Good afternoon. My name is Britney, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation June Quarter 2021 Earnings Conference Call and Webcast. All participant lines have been placed in a listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Thank you. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations. Please go ahead.

Thank you. And welcome to KLA's fiscal Q4 2021 quarterly earnings call to discuss the results of the June quarter and the outlook for the September quarter. With me on today's call is Rick Wallace, our Chief Executive Officer; and Bren Higgins, our Chief Financial Officer. During this call, we will discuss quarterly results for the period ended June 30, 2021. Released this afternoon after market close, you can find the press release, shareholder letter, slide deck, and infographic on the KLA IR section of our website. Today's discussion is presented on a non-GAAP financial basis unless otherwise specified, and whenever we make references to a year, we are referring to calendar years. A detailed reconciliation of GAAP to non-GAAP results is in the earnings materials posted on our website. Our IR website also contains future investor events, presentations, corporate governance information, and links to our 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 risk factor disclosure in our SEC filings. Any forward-looking statements, including those we make on the call today, are 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. Let me now turn the call over to our Chief Executive Officer, Rick Wallace. Rick?

Hello, and thank you for joining us today. The June 2021 quarter showed continued momentum and strength for KLA. We delivered on our top and bottom-line goals and progressed against our long-term strategic objectives. Specifically, quarterly revenue grew 7% sequentially and 32% year-over-year to $1.95 billion. Non-GAAP earnings per share was $4.43, representing 15% sequential growth and 63% growth compared to the prior year. These results demonstrate strong growth momentum in our core markets and the operating leverage in the KLA model. We continue to see increased customer demand across each of our major product groups. This demand is related to ongoing secular demand trends driving semiconductor industry growth across a broad range of markets and applications. Our customers are increasing their strategic CapEx investments to address these growth markets and investing in their leading-edge R&D efforts. Against the strong demand backdrop, we are navigating evolving customer needs and persistent supply chain challenges. Still, KLA continues to outperform expectations by operating with purpose and precision, and focusing on creating value for our customers, partners, and shareholders. This strong execution is led by our talented global teams, continuing to go above and beyond, constantly rising to the challenges and opportunities of the marketplace. I will quickly summarize our view of the industry demand environment. We're in a great position relative to the growth drivers that are creating momentum for the industry and our business. As a result, our outlook for the wafer fab equipment industry continues to move higher. We have increased our growth estimate from low to mid-20s stated last quarter to the low to mid-30s on a percentage basis. This is from a base of approximately $61 billion in calendar 2020. With strong secular semiconductor demand trends continuing, we expect positive industry dynamics to sustain into calendar 2022. As our business benefits from this increased demand and our customers are also investing in leading-edge development, fab optimization, and regional expansion, KLA offers a leading portfolio of products to solve our customers' challenges. We continue to invest in high levels of R&D to ensure we are constantly improving and remaining indispensable to our customers. Specifically, we are prioritizing investment in artificial intelligence and machine learning. KLA's unique capabilities in leveraging these technologies in our product and service offerings help drive adoption, differentiating KLA against the competition. KLA benefits from long-standing market leadership and high levels of investment in advanced laser, sensor, optics, and data analytics technologies that leverage our AI and ML capabilities to identify critical defects in the production process and deliver ever-increasing precision in metrology applications. This investment helps our product and service offerings deliver best-in-class performance, lower process variability, higher yields, improve time to market, and reduce cost of ownership for our customers. Our growing R&D investment is happening as process control intensity is increasing, and KLA's market leadership in the process control market remains greater than four times that of the nearest competitor, as reported by Gartner Research in April of 2021. KLA's sustained performance in process control is augmented by a broader position within the electronics ecosystem through our Electronics Packaging and Components or EPC businesses and the contributions of our large and growing services business. For new and long-time KLA investors, it's essential to point out that KLA's market leadership is a result of consistent and focused execution of our company's differentiated strategy. With this favorable backdrop and our strong execution, we're on track to achieve our 2023 financial targets well ahead of expectations. Let's now move along to the top highlights for our most recent quarter. First, KLA continues to execute well and outperform expectations. In foundry and logic, we see simultaneous investments across multiple nodes, and our customers continue to increase demand forecasts. We remain encouraged by the breadth and consistency of investment across our customer base. In memory, demand is strong and spread across a broader set of customers. During the quarter, we announced four new products targeting the automotive semiconductor market, including patterned and unpatterned wafer inspection and in-line test solutions. KLA's automotive solution is aimed to help customers identify and mitigate potential reliability defects in the development and manufacturing of automotive semiconductors early in the manufacturing process, improving device reliability and driving significant value for our customers. Second, KLA's strong market leadership in optical pattern wafer inspection has helped to drive strong relative growth for our semiconductor process control segment in 2021. In fact, optical pattern wafer inspection is forecasted to be among the fastest-growing segments of WFE in 2021, for product segments over $1 billion of revenue and is poised to outpace the overall industry growth by a factor of two times this year. This follows similar growth and outperformance in 2020. Third, KLA's flagship reticle inspection business is on pace for a record year in 2021, growing faster than the market and expanding our leadership position. As proof of that, we estimate that nearly all the reticles today at 5-nanometer are inspected by KLA systems. Our next-generation EBM-based 8xx mask inspection platform shipped last quarter and has begun customer qualification for applications at 3-nanometer and below. Fourth, our services revenue was $444 million in the June quarter, or 23% of total sales. Seventy-five percent of services revenue in our semiconductor process control segment and more than 90% of services revenue in our printed circuit board business comes from recurring subscription-based contracts. We believe these are among the highest subscription service rates in the industry. The services business is on track for another year of strong double-digit growth, well above our long-term growth model target. The growth is driven by our expanding installed base, higher utilization rates, and increasing expansion of service opportunities in the trailing edge and the EPC group. Our semiconductor process control service business revenue continues to grow faster than the rate of the growth of the installed base, approximately 2.8 times faster from 2016 through 2020. KLA's service business has the advantage of always working in close collaboration with our customers and partners, driving innovation and new initiatives for growth. Finally, in keeping with our commitment to deliver strong and predictable capital returns to our shareholders, today we announce that KLA's Board of Directors approved a 17% increase in the company's quarterly dividend level from $0.90 to $1.05 per share. This is the 12th consecutive annual increase in our dividend level, which has grown at a compounded annual rate of 16% since inception in 2006. In addition, we announced a new $2 billion share repurchase authorization, targeted for execution over the next 12 to 18 months. We believe KLA's track record of delivering strong capital returns is a key component of the KLA investment thesis and offers predictable and compelling value creation for our shareholders. Before moving into the financial highlights, let's briefly summarize a few key points. KLA's June quarter results demonstrate the critical nature of KLA's products and services in enabling the digital transformation of our lives, the resiliency of the KLA operating model, and our commitment to productive capital allocation. KLA is exceptionally well-positioned with a comprehensive portfolio of products to meet demanding customer requirements that balance sensitivity and throughput. The semiconductor and electronics landscape are constantly changing, and we're seeing broadening customer interest driven by more technology innovation than ever before at the leading edge. KLA also delivers enduring value through our commitment to corporate stewardship. We look forward to sharing an update on our ESG vision in our global impact report, which will be released in the coming weeks. And with that, I'll pass the call over to Bren.

Thank you, Rick. KLA's June quarter '21 results highlight the soundness and strength of our ongoing strategies. We continue to demonstrate our ability to meet customer needs in a robust demand environment while expanding market leadership, growing operating profits, generating strong free cash flow, and maintaining our long-term strategy of productive capital allocation. Total revenue in the June quarter was $1.93 billion towards the top end of the guided range. Non-GAAP gross margin was 62%, at the midpoint of the guided range for the quarter of 61% to 63%. Non-GAAP EPS was $4.43, above the guided range of $3.47 to $4.35. GAAP EPS was $4.10. Non-GAAP total operating expenses were $419 million, about $7 million higher than expected primarily due to engineering materials timing and adjustments to variable compensation programs. Non-GAAP operating expenses included $241 million of R&D expense and $178 million of SG&A. At KLA, technical application support for our customers included in SG&A was $44 million in the quarter. The combination of R&D expense and technical applications represents about 70% of total operating expenses. KLA innovation is fundamental to our go-to-market strategy focused on differentiated solutions. R&D is at the heart of KLA and remains a key element in driving our portfolio strategy and product differentiation. This, in turn, helps sustain our technology and market leadership. Non-GAAP operating income was very strong at 40%. Given higher revenue expectations for the second half of '21, product development requirements, ongoing regionalization of additional customer engagement resources, and increased investment in our global infrastructure due to overall business volume, we expect non-GAAP operating expenses to be approximately $430 million in the September quarter. Going forward, we will continue to size the company based on our target operating model, which delivers 40% to 50% incremental operating margin leverage on revenue growth over a multi-quarter horizon. Other income and expense in the June quarter net was $11 million, reflecting the gain on an investment in a strategic supplier that recently completed its initial public offering. This gain represented $0.15 of earnings per share at the company's tax planning rate of 13.5%. You should continue to model other income and expense net at approximately $43 million per quarter. The quarterly adjusted effective tax rate was 10.4%, reflecting the benefit of favorable audit adjustments recognized in the period. Non-GAAP net income was $684 million, GAAP net income was $633 million, cash flow from operations was $466 million, and free cash flow was $410 million. The company had approximately 154 million diluted weighted average shares outstanding at quarter-end. Revenue for the semiconductor process control segment, including its associated service business, was $1.581 billion, a sequential quarterly increase of 5% and also up 37% compared to June of last year. The approximate semiconductor process control customer segment mix was in line with our forecast from April, as foundry logic was 68% and memory was 32%. In memory, the business was split roughly 34% NAND and 66% DRAM. Revenue for our Electronics, Packaging, and Components Group hit a record in the quarter driven by continued strength in 5G mobile and infrastructure, as well as rising demand in automotive. More specifically, the specialty semiconductor process segment generated revenue of $98 million, up 7% sequentially and down 2% over the prior year. Demand in this segment was mostly driven by growth in the automotive power semiconductor applications, where we have a leading position in edge and deposition products. Specialty semiconductor process's performance was also highlighted by the second straight quarter of record bookings. PCB, display and component inspection revenue was $247 million, up 20% sequentially and up 22% year-over-year, with the data center driving strength in advanced PCB and packaging inspection. KLA ended the quarter with $2.5 billion in total cash, total debt of almost $3.5 billion, and a flexible and attractive bond maturity profile supported by strong investment-grade ratings from all three agencies. We were also pleased to see Moody's upgrade our debt rating in early June to A2 from Baa1, further underscoring the strength of our balance sheet and sustainability of our business and financial performance. We have tremendous confidence in our business over the long run and are committed to a long-term strategy of cash returns to shareholders, executing a balanced approach split between dividends and share repurchases, targeting long-term returns that at least 70% of free cash flow generated. Our announcement today of our 12th consecutive annual increase in the dividend and additional share repurchase authorization are representative of our explicit approach and strong track record of predictable and productive capital deployment. Over the last 12 months, KLA returned $1.5 billion to shareholders, including $559 million in dividends paid and $939 million in share repurchases. While circumstances can change, our current expectation remains that our capital returns for calendar '21 will exceed 85% of expected free cash flow. KLA has a history of consistent free cash flow generation, high free cash flow conversion, and strong free cash flow margins across all phases of the business cycle and economic conditions. During the quarter, we generated $410 million of free cash flow and repurchased $300 million of common stock, while also paying $139 million in dividends. Our overall semiconductor demand and WFE outlook continue to increase from our views earlier in the year. At the start of this year, we characterized the expected growth of the WFE market to be in the low teens, plus or minus a few percentage points. In April, we revised that view to the low to mid-20s on a percentage basis with a bias to the upside. Today, we see further improvement and expect the WFE market to grow in the low to mid-30s from approximately $61 billion in calendar 2020 to approximately $81 billion at the midpoint in calendar '21. This reflects the broad-based strengthening of demand across all customer segments. KLA is positioned to deliver strong relative growth this year, driven by our market leadership and strong momentum in the marketplace across multiple product platforms in both the semiconductor process control and EPC groups. Looking ahead, we remain encouraged by the sustainability of our current demand profile. As a result, we continue to expect total company revenue to improve sequentially quarter-to-quarter throughout the remainder of the calendar year. We also expect the second half of calendar '21 to grow in the mid-teens on a percentage basis versus the first half, as more of our manufacturing capacity comes online to support the strong customer demand. Furthermore, our system shipment expectations point to meaningful growth in semiconductor process control equipment systems in the second half of calendar '21. This strong backdrop supports our current expectations of high-30s to low-40s year-over-year percentage growth for the semiconductor process control systems business in calendar '21. As a result, we continue to believe that this business is positioned to outperform in '21 relative to the overall WFE market. Our September quarter guidance is as follows. Total revenue is expected to be in a range of $2.02 billion, plus or minus $100 million. Foundry logic is forecasted to be approximately 59%, and memory is expected to be approximately 41% of semiconductor process control systems revenue to semiconductor customers. Within memory, DRAM is expected to be about 60% of the segment mix. We forecast non-GAAP gross margin to be in a range of 61.5% to 63.5%. At the midpoint, this is 50 basis points above the June quarter level, due principally to product mix. While in any given quarter, the mix of our business across products and business segments will affect our gross margin results, the structural trends both in terms of product cost, manufacturing efficiency, and product positioning remain compelling and are sustainable tailwinds going forward. Other model assumptions for September include non-GAAP operating expenses of approximately $430 million, other income and expense of approximately $43 million, and an effective adjusted tax rate of approximately 13.5%. Finally, GAAP diluted EPS is expected to be in a range of $3.76 to $4.64 and non-GAAP diluted EPS in a range of $4.01 to $4.89. The EPS guidance is based on a fully diluted share count of approximately 153.5 million shares. In closing, the industry dynamics driving semiconductors and investments in WFE remain compelling, with broad-based customer demand and simultaneous investments across multiple technology nodes. We are encouraged by the leading indicators for our business, including our backlog and sales funnel visibility over the next couple of quarters. Our customer's multiyear investment plans also point to the stability of demand in the future. KLA continues to execute well and is on track to exceed our 2023 financial targets well ahead of expectations. The KLA operating model positions us well to outperform and guides our important strategic objectives. These objectives fuel our growth, operational excellence, and differentiation across an increasingly diverse product and service offering. They also underpin our sustained technology leadership, deep competitive moat, strong financial performance, and long-standing track record of free cash flow generation and capital return to shareholders. And with that, I'll now turn the call back over to Kevin to begin the Q&A.

Thanks, Bren. Britney, can you please queue up for questions?

And we will take our first question from Harlan Sur with JPMorgan. Your line is now open.

Hi, good afternoon and great job on the quarterly execution and strong results. EUV adoption continues strong. And if I look at the outlook for EUV Litho systems expected to grow mid-30% this year. Do you have a positive exposure here via your wafer inspection systems, but also the strong leadership in EUV mask inspection and printed? I know this doesn't represent your entire process control business, but it's a good proxy. But you guys are guiding your optical inspection, your mask inspection, and your overall process control business to go well above that range. So, what are the two or three dynamics that are driving the strength above EUV adoption? And more importantly, with the visibility that you guys have, how are you feeling about the sustainability of the overall second-half momentum into the first half of next calendar year?

Hey Harlan, it's Rick. Thanks for the question. You're right. We are experiencing significant strength in the process control portfolio. As I mentioned earlier, we're seeing notable growth in optical wafer inspection, especially with a balanced mix between Gen 4 and Gen 5. While Gen 5 is more influenced by the EUV dynamic, there is also a growing use of Gen 4 as companies enhance their advanced capabilities. We anticipated this due to the increasing complexity across the board, not just in EUV areas like memory, logic, and foundry, but also in memory in general. Additionally, we've noted that reticles are having a very strong year, which correlates with the rise in advanced designs. This increase in process control intensity spans our entire portfolio and is why we feel optimistic about the rest of the year. As Bren mentioned, we expect this strength to carry into 2022. Bren, would you like to add more details?

Yes. So, as Rick said, I think as we continue through the second half of this year, both those businesses are growing faster than the market, as we said in the prepared remarks. In fact, I would think that the optical inspection business is one of the fastest-growing markets in all of WFE, if not the fastest. So, there are a lot of inflections around EUV, but also other process dynamics that are driving that. But the introduction of EUV is driving shrinks in the business or shrinks in design rules, creating an opportunity for both platforms and also leveraging optical inspection for validating reticle quality. Also, with 5-nanometer in the reticle part of the business, you also have increasing reticle complexity. Our offering in that market, after a number of years where reticle complexity wasn't changed all that much in the double patterning environment, as we move to EUV, reticle complexity is changing dramatically. Our offering is a more technical offering and we're getting strong customer interest in that product. So, I think there's sustainable tailwinds here through the rest of this year and as we move into '22.

I appreciate that. And then on the gross margin front, if you could just help us understand the uptick in our gross margins into the September quarter. It looks like component costs are rising, I'm assuming the team also has to pay expedite fees for some parts, and your end market mix is more weighted towards memory, which I would think would have some slight negative bias on gross margins. So, it's great to see the team driving the margin profile higher, but just help us understand some of the drivers of that?

Customer mix doesn't impact our margin profile; our products across all segments have the same margin profile. So, it really is a mix dynamic that is driving the quarter-to-quarter, 50 basis point increase we have. Most of the growth quarter-to-quarter is coming from semi-process control systems, and those carry higher margins than our service business or EPC business. So, that's been the bigger driver. We have supply chain challenges like everybody else, and we're constantly trying to manage our way through those. Freight costs are higher; those are embedded. And maybe over time, as some of those pressures alleviate, we'll get a little bit of benefit from that into the future. But we certainly have that in our numbers and expect it to remain at that level over the next couple of quarters. On the component side, there is pressure on components; there is pressure on raw materials for frames and steel specifically, for the frames of our tools. So, we're dealing with that. Labor pressures are different around the world; we have factories in different locations but we're also dealing with that as well. I would expect as we move forward, we'll see some pressure. So far, it's been offset by the strength of the volume. So, we worked with our suppliers and the volume upside has been favorable. But I do expect we'll see some pressure on components. The way we price products tends to be value-centric. We have a value pricing model, not a cost-based model. But we're certainly going to have to deal with that as it comes through. With these revenue levels into the future, I would think we're probably looking at a 10 to 20 basis points type of impact over time from some of the inflationary pressures on our COGS. But that's contemplated in the guidance we provided in terms of our margin expectations moving forward.

Great insights. Thank you.

Yes. Thank you, Rick and Bren. Congratulations on the impressive quarter. I appreciate the opportunity to ask my question. Rick, I'd like to revisit your comments regarding the investments in AI and ML. It's apparent that some of your competitors have made significant investments in this field. Could you explain how your approach might differ from theirs? What specific competencies might give you an advantage? Additionally, do you see this as a strategy to maintain your already strong market share, or do you believe it will lead to additional revenue and market opportunities? And Bren, regarding gross margin, what impact do you foresee? I'm assuming this primarily involves software intellectual property, which should be beneficial for gross margins.

Thank you for the question. We have been working on what is now referred to as AI and ML for many years. Given the amount of data we handle in our systems, particularly in optical wafer systems and reticle systems, we have been managing this data and searching for insights for quite a while. Machine learning and AI allow us to extract more valuable information from that data. As our capacity to manage data improves, our AI endeavors have spread across most of our products in various forms, and we continue to enhance them. To respond to your question, one way to understand this is that we can extract greater capabilities from existing generations by utilizing algorithms associated with our AI initiatives. In the past, we might have needed to change wavelengths to enhance capability, but now we can achieve that using algorithms. A concern that was raised previously pertained to the limitations of optical wafer inspection, and the belief that EBM might capture a significant market share. However, thanks to AI, machine learning, and our advanced optics, we have been able to enhance the capability of our optical systems. This is another way we have extended the lifespan of our products. The reason Generation 4 systems last longer now is that we are maximizing their capabilities. Regarding your other question, this advancement is also being incorporated into our other products; the work we do with reticles is just the beginning. It is also opening up opportunities in other sectors as we apply this capability to metrology and some of our historically lower-end wafer inspection systems that are integrating trailing-edge capabilities. This is a comprehensive effort across our range. Moreover, if we can spread the engineering costs effectively, it enhances the overall business volume, given our significant investment. We have made the largest investment among our peers due to the diversity of our portfolio, and we are gaining efficiency as numerous products benefit from this approach. Bren can elaborate on how this impacts the financials.

Yes, John. And I think it's much more of an operating margin statement or a reduction in R&D intensity is another way to think about it. Platform extendability is one of the biggest decisions we make in our product lifecycle processes. We're making choices and we can extend platforms. It means that over time we get a higher return on investment on those engineering dollars. So we don't have to go develop the next one, which is what drives significant cost of the model as you're developing and bringing a new product to market. So, by extending it, we see the leverage in our operating margins. Now, in terms of gross margin, software content or software offerings are increasing across the whole company, not just within semi-process control, where we have businesses that are starting to get to meaningful revenue levels, but we're selling software directly and we have that there, and we also have it in the EPC business where we're providing simulation capabilities, data analytics, and other computational methods, design-based capabilities to help point our inspectors and get more value out of the KLA offerings. So, there are a few dynamics that are there that I think are good for us in terms of solving some of these problems as technology roadmaps get more and more complicated, but then also driving operating margin leverage over time.

Thank you very much.

Yes, good afternoon. Thanks for taking the question. As you think about your implied revenue guide for December, it looks like it's about $250 million of process control. And it sounds like that is coming on, based on new manufacturing capabilities that you're bringing online. So, curious, what's the impact to gross margins at that timeframe? And will that satisfy all pent-up demand? Or will your lead times still be extended heading into calendar '22?

Yes, CJ. It's a great question. As far as lead times go, I think lead times are holding pretty flat. One of the challenges, and we had hoped that we'd start to see those pull in a bit, but demand has continued to increase. So we're seeing stronger demand and we're doing a lot of work to add capacity, so things are extending out, but they're not necessarily pulling in either. Yes, based on our comments, you do have a ramp in our semiconductor process control equipment into the December quarter; that's a richer mix. So, I'm not going to guide December but that should carry a richer gross margin profile, given the nature of the products that we're shipping. That capacity has come online, that's a revenue recognition dynamic related to new facilities and product transitions that's pushing some of those shipments, if you will, that are happening this quarter that will happen next quarter. So, that's also part of the higher sequential growth that we're seeing into the December quarter. Did I answer your questions?

Yes, that's great. If I could just sneak a second one in. As you think about your foundry logic outlook for 2022 and you talked about continued strength, I was hoping you could speak to perhaps any changes that you see in the landscape, whether leading-edge, lagging-edge, EUV adoption, DRAM — anything we should be thinking about portfolio wise that could be a little different than 2021?

Yes. Really, I think just in terms of overall sustainability, we would expect to see the leading edge continue to invest as we go into next year. And given the public statements that have been made there, I think that's pretty consistent with what we're seeing. On the trailing edge side, we are seeing orders that are coming into backlog, but also in the funnel from a number of customers and much more meaningful levels of customers that haven't invested all that much in the past and are addressing some of these automotive and industrial, and some of these other more trailing edge challenges. So, I would think from a shipment and revenue point of view, we'll see that business actually start to come to the P&L as we move into 2022. China has been mostly logic-centric this year, native China. And so, I think we'll have to see how that plays out as we move into next year in terms of growth. Certainly, there is sustainability with the business levels that have been elevating through this year, but I would expect to see a little bit more memory activity probably next year in China. And I think that's probably the one area we don't have as much visibility in terms of logic growth there. So, I think those are the dynamics and how they're planned. I think in terms of DRAM and NAND, I would expect those to continue to maintain the momentum that we've been seeing through '21.

But CJ, I mean, just one thing to add; a lot of the business that we're booking now is revenue in '22. I mean, that's part of our confidence in '22. We're filled out for '21. And so, that's part of what we're seeing. And then some of the players you know who are trying to regain the lead, a lot of that investment hasn't really shown up in our revenue numbers yet.

Hi, thanks for taking my question and congrats on the strong results. I had two of them. First one for Rick or Bren. I do want to have the December quarter question a different way; you said your semi-process control should grow 40% this year, and a half or half is mid-teens growth. So, if I look at that, it looks like December quarter is around $2.3 billion, give or take. Is that a decent proxy for December revenues? And are you not seeing any impact from any of the component shortages that's affecting some of your friends in the industry? And then I had a follow-up.

Yes. So I'm not going to guide December specifically. What we're trying to do is give you some perspective on our expectations for growth of semiconductor process control equipment for the year; that was the high '30s to low '40 statement. We also talked about the total company growing mid-teens half to half, and so that was another statement there as well. So, I don't want to put a point out there in terms of the revenue guide but hopefully, you can get there with the details we have provided. Components are a daily challenge, we are managing across our factories, across our teams, managing our suppliers to be able to deliver the parts that we need. Some components have intrinsic lead times for us that are long term, and so we have to make decisions, and we've been making decisions to make investments or for that to make commitments to those suppliers to be able to provide that supply for us as we move into '22. So, it's a challenge; we're working our way through it. I'm spending more time — I've been with KLA for 21 years, and I'm spending more time on supply chain than I ever have. And certainly, as a CFO since 2013; so, we're dealing with it. We're making our way through it, and the guidance and context we provided contemplates what we expect to happen. It's our best expectations based on what we know today.

Got it. Thanks, Bren. And then, just as a follow-up, I do got a question on China. Obviously, you had really strong sales there in the June quarter. And if I try to back out, your ex-China sales had actually declined from March to June. And you also said China is mostly logic, so I'm kind of curious, are there that many logic foundry players in China? Or is this just a long tail of smaller players buying equipment? And any kind of color you can give on China with regards to your sales and any kind of split between domestic and MNCs would be very helpful. Thank you.

Yes. You have to remember that when we just talk about our mix of business, that's the total company, so that includes EPC. So, I believe our China percentage was like 32%. If you looked at the native investment as a percent of our semiconductor process control segment, it's about 25%. So, the numbers, when you're extrapolating like that can lead you to different conclusions. There are a number of small projects that are logic-centric projects in China that are targeting specific markets around IoT and image sensors, and a bunch of those kinds of opportunities; obviously, automotive and industrial. So, I think there are new projects in a lot of cases which are going to be coming online over time. But there is a lot of activity there. So, yes, there are.

Thank you. Could you discuss the new products you have for the automotive sector? How do you see the older foundry nodes contributing to sustainable strength in the market? Can you focus on that business more directly than before? Additionally, what kind of activity are you observing in the older foundry nodes?

Yes. Sure, Joseph. We've actually been engaged for quite a while with some of the leading automotive — even the automotive customers coming to us asking us to help them with their suppliers. That's been going on for a few years. What's really happened now is, it's broadened, the number of customers that are recognizing and, of course, the shortage of automotive semiconductors contributed to that. So, we've been developing products that have, I would say, are adaptations of existing products that provide additional capability in support of automotive, whereas you know, they're looking for more reliability, there are some cases where we're helping traceability in terms of how they're driving those fabs. So, yes, that's an area we outlined in our 2019 Analyst Day where we talked about, that was a growth area for us and we believe it continues to be. Obviously, it was a rough start to 2020 where a lot of customers shut down their plants for automotive semiconductors, much to their dismay, but those are back on. And so, we do have those products, we're engaging with customers, and there is a strong demand for that, and we think that's sustainable and we think that will continue to grow as more of the automotive players see the value in that, and that will just continue to broaden. So, we have a segment and a work area that we're focused on that, and it's also where our business that we got through Orbotech, SPTS works also in some of the process capability there. So, it's more than just inspection; it's broader for us than that. So, it's pretty exciting. It's a good growth area, and I think it's one that we'll continue to see progress over the next several quarters.

Yes, thanks for taking the question. I'm curious on your advanced packaging. You recently talked about packaging becoming more like front-end. I was curious to know how you would compare maybe contrast the two in terms of just the increasing capital intensity. And then, maybe can you touch on your position in front-end and how that may drive differentiation for the packaging?

Joe, I think there's a couple of things. One is, as more of the big players are focused on packaging as a source of either maintaining differentiation or closing a differentiation gap, there is more investment with larger players that know KLA. And frankly, I think we're getting more seats at the table and engagements with them because of their knowledge of KLA and their desire to put their best behind a proven player. So, we have the capability. We have some products. We're doing some product developments, some product adaptations in support of that, but the technology there is moving. The process control intensity is significantly lower than it is of course in the leading edge, but the rate of growth is very fast, the rate of growth of process control. So, I would say, we have an abundance of opportunities there to execute on, but it will require us to bring new capabilities. And so, we're engaging with our customers in that. And I can tell you, we're getting as much pull there as we are in the front end for capabilities as customers try to accelerate their roadmap. So, we're seeing strong growth as we increase the process control intensity, and it's not just process control; once again, some of the process equipment we have with SPTS is also being leveraged in that area as well as in our PCB business, which isn't all inspection and measurement. So, we do see strong growth. We see a lot of potential consistent with the plans we laid out in 2019 at our Investor Day.

The integration of the PCB board into the IC substrate within the package is a positive driver for our future. We are developing new capabilities to better address this market. The finished component inspection business of ICOS is inspecting these packages, adding to the complexity that is influencing growth in this area. We are experiencing significant growth in this market, likely making it the fastest-growing segment of EPC currently. There are numerous opportunities, as mentioned by Rick, though some of this depends on us introducing new capabilities to the market. Customers are eager to leverage our various positions across different applications and strengthen their relationship with us to accomplish more.

Yes. And just to put a number on it, we said $400 million in 2019. We're ahead of plan and we can beat that, do more than that with some of the developments we're contemplating. So, I think we've got the products now to perform to that and we can do more. And we're getting encouraged by the signs that we're seeing and engaging with these customers.

Thank you very much and congrats on the nice quarter and outlook. Rick, maybe first off, big picture, kind of the long-term outlook for the process control industry and your positioning. Gate-all-around will be coming on board in the next few years, and I know you probably are working with your customers. You've got an incremental benefit when the industry transitions to FinFET transistors. How do you see the incremental opportunities as you go to gate-all-around where not only are you seeing new materials but more materials in that transistor area?

Yes, it's a great question. And as you know, with all our business, any of these technology transitions, inflections present opportunity for process control, because the first thing that our customers need to figure out is how to get the process ramped. So, I think we're seeing advanced indicators that that's going to be great for adoption of additional capabilities. It's also where the portfolio really matters, because in the case of gate-all-around, adaptation to the Gen 4 wafer inspection in some ways is more important than what Gen 5 does. Gen 5 is very important for the smaller defectivity that we need to detect and the lower rates, but Gen 4 for the contrast. And so, some of the development we've been doing with our customers has been to tune our products for that advanced transistor capability. So, I think that what you'll see is a continued increase in process control intensity. The way we modeled it is relatively modest over the long term, but of course, the cumulative effect is it adds up, and that's why we think process control intensity outgrows WFE on the order of half a percentage point if we're going from 15 to 15.5, depending on what the aggregate is; that's a blended between logic and memory. But we'll see it over time that you'll see it creep up as a result of those new inflections, provided we have the products to support it, which is a lot of the work that we've been doing. So, we feel like we're really in a good position to support our customers to do that.

That's helpful. And my follow-up question may be for you, Bren, in terms of the investments you're making. We talked about systems picking up, expanding capacity, bringing people on board to meet the increased shipments. Services are also growing quite rapidly, and you've mentioned that it's growing faster than the target CAGR you are looking at. What are the types of investments you need to make in services given that not only is your semi services growing as the installed base grows but PCB tends to be a very service-intensive business as well? And that marketplace is also showing signs of some more secular growth trend given some of the marketplaces that they penetrated. How do you look at service investments, both near term and over the next few years? That's a great question. And certainly trying to get more leverage out of the service business is one of the acquired companies. Acquired businesses for KLA has been one of our key components of the investment thesis when we look at these kinds of transactions. Smaller companies have a hard time trying to have the infrastructure given the nature of their size to be able to support a broad service footprint. So, being able to leverage our infrastructure now the go-to-market is different; how we engage with those customers is different. So, leveraging the infrastructure we have is I think a big part of that, so there is a big cost element. We made the investments, I think we need to make. Certainly, China and the investments we made back in 2016 and 2017 to build infrastructure to support the China business is great for us now and we're seeing scale on that. With some of the regionalization dynamics that are out there, if we see new fabs popping up, we have to build that capability in some new places. We think those are great opportunities for us because our customers rely on us to help bring those kinds of facilities up and to bring our capability to help them do that. And so, whenever they're building a new fab in a new geography, it creates a big opportunity for KLA. We're working on remote diagnostics, remote capabilities, so we can do a lot more diagnostics; these diagnostics tool problems from back here from the factory or from our development teams depending on what's happening. One of the challenges in COVID obviously has been getting people in and out when we have an escalation situation. So, I think those are the kinds of areas that we're investing in, and it's a great opportunity for us just in terms of growth given the strength of the WFE but also the lengthening of lifetime on the tools and how customers are using them from a utilization point of view.

Yes. And then, the biggest investment really right now is in the workforce to support that. And so, as Bren mentioned, we're working on that. I think that hiring, training, onboarding as we anticipate the continued growth is an area we've done well with. But as you know, there is a big demand for talent out there. So, we have to keep on it, keep hiring and doing that training. So, that's probably the biggest area of investment over time; that's going to be the workforce.

Hi, thanks. I had two clarifications, Bren. And then I had a real question. The first two clarifications are, the comment you made about 15% half-on-half; that was a corporate revenue comment. Somebody attached that to process control systems, but I don't think — I think your process control systems comment was up like mid-30, high-30s to 40% for the year. That half-on-half comment was a corporate revenue comment. Correct?

That's correct, yes. And I attempted to clarify that in one of the earlier questions. But yes, you're right. That's the total company aggregate revenue expectation second half versus first half, mid-teens.

Perfect. And then the second clarification, did you say that domestic China is 25% of your process control systems revenue? Because WFE, it's like 15% of total WFE.

In the quarter that we just completed.

Yes. Tim, it's a great question. We feel confident that we will have the capability we need when it is needed for the high NA. So, I understand what your question is; we believe that with the products that we have, with the 8xx in particular, and actually the continued capability we're seeing in 6xx, we feel that we will be there when the market is needed for the high NA.

Thanks for taking my question. I'm curious if, let's say hypothetically, WFE is $90 billion or $100 billion next year, are you prepared to support that right from your capacity perspective? Or I guess a different way of asking the question is, how much additional capacity are you planning to bring online next year?

Yes, Vivek, that's an interesting question. And right now, what we're trying to do is ramp up to support the customer demand that we have. And I have expectations for incremental capacity as we move forward. I feel like these are good investments to make for us over the long run given our expectations for multi-year growth in WFE. I think given the strength of the WFE investments in some of the end market drivers that we're talking about, that we would expect to see WFE grow over the next few years, at least in line with semiconductor revenue, with rising capital intensity probably faster than that. So, these investments and given the extendability of our platforms and the lifetime of our tools in terms of how we're shipping to a very broad demand environment from a technology point of view, that these are investments that are important for us in terms of just being able to support that kind of environment moving forward sort of a through cycle over time statement. But we're continuing to invest to make sure that we have the flexibility to be able to respond to our customer demand. So, I think that's — as I look at it right now in terms of the first half of the year, in terms of expectations, it's hard for me to see how it's at least as strong as what we've seen in the second half of '21 in terms of what we see in the funnel and in our backlog in terms of how we're managing it. I don't want to make any statements much beyond that.

I think the one thing I would add is, we are cognizant of our customers' desire to get more capability sooner, and we're doing everything we can to size it. But the numbers you've talked about, we have contemplated in our plans.

Great. Thanks for taking my question. So, speaking of these multiyear investment plans that you just talked about, there are obviously a lot of new fabs being announced in the past few months. When do you expect those new fab investments to start generating revenue for you? And when do you expect to start seeing those orders coming in?

Well, in a lot of cases, we're already seeing the orders, right? So, I think that customers are getting into the queue for deliveries. And in some products, deliveries could be 12 months from now. So, it's absolutely happening, and customers are trying to make those commitments as they're planning for their facilities. Obviously, they plan across a lot of different types of equipment. And so, those planning cycles tend to move around a little bit. Sometimes they are also dependent on winning business and product ramps and so on. So, there's always a little bit of variability around the timing. And then, of course, generally, as you try to build something, there's always infrastructure and delays and pull-ins that can happen associated with just construction overall. But yes, we're absolutely seeing that demand in the backlog and certainly in the sales funnel. Thanks for that. Britney, we have time, it looks like for one last question.

And we will take our final question from Sidney Ho with Deutsche Bank. Your line is now open.

Great. Thanks for taking my question. So, speaking of this multiyear investment plans that you just talked about, there are obviously a lot of new fabs being announced in the past few months. When do you expect those new fab investments to start generating revenue for you? And when do you expect to start seeing those orders coming in?

Well, in a lot of cases, we're already seeing the orders, right? So, I think that customers are getting into the queue for deliveries. And in some products, deliveries could be 12 months from now. So, it's absolutely happening; customers are trying to make those commitments as they're planning for their facilities. Obviously, they plan across a lot of different types of equipment. And so, those planning cycles tend to move around a little bit. Sometimes they are also dependent on winning business and product ramps and so on. So, there's always a little bit of variability around the timing. And then, of course, generally, as you try to build something, there's always infrastructure and delays and pull-ins that can happen associated with just construction overall. But yes, we're absolutely seeing that demand in the backlog and certainly in the sales funnel.

Thank you very much. And I wanted to thank everybody for their time, their interest, and their questions. We will be in touch. Take care.

This concludes today's KLA Corporation June quarter 2021 post earnings call. Please disconnect your line at this time and have a wonderful day.