Good afternoon. My name is David and I'll be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation June Quarter 2024 Earnings Conference Call and Webcast. All participants have been placed in a listen-only mode to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead.

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

Thank you, Kevin. I will cover a few business highlights for this quarter. KLA's June quarter revenue, gross margin, and EPS were all above their respective guidance midpoints. The quarter played out mostly as expected with strong customer demand and solid company execution. We continue to see signs of a strengthening market environment for customers at the leading edge and remain confident in our plan for steady improvement throughout the remainder of this calendar year and into 2025. This quarter, KLA results returned to sequential and year-over-year revenue growth, demonstrating an improving industry environment. Foundry/logic, the continuation of scaling and incorporation of new technologies and slowly rising capital intensity continues to be a long-term tailwind. In memory, technology development investments supporting AI, high-bandwidth memory and the improved supply-demand environment support an expected return to growth for memory markets in 2025. The June quarter also marked another quarter of strong performance from our portfolio of broadband plasma or BBP products, which we also refer to as Gen 4 and Gen 5. This year marks 40 years of innovation for our BBP patterned wafer inspection business. We continue to see significant differentiation, keeping this product line at the forefront of defect discovery for the semiconductor industry. We expect this product family momentum to continue delivering strong relative growth performance in County Year 2024. AI continues to be a driver and an enabler for KLA's business. AI adoption is driving higher volume wafer manufacturing, more complex designs, larger die and chip sizes, and growing advanced packaging demands which support an increase in process control intensity. Last quarter, we estimated that the KLA opportunity would reach approximately $400 million in annualized revenue exiting calendar 2024. Today, we're raising that estimate to more than $500 million in total advanced packaging revenue across the entire KLA portfolio on the momentum we're experiencing. Additionally, AI is enabling KLA to further differentiate our products and make continuous improvement in the performance of our systems. KLA Services business grew to $614 million in the June quarter, up 4% sequentially and 14% year-over-year. Utilization rates of existing installed capacity are steadily rising across all business segments as end-market demand improves. Finally, quarterly free cash flow was $832 million. The last 12 months free cash flow was $3 billion, with a free cash flow margin of 31% over the same period. KLA results continue to demonstrate our sustained process control leadership and the success of our broad portfolio-specific product strategies. In this industry environment, KLA will continue to focus on supporting customer requirements, executing on product roadmaps, and preparing for growth at the leading edge. I'll now hand the call over to Bren to go through the financial highlights and outlook.

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

Thank you, Bren. Operator, we're ready for you to provide instructions and begin the Q&A section.

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

Thanks for taking my question. Rick, recently TSMC said they expect the number of new tape outs for 2 nanometers in the first two years to be higher than what they saw for 3 and 5 in their first two years. And I think they've also heard a number of AI customers accelerate their roadmaps. I'm curious, what does this mean for KLA in terms of your outlook and kind of your share of the WFE wallet? And do you expect 2 nanometers to be a bigger factor for 2025 or for 2026?

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

No, I think you covered most of it, Rick. I would say also one of the things that we're encouraged by with the design start environment given the high mix of parts, that our participation with our customers in terms of process control and monitoring that happens in production tends to be at a higher level. So they're trying to manage a robust design environment that's testing design rules in different ways, and that tends to be positive for continuous process control investment as they wrap the node.

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

Got it. Now on advanced packaging, you raised it from $400 million to $500 million. I wanted to clarify, is that on an exiting full year basis, or is that for the full year? So just that clarification, then, how would you break it out in terms of specialty and inspection metrology?

That's a good question. Our expectation for the business in 2024 is not a run rate but significantly higher than last year's performance, which was around $300 million. We're anticipating a growth rate in the mid-60% range with ongoing momentum. I expect strong demand to continue, at least through the first half of next year, particularly in packaging. This presents a great opportunity for us. We're noticing increased customer interest as there’s a growing focus on broadband capabilities moving to the backend. We previously mentioned that AI is a key driver; it influences not just silicon but also packaging and HBM, all of which are essential for achieving the plans that our clients have. Regarding the mix, approximately 60% of our business comes from process control, with the remaining 40% related to our specialty process business and some exposure to chemical process control as well. So, overall, about 60% is from the traditional semiconductor process control segment of our business.

Thank you.

Good afternoon. Thank you for taking the question. In your prepared remarks, you talked about returning to growth for memory in 2025. I know it is early, but would love to hear your initial thoughts and maybe separating DRAM versus NAND? And then within DRAM, how you are seeing HBM conversion versus DDR5 and greenfields? Same for NAND, later accounts versus any sort of expectations for greenfield in the 2025 timeframe?

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

Yes. And I think much like some of what we saw in the early discussions of AI last year where we didn't really see an increase in silicon because there was still utilization leverage that our customers have. Some of that's in memory. So we really don't see capacity starting to be added significantly until '25 and into '26 on HBM. So as Bren said, conversion, but then you don't get the capacity until later, and it's really HBM associated DRAM before you see flash.

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

Yes, we are feeling quite optimistic. We're seeing strong performance this year, which is still marked by significant investment in legacy areas, especially in China. As we shift toward leading-edge technology and begin initial investments, we believe we are well-positioned for the upcoming year. We expect foundry and logic leading-edge investments to enhance KLA's share of overall spending. Regarding DRAM and HBM, HBM represents a device that involves advanced DRAM and the use of EUV technology. As we integrate these chips, we not only see new packaging opportunities but also increased sampling to ensure each DRAM die works correctly. Since the introduction of EUV, process control for DRAM has improved, and we expect this trend to continue. Overall, we feel confident about the company's positioning as we approach next year.

So CJ, one of the things we're observing, which we haven't seen in many years, is that part of the reason for the low adoption of memory was due to repair issues. It appears that with leading DRAM, repair has become less effective. This is influencing our customers, who are trying to navigate through it. However, they anticipate a greater need for process control as a result. Additionally, as Bren mentioned, the introduction of print-check in memory due to EUV has introduced challenges related to pellicle. I understand this is quite detailed, but it leads to an increased need for print-check. Therefore, the adoption of process control is positioning itself to be better than in the past, especially for advanced DRAM.

Very helpful. Thank you.

And good afternoon. Thanks for taking my question. As the team steps into the second half of this year, advanced technology node deployment is accelerating, obviously reflected in your strong guidance for the September quarter, appears to be reflected in your confidence on the spending outlook this calendar year and grows into next. Near-term, does the team anticipate sequential growth in the December quarter? And then relative to let's say, last earnings call has your qualitative view on 2025 improved? I mean I know, Rick, you mentioned incrementally better 3-nanometer investments. Any other indicators that are coming in better versus your prior expectations as you look into next year?

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

Perfect. And then for my follow-up, and this is sort of a follow-on to what Rick was saying, but as you mentioned, memory has always had a lower process control intensity. But there are dynamics that are pushing advanced logic-like capabilities right into memory. You mentioned more EUV adoption in DRAM, but like for example, in HBM, DRAM, I mean, that's requiring is very advanced logic chip that sits at the bottom of the staff, right? That's using against CMOS logic technology in NAND, the periphery and controller chip, which is increasingly becoming more advanced logic is being processed separately from the NAND staff right, and then bonded it together. And then this whole NAND sort of bonding technology process appears to be a nightmare from a manufacturability and yield perspective. But kicking in totality, I mean it does appear that these dynamics are driving memory process control intensity higher. I mean, any way to quantify, I know historically, memory intensity has been about 10%. But if you look at all of these trends over the next few years, like where can you see that memory intensity sort of trending to?

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

Yes. If we compare this to a few years ago, when 3D technology emerged, our customers were moving backwards in lithography. DRAM isn't significantly advancing design rules or pushing advanced logic, and repair processes are still effective. Taking these factors into account, we anticipate stronger growth and intensity in logic and leading-edge foundry for similar reasons. However, we haven't fully modeled this yet because customers are still figuring it out. There's increased characterization at the leading edge, suggesting more implementation will occur. But until they experience the cycles, they won't know for sure. This uncertainty aligns with Bren's perspective, which is why we feel more optimistic about our engagement with those customers; they see a growing need for process control capabilities. There's also the significant issue of bonding packaging, with high value in HBM. There are numerous factors at play; many opportunities exist. Additionally, we need to ensure that our solutions will effectively address these opportunities, and we are still in the process of validating that.

Perfect. Thank you very much.

Hi, thank you for taking my question. The first one for Rick on gate-all around PDC intensity. Some of your peers have talked about a 30% increase in metrology intensity at 2-nanometer gate-all-around or 3-nanometer. And the reticle inspection peers have talked about EUV map that's actually coming down to 20 from 30 from 3-nanometer. So when we put these two trends together, I'm curious how you're looking at your overall PDC intensity? And does that imply that you're gaining share on the reticle side?

Let me clarify that a bit. It is certainly true that gate-all-around introduces new integration challenges, and we have been discussing for some time the adoption of Gen 4 in a new configuration to address those issues. This is one factor driving the change. Additionally, this approach differs from what customers have previously used due to architectural changes, resulting in a greater emphasis on metrology and an increased need to manage voltage threshold, making VT control more critical. Film thickness measurement and management also require more attention. Overall, we expect these factors to contribute to the increased process control intensity we've highlighted before, and there is nothing new in our modeling as we look toward our 2026 plan regarding process control intensity and our expected performance in that area.

Atif, if you look back to the last local high in KLA share WFE, it was when the industry transitioned from planar to FinFet structures. So typically, architecture changes do drive because of just the change that's happening and the immaturity of the change, it does drive process control intensity to a higher level. So historically, it is proven. So Rick talked about not only inspection opportunities, but you are depositing a lot more layers, 20% to 30% more critical layers on the metrology side. So we think in a number of areas, it is going to create opportunities. And you still have the scaling dynamics, while Litho layers are constant. Those are still pretty challenging layers in terms of from a defect control point of view. So we are pretty bullish about the opportunities. I think it's feeding into a lot of what we've said here over in the last few questions in terms of our confidence moving into next year.

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

Yes, it's a function of higher revenues, around 5%. As we progress through different quarters and revenue ranges, we start to adjust because of the increased levels. This shift is mainly due to a 9% increase in revenue, which prompted us to raise the guidance range by an additional 7%. It's important to remember that we deal with substantial integers; for instance, our broadband plasma systems can vary by over $20 million depending on their configuration. Therefore, the movement of tools can affect our overall performance. Ultimately, this is primarily driven by rising revenue levels and not influenced by any other factors.

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

Yes, Krish. Regarding China, I think it's relatively stable from a half-to-half perspective, with no significant changes expected. This stability largely hinges on project timing given the greenfield activities we’re observing. Looking into next year, my preliminary outlook for our business levels aligns closely with what we're experiencing this year. The order funnel, backlog, and deposits provide me with confidence in our prospects for next year, indicating no anticipated changes. However, the mix is likely to shift due to infrastructure investments, particularly in logic and foundry memory. Overall, it appears consistent year-over-year. As for gross margin, while we exceeded expectations in the June quarter, it was slightly better than our initial forecast. We are seeing some investment in the September quarter as well. I frequently emphasize that product mix is the main driver of our gross margin variability. It's not about customer or regional mix but rather the mix within our portfolio, as not all products have the same margin profile. Additionally, even within product families, selling across multiple nodes with highly configurable systems can result in varying gross margin profiles. Consequently, these factors are more influential than anything else. The June quarter was particularly strong, and I'm reiterating our expectations for this year to be in the mid-61% range.

Thank you for the opportunity to clarify on the advanced packaging. You increased your guidance from $400 million to $500 million about three months ago. Is this increase truly due to the growth of the advanced packaging market? Or are you focusing on markets like macro inspection, where it seems your competitors are performing better? Are those markets contributing to this additional revenue growth this year? Additionally, I'm interested to know if you can project this into panel-level packaging, which may be a couple of years away. Thank you.

Yes, there’s no doubt that the package market is expanding due to various factors, and I believe we’ve seen an acceleration in this area. As I mentioned earlier, there are gaps related to AI and packaging shortages, which are driving significant investment. It’s not just broader market trends; what was once considered advanced lithography or inspection a few years ago is now at a higher risk in terms of cost and design rules. When we initially acquired a company to enter the packaging space, some customers questioned our decision, stating it was not a KLA market. However, over the past year, customers have recognized the need for our front-end capabilities to help them tackle their advanced packaging challenges. This has led to accelerated discussions about product roadmaps and a high level of customer engagement. They are pushing for solutions due to shortages, and this is evident across many of our products, including both processing and process control. The growth we are witnessing is significant and rapid. While we have provided an annualized figure for calendar '24, we anticipate that this growth trend will continue into '25 and beyond.

Most of our growth has been primarily on the logic side. We are particularly excited about the advancements in high-bandwidth memory and hybrid bonding techniques, which significantly increase the complexity of the process. Given KLA's position in the market with higher value offerings that support greater complexity, we are optimistic about the opportunities this presents as we approach the 2026 and 2027 timeframe. The industry is actively considering the future of panel level packaging, which involves substantial research and development. Therefore, we will be investing our resources into this area. These opportunities, as Rick mentioned, clearly highlight the potential available in this segment of the market over the next several years.

I have one final point. Some of our customers, and our competitors, are approaching this from a lower end. In many cases, their requirements are at the top end of their capability. What we're hearing from customers is that while they are purchasing our systems, which are at the lower end of our capability, they also want the roadmap. They want the ability to acquire that capability now with the expectation that they can upgrade it over time as their needs evolve. With that packaging, it's clear that the roadmap will resemble a more traditional scaling roadmap moving forward.

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

Yeah, thank you for taking the question. I just want to kind of understand, looking at the guide for the September quarter and thinking about sequential growth into the December quarter, is it more fair to assume now they're kind of thinking about low double-digit half-on-half growth rate for the calendar year relative to the high single digit last quarter that you talked about. And then kind of duck-tailing that, I think last quarter you talked about process control systems mixes being closer to like 70% for foundry/logic. Is that maybe a bit higher than that now?

Yes. While I don’t want to provide guidance for December, I believe a high single digit to low double digit performance is a reasonable expectation for the overall year. In June, we performed better than our earlier expectations. The guidance for September was significantly above consensus. This incremental optimism I mentioned earlier in the sales funnel indicates some additional growth in the latter half of the year. Regarding the overall business mix, I anticipate that foundry and logic could be around 75%. Last year, it was approximately 70% for foundry/logic and 30% for other segments, but now it may be closer to 75% for foundry/logic and 25% for other areas. We will see how things finalize.

Perfect. That's helpful. And then as a follow-up, the N3 strength you're talking about, given the lead times for Gen 4, Gen 5, I mean is that going to enter the model in terms of demand into next year? Is that how we should think about that? Or can some of those tools be pulled into 2024?

We are observing an increase in capacity coming online, particularly with products where we have experienced supply constraints, especially around Generation 4. As this new capacity becomes available, it presents challenges that we faced in 2023. Moving through this year, we are seeing an incremental increase in supply. Given the supply limitations and the high demand, we expect to continue experiencing growth in this area into next year. Therefore, I am optimistic that this segment of our business will grow faster than the overall market in both this year and the next. This aligns with our confidence in our market share, especially in certain sectors that are growing significantly faster than the average, such as high-end wafer inspection.

Hi. Thank you so much for taking the question. I wanted to double quick on China and what you're seeing in the region. You guys gave a lot of color in terms of what you're expecting for the overall geo. But by application, any standouts as you think about DRAM, foundry, other applications or maybe by customer type, mask making, wafer making, etc., whether it be trends you saw in the first half or as you think about the flattish outlook in the second half, and you stand out to the positive side or the negative side?

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

Some weakness in automotive.

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

Yes. Utilization rates are definitely a factor, and we've seen them steadily improve across all segments this year, contributing to incremental revenue. Additionally, the tools we shipped in 2021 and 2022 have come off warranty and entered contract, which has a contract renewal or attachment rate of about 95%. As these tools switch from warranty to contract, that acts as a driver as well. We've had good visibility into the service business, although we've encountered some challenges from foreign exchange rates, particularly since some of the service revenue is denominated in local currency, especially in Japan. This has affected our growth rate. However, we are trending towards the top part of the 14% guidance range, and I believe we are closer to the top end of the range than the bottom as we look ahead to the next couple of years. Thank you, Toshiya.

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

Yes. We are a very little multinational business in China.

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

Sure. It is definitely not as high as what you would see on leading edge. But often in the case of you have small relatively size-wise small sites, then you are not really up against the percent against a huge number of wafer starts. So that's one factor. The other factor is some of the infrastructure that people are adding in terms of whether it is mask shops or wafer. So in aggregate, that's why it's for us, it's pretty much helps serve.

And Joe, regarding the multinational question, most of that business is service-oriented. There's not much equipment business occurring with our multinational customers, but there is activity supporting those fabs.

Hi everyone. I have a question about the wafer fabrication equipment market for 2025. Rick, demand is clearly improving overall, and the situation in China is stable. It seems reasonable to expect growth in wafer fabrication equipment next year. I'm curious about your assumptions regarding the funding for chips. It appears that financial support may come in during the second half of the year. Are you receiving clear indications from your customers that this funding will be utilized in 2025?

Yes. Our forecasts do not rely on any Chips funding. There is no dependence on that. If our customers receive it, they will use it to offset the costs of building fabs in more expensive locations. However, it will not influence their decisions to expand capacity based on demand. Their demand will be determined by the overall market, and they will purchase equipment accordingly. We are not basing our plans on our customers receiving Chips funding.

Okay. Thank you. And then more of a technology question, Rick. I time to time get questions about APMI for mask inspection. My understanding is that you guys were involved in that market and maybe exited at some point? I'm just curious, maybe I'm wrong here, but I just want to get your thoughts on that as to how you are approaching that market and what your strategy for that market is?

Yes, we are heavily involved in the reticle market. We initiated our focus in this area and continue to be deeply engaged. Regarding the necessity of actinic inspection for reticles, we've had an ongoing discussion and, based on our analysis, it appears there is a significant market need for this as high NA technology is introduced. Due to the current technology nodes, there are three primary approaches to address the issues: one involves enhancing reticle quality, another relates to our long-standing flagship product line, the 6xx accident extensions, and the third concerns an e-beam product we have discussed that is utilized for very high resolution. At present, this is the most sensitive reticle inspection tool available, and we are in the characterization phase of the 8xx model with our customers. Additionally, we are employing the Gen 5 print check application for printing onto wafers and confirming the integrity of the reticles. Concerning our investment in actinic products for high NA, we are confident in our capability to support the high-volume manufacturing of high NA, which remains a few years away.

Thank you. Very helpful.

Hi, good afternoon. Thanks for letting us ask a few questions. Rick, you talked about inflections and sequential and year-over-year revenue growth. Are you also seeing this in terms of bookings? And did your 12-month shippable RPO increase this quarter?

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

Okay. That's helpful. And then I guess you've made a lot of disclosures in the past couple of calls about advanced packaging, and you saw even a step-up on the year forecast over the past three months. Can you sort of ballpark how large the advanced packaging process control TAM is? It's – you are probably not at your kind of typical on average 50%, 60% market share in process control overall. But maybe a sense of where the starting point is now. And obviously, I'm sure you expect the market to grow and probably your share as well in the years ahead.

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

Currently, we believe that this segment of the market will outpace the overall growth in WFE. Looking ahead, as we anticipate a gradual increase in capital intensity in WFE over the next few years, which we expect to grow slightly faster than semiconductor revenue, this specific segment is likely to grow even faster. That's the extent of our quantitative assessment at this time. As Rick mentioned, we have a diverse portfolio; we’re observing some advancements in the inspection segment, but we also provide various process tools and chemical process control solutions. Thus, we are tackling this market from multiple angles. Additionally, in terms of memory related to HBM, we believe we are well-positioned compared to some upcoming technology transitions that present us with significant market share opportunities.

All right. Great. Thank you.

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

Yes. In the specialty semiconductor sector, we experienced a slight decline in the June quarter, primarily due to timing issues. However, we are still anticipating modest growth for the year in this area, which benefits from a diverse market presence. While power semiconductors related to automotive have decreased, we have seen growth in packaging. There was a minor dip in June, but we expect a significant recovery in the second half of the year. Regarding the flat panel business, we have announced our exit, but we still expect revenue from this segment as we wind it down, aiming for manufacturing to conclude in the first quarter of 2025. In the PCB segment, which is more focused on consumer products, the market has been somewhat sluggish but has shown slight improvement. The growth in this segment is closely linked to mobility, and we anticipate that an increase in cell phone sales will support the business's recovery moving forward. The business performed very well in 2021 and into 2022, with a significant amount of capacity added during the pandemic period. The industry is still addressing some of that capacity. In this area, we have service exposure, which means we have good contract penetration in the PCB sector. Although the systems business has been slower, we've seen revenue contributions from services over the past year. Overall, the growth in that business is up a few points compared to last year, likely in the low to mid-single digits.

Thanks. I wanted to ask about China. I've heard from others that there are fewer new names emerging, and it seems like the focus might be on expanding existing facilities. You mentioned greenfields, and there's potential for additional funding. As you look ahead a year, I'm curious about whether you think the previous excitement around all these unfamiliar names starting new companies might return.

Well, there's still some new business from new customers. The other thing that's happening in China is you do see investment from our mature legacy customers in China. And so where we've been engaged in supporting those customers for many, many years. And their businesses are typically driven by supply for specific markets and in response to expectations of demand moving forward. So you do have those customers also investing more here, I think moving forward. And then you do move into second phases with certain ones, but there is also some new ones too. So it's a pretty broad mix as I look at the remainder of this year and into next year.

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

Yes, Tim, I mean, there's been a lot of news for some time. And so you're right, I can't participate here in speculation and hypotheticals about what could or could not happen. So we will continue to assess, we're very closely with the US government. Of course, we do everything we need to do in the company to be in compliance. We will follow the laws we do, and we'll support our customers as well within the confines of whatever the regulations are. So if and when something happens, we'll assess the impact and let you know what the impact is in sort of the near term and what might be over the long term.

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

If you go back to 2022, 75% plus of our business was what we'll call leading-edge advanced design rules, 20-nanometer or below. So with the expectation of a ramp into next year from our leading-edge customers on the logic and memory side, we think that that’s going to drive the hundreds of our business as we move over the course of next year and beyond.

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

This concludes the KLA Corporation June Quarter 2024 Earnings Call and Webcast. Please disconnect your line at this time, and have a wonderful day.