KLA Corp. (NGS: KLAC). After a June 2020 fiscal year in which KLA’s revenue grew 28%, sales growth moderated to 9% in fiscal 1Q21. During fiscal 2021, KLA acquired Orbotech, which added to the company’s specialty semiconductor processes business while adding new capabilities in PCB, display and content inspection. Across fiscal 2020, KLA was able to replace revenue from memory customers thanks to robust demand from major foundry customers. While foundry demand remains solid, memory paused its recovery amid global demand uncertainty in fiscal 1Q21. We look for memory demand to accelerate across calendar 2021 as the previously tepid smartphone business is rejuvenated by 5G and pandemic effects boost data center traffic. Despite the global pandemic, KLA Corp. is not walking back the strategy laid out at the company’s investor day in late 2019. That includes a more shareholder-friendly capital-allocation plan, exemplified by the 6% dividend hike in August 2020, and revised operating goals in the wake of the Orbotech acquisition. These goals include increasing revenue from an estimated $5.5 billion in FY20 to $7.0-$7.5 billion by FY23, and boosting non-GAAP EPS from the $9.50 range at time of the acquisition to $14.50-$15.50 over that time span.
KLA CEO Rick Wallace noted that demand in the September quarter reflected broad, diversified strength across the company segments and markets served. Semiconductor Process Control revenue, representing four-fifths of sales, was ‘solidly above plan,’ while services revenue was above plan and on track for double-digit growth in calendar 2020. KLA ended fiscal 1Q21 with a strong and growing backlog.
Both in spite of and because of the pandemic, industry demand environment remains robust. As a provider of semiconductor capital equipment and wafer inspection solutions, KLA is leveraged to R&D investments by its semiconductor customers in the key markets of foundry, logic and DRAM and NAND memory. These R&D investments are critical to the customers’ long-term growth and financial health and have therefore tended to be resilient during the pandemic.
As outlined at the company’s investor day in late 2019, key drivers in the current environment include data center, 5G infrastructure and smartphone growth, and the revival of PC demand to support remote work & learn, virtual collaboration, entertainment & gaming, and other aspects of the remote and/or hybrid lifestyle. These digital transformations in turn are accelerating next generation technologies including high performance computing, AI and accelerated migration to the cloud.
Memory recovery paused, as memory customers used up inventories; this market remains on track for growth in 2021 as customer plan for higher bit growth. Services continued its multi-year growth trajectory. Semiconductor process controls represents all of legacy KLA excluding content inspection. Revenue of $1.16 billion (82% of total) increased 9% annually and 10% sequentially.
Within Specialty Semiconductor processes, foundry shipments (59% of total) continued their strong growth, rising 46% annually. Memory shipments (31% of total) were down 21% year-over-year a and 15% sequentially as memory customers worked off inventories.
On a regional basis, Chinese demand for WFE gear has not been meaningfully impacted by the trade war or by U.S. government plans to limit WFE shipments to that nation. China represented 32% of regional revenue; sales increased 45% annually, suggesting that Chinese fabs may be laying in equipment in anticipation of heightened restrictions.
Traditional WFE customers Korea (12% of revenue) and Taiwan (24% of revenue) declined in low single digits after growing sharply in the prior quarter. The U.S., at 11%.
Looking out to fiscal 2Q21, or the calendar fourth quarter, KLA expects approximately 10% in global WFE growth for 2020, off the $52-$53 billion baseline for 2019. KLA is poised to grow faster than the industry in calendar year 2020. While not providing its WFE industry outlook for calendar year 2021, KLA remains confident it can outgrow the industry based on its current sales funnel and backlog.
EARNINGS & GROWTH ANALYSIS
KLA Corp. posted revenue of $1.54 billion, which was up 9% annually and 5% sequentially; the Orbotech acquisition is now fully anniversaried, and annual comparisons are again meaningful. Revenue was above the $1.48 billion midpoint of management’s wide guidance range of $1.41-$1.564 billion and above the consensus forecast of $1.49 billion.
Non-GAAP EPS of $3.03 rose 22% year-over-year and $0.30 sequentially. Non-GAAP EPS meaningfully exceeded the $2.74 midpoint of management’s wide $2.42-$3.06 guidance range and the $2.77 consensus call.
EPS would be up in high teen percentages annually. Midpoint guidance for 2Q21 topped the $1.50 billion consensus on revenue, and the non-GAAP EPS Street forecast of $2.80.
KLAC shares trade at 15.2-times our FY21. Other historical comparables also signal undervaluation.