Maybe first off, in terms of leading edge versus trailing edge foundry/logic, obviously, I think a lot of your leading edge customers are still powering through with their investment plan. It's more the question of timing of when they can get tools.

Richard Wallace:

Sure. And yes, you're right. The leading edge guys are continuing, and we don't expect -- in our conversations with them, we don't expect any change in that. In terms of the trailing edge, it's not really been a big part of our business. And as we look forward, we're still struggling with demand -- with supply for some of them.

Bren Higgins:

And the other thing I would add is about 80% of the revenue tends to be leading edge. So where we are selling to the trailing edge do have customers that are strategically trying to in-source more, so they're making more investments and longer-term investments.

Atif Malik;Citi Investment Research (US);Analyst:

I had a question on CHIPS Act, and I understand it's early. It looks like equipment companies might be able to get money to expand manufacturing of equipment in the U.S. with priority going first 2 companies that already manufactured in the U.S., and I understand you guys have manufacturing both the inside the U.S. and outside. And how would this change, if at all, your long-term manufacturing strategy?

Bren Higgins:

You also [indiscernible] that we're fairly asset-light. So to the extent that we're building or expanding our facilities anywhere, it's really about space more than anything and some equipment. So it isn't -- it's very [indiscernible] our customers in terms of significant billions of dollars investment in a production facility.

Atif Malik;Citi Investment Research (US);Analyst:

Great. As my follow-up, Bren, 19 years ago, you were talking about EPC systems growing 20% for the year, and I understand June was a record quarter. Are you still looking at 20% growth for the EPC systems for the full year? And how are you -- what are you seeing in the mobile segment versus the auto segment of that end market?

Vedvati Shrotre:

I just wanted to go back on something that was asked earlier. So you mentioned that your customers are sort of looking for slots in case any opens up. So can you help me understand how that works. So if you get a push out from your customer, does that mean that slot is sort of close and the customer has to go back in the line. Is that a right interpretation?

Vedvati Shrotre:

Right. And so if I understand correctly, so if -- in case if there is a pushout and not a cancellation, does that necessarily open up a slot or a push out can be different from...?

Kevin Kessel:

Thank you, and thank you, everyone, for joining us. We know how busy of a day it is today in terms of earnings. So I appreciate your time and interest. With that, I will turn the call back over to Leo to close it.

Richard Wallace:

Thanks, Kevin.

Harlan Sur:

Great job on the solid execution.

Bren Higgins:

Yes. Harlan, I'll go ahead and start and let Rick add if he needs to here. But it was a very strong year, obviously, for the company. And we're really pleased with the share results.

Richard Wallace:

Yes. Just to add a couple of things, Harlan. One is, of course, Gartner's data is revenue and the bookings picture is even stronger. So we're in really good shape in terms of that.

Harlan Sur:

I appreciate the insights there. And then on your EPC franchise, specialty semiconductor, manufacturing, packaging, PCB, display franchises. It's been a great diversification for the KLA business. And I know, going back -- and you guys will probably update us, but going back to the last Analyst Day, the team's outlook for EPC was to grow that business at a 9% to 10% CAGR. You grew that business -- and this includes services, you grew that business about 15% last year. The 2-year CAGR up to last year has been about 12%.

Richard Wallace:

Yes, Harlan. So in terms of the systems part of EPC, we're somewhere close to 20% is our expectation for the year. Obviously, we'll have to see how that plays out. That tends to be a little bit of a shorter lead time business and have some parts of its markets that are a little bit more sensitive to some of the consumer dynamics.

Christopher Muse:

I guess first question, can you speak to your backlog? What your blended kind of lead times look like today? And what kind of visibility that provides you into 2023?

Richard Wallace:

Well, our guidance implies a risk-adjusted assessment of where we're at. Obviously, there's always some unknowns about that, both from a supply point of view, which we feel pretty good about, but also more so from just can we get access to customers, can we get tools installed, can we get acceptances done and so on.

Timothy Arcuri:

Bren, I wanted to try to probe a little bit on that question around backlog because backlog really doesn't mean a whole lot when your lead times are sitting beyond that 12-month window for backlog.

Bren Higgins:

Yes. So Tim, you'll see the exact number in the 10-Q that we file. And it's the performance obligations, not purchase commitments. But anyway, the performance obligations, where you're right, we're over $8 billion last quarter and we'll be in excess of $10 billion this quarter. And to my earlier comment, I think we'll see book-to-bill above 1 through the year.

Joseph Quatrochi:

I was curious, how should we think about the -- you mentioned slower-than-planned or hiring in a difficult labor environment? I assume that's more maybe geared towards 2023. Or how do we think about that in terms of your ability to have enough labor to meet demand for this year?

Joseph Quatrochi:

Got it. That's helpful. And then just as a quick follow-up. I was wondering if you could talk about the strength you saw in DRAM during the quarter? And I think you even implied in the guide, I think we're at record levels for process control systems. Just kind of curious what drove that, if it's architectural changes, EUV? Anything like that would be helpful.

Operator:

We'll take our next question from Patrick Ho with Stifel.

Bren Higgins:

Yes, Patrick, that's a great question. And when you're talking about process tools, you have modular systems. And so they kind of come together at the customer site in a lot of cases between the automation and then the gas boxes and the process chambers. And so if you're missing parts, sometimes, you have that issue.

Vedvati Shrotre:

I think my first question is I wanted to understand if you have a sense of what the industry wafer capacity is expected to grow in this year and for the next year.

Bren Higgins:

Yes. So at least $100 billion in WFE. It's translating. And I don't have the exact numbers, but we're seeing new wafer starts per month being added across all production nodes. And you're seeing it in memory at a limited level, certainly this year compared to prior years, less because it's more of a technology transition-focused year.

Vedvati Shrotre:

So is that in line with WSE growth? That's what I was trying to get at. Or is it -- so is that like an 18% increase? Or if you could help me characterize what kind of capacity increase that is.