Good afternoon. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation December Quarter 2022 Earnings Conference Call and Webcast. Thank you. And I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Sir, please go ahead.

Thank you, Chelsea, and welcome to our earnings call to discuss the results of the December quarter and our March 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 close. All materials can be found on our IR website. Today's discussion is presented on a non-GAAP financial basis, unless otherwise specified. Whenever references are made to full year business performance, they are calendar year references. A detailed reconciliation of GAAP to non-GAAP results is in the earnings material posted on our website. Our IR website also contains future investor events as well as 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. Our CEO, Rick Wallace, will begin the call with some quarterly comments and highlights before discussing the semiconductor industry demand environment. Bren Higgins, our CFO, will conclude with the financial highlights as well as our guidance and outlook. I will now turn the call over to our CEO, Rick Wallace. Rick?

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. Before we get into details, I want to first acknowledge our global KLA teams who've continued to deliver for customers despite persistent challenges. KLA's results are proof of their commitment. KLA's December quarter revenue was $2.98 billion, which is above the guidance range, with 27% growth year-over-year and 10% sequentially. Quarterly non-GAAP net income was $1.05 billion. GAAP EPS was $6.89, and non-GAAP EPS was $7.38, with each finishing above the midpoint of the guidance ranges. Calendar 2022 was another year of record growth, profitability, and free cash flow. Specifically, revenue increased 28% in 2022 to $10.5 billion, marking the seventh consecutive year of growth, driven by 36% growth in semiconductor process control systems. KLA also demonstrated strong operating leverage on our revenue growth in 2022 with non-GAAP operating profit up 31% in the year. Non-GAAP incremental operating margin on the revenue growth was 46% for the year. For calendar 2022, free cash flow was up a healthy 18% to a record $3 billion, with free cash flow growth exceeding our 15% long-term target growth rate. Now I'll summarize some specific highlights from the quarter and the year. First, KLA continued to deliver strong relative outperformance versus peers. KLA substantially outperformed overall WFE market growth in 2022. Looking ahead, our leadership in critical markets, such as wafer and reticle inspection, are expected to demonstrate resiliency in a year of contraction in overall WFE demand, setting the stage for another year of relative strength for KLA. Second, our Patterning Systems revenue grew 17% sequentially, which is up 69% on a year-over-year basis. Third, KLA delivered record revenue in the 10th consecutive quarter of sequential growth in our specialty semiconductor process segment, demonstrating resiliency and expanding market opportunity. Fourth, the KLA Services business grew 14% year-over-year in the December quarter and was up 15% on a full-year basis. Finally, the December quarter was another exceptional period from a capital returns perspective as we completed the $3 billion accelerated share repurchase component of the $6 billion share repurchase authorization announced last June. KLA's December quarter and calendar 2022 results and strong relative performance once again highlight the critical nature of KLA's products and services. Our consistent strong execution against various challenges in the marketplace, both in terms of macroeconomic uncertainties and addressing persistent supply chain challenges, highlights the resiliency of the KLA operating model, the dedication of our global teams, and our commitment to assertive capital allocation and delivering long-term value to our stakeholders. Looking at 2023, we know that this will be a year of industry capacity adjustments as customers fine-tune their CapEx plans to address decreased demand in some segments. However, we recognize that the semiconductor industry continues to be positioned for long-term growth, benefiting from the continued advancement of leading-edge technologies, increasing investment in legacy nodes, and innovation and growth of new enabling technologies such as advanced packaging. To address this period of adjustment and maintain our commitment to growth, we're emphasizing three main priorities for our teams in navigating 2023. First, we will continue to ensure that we support our customers by delivering on our commitments and continuing our levels of investment in R&D. Second, we'll stabilize our spending levels. To strategically navigate the current environment, our focus will be on stabilizing spending while maintaining R&D investments to drive market leadership. Our expectation is for R&D investment to increase in calendar 2023. Third, we'll emphasize the development of our workforce. After a strong hiring pace, we're currently at approximately 15,000 employees worldwide. Optimizing training and developing our workforce will help ensure continued strength for the long term. Now Bren will review our December quarter highlights and our outlook. Bren?

Thanks. As Rick just detailed, we delivered strong December quarter and calendar 2022 results that demonstrated consistent execution by the global KLA team. While supply chain challenges remain and impact certain products, we continue to demonstrate resourcefulness and the ability to adapt to meet customer requirements. Quarterly revenue was $2.98 billion, $184 million above the midpoint of guidance and just above the guided range of $2.65 billion to $2.95 billion. Revenue outperformance in the December quarter was driven primarily by KLA's broadband plasma optical pattern wafer inspection and mask inspection systems, resulting from favorable mitigation of identified supply chain risks as we move through the quarter. Non-GAAP diluted EPS was $7.38, above the midpoint of the guided range of $6.30 to $7.70. GAAP diluted EPS was also above the midpoint of guidance at $6.89. Non-GAAP gross margin was 61% and just below the guidance range of 61.5% to 63.5% due to the impact of increasing noncash inventory reserves taken in the quarter as we adjusted our factory output expectations and supply chain commitments to the current outlook, which has weakened at an accelerated pace over the past several months. These reserves were primarily taken against high-volume products and are consistent with shifting customer delivery dates and resulting backlog adjustments in the quarter. Given the diversification of end demand across technology nodes, the extendability of our product platforms, and the expectations for growth in our service business, it is likely that we will realize a benefit from releasing these reserves over time when industry growth resumes. We estimate that these adjustments had a roughly 200-basis-point impact on GAAP and non-GAAP gross margin compared to what would have been assessed in a normalized industry environment. This impact was offset somewhat by higher business volume and by a strong product mix realized in the quarter. Non-GAAP operating expenses were $555 million, slightly above our estimated $550 million for the quarter. Total non-GAAP operating expenses comprised $332 million in R&D and $223 million in SG&A. Non-GAAP operating margin was strong at 42.4%. Quarterly non-GAAP net income was $1.05 billion. GAAP net income was $979 million. Cash flow from operations was $688 million, and free cash flow was $595 million. Breakdown of revenue by reportable segments and end markets and major products and regions can be found within the shareholder letter and slides. Switching to the balance sheet, KLA ended the quarter with $2.9 billion in total cash, cash equivalents, and marketable securities, debt of $6.1 billion, a reduction of $200 million in the quarter, and a flexible and attractive bond maturity profile supported by strong investment-grade ratings from all three agencies. Over the last 12 months, KLA has returned $5.2 billion to shareholders, including $4.5 billion in share repurchases and $689 million in dividends paid. Looking ahead to calendar 2023, we expect industry spending to slow with the continued expectation for CY 2023 WFE demand to be down approximately 20% in the year, down from approximately $94 billion to $95 billion in CY 2022 due to increasing global macroeconomic concerns highlighted by our customers in most end markets and widely reported customer CapEx expectations. This WFE estimate reflects our current top-down assessment of industry demand as follows. In memory, we expect WFE investment to decline by more than the market, with DRAM down more than NAND as memory customers respond to lower consumer demand by cutting production and factory utilizations to bring device supply in line with demand. We expect foundry logic to decline less than the overall market, with leading-edge investment declining less than legacy. KLA's unique broad portfolio differentiation and primary value proposition are focused on enabling technology transitions, which our customers continue to invest in regardless of the business environment. While capacity plans could change, technology roadmap investment tends to be more resilient and aligns with KLA's highest value product offerings, where we continue to have supply chain constraints inhibiting our ability to add the additional volumes to meet current demand. This demand adds additional confidence in our business expectations as customers align shipment slots with roadmap requirements. In this industry environment, we will continue to focus on meeting customer requirements, maintaining a high level of investment in R&D to advance our product roadmaps and KLA's market leadership, and aligning our operating structure with top-line expectations, which we expect to be in line or better on a relative basis while delivering strong relative financial performance. Our March quarter guidance is as follows: Revenue of $2.35 billion, plus or minus $150 million. Foundry logic is forecasted to be approximately 85%, and memory is expected to be around 15% of semi PC systems revenue. Within memory, DRAM is expected to be about 71% of the segment mix and NAND 29%. We forecast non-GAAP gross margin to be in a range of 60.5% to 62.5% as product and segment mix and lower volumes dilute gross margins versus the 2022 baseline in the quarter. Based on current market demand assessments, we do not expect incremental inventory reserve requirements to be a factor in the quarter. For calendar 2023, based on our current industry outlook and the impact on overall volume, segment contribution, and product mix within the semiconductor process control group, we are modeling gross margins to be greater than 60% with variability quarter-to-quarter attributable to product mix fluctuations. Operating expenses will decline in the March quarter to approximately $545 million. For calendar 2023, KLA will continue to balance investments in technology, headcount, and infrastructure to support our long-term growth objectives while managing the business against the expectation of a softening near-term outlook. As a result, we expect quarterly operating expense levels to decline as we move through the balance of the year. Other model assumptions for the March quarter include other income and expense net of approximately $62 million and an effective tax rate of approximately 13.5%. Based on our current assessment of geographic revenue and profit expectations, you should continue to use 13.5% as the tax finding rate for calendar 2023. Finally, GAAP diluted EPS is expected to be in the range of $4.06 to $5.46 and non-GAAP diluted EPS in a range of $4.52 to $5.92. EPS guidance is based on a fully diluted share count of approximately 139 million shares. In conclusion, though calendar 2023 will be a year of contraction after three strong years of growth, we remain confident that the secular trends outlined in our Investor Day last June are driving long-term semiconductor industry demand, and investments in WFE are durable and compelling. Broad-based customer demand across multiple production nodes, increasingly strategic role semiconductors are playing in influencing national industrial policy, a robust design environment at the leading edge, and growing semiconductor content across technology nodes remain important trends. These are long-term secular growth drivers for the industry as technology investment and node transitions reflect the value that semiconductors in our industry have in lowering costs for our customers and enabling a broader application universe for semiconductor-based technology across multiple end markets. For KLA, we have a strong historical track record of delivering relative outperformance across industry cycles. To be competitive over the long run, our customers must continue to invest in product roadmaps irrespective of market conditions. Furthermore, KLA services has continued to grow consistently over multiple decades due to the critical nature of KLA products to improving yield learning and driving fab productivity. Our operational execution, coupled with the power of our portfolio strategy, positions us to continue to deliver sustainable relative performance over the next several years. We will continue to maintain our R&D investment and our product development roadmaps to enable market share expansion, support customers' technology roadmaps, and multiyear fab investment plans. This provides an element of stability that shores up our confidence in the demand outlook for the future. These factors, combined with the KLA operating model that guides our execution, positions us well as we execute our strategic objectives. These objectives fuel our growth, consistent operational excellence, and differentiation across the diverse product and services offering. They are also the foundation of our sustained technology leadership, consistent industry-leading financial performance, and growing capital returns to shareholders.

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

We'll now take our first question from C.J. Muse with Evercore.

I guess, first question, you talked about expectations to outperform WFE again here in calendar 2023. 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.

I'll begin, and Rick can add if necessary. There are several factors to consider regarding KLA's performance this year. We had a strong 2022 when comparing it to WFE. Our success is particularly noticeable in comparison to WFE since the situation in other industries is less straightforward. Historically, we perform well during downturns in WFE because, while our customers reduce capacity, they continue to invest in their technology and future plans. This remains a positive aspect for us. Additionally, we are seeing an increase in PC intensity, specifically in memory, which is beneficial for us given the current dynamics. Our optical pattern inspection business is also improving, contributing further to our growth prospects, as we anticipate strong performance in these areas relative to the overall industry. China is another influencing factor. Compared to some of our peers, who seem to be facing challenges due to export control issues, we feel less impacted. All these elements bolster our confidence in our position and performance relative to the market, especially given the strong performance we experienced in 2022. Regarding the first quarter and our backlog, our deferred revenue has remained stable; we haven't encountered the same supply chain issues that other companies have faced. The backlog did decrease due to some adjustments mainly related to the China exports, leading to a forecasted decrease in performance obligations by about $1 billion overall. This decline is partially attributed to the China situation but also results from revenue being recognized at a level higher than new bookings. There is still a substantial backlog, and we expect it to play out positively moving forward, particularly since 45% to 55% of our backlog is set for delivery beyond 12 months. This should provide some insight into our overall expectations for 2023.

C.J., I'd like to add a point. When we outlined our investor plan for 2026, we anticipated a contraction between 2022 and 2026, although we were unsure of the timing. Our model assumptions were based on our percentage of WFE, which includes the process control intensity in our share. We don't foresee any decline in that for 2023. We expect to maintain or possibly improve our percentage of WFE. Therefore, we remain optimistic about the trajectory we set for 2026. Despite some fluctuations related to ongoing projects, we believe 2023 will align with our long-term plan.

Very helpful. As my follow-up, you talked about expectations for gross margins north of 60% for the whole year, guided 61.5% for March. I guess this is kind of a two-part question. I guess how do you see kind of a trough revenue quarter here? If you can answer that. And does that mean that we would be below 60% in the back half of calendar 2023? Or you think you can stay north of 60% every quarter for the year?

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. I would expect, and as we said over the course of last quarter, that we thought that Q1 was likely the higher quarter in the year and that we would see a drifting down in terms of the run rate. And just to make the math work, you would see a lower second half than the first half. So I think we'll likely stay north of a couple of billion in terms of revenue levels, and we should be able to hold 60% in terms of a run rate from a gross margin point of view.

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

I wanted to kind of double-click on your WFE expectations and then how do you think about your model. Are you thinking about first half or second half WFE being relatively balanced for the year and then within your kind of forward revenue expectations for KLA as well?

I believe my earlier comments were mostly focused on KLA, but I don't expect a significant deviation from the overall WFE. Of course, this also involves other markets and businesses that we are not involved in. Generally, I anticipate that our WFE run rate in the first half of this year will be higher than in the second half. Therefore, I expect it to be down, although I'm not certain by how much, but it will likely be lower in the second half compared to the first half.

Got it. And then just kind of maybe bigger picture. But one of your larger customers have talked about a temporary decline in the 7-nanometer utilization rates, but at the same time, also talking about working with their customers to introduce to backfill capacity and introduce new products over the next few years. I guess how do we think about that dynamic in the context of your print check business and the mask shop?

I believe that our assumptions account for the overall reduction in wafer fabrication equipment shifting. However, I don’t anticipate significant changes in the mix of our products during that time, considering the positioning of logic. Additionally, as Bren mentioned, as extreme ultraviolet lithography becomes more widely used, even at a lower capacity, we expect to see increased demand for print check and reticles overall. We believe that those business segments will maintain their strength relatively, even in a declining overall market for a while. Nevertheless, we are currently supply-constrained in our ability to meet customer needs for those products.

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. And then if in the longer run, they feel like they can move it, they'll try to move it. They do have the technical challenges though that if you were to move from 7 nanometer to 5 nanometer, you have the introduction of EUV from node to node. So the technical challenges of trying to reuse that capacity are much more difficult in this environment than it was, let's say, 10 years ago.

Our next question will come from Harlan Sur with JPMorgan.

Your services business last year was strong, right? It was up 15%. Historically, like this segment does not decline during downturns, right? Very stable subscription services contracts, expanding support opportunities, legacy nodes, more software attach, et cetera. But you do have a transactional part of the business, right, tied to manufacturing activity. You've got your EPC services business in there as well and the impact from China export control. So lots of puts and takes. So does the team believe it can grow services revenues this year?

Yes, you're correct. We do have some factors to consider. Looking back, our service business related to Semi process control has only experienced one down year in the last 20 to 25 years, which was in 2009 due to a very tough macroeconomic situation. So when there’s a slowdown, especially in memory, customers tend to reduce how much they use their equipment. However, we still have a significant amount of equipment coming off warranty and moving into contracts from shipments over the past few years. Customers usually continue to operate their existing equipment even if they're not investing in new capabilities. EPC is more transactional, and I anticipate that EPC service will remain flat year-over-year. We may not see the same growth as this year, where we achieved a 15% increase, but I expect a mid- to high single-digit growth rate overall for services. Therefore, if we look at our overall business, Semi PC is projected to grow in line with or slightly above the market, while service is expected to grow in the mid- to high single digits. I foresee EPC systems facing a decline, but one that is less severe than what we observe on the WFE side. Given that we had a weaker 2022, this business is more closely tied to consumer trends, which may mean it faced challenges earlier in the cycle. That's our perspective on the overall situation.

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.

I appreciate that. We saw significant growth in patterning in 2022, with an increase of around 50%. This growth is largely driven by the adoption of EUV and Deep EUV lithography. ASML's results reflect this ongoing strength, and they expect EUV lithography system approvals to grow by approximately 40% this year for both EUV and Deep EUV. Lithography shipments serve as a positive forward indicator for your business. You have a favorable position with your wafer, reticle inspection systems, print check, and lithography metrology. Last year, this was a major driver for us. Will this continue to be a key factor for potential outperformance this year for the team?

I agree with you to some extent. The advancements in metrology are significantly influenced by technology transitions, particularly in areas like data. This ongoing work is a key factor. However, there's also a component of that business linked to capacity, making it a mix of factors at play. It isn't solely dependent on technology advancements. Additionally, when we consider market growth across various segments, our perspective on lithography within WFE differs slightly from the overall perspective, mainly due to the impact of deferred revenue. Looking ahead to 2023, I believe KLA will perform well, and metrology will remain robust as it relates to technological development. Both metrology and overlay segments will be important as our customers strive to progress through tech nodes that pose significant challenges.

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

If you look at the full year WFE view down 20%, in the mid $70 billion range, that overall view hasn't changed in the last three months. However, there seems to be a shift in the commentary from you and your peers. I'm curious if Rick or Bren could reflect on the last three months and share what has changed from an assumption perspective. Is there a particular part of the market you are focused on? Has there been any change in that time, given the overall number remains the same?

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 three months ago. So I don't think that much is different. It feels pretty consistent.

Well, I guess, yes, it's kind of similar to what we said. But at the time, it wasn't what a lot of customers were saying yet, right? So at that time, there hadn't been as many announcements for CapEx reductions. So we kind of forecast that that was going to happen. And with that kind of the news, it kind of got to this point where we're about where we said. That wasn't the case when we first viewed what was probably going to be a correction in 2023. So I would say it's kind of landed where we thought, but there was a fair amount of news in getting there as people said they're going to cut their CapEx.

Got it. For my follow-up, if I'm understanding you correctly, March may not be the lowest quarter for the year; it could possibly be June or September. Is there any way to estimate what that lowest quarter might be? When I look at memory, it seems to represent only about 15% of process control in the first quarter. Is that the lowest point for memory, or could it drop even further?

Yes, Vivek, I'm not going to provide guidance for each quarter. It seems that things are likely stronger in the first half of the year. There are some investments toward the end of the year that could make the December quarter stronger, depending on the timing of the fab construction. There are factors in Q4 that could influence the quarter-to-quarter performance either way. However, I maintain that the second half is likely to be lower than the first half, and I stand by that for now.

Our next question will come from Brian Chin with Stifel.

I’d like to revisit the performance obligations. I may not have the exact figures, but regarding the 12-month RPOs, it seems we ended the December quarter at around $6 billion. Is that correct? As you gradually draw that down in the coming quarters, is there a specific time in the year you anticipate that number will stabilize?

We will likely file our Q report in the next day or so, so you will have the specifics. Your math is generally correct; it's slightly higher than that, and we still expect a 45% to 55% increase beyond the 12-month mark. Some adjustments were made due to greater clarity on China export restrictions, which influenced our changes. As we move through the year, we will observe how the order flow develops over time. Additionally, we are still working on obtaining some licenses, which may also affect the situation. However, I don’t anticipate a significant decline; I believe it will stabilize as we progress throughout the year. Nonetheless, things can change, and this is the best visibility I can provide today.

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?

I would have to agree that it's lower than it has been for a few years. I'm not sure if it was lower in any specific quarter back in late 2018 or early 2019; I would need to check that. However, it is definitely as low as it has been for some time in relation to the total.

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

The revenue decline in the March quarter is a little more severe than we kind of expected. I guess, we had thought the revenue is relatively stable, especially given the large backlog you had going into the quarter. Is it just that you were able to pull in some of the revenues into the December quarter? Or was it my assumption that revenue could be stable in the near term was incorrect?

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…

Sorry, we got cut out there. I know it's in the middle of Bren's answer to Sidney. Bren?

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. As we were looking at the business back in October, we had some systems where we were dealing with some supply chain issues, particularly as it relates to broadband plasma and reticle inspection products. As we worked through the quarter, we were able to work with those suppliers, get the parts we needed, run through our qualification processes and complete those tools. Customers, given the demand and balance we've been dealing with for some time on these products, were more than willing to take the products when we had them finished. So when you add the two quarters together, the number is basically the same. And our view here is, is we're going to keep the line moving, particularly as it relates to getting these systems out the door to meet customer requirements. And so we finished them, and we shipped them at the end of the quarter.

Okay. That's helpful. Can I ask a second question? You mentioned that you expect operating expenses to decrease throughout the year. What is a reasonable level to anticipate at the end of this calendar year? Can you discuss which areas will see more cuts and whether any actions will positively affect gross margin as well?

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. It wasn't that long ago when people were talking about $100 billion of WFE this year and $105 billion or more into '23, so $100 billion in 2022. And so there's been about $30 billion plus of WFE that's come out in a relatively short period of time. That had an effect on some of the buying that we've done to drive our supply chain the way that we have. But also, it will have to deal with some of the underutilization of the factory resources that were put in place to support higher volume levels. But the guidance I gave in terms of gross margin reflects those actions and what we plan to do. I would think that by the end of the year, we'll probably be looking at a quarterly run rate based on how we're running the business today. And our expectations for top line, somewhere in that, I'll say, somewhere around $530 million to $535 million. So we'll see it trend down as we go according to each quarter, more or less. And depending on how we see the top line evolving, not only as we look at the second half of the year, but as you start to look at '24 and size '24, then we'll come to a determination whether that is appropriate level for us to be at or whether we need to do more or less from there.

Our next question will come from Atif Malik with Citi.

Sorry. Can you hear me?

Yes, we can hear you.

Yes, we can hear you.

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

I'm expecting it to be pretty broad. And look, it'll vary by customer. And as you know, it's not our strongest market in terms of overall exposure, and we tend to be more focused on the technical part, right, technology roadmaps, less so than capacity. So when we look at it, I think it's pretty broad across all our customers, but varies according to some of them, right? I don't think they're all completely consistent.

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?

Yes. Most of the logic investment has been at the legacy nodes. The other thing that gives us some confidence about 2023 that I mentioned in the earlier answer was the infrastructure investment that's happening in China for mask investment, mask infrastructure, and for wafer infrastructure, which are parts of WFE that we're exposed to that some of our peers are. So when I look at the overall, inclusive for KLA, inclusive of what we expect in export restriction, which hasn't changed from what we talked about a quarter ago, I think overall, we'll see our business in China likely decline less than the overall WFE.

Our next question will come from Tim Arcuri with UBS.

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.

Yes, Tim, we don't break it down that way, but I can give it a try and discuss the related applications. The most apparent one that's new is print check, which is inspection directly tied to EUV. Additionally, there's the reticle aspect and some overlay work related to the matching challenges of EUV. I would estimate that probably 15% to 20% of our overall business in these markets is directly connected to EUV rather than just further scaling. We can explore this more and provide additional insights since it has been growing. The print check component has significantly contributed to the growth we're witnessing, particularly in the Gen 5 area. That's my perspective on it. Bren?

I think that's good.

Thanks, Rick. That was very helpful. Bren, I have a question regarding process control systems. The March guidance seems to suggest something in the 16.5% range for the process control segment. Could you confirm that for me? Additionally, I'm curious about when we can expect the process control systems to reach their lowest point. While Lam is projecting a bottoming in March, it appears that if we consider low to mid-70s for WFE, you likely won't lose much WFE share. I'm having difficulty seeing the number not bottoming until we reach around 1.1, but you're still at 1.6. Could you address these points for me?

Yes. Regarding your question about margin, while we don't provide guidance for individual segments, your assumption about our situation in March seems accurate. We plan to manage the entire company according to the overall numbers we've shared, rather than focusing on specific segments. The decline you've mentioned, while I won't detail each quarter's guidance, suggests a relatively low figure. I believe it would indicate a drop greater than the overall expectations for WFE, which anticipate a decrease of about 20%. It's difficult to pinpoint the timing of these changes, but a figure of 1.1 seems quite low.

Our next question will come from Krish Sankar with Cowen and Company.

Rick, my first question is, just to play the devil's advocate. Last quarter, you said the process control argument was site-to-tech roadmap and transition and not as much as to capacity, i.e., less technical. But then, it seems like process control is not immune to the cyclicality. So I'm just kind of curious, like, are these just, like, regular cyclical issues? Is process control actually really driven by tech and not capacity purchases? And long lead time inspection doesn't matter anymore? I'm just kind of curious. Or do you think we get back to trend line in a couple of quarters? Any color on that would be helpful, and then I have a follow-on.

Yes, I believe the process control aspects of our business are influenced by both capacity and technological transitions. It's not solely about technology. I expect that those more focused on capacity will experience greater declines in this environment, while those centered on technology will remain more stable. We find ourselves positioned between these two factors. We have capacity-related businesses, such as metrology that increases with more wafer starts. However, the ongoing work in reticle and advanced patterning inspections will be more aligned with Gen 4 and Gen 5 technologies, which should not face significant decline. We have a bit more upside to capacity than we previously did. Nevertheless, a large segment of our business is linked to technology transfers, and there has been an increase in these transfers recently, particularly from the DRAM segment despite their minimal capacity investments. Multiple players in logic are also pushing forward on technology transitions. Therefore, we anticipate a balanced performance this year, although we do have some components related to capacity that may affect stability.

Yes, Krish, we did share the market move in 2021, right, from below 6 percent to the high 7 percent. And so that clearly was driven by, not just the technology transition that we talked a lot about, but also higher exposure to capacity opportunities. And we talked about this at Investor Day that with scaling with a more robust design environment, less reuse overall and more process flows, that our customers were investing more in capacity from KLA in capacity environments because they're managing each design, test design rules in different ways, different process flows as there's a change in complexity into the fab. And for all those reasons, we were seeing more adoption of process control in what we'll call a more mature state in the fab. So obviously, that's the part that falls off as customers adjust those capacity plans. But to Rick's point, most of our leverage is in the development area, and it has the fab scales. And so that's why we feel pretty good about dynamics driving our relative performance this year and a continuation of the SAM expansion that we've seen over the last couple of years.

Got it. Super helpful. As a quick follow-up, Intel recently announced that they have extended their depreciation from 5 to 8 years. I'm curious if that means the useful life of semiconductor capital equipment is being extended from 5 to 8 years. Additionally, what implications does this have for process control tools? If the equipment can be used for a longer period, does that suggest there will be less need for purchasing in the long run?

The useful life of equipment has been increasing for years, which we've demonstrated through our service work. One reason our service business is growing is that the lifespan of equipment extends well beyond the traditional perspective. This observation reflects different practices globally regarding how customers amortize or depreciate their equipment. Therefore, there is no impact from this. We are still discussing what drives reuse and the next generation, which relates to node migration and customers' actions. Recently, we've noticed that more nodes are being filled in rather than just replaced. Thus, there is no alteration in the long-term outlook based on one customer's decision.

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 have been restarting some of those older generation tools to meet those demands. So I think it's a reflection of, at least, to Rick's point in how it affects equipment overall, reflection of the strength of some of those markets and those opportunities. The good thing is as we are able to sell those tools, the incremental R&D to support those markets is fairly low. And so it creates a nice vector, not only of growth for us but also growth in our profitability and leverage in our model.

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.

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

I have a couple of housekeeping questions. Can you clarify the impact of China and the export restrictions in the December quarter and what you expect for calendar 2023? If you could remind us how significant the impact was in Q4, that would be helpful.

Yes. So no change to what we talked about last quarter overall. We talked about a range of $500 million to $900 million across the business in terms of its impact to 2023, and so I don't have an update to that or a different view at this point. We'll see as we go, active engagement.

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 2023 on a relative basis?

Yes. Yes. And I would expect our DRAM business to be stronger than our NAND as a percent. Yes.

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.

Thank you, ladies and gentlemen. This concludes the KLA Corporation December 2022 Earnings Call and Webcast. Please disconnect your line at this time, and have a wonderful day.