Good afternoon everyone. My name is Bo, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation's September Quarter 2024 Earnings Conference Call and Webcast. All participant lines 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. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead, sir.

Welcome to our earnings call to discuss the September 2024 results and the December quarter outlook. I'm joined by our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results released after the market close and available on our website along with the supplemental materials. Today's discussion and metrics are presented on a non-GAAP basis, unless otherwise specified, all full-year references we make are to calendar years. The earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. KLA's investor relations website also contains future investor events presentations, corporate governance information and links to our SEC filings, including the most recent annual report and quarterly reports. Our comments today are subject to risks and uncertainties reflected in the disclosure of risk factors in our SEC filings. Any forward-looking statements, including those we make on our 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 start with some introductory comments, followed by Bren with financial highlights and our outlook. Before I turn the call over to Rick Wallace, I wanted to provide a save-the-date for our 2025 Investor Day. It will be held on the morning of June 18th, 2025 in New York City at the NASDAQ market site.

Thank you, Kevin. KLA's September quarter exhibited strengthening customer demand and solid execution by our global team. Results exceeded expectations and delivered continued relative outperformance with revenue of $2.84 billion, non-GAAP diluted EPS of $7.33, and GAAP diluted EPS of $7.01. All results came in at the upper end of their guidance ranges. As expected, we are encouraged by the signs of a strengthening leading-edge logic and memory environment for our top customers and we remain confident in our plan for steady improvement and continued growth in 2025. The quarter saw a number of highlights, including strong double-digit sequential and year-over-year revenue growth. In foundry logic, the continuation of scaling and incorporation of new technologies, and slowly rising capital intensity continued to be a long-term secular tailwind. In memory, technology development investments supporting AI and high-bandwidth memory, along with an improving supply-demand environment, are positioning memory makers to return to growth for the wafer fab equipment industry in 2025. This quarter continued to demonstrate growing customer adoption of KLA's advanced packaging portfolio, and we remain confident that revenue in this category will exceed $500 million in 2024 and continue to grow in 2025. We also continue to see AI as an important driver and enabler of our business. Growth in demand for AI chips supports rising process control intensity, which benefits KLA meaningfully. Additionally, KLA was an early adopter in using and incorporating AI into our products and designing our computer architecture to leverage GPUs. KLA's future product enhancements will leverage AI to improve the performance and customer cost of ownership of our leading-edge systems. Daily service business grew to $644 million in the September quarter, up 5% sequentially and 15% year-over-year, marking the 49th consecutive quarter of growth on a year-over-year basis. Lastly, the September quarter was strong from a cash flow and capital returns perspective. Quarterly free cash flow was $935 million. Over the last 12 months, free cash flow was $3.2 billion, with a free cash flow margin of 31% over the same period. Total capital return in the September quarter was $765 million, comprised of $567 million in share repurchases and $198 million in dividends. Total capital return over the past 12 months was $2.6 billion. We are confident that KLA's operating model positions the company well for sustainable outperformance relative to the industry over the long run. I will now pass the call over to Bren to cover financial highlights and our outlook.

Thanks, Rick. KLA's September quarter results demonstrate market leadership, combined with the consistent execution and dedication of our global team. Quarterly revenue was $2.84 billion, above the guidance midpoint of $2.75 billion. Non-GAAP diluted EPS was $7.33, and GAAP diluted EPS was $7.01, both above the respective guidance midpoints. Gross margin was 61.2%, slightly below the midpoint of the guidance range as the systems product mix was modestly weaker than expected. Operating expenses were $560 million, comprised of $322 million in R&D and $238 million in SG&A. Operating margin was 41.5%. Other income and expense was a $41 million expense with the downside from guidance attributed to the mark-to-market effect of the strategic supply investment. The quarterly effective tax rate was 13.2%. Quarterly non-GAAP net income was $988 million, GAAP net income was $946 million, cash flow from operations was $995 million, and free cash flow was $935 million. The breakdown of revenue by reportable segments and end markets, major products and regions can be found within the shareholder letter and slides. Moving to the balance sheet, KLA ended the quarter with $4.6 billion in total cash, 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. Our debt levels are expected to decline in the December quarter as the company retires its November 2024 bonds at maturity. Moving to our outlook. In the near-term, the industry outlook remains positive for our business. Our quarter-to-quarter performance is also consistent with the views we articulated at the beginning of the year. For calendar 2024, supported by recent customer announcements, our expectation is for the WFE market to increase modestly from the mid to the high $90 billion range, based on our internal analysis of reported results and guidance across our peers and customers. Our perspective on calendar 2025 expectations is mostly unchanged from what we articulated last quarter. While we will not be overly specific on expectations for next calendar year until we report in January, we do continue to expect another year of growth, fueled principally by growth and investment in both leading-edge foundry logic and memory, primarily DRAM, offset by lower China demand as customers absorb the equipment investments made over the past couple of years. Given KLA's business momentum, market share opportunities, and higher expected process control intensity at leading edge across all segments, we are confident we can maintain our relative WFE market outperformance in 2025. KLA's December quarter guidance is as follows: total revenue is expected to be $2.95 billion, plus or minus $150 million. Foundry logic revenue from semiconductor customers is forecasted to be approximately 76%, and memory is expected to be approximately 24%. Non-GAAP gross margin is forecasted to be 61.5%, plus or minus 1 percentage point, or up 30 basis points sequentially at the midpoint on slightly higher revenue and more favorable product mix expectations. Non-GAAP operating expenses for the December quarter are forecasted to be approximately $580 million as we continue to make important R&D and scaling investments to support expected revenue growth. Looking ahead, we expect approximately $15 million in incremental quarterly spend and operating expenses over the next several quarters, supported by our product development roadmap requirements, revenue growth expectations, and further balanced against our 40% to 50% incremental operating margin leverage business model over the long run. Other model assumptions for the December quarter include non-GAAP other income and expense of approximately $33 million expense. GAAP diluted EPS is expected to be $7.45, plus or minus $0.60, and non-GAAP diluted EPS $7.75, plus or minus $0.60. EPS guidance is based on a fully diluted share count of approximately 134 million shares. In conclusion, we are guiding to our third consecutive quarter of sequential revenue growth and improving market demand at the leading edge, and we expect annual growth to continue in 2025. KLA remains focused on delivering a differentiated product portfolio that addresses customers' technology roadmap requirements and drives our longer-term relevancy and growth expectations. KLA's focus on customer success, delivering innovative and differentiated solutions, and operational excellence drives our industry-leading financial and free cash flow performance, allowing us to return capital consistently. The return of semiconductor scaling leads to increasing complexity, and new technologies that have strengthened our confidence in the rising importance of process control for enabling new technology advancements. This is not just an improving time to results and process integration at Fab ramp, but also optimizing yield across high-volume manufacturing environments with high semiconductor device design mix. Additionally, our service business continues to increase its relevance as system lifetimes increase, and customer expectations for increased tool availability and performance create a growing long-term tailwind. This bodes well for KLA's long-term growth outlook, as industry demand trends favoring KLA are continuing to improve. That concludes our prepared remarks. Let's begin the Q&A.

Thank you. Ladies and gentlemen.

Sorry, go ahead, operator. I was just going to say please provide the instructions.

Certainly. Thank you, Mr. Kessel. We'll go first today to Vivek Arya of Bank of America.

Thanks for taking my question. Rick, I'm curious, there's a lot of excitement about the leading edge, but how do we square back to the fact that only the leading foundry appears to want to increase spending, but the next two want to cut spending? So, is this TSMC spending good enough to drive up leading-edge investments by the double-digit or so pace that everyone is looking for? I was just curious, is this excitement broad-based or is it just based on one foundry's desire to increase spending?

Thanks, Vivek, for the question. It's not a foundry question. It's a customer of the foundries question. If there were more suppliers of leading-edge chips, I think the business would be spread across them. But right now, there's one supplier in the leading edge. What they're seeing is significant demand above what they anticipated. We previously expected 2-nanometer demand to be strong, and the fact that there's additional demand for 3-nanometer leads us to some robust forecasts through the rest of this year for the bookings and into 2025. So, I don't think it's a function of the number of players; I think it's a demand driver. The fastest-growing segment, AI, is both for training chips and inference chips, and that's really driving this additional demand that we're seeing.

And Vivek, the other thing I would add is that we stay very close to our customers, and they approach process control in different ways. We want to ensure that we're collaborating closely enough to have a good understanding of the overall demand picture. We feel good that our supply aligns with that demand expectation.

That's very helpful. And for my follow-up, a question on your China exposure, about 42% in September. Curious what you are expecting or what's baked in for December? Can you disentangle what the exposure is in China? How much is product services? How much is resilient or how much might be exposed to any potential restrictions? Just how do you think about China for the next several quarters, whether on an absolute basis or on a percentage of sales basis? Thank you.

Well, Vivek, understanding China right now this year, it's important to keep in context what happened in 2022, 2023 and 2024. If you go back to 2022, we took a lot of orders for greenfield projects and had supply constraints and strong demand from our other non-China customers that effectively limited what we could produce in 2022, focusing on our more strategic long-standing customers. As we moved into 2023 and 2024, much of that activity was greenfield, which wasn’t necessarily put in place to react to supply and demand dynamics. It was essentially new fabs starting up. So, while funding was available, those customers could fill a void from our other customers pulling back pretty significantly. Our China exposure has been elevated for a couple of years. For the fourth quarter, as I said before, I expected the percentage to come down, and it looks like it is coming down to somewhere in the mid-30s for the fourth quarter. For 2024, it’s been elevated to the low 40s as a percentage. Moving forward, I expect digestion next year, and I would anticipate that to drop down to around 30%, plus or minus a couple of points. I'm not going into the various aspects of the mix from a service perspective, just noting that it's a lower percentage than the corporate average as a percentage of revenue. Hopefully that provides some clarity. But that's all I'll say on that front.

Thank you.

Thank you. We go next to Harlan Sur at JPMorgan.

Good afternoon. Great job on the quarterly execution. On your qualitative comments on the 2025 view, you're calling out growth for next year. You mentioned that not much has changed relative to your view 90 days ago. I assume that in terms of total dollar spending, you did call out lower China revenues next year. Should we interpret the downshift in China as being more than offset by incrementally better spending on advanced foundry logic and memory based on the strong demand trends that Rick articulated earlier?

Yes, I would expect that to be the case. If you go back to what we said a quarter ago, our view of stability might be up a little bit, down a little bit, but not as clear. Where we stand today, I expect it to be down some, and we think it's being offset by the leading-edge demand that Rick referred to. Overall, our views on 2025 haven't really changed.

Yes, Harlan, if you think about the exit rate we're discussing for Q4, if you maintain that rate for 2025, it's a higher number. So, China could remain at a similar dollar level but as a lower percentage.

Got it. And then on your process control business, inspection and metrology are up 10% year-over-year for the first nine months versus a year ago. Inspection is up 18% year-over-year. Given this patterning and metrology intensity increases on gate-all-around and advanced memory, do you anticipate your patterning/metrology business experiencing growth acceleration as we move into next year?

Yes, that's our current view. Metrology is very closely linked to process tool purchases because you're monitoring films and overlay. The expectation for design starts is also projected to uplift the reticle part of the business next year. We anticipate growth in metrology and reticle inspection into next year. What's driving inspection is the activity due to yield challenges customers have faced, particularly as we approach the fourth quarter. Also, advanced packaging has shown growth in our inspection offerings for that market segment.

One other thing, Harlan. If you consider the capacity constraints we've experienced, we were more gated by lead-times of subsystems like optics in the inspection business. In contrast, metrology didn't have that phenomenon, so it can flex based on production. We still have a good backlog for our BBP platforms and an increasing demand environment. Additional capacity to support growth in 2025 is also coming on board, allowing our BBP product lines to grow.

Great insights. Thank you.

We'll go next to Joe Quatrochi at Wells Fargo.

Thanks for taking the questions. I'm wondering about 2-nanometers as you think about the capital intensity for process control. Any color you can share there regarding sample rates to 3-nanometers?

Sure. We're seeing now what we expected on 2, as well as a bit on 3: process windows are being squeezed further, which is leading to more inspection points being added. When we think about the steps and the locations that customers are inspecting, those are increasing. If you go from 3 to 2, you might not dramatically increase the number of EUV layers, but there is an increase and more places requiring sampling. Initially, during debugging, you have a higher number, observing different defects may mean looking at higher sensitivity settings, which necessitates additional capacity to support it. We haven't fully quantified this, as we work with clients on efficiency, but we expect higher sampling levels with more systems and configurations driving higher process control intensity.

On architectures, changes typically drive process control higher. When architectures shift, capacity increases, and we saw that transition with FinFET. As we move to new architectures, it creates not only new patterning requirements but also newly defined defect mechanisms. This drives additional opportunities for us beyond what's typically expected during a node transition. We see a lot of potential here and if we execute well, we're optimistic about what's ahead.

That's helpful detail. As a follow-up, how should we think about half-on-half growth as we look into the first half of 2025? Are we looking for similar growth rates as seen in the second half versus the first half of 2024?

As Rick mentioned earlier, we foresee a stable environment based on current run rates moving forward. I won't discuss the full half at this moment, but we’ll have more elaboration when we report on the December quarter in January. For the March quarter, however, I'm feeling confident about stability and run rate levels in the business.

Thank you.

We'll next go to C.J. Muse of Cantor Fitzgerald.

Good afternoon. Thank you for taking the question. To follow up on your stability point, I believe 2 is moving into HVM in Q1. You talked about the expected strength from advanced packaging. Looking at your foundry logic business in the current quarter, Taiwan fell sequentially. It seems like you're experiencing good business from rapid ramps and mass currently, specifically Intel. Can you speak to the breadth of foundry logic you’re seeing in early 2025? Would you anticipate this would fully offset a slowdown in China?

Given the normal ramp schedule from our leading foundry customer, we should start to see volume shipments early in the year. I would expect that to be the case.

Great. A gross margin question: semi process control gross margins dropped maybe 150 bps sequentially in September. You attributed that to mix. How should we think about those margins normalizing through 2025?

Mix is always a factor, C.J. Our incremental margin model suggests about a 60% to 65% incremental. However, mix variability can shift across quarters. Over longer periods, it tends to stabilize. The packaging opportunities are excellent growth prospects, but we are currently selling some lower-end systems into that segment, affecting the mix. Generally, we expect to remain around the 61.5% range, and as we project out into next year, I think we’ll likely be north of that rather than south.

Very helpful. Thank you.

We'll go next to Tom O'Malley at Barclays.

Hey guys. Thanks for taking my question. I wanted to ask specifically about the NAND market. You are coming off a very low base in September, but there's a debate about where normal capacity is historically and the potential technology transitions. Are you seeing intensity pick up in NAND, are customers looking to expand lines, or are technology upgrades driving demand? Just any comments there would be great.

Off a low base, we expect some incremental investment next year. We’re seeing improvement in utilization rates and customers’ financial performance, which should translate to investment next year, but we don't foresee substantial growth in absolute dollars due to the low baseline. We are optimistic about incremental business moving into next year.

One technology trend that will boost process control intensity for NAND is wafer-to-wafer bonding. Beyond that, we are not seeing any major pushes in technology compared to DRAM or logic.

Got you. That’s very helpful. My second question is on the advanced packaging side. You talked last call about the topic and that you're seeing a move to hybrid bonding accelerate. Some believe this will be a 2026 timeframe, but are you seeing opportunities in 2025?

You have development activities, but we don't expect production moves to hybrid bonding for high-bandwidth memory until probably at least into the 2026-2027 timeframe. The logic side drives that part of business growth, but we’re encouraged by memory trends creating opportunities.

One important dynamic in our business for inspection metrology is the cost between the inspection layer and the production cost. For high-cost production steps, we see more investment in inspection. The biggest dynamic for advanced packaging is that the costs have increased, necessitating higher inspection standards, which drives opportunities for us. Customers are investing heavily to avoid failure because the stakes are high. We're witnessing early signs of that shift already.

Thank you. We'll go next to Srini Pajjuri at Raymond James.

Thank you. Hi guys. My question is on M3 versus M2 demand. Both seem strong, but in terms of near-term upside, is it primarily coming from M3? And is M2 still tracking in line with your expectations?

Yes, we've observed more upside from M3. We’ve begun to witness billing investment and shipments for M2 this quarter. Most of our expectations for next year center around M2.

Okay, got it. That's helpful. How does your visibility look, especially with China dropping next year? Would that affect your bookings and RPO as we move forward?

RPO has been flat quarter-on-quarter, and we expect to see a slight decline for the December quarter. Generally, lead times are coming in due to new supply capabilities allowing us to ship some tools that were constrained. It's a factor to watch as we move into next year.

Right. Thank you.

Thank you. We'll go next to Krish Sankar at TD Cowen.

Hi, thanks for taking my question. First, to clarify, Bren, you mentioned that China could go from 40% to 30% of sales next year, but dollar value remains the same. Is that true, and if so, shouldn’t overall revenue grow strongly compared to WFE expectations? How should we think about those two metrics?

Yes, that's a reasonable perspective. I mentioned the downward trend, but we still expect investment levels to be stable. We’ll see how it plays out across 2025; it varies quarter-to-quarter. I was trying to convey directional insights into 2025.

Got it. Lastly, regarding foundry demand, how is it improving in the leading edge? Given this and expectations for DRAM, is that helping next year?

Yes, there’s growing momentum from certain customers, particularly for advanced DRAM and high-bandwidth memory. We expect to see more DRAM investment next year, strengthening KLA's relevance in process control during ramps.

Got it. Thanks, Rick. Thanks, Bren.

Thank you. We'll go next to Joseph Moore with Morgan Stanley.

Great. Thank you. On the topic of export controls, you said you didn't want to speculate. How do you expect that to be conveyed? Have you had preliminary conversations? Are you making a base assumption in your guidance regarding what they might do versus just working off your models?

If you go back two years, there was some notice, but the government has to go through a reconciliation process with multiple agencies. Nothing is decided until announced, so we can't speculate. Many scenarios are covered in our forecast for 2025 and it aligns better with others now than before. Our forecast remains unchanged, shaped by conversations with our customers about their investment plans.

Thanks. And within your China business, how is your DRAM exposure compared to foundry now?

Yes, we'd expect memory to be down due to market access, but foundry logic should stay fairly strong. Infrastructure remains steady, but that's a broader statement than just wafer impressions.

Thanks so much.

Thank you. We'll go next to Charles Shi of Needham.

I remember a quarter ago, you discussed not just 3-nanometer for the second half this year but also for 2025. I believe you've mentioned some customers not ruling out more 5- to 3-nanometer conversion. Are you still expecting 3-nanometer upside for 2025, given current visibility?

Yes, I can confirm that 3-nanometer continues to show strength. We anticipate robust activity for M2, which contributes to our forecast for next year.

Thanks.

Thank you. We'll go next to Atif Malik at Citi.

Thank you for taking my questions. First, on China, how big is your wafer and reticle inspection business in China compared to your peers that face potential restrictions?

Yes, it is different in China. We haven't disclosed the actual amount, but over the last couple of years it was somewhere between 25% to 35% of our China systems business.

Understood. Regarding the services business, with your China demand coming down as you laid out, will there be an impact on your services growth expectations of 12% to 14% long term?

We remain optimistic about services and are trending closer to the top end of that range. We are seeing dynamic trends in useful life and new value offerings driving incremental service demand. Higher shipment levels and ASPs also foster growth. We feel very confident in our long-term model, anticipating an ongoing trend towards the high end.

Thank you.

Thank you. We'll go next to Timothy Arcuri at UBS.

Rick, can you clarify the extent to which you're handicapping export controls? It sounds like you're not really factoring much into your guidance, just waiting for announcements that will impact your numbers. Is that correct? Lam has made assumptions on what they expect and where they expect it to go; is that the case for you?

We’re confident in our guidance. We carry a range based on scenarios but won’t delve into long-term implications unless an official announcement is made. Our near-term outlook feels solid.

Okay, thanks. Also, could you share thoughts on your China revenue performance versus peers? You seem to have grown faster this year compared to them?

Well, there's different buying patterns, especially timing-wise and across different segments. In 2023, our business in China likely underperformed compared to peers. If you look across longer periods, investment levels appear stable. So it's difficult to make conclusions based off single-year data.

Okay, thank you.

We'll go next to Toshiya Hari at Goldman Sachs.

Hi, thank you. I wanted to discuss customer mix as we head into 2025 and margin implications. You mentioned China going down next year in leading-edge foundry. Does this potential shift put any pressure on gross margins? Historically, your margins have been stable; do you think this trend affects that?

Our gross margins are product-specific rather than customer-dependent. Therefore, margins don’t vary widely depending on customer volume, although high-volume customers might see some incentives. Our margins remain product-focused rather than region-focused.

Got it. Thanks. Regarding your China business, what does it look like by application or customer type?

As mentioned, the percentages reside between 25% to 30% of our China systems business. I foresee that being fairly stable, but with more reticle than wafer in 2025. Memory stands to drop due to limited market access, but foundry and logic would remain stable.

Helpful. Thank you.

Thank you. We'll go next to Chris Caso at Wolfe Research.

Hi. My first question concerns DRAM: what are your thoughts on DRAM investment for the next year, especially the divergence among customer segments?

It hasn’t shifted much. Customers' business performance is improving, boosting utilization rates, which benefits our service business. We expect to see a decent upturn in DRAM investment next year; I will elaborate further in our January call.

Thanks for that. As a general question, what happens if leading-edge customers consolidate more? Would that put pressure on your margins, seeing that they grow more quickly?

It would depend on the drivers. If a single supplier controlled the entire leading-edge market, it could mean manufacturing consolidation, which is beneficial for efficiency. However, in today's landscape, diverse advanced designs increase efficiency demand that drives capital needs. Our assumption for capital efficiency at emerging processes remains stable; there's plenty of demand. Broadly, we're not modeling changes in intensity just yet.

Thank you. Understanding.

Thank you. And ladies and gentlemen, we have time for one more question today, and we'll take that now from Blayne Curtis of Jefferies.

Thanks for squeezing me in. I appreciate your perspective on the outlook for the market. So far, consensus suggests growth expectations. As you assess the market, how does your outlook align? I found your previous expectations rather low, suggesting potentially different perspectives.

We haven’t published a concrete 2025 number yet. Our recent 2024 view has shifted to anticipate flows in the high 90s. As it pertains to 2025, we're observing stability currently; we’ll provide more clarity on that in the upcoming presentation.

I want to clarify: I believe you indicated China revenues are expected to drop to about 35% of your revenue, which would indeed present a dollar decline. Yet you mentioned growth across others. What could we conclude from your comments?

We believe growth at the leading edge will drive future investment. Leading-edge demand is primarily driven by advanced technologies, particularly in AI and high-bandwidth memory, as well as technology nodes. History shows that the leading-edge portion has large impacts on semiconductors. As we anticipate a return in growth to historical norms, leading edge demand will drive that transition.

Thank you, Blayne, and thank you, everyone, for your interest and time. We’ll be following up with many of you in the following days. With that, I’ll turn the call back over to the operator.

Thank you, Mr. Kessel. This concludes the KLA Corporation September quarter 2024 earnings call and webcast. Please disconnect your line at this time and have a wonderful day.