Good afternoon. My name is Chelsea, and I will be your conference operator today. I would like to welcome everyone to the KLA Corporation March Quarter 2023 Earnings Conference Call and Webcast. Thank you. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead.

Thank you, Chelsea, and thank you for joining us for our earnings call to discuss the results of the March 2023 quarter and our June quarter outlook. Joining me is Rick Wallace, our Chief Executive Officer; and Bren Higgins, our Chief Financial Officer. During this call, we will discuss our results released today after the market closed. All materials can be found on our IR website. Today's discussion is being presented on a non-GAAP financial basis unless otherwise specified. Whenever we make full year references, they are for 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 as well as presentations, corporate governance information and linked to our SEC filings, including our most recent annual and quarterly reports on Forms 10-K and 10-Q. Our commentary is 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 also subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. Our CEO, Rick Wallace, will begin the call with some comments and quarterly highlights. Bren Higgins, our CFO, will conclude with our financial highlights, including our guidance and our outlook. I will now turn the call over to our CEO, Rick Wallace. Rick?

Thank you, Kevin. Let's start with a summary of KLA's performance in the quarter, along with a few highlights. Further color and detail on my comments and the semiconductor demand environment can be found in our shareholder letter released earlier today. KLA's March quarter results again demonstrate the company's consistency in delivering on long-term strategic objectives and financial targets. Specifically, revenue of $2.43 billion was above the midpoint of the guidance range. This represented 6% growth on a year-over-year basis, although down 18% sequentially. GAAP EPS was $5.03 and non-GAAP EPS was $5.49, with each finishing above the midpoint of their respective guidance ranges. From a customer perspective, demand in the quarter was slightly ahead of expectations. Near-term headwinds related to the global macro economy and supply chain remain, but we also see positive outsets emerging as automotive demand and other markets served by legacy nodes remain strong. Additionally, the silicon wafer industry continues to invest to support long-term wafer demand growth. Our customers are adjusting capacity plans across both foundry/logic and memory due to changing demand expectations. However, we see R&D investments remain a top priority. This is important for KLA as our products are consistently relied upon during the R&D process as well as the early ramp phase and faster time yield is critical. We had a number of additional business highlights in the quarter. Gartner recently released their latest industry market share analysis and process control is the fastest-growing WFE market in 2022, growing 30% in the year to $13.5 billion. Within process control, KLA increased market leadership in most segments, resulting in an overall market share gain of approximately 300 basis points in 2022 to over 57%, greater than 4x our nearest competitor. KLA's sustained market leadership is underpinned by our innovation and commitment to high levels of R&D investment. Additionally, the successful execution of KLA's strategies for market diversification were demonstrated by the rapid growth in KLA's automotive-focused businesses. Automotive semiconductor demand is growing in applications where 0-defect mentality is required to achieve superior standards of quality and reliability. KLA has been working with the entire automotive ecosystem to standardize our in-line defect screening methodology called I-PAT to augment existing reliability test efforts. As electrification proliferates, the industry is facing an additional opportunity with the introduction of new compound semiconductor materials, such as silicon carbide that offer a significant improvement in power efficiency over silicon. In this category, KLA's revenue has grown 2.5x since 2019, approaching $700 million in annual revenue in calendar 2022 and including 5x growth in silicon carbide-related businesses, which account for almost half of total automotive sales. We expect this growth to continue in calendar 2023. In Services, our business grew to $529 million in the quarter, up 8% year-over-year and 2% sequentially. KLA's service strength was driven by our growing installed base, increasing customer adoption of long-term service agreements, expanding service opportunities in legacy nodes and emerging long-term opportunities in acquired businesses. And finally, the March quarter was another excellent period from a cash flow and capital returns perspective. Quarterly free cash flow was $926 million, which drove the latest 12-month free cash flow up 20% to $3.2 billion. Total capital returns over the past 12 months was $5.11 billion or 160% of free cash flow. Dividends and share repurchases in the March quarter were $659 million, composed of $478 million in share repurchases and $181 million in dividends. Our consistent execution despite challenges in the marketplace continues to prove the resiliency of the KLA operating model and the dedication of our global teams. I will now hand the call over to Bren to go through our financial highlights. Bren?

Thank you, Rick. KLA delivered on our quarter guidance and commitments, demonstrating consistent execution in a challenging marketplace. Our continued focus on meeting customer needs while expanding market leadership, growing revenue, sustaining industry-leading gross and operating margins, generating strong free cash flow and maintaining our long-term strategy of assertive capital allocation is what makes us successful. Quarterly revenue was $2.43 billion, above the midpoint of the guided range of $2.2 billion to $2.5 million. Non-GAAP diluted EPS was $5.49, above the midpoint of the guided range of $4.52 to $5.92. GAAP diluted EPS was $5.03. Non-GAAP gross margin was 60.8% at the lower end of the guidance range. While volume and product mix were stronger than expected, persistent end market weakness continues to affect the PCB and display in component inspection businesses to a greater degree than expected and drove incremental inventory reserve requirements. Adjustments also remain a factor across the company as we adjust our capacity down to reflect the current business environment. These issues combined diluted gross margins by approximately 100 basis points and offset the volume and product mix benefits mentioned earlier. Non-GAAP operating expenses were $534 million, below our expectation of $545 million, reflecting the impact of modest headcount reductions implemented in the quarter and prudent cost management across the company. Total operating expenses comprised $322 million in R&D and $212 million in SG&A. Non-GAAP operating margin was 38.8%. Other income and expense net was $60 million, and the quarterly effective tax rate was 14%. At the guided tax rate of 13.5%, non-GAAP EPS would have been $0.03 higher or $5.52. Quarterly non-GAAP net income was $761 million. GAAP net income was $698 million. Cash flow from operations was $1.01 billion, and free cash flow was $926 million. As a result, free cash flow conversion was 122%, and free cash flow margin was 38%. The company had approximately 139 million diluted weighted average shares outstanding at the end of the quarter. The 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 $5.95 billion and a flexible and attractive bond maturity profile supported by strong investment-grade ratings from all 3 agencies. Over the last 12 months, KLA has returned $5.1 billion to shareholders, including $4.4 billion in share repurchases and $711 million in dividends paid, the total capital returns amounting to 160% of free cash flow. Turning to our outlook now. We continue to estimate WFE to decline approximately 20% to $75 million in calendar '23 from approximately $95 million in '22. Our customers' capacity planning remains fluid and indications of end market improvement have limited visibility today. While the timing of a meaningful resumption in WFE investment growth remains unclear, we do see overall demand stabilizing around current business levels for our semiconductor process control systems business. We expect this demand profile to continue through the second half of the calendar year. In particular, we are seeing higher than initially expected investment from legacy customers globally, including in China. We have also received clarification from the U.S. government on the export rules issued last October and can now resume some shipments that we had previously excluded. Furthermore, we see additional wafer and reticle infrastructure spending worldwide. Our WFE estimate reflects our current top-down estimate of industry demand as follows: in memory, we expect WFE investments to decline by 35% to 40% as memory customers continue to respond to lower consumer demand by adjusting production to bring device supply in light of demand. We expect foundry/logic to decline by about 10% overall with legacy investment declining less than the segment overall due principally to automotive and continued demand for legacy design nodes in China. Our June quarter guidance is as follows: total revenue is expected to be $2.25 billion, plus or minus $125 million; Foundry/Logic is forecasted to be approximately 77%, and Memory is expected to be around 23% of semi PC systems revenue. Within Memory, DRAM is expected to be about 85% of the segment mix and NAND approximately 15%. We forecast non-GAAP gross margin to be 60.75%, plus or minus 1 percentage point, due primarily to the expected product and segment mix. Given the view of a stabilizing demand environment for the remainder of the year, non-GAAP gross margin should remain in this range with the expectation of gross margins to be between 60% and 61% for calendar '23 with product mix being the largest factor in quarter-to-quarter variability. Looking ahead, we will continue to manage costs carefully. The June quarter always represents the first full quarter of our annual salary adjustments. As a result, operating expenses will tick up slightly to approximately $540 million. We continue to see operating expenses trending down for the remainder of calendar '23, exiting the calendar year in the $530 million to $535 million range. Other model assumptions for the June quarter include other income and expense net of approximately $58 million and an effective tax rate of approximately 13.5%. Finally, GAAP diluted EPS is expected to be $4.47, plus or minus $0.60 and non-GAAP diluted EPS of $4.83, plus or minus $0.60. EPS guidance is based on a fully diluted share count of approximately 137.5 million shares. In conclusion, after 3 years of strong industry growth, our view of total WFE demand remains unchanged at down approximately 20% in calendar '23. Against this backdrop, KLA is well positioned to continue to outperform the industry, building on the increased market relevancy delivered in calendar '22. Looking ahead, we remain confident of the secular trends driving long-term semiconductor industry demand and investments in WFE are intact. Broadening semiconductor demand, the increasing strategic role semiconductors play in influencing national industrial policy and simultaneous investments supporting growing semiconductor content across technology nodes remain catalysts for growth. Technology investment and node transitions reflect the value that semiconductors and 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, while the global economy and semiconductor industry faced headwinds in 2023, we are well positioned to deliver strong financial performance driven by the relative strength of our Semi PC and SPTS businesses and continued growth in Services. We will continue to focus on innovation as we execute our portfolio strategy to support our customers' technology roadmaps and multiyear investment plans. With the KLA operating model guiding our execution, we will execute our strategic objectives and drive outperformance. These objectives drive our growth, consistent operational excellence and differentiation across the diverse product and services portfolio. They are also the foundation that sustains our technology leadership and competitive differentiation. This has enabled us to achieve industry-leading financial and free cash flow performance and deliver consistent and growing capital returns to shareholders. And with that, I'll now turn the call back over to Kevin to begin the Q&A session. Kevin?

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

Yes, our first question will come from Harlan Sur with JPMorgan.

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

Harlan, thanks for the compliment. On overall, from a bookings point of view, look, the customers are still moving things around in terms of backlog and slotting. There was some scrubbing in the quarter of some adjustments, fairly minor, in our overall backlog in our RPO number, which you'll see in our 10-Q filing that we'll do in the next day or so, came down about $600 million. So that implies that the book-to-bill was a little bit less than 1, and then there were some adjustments overall. But some timidity in scheduling, but just over the prepared remarks, we do see a stabilization around these levels as we look out over the next few quarters.

Perfect. And then on your EPC franchise, this - it's driven pretty strong growth, right, 10% to 11% CAGR over the past 3 years, that's including Services. It even grew 7% last year, right, in a slower consumer environment. Coming into this year, though, you guys are already driving an EPC systems profile of down about 20% year-over-year. Do you still anticipate the EPC business to outperform WFE growth? And sort of at a high level, how are you thinking about EPC profile second half versus first half?

Yes, that's a great question, Harlan. Over the last few months, our expectations for that business have shifted. It tends to have a short lead time and is very sensitive to consumer trends. As the consumer markets have not fully recovered, we anticipated a rebound in the second half of the year. I expect that the second half will be somewhat stronger than the first half, particularly for the PCB business, flat panel business, and the ICOS component inspection business, as SPTS has a different growth profile, which I'll address shortly. In those areas, we expect modest improvement in the second half, but it is likely to show a year-over-year decline that will be greater than what we expect from the WFE-centric businesses. Conversely, SPTS has experienced solid growth; after a strong performance last year, we expect the business to remain flat or see slight growth this year. This sector is highly tied to the automotive market, especially regarding power semiconductors and new specialty substrates, presenting us with opportunities. We are pleased with the progress of that business, even amid the overall weakness in WFE.

Our next question will come from C.J. Muse with Evercore.

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

Yes, C.J., in the overall business, we're seeing more strength than we had expected originally in the legacy parts of the market, so greater than 28-nanometer, and that's a global statement. China is also stronger in terms of expectations there from a legacy point of view. So while we've seen some adjustments in the leading-edge expectations, we've seen some strengthening overall legacy. So obviously, there are some error bars around these percentages as we look out from the March quarter. But that's really what's driving our outlook here.

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

So over the course of the - if we just take an annual perspective and think about it, I would say the silicon wafer part is probably - and this is an estimate, probably about 20% to 25% of it. So the other thing that you asked about on optical inspection. You asked about lead times of our - on optical inspection. I'm sorry, I left that out of your - the first part of your question. So lead times are - on optical inspection are still pretty long. There hasn't really been a change there as we are adding new capacity to support demand. Customers are still investing in their technology road maps, and that product is pretty essential to that. And so we continue to see an environment where demand is outpacing supply. So in a down WFE market, I expect the high-end optical inspection to grow this year given those dynamics.

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

I'm curious what's giving you the confidence that sales have bottomed when many of your memory customers still appear to have a lot of inventory and are unclear when the utilization will pick up. So specifically, how is your visibility to the memory demand for the back half of this calendar year? Do you think it will be about this level, it'll be lower, above this level? Because I noticed that in June, the implied memory sales seem to be picking up, albeit of small numbers. So just any comments on how you're thinking about memory demand recovery from here as it pertains to what you think about utilization at your key memory customers.

Sure. It's a good question. If you look at the March quarter, it was pretty low, right, at 14%. So - and I look back - and you go back in any of our recent history hasn't been that low really ever. So - and even as you see it progress through the year into the guidance, sort of the 23% that we talked about in June and - even as it sort of stays in that range as you move through the second half of the - for the year, it's still - while second half might be a little bit stronger than the first half, given how low the first half was, it's still pretty low overall in terms of our forecast and expectations. And there's some wildcards around how customers ultimately spend. We tend to be more technology-centric, and so there's still a roadmap investments that's happening that we're participating in. There's also some opportunities related to the clarification of some of the export controls and what that means in terms of some incremental opportunities to support some of the older generation memory devices in China. And so that clarification that we received from the government will enable the second half shipments. And so that's in our outlook as well.

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

Got it. And for my follow-up, I realize it's early, but I thought that given that you have long lead times and you are engaged in the technology side with many customers, you probably have a decent view of how the calendar '24 might look like. So I'm not asking for numerical guidance, but what's your gut right now that is WFE likely to grow next year? Is it supposed to be flat or down? Like what could be, just the kind of qualitative puts and takes as we start thinking about WFE next year?

Yes. Obviously, just to start off with the obvious, we don't have a lot of visibility into next year. But we can tell you about the conversations we're having with customers, which have to do a lot with their view that things are kind of stabilizing at this level for the most part. And in some cases, it's because things are down quite a bit, but there's a lot of activity still in, for example, advanced logic nodes or advanced foundry nodes, of design starts and a lot of work going on there. And we're still having conversations about supporting projects that are due to happen at the end of this year or early into next year. So if you had to pin us down on it, I think we're kind of - at these kind of levels, plus or minus, for a while. And hopeful that during calendar '24, we'll see some recovery, but it's obviously too soon to know that. But I think that that's the general way we're thinking about it going forward.

Our next question will come from Krish Sankar with Cowen.

The first one, Rick or Bren, you spoke about resuming some shipments to China. Can you quantify in terms of millions of dollars, how much that you're going to expect to recoup in the second half? And is that baked into your view that revenue will stay around these levels into the calendar second half? And along the same path, this China shipment assumption is tied to kind of lagging as memory, and I'm kind of curious, what exactly you mean by lagging as memory because I thought memory is always at leading edge. And then I have a follow-up.

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

Yes, this is Rick. So yes, we should see growth in Service. And I think this is one of the differentiators for KLA is how our Service behaves and slow down. We're seeing a lot of interest from our customers to keep that capability. So even when capacity might go off, what customers want to focus on is yield and making sure that they're continuing to develop new technology. And so that plays to our strength. Obviously, we've talked about some of the slowdown we've seen in EPC. So this is much more about Semi process control. But yes, we're still modeling the growth that we've talked about in the past for Service, and that's a big part of our value that we provide for our customers. So we feel good about where we are there.

Yes. And for the Semi PC part of the business, given the reduction or the softening in the industry environment, some adjustments in capacity, the dynamics around the memory business that people have already asked about, I wouldn't expect Service to grow in line with the long-run target of 12% to 14%. As we said last quarter, we see it somewhere in the mid- to high single-digit growth rate this year, obviously some headwinds from the export controls as a factor in that. But still growth, to Rick's point. And on the EPC side, the EPC side, probably flat, maybe modestly up a little bit. Service business behaves a little bit differently. There are some long-term opportunities for us to try to drive that business over time given our global footprint. That's obviously a longer-term play. But the Service business generally is not declining, but not growing a lot this year.

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

Just a first of clarification. For the clarification on export restrictions that you received, that $200 million you're thinking about for the second half of this year, did that reenter your backlog or RPO this quarter?

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

Got it. And then as a follow-up, on the gross margin side, how should we think about inventory reserves for the rest of this year? And then can you just remind us how do we think about the timing of those reversals?

Yes. I think the last couple of quarters, we've had some meaningful adjustments from what we were driving the company to the current demand levels. And if you recall back in '21 and '22 given the supply chain shortages that were out there, we were making fairly significant commitments in our supply chain that in a lot of ways, drove the performance that we saw in '21 and '22 from a growth point of view, and particularly from a relative growth point of view. So as we've had to adjust down to different demand levels at a fairly quick pace, it has driven some incremental reserves related to just excess supply. So what I would expect, well, in this happening is, over time, as we see a meaningful resumption in demand given the extendibility and lifetime of our platforms, the strength of our Service business will ultimately consume those parts. It's not like you throw the parts away. It's just you have more than you need for the demand window in terms of how you see the assessment. So on a go-forward basis, I expect it to normalize and not be an issue for us. EPC was a bit of a surprise, as I mentioned in the prepared remarks this quarter. And that was really driven by just this weakening overall expectation into the second half that we previously thought we'd see stronger demand. But we think that we've adjusted now and so the impact moving forward, assuming the outlook that we provided normalizes and isn't an incremental factor one way or the other.

Our next question will come from Atif Malik with Citi.

I have 2 questions on China. First, is the number of customers you're engaged domestically in China on trailing edge higher this year versus last year or year before?

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

I mean, Rick's right. I wouldn't say higher.

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

Well, it's hard enough for us to get the clarification. I think for them, that's - they're working on the same thing as getting clarification on exactly what they'll be able to do. So I think there - they have conversations with us, but frankly, the discussions they're having that matter the most to them are not with us. We're able to support them no matter which way that goes. But I think that's something they're all working through. And there's some stuff in the press about it, but you can imagine that there's a fair amount of anxiousness around that.

Our next question will come from Timothy Arcuri with UBS.

Bren, I had 2. So first, I'm just trying to tie your process control systems commentary to WFE. And it sounds like Orbotech systems - I mean, you're not exclusively saying this in June, but it sounds kind of like they're pretty flattish. So Process Control Systems have to be about 1,550 million, down maybe $175 million from March. And then in the shareholder letter, you're saying that it's going to sort of remain flat into the back half of the year at that level. So if I just take the 1,720 million you did in March and then I take the 1,550 million in June and I kind of flatline that, and I used $75 billion this year in WFE, that implies you're like 8.5% this year for WFE share, that's - I mean, that's a record high. So I guess the question is, is there something structural going on that you think there's staying power to where your WFE share could stay that high? Usually, I think, 6% in the trough and 8% in the peak, but you're sort of like 8.5%? Or maybe is it that your $75 billion number too low?

Tim, I'm not - we do this every quarter. I'm not going to guide the individual segments, but your math is reasonable. And again, with our comments around stabilized, it's plus or minus relative to the current business levels. But that's how we see things moving forward now. In terms of your - and we talked about this a little bit over the last number of months is that we felt pretty confident about our ability to maintain our share of WFE that there were drivers in terms of as we look at '23 and you see customers continuing to invest in their road maps. Particular product lines that are inflecting some of the fastest-growing product lines and overall WFE would be factors for growth for us. Our exposure to the bare silicon or the silicon wafer industry is a driver of WFE that we're exposed to that others aren't. The infrastructure investment that's happening in China from a wafer and reticle point of view is also an inflection point. I think what's exposed to export controls overall as a percent of the total for us is a little bit lower than some of the other peers. And then finally, we're seeing a very strong share performance overall, as we talked about in the prepared remarks. So when you add all that up - and share is also important because in a downturn when budgets are limited, customers tend to buy best of breed, and that tends to play to KLA's favor as well. So when you add all that up, as I've been saying for a number of months, I feel pretty confident that despite all the adjustments out there that folks were making in deferred revenue and partial shipments and all those kinds of dynamics that we're adding some confusion overall that we feel pretty comfortable about our ability to maintain our share of the overall market.

Yes. Just to build on it, Tim. I think, as Bren mentioned, process control intensity is up some, but I think the share story is maybe even more significant. And then where it's really shown up has been optical inspection. And a lot of that is around relevancy of our optical inspection to some of the new nodes that people are dealing with. And it took a while for some of our customers to really fully appreciate the capability of both the Gen 4 and Gen 5 platforms. And those 2 - I mean, frankly, we're still constrained, we're capacity constrained on those. Those would grow more if we had more capacity. And the reason for that is, I think we are demonstrating to our customers value. And when we thought originally, it'd be mostly logic and foundry, even there, we're seeing some strength, albeit memory is very low. But we're seeing adoption of advanced inspection. So I think that's another way to look at it. If you look at the performance last year overall for process control, I don't think it was an accident, it's relevancy of our solutions.

And then I guess I had a question also on WFE. And some people are trying to get at this, I think. But - so WFE is still sort of flat in the $75 billion range. I think, Bren, you said that there's $200 million for you that can shift that sort of an add-back of stuff that was banned in the past. So if you're less than 10% of WFE, that's probably like a few billion dollar add back from just from China there, and then there's all this lagging edge stuff happening in China. So is it that the lagging edge kind of stuff - like it's not helping this year? It's more helping next year? I guess I'm a little surprised that the $75 billion number is not higher just given the massive increase in bookings that we're seeing from lagging edge in China?

Yes. We're a little - Tim, we're in April. It's an estimate, an approximation at plus or minus around 77 - or $75 billion is a way to think about it at this point. So we don't put a lot of extra effort. We focus a lot on running our own business and executing this one. We just try to do what we can to do an assessment of the overall market, and we'll share that with you. But there are a lot of moving parts, right? We'll get some clarity in terms of ultimately what that impact is. I sized it. Could it be more, could be less? Perhaps, but just overall - and I think the other factor that could impact this year is just some of the construction dynamics where facilities are being built. And when customers actually receive tools, if you have delays in construction schedules that could affect what shows up when, and there's a number of greenfield projects that are out there. So a lot of moving parts in it, but we're comfortable with the plus or minus $75 billion, and we'll firm it up as we go here.

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

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

Yes, Sidney, we just did $2.432 billion, right, in - or $2.433 billion in the March quarter. And so the commentary was focused on current business levels at $2.25 billion. So it might put a little bit of pressure on the second half from a half-to-half point of view. But we are talking about kind of low single digit, low to mid-single digit given that guidance. And again, we're not guiding the second half. We're just giving a view of this stabilization here. So it's possible, right? It will be close. But I think just given the strength of the March quarter, that it would - if you end up with roughly the same numbers in the second half, you might be half to half down modestly.

Okay. That's helpful. My follow-up question is one of your largest customers in Taiwan talked about higher levels of tool reuse between the 5 nanometers and 3 nanometers. How is this factored into your second half outlook and maybe even the longer-term outlook? And do you think that's anything incremental to what the industry's current level of capacity is used between those?

It's a good question, Sidney. I think that those are always conversations customers have had in terms of when they look at their utilization. And they look at the differences from node to node. I think it is something that is always being evaluated. They're always trying to optimize the portfolio. The work that we've done in modeling our 2026 plan and the work that we do even looking through the rest of the year and next year, have contemplated all of that. So there's nothing really in there that's new from our perspective about the amount of consumption of process control and process control intensity. It does highlight the need for us to continue to invest in R&D and bring out new capabilities and continue to support our customers. So nothing really new in what we see in those statements.

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

I had a follow-up question to Sidney's question. Given the depth and breadth of design start activity you're seeing in the leading edge foundry space. What are your expectations for process control intensity into 2024? Is there a bias potentially to the upside from where you are in 2023?

Well, look, Toshiya, we - process control intensity has been very strong for the reasons you talked about, if you think about the number of design starts and what that means in terms of our customers managing a number of different designs that test design rules in different ways and then having to deliver yielded wafers in fairly tight market windows. It all drives a higher level of inspection and metrology. You also have different process flows and process points that are expected to. So those are all - have been drivers for process control. As the design starts at the previous node, it was also a factor. And then new tech, right, new tech with the introduction of more EUV to drive scaling but also more layers here moving forward. So those are all positives for us. We feel pretty - if you just back up and look at the overall share of the market as it relates to foundry/logic, we've seen an inflection here, and we think that we can sustain that inflection as we move forward.

Got it. That's helpful. And then as my follow-up, I think you commented specifically on China as it pertains to your business with wafer suppliers and reticle suppliers as well. But curious on a global basis, how big are those businesses today? And how should we think about sustainability over the next 12 months or so, again, on the wafer side as well as both merchant and captive reticle customers?

Yes. Most of the reticle infrastructure - new infrastructure is being added in China to support legacy activity, and that's probably a driver of an incremental couple of hundred million or so of revenue for us. Overall wafer - and I'm separating this way because I don't want to double count. But overall, wafer should grow meaningfully this year compared to last year. And it's a pretty sizable business for KLA. So I don't want to - we haven't broken it out before, but we're a big part of the CapEx for wafer suppliers, and we would expect to see that growing this year.

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

You talked about kind of qualitatively about Services not being down this year, maybe up a little bit this year. Can you talk about the utilization impact on that? And as you see utilizations coming down in both foundry and memory, I guess I would think that has less impact on you than it does for some of the other guys. But can you just talk to how utilization might weigh on that number?

The utilization rates have clearly come down, particularly in the memory space. It seems like they are fairly stable at this point. We don't see them continuing to decline from where they are. So - and that's why we see the overall revenue because customers are not running the tools to start or in some cases, idling capacity. So you don't have the opportunities - the Service opportunities we would have in a higher utilization environment. So that's what's driving the overall growth rate down from what a normalized or our trend line expectation is. But we're not seeing it really getting worse at this point, and there are pockets from time to time of improvement. So I think it's - stabilization is the right word is why we chose to use it, but it feels like that's really what we're seeing today.

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

Yes. It's possible. I mean we don't have great clarity on all of it, but it does seem unlikely given the recent history of when you've lost support of equipment providers, the tools aren't very useful. So I think the expectation is the controls will remain on the leading edge, and they'll be able to continue to develop some of these mature technologies. Remember, there's a very active EV market in China. So there's a lot of need for some of that more mature technology as it applies to some of those markets. So it does seem to be based on some real demand around things that are not leading edge, and that's really what we're seeing and have for quite a while in China. So it doesn't feel like it's necessarily that. There are companies that are ramping up. And in that sense, they might not have won the markets that they hope to win yet, but we've kind of factored that into our overall forecasting for China anyway.

Our next question will come from Blayne Curtis with Barclays.

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

Well, so it's declining less. It's not growing. It's really just declining less in terms of the overall outlook. I mean for KLA, if you just thought about what's less than 28 nanometers versus what's above in our mix profile, you have about 60% of our revenue is we'll call it less than 28-nanometer, and so about 40% of it is above. And then normally, it's closer to 75% leading, 25% lagging, so to give you a sense of it being a bigger part of our mix this quarter. And it's broad-based. And certainly, China is a pretty big factor in and all, but you also have a fair amount of revenue growth, the analog guys and supporting some of the automotive markets, sensor investment, some industrial markets and so on. So that's - there's steady investment in these end markets where semiconductor content is rising, and so you're seeing more investment in those areas that we frankly didn't ship a lot into over the last couple of years given the strength of demand at the leading edge. Our largest customers, given the supply-demand imbalance taking most of the slots. So in some ways, as we've seen the leading edge adjust, and this is a logic and memory statement, we've seen some adjustments in our largest customers over the last 6 months or so and into this year, some of that capacity is getting consumed by folks that wanted earlier slots, and we weren't able to deliver to them.

Our next question will come from Brian Chin with Stifel.

Maybe for Rick, trailing edge clearly is sort of less process control intensive. But I guess to what extent does the immaturity of these production lines, particularly in China, a lot of greenfield situations and also the desire for faster time to market, how do these factors counteract that typical kind of lower intensity for trailing edge?

Well, I think that - a couple of ways. One is it depends on the applications for the fabs. So if you're an automotive fab, you actually have a different kind of need for process control than you do if you're just a traditional legacy fab. So that's 1 thing. The - that actually process control intensity can be a little bit higher. And then depending on the scale and the size of the fab on a relative basis, it's harder to have - you get more efficiency on a large fab. And so these fabs tend not to be as mega fabs, and then you actually get a little bit of intensity as a result. They're also looking for solutions that have been proven in the market. And so for us, those are established product lines that we've been supporting for a long time that might not need as much advanced application support. So those are all factors that I think both good for our customers, but also a good business for KLA. So yes, it's not as intensive as a leading-edge fab, but they still have a ways to go to catch up. And there's always value in getting higher yield. And whenever they change process nodes, we see interest in upgrading their process control.

Our last question will come from Mehdi Hosseini with SIG.

I have two follow-up questions. First, regarding your comments on the revenue trend between the first half and the second half of the calendar year, it appears that the revenue decline could be in the 25% to 30% range. I'm not asking for guidance, but I would like to understand if you achieved close to $3 billion in December 2022 with a WFE of $90 billion to $95 billion. Can you reach that revenue run rate without WFE, or would it require WFE to be over $90 billion? Moving forward, does your diversification, particularly in semiconductor materials and other areas, allow you to achieve $3 billion without needing WFE to exceed the $90 billion mark?

Yes, Mehdi, I mean, one of the things - and this ties back to the rising share of WFE that we've seen over the last couple of years is that we're gaining share of the overall market, so we should be able to do more revenue with lower WFE levels as that sustains. Now there are mix dynamics and other factors that affect it. But given the dynamics that have driven and we believe there's a fair amount of sustainability to it. There are new products that we believe can continue to solve problems for customers. We have exposure to markets that are inflecting and are pretty critical to the scaling road maps out there. So - and our share, we improved share by almost 300 basis points. And that's a lot in 1 year. We talked a lot about 0.5 point to 1 point a year in terms of our objectives. But we do think that, that is a clear indicator of the differentiation that we have. And if we're able to be successful with some of the new products that are coming and the mix generally stays as we talked about at our Investor Day of 60-ish percent foundry/logic in terms of overall mix of WFE, that there's an opportunity for us to continue to grow our share opportunity.

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

Well, as Rick said earlier, this is nothing new that customers are always looking to optimize their capacity, given what this equipment costs and the amount of investment they're making, they're always looking to do that. And there are certain product types where there are - there's more opportunity than others. It was easy for customers to reuse capacity when they only had a very limited number of designs and no major technology drivers. But as you look out going forward, given scaling dynamics and increase in EUV layers, I think that there's a technology element that will drive our customers to continue to upgrade their capabilities. But I am sure they will look for opportunities. If in the long run, they believe that there's a sustainable drop in the wafer start requirement to try to relocate that capacity or try to reuse it. You can't move it overnight, right, particularly if you're moving it to a different facility. These tools have to be disassembled, they have to be shipped and reassembled and then calibrated and brought up. So those tend to be longer-term decisions. So structurally, they have to feel pretty good about the longer-term setup for that fab or at that node to move the equipment. What they typically do in the short run is they idle capacity if they don't need it for a period of time, but with an expectation that it will come back online. And given the design start environment at 7 and 5, it's really - there's still a fair amount of designs out there that is just volumes are low. So we'll see how it plays out. But nothing new. And as Rick said, it's modeled in our view of growth in KLA opportunity moving forward.

And thank you, everyone, for your time today for - we know it's busy earnings season. I appreciate it. We'll be seeing many of you at some of the upcoming conferences. And with that, I'll turn the call back over to Chelsea, so she can provide any final instructions.

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