KLA-Tencor Corporation’s (KLAC) third quarter
earnings exceeded the Zacks Consensus Estimate by 17 cents, but
investors remained unexcited, as orders declined.
Revenue
KLA reported revenue of $840.5 million, which was up 30.8%
sequentially, 0.8% year over year, better than the guided range of
$770-830 million and well ahead of the consensus estimate of $802.0
million.
The technical complexity of manufacturing semiconductors and
increasingly challenging yield issues remain revenue drivers for
the leading manufacturer of process control equipment.
Additionally, delays in EUV adoption are likely to increase yield
issues and the demand for better yields, which will be a positive
for KLA.
Products generated 83% of total revenue, an increase of 40.1%
sequentially and 1.4% year over year. Services revenue comprised
the remaining 17%, down 1.7% sequentially and up 2.4% year over
year. Services are likely to grow in importance, as the company
strives to maintain its large installed base.
As usual, KLA did not provide category-wise and region-wise
details on the call, so they would not be available until the
company files its Form 10Q.
Orders
KLA’s orders were down 12.3% sequentially and 2.3% year over
year to $833 million in the last quarter. The decline in the last
quarter was related to the push-out of one big order into the June
quarter. Foundry, memory and logic were all down sequentially.
However, while foundry and memory were also down year over year,
logic jumped a whopping 88.8%.
KLA’s fortunes are tied to the foundry segment, first because
the company is more exposed to this market and second, because its
process control equipment is in higher demand at foundries that are
always looking to improve efficiencies in order to drive down
costs.
In the last quarter, KLA benefited from strong demand at leading
edge foundries, which are seeing supply constraints due to a very
strong demand environment. As a result, the segment continued to
make up the largest chunk of orders (55%) in the last quarter, down
15.4% sequentially and 7.4% year over year. It appears that the
order pushout was in the foundry segment (although management chose
not to give details).
The memory segment (16% of total orders) was down 12.3% and
42.1%, respectively from the previous and year-ago quarters.
Overall demand drivers remain extremely strong with the ongoing
push to mobile driving strong demand for NAND production.
The DRAM side of the business, although soft at present, is
expected to look up in the back half of the year. However, while
NAND demand is strong enough to encourage capacity adds right now,
the spending on DRAM is likely to be in the nature of technology
transitions.
Logic brought in the remaining 29% of orders, down 5.8%
sequentially and up 88.8% from the year-ago quarter. KLA stated
that logic demand in the last quarter was attributable to 28nm
builds, as well as R&D for production at even lower geometries.
With Intel Corp (INTC) as a major customer, KLA
should see continued growth in this segment through the rest of the
year.
There is considerable lumpiness in KLA’s semiconductor business,
since individual units are of high value and there are a few large
customers accounting for the bulk of revenue. However, management
commentary was extremely positive for 2012, where they expect KLA
to significantly exceed the expected industry growth rate of 0 to
-5%.
The wafer inspection product line saw orders drop 1.4% on a
sequential basis, while growing 9.9% year over year. Reticle
Inspection was down 59.5% sequentially, and 41.4% from a year ago.
Metrology was down 24.3% sequentially and 2.3% from last year.
Solar, storage, HB LED and other products were up 16.9%
sequentially and down 34.9% from last year. Wafer inspection and
metrology were up triple digits in the December 2011 quarter, so
the sequential declines are illustrative of typical lumpiness in
the business that we don’t think is anything to be concerned
about.
Taiwan was the only region to have declined in the last quarter.
Overall, the order contribution by geography was as follows: U.S.
22%, Europe 8%, Korea 39%, Taiwan 13%, Japan 11% and Other
Asia/Pacific 7%. The relatively higher concentration in Asia is due
to the presence of a larger number of foundries and memory
manufacturers in the region.
The six-month backlog at quarter-end was $1.34 billion, up 4.3%
from both the previous and year-ago quarters.
Margins
KLA’s gross margin dropped 6 bps sequentially, remaining at
58.3%, as the higher revenue was more than offset by unfavorable
product mix and product transition-related inventory reserves. It
also shrunk 306 bps from the year-ago quarter. Incremental gross
margins remained just below the targeted 60-70%.
Operating expenses of $198.7 million were up 3.8% from the
previous quarter’s $206.5 million. The operating margin was 34.7%,
up 845 bps sequentially and down 395 bps year over year. Both
ER&D and SG&A as a percentage of sales were significantly
higher than in the December quarter.
Excluding the impact of acquisition-related expenses on a
tax-adjusted basis, as well as some discrete tax items, the pro
forma net income came in at $215.8 million, or 25.7% of sales,
compared to $121.9 million, or 19.0% in the previous quarter and
$224.8 million, or 26.9% of sales in the year-ago quarter.
Including the special items, the GAAP net income was $205.3
million ($1.21 per share) compared to income of $110.8 million
($0.66 per share) in the December 2011 quarter and $209.8 million
($1.22 per share) in the March quarter of last year.
Balance Sheet
Inventories were up 1.7%, with inventory turns going up slightly
from 1.7 X to 2.2X. Days sales outstanding (DSOs) went from 77 to
around 69. KLA ended with cash and short term investments of $2.37
billion, up $193.1 million during the quarter.
The company generated $262.1 million in cash from operations,
spending $14.3 million on capital expenses, $66.9 million on share
repurchases and $58.5 million on dividends during the quarter.
Guidance
For the fourth quarter of fiscal 2012, KLA expects orders to be
down 7.0% to up 14.0%, revenue of between $840 million and $900
million, opex to be slightly up sequentially, other income/expense
to be a net expense of $10 million, a tax rate of 26% and a share
count of 171 million, resulting in a non-GAAP EPS of between
$1.20-1.38.
In Summary
KLA reported a good quarter and provided encouraging guidance.
Although orders were soft in the last quarter, this was on account
of a pushout, which management said had already materialized after
the end of the quarter.
The market environment remains extremely positive for KLA
because of the strong demand for mobile devices that is driving
demand for higher volumes at foundries and memory manufacturers.
Moreover, the devices being manufactured today are getting
increasingly more complex. Both these factors are driving the need
for improved yields, which is KLA’s sweet spot.
The non-semi business also did well in the last quarter despite
the issues in the solar market, which makes this difficult. Of
course, the segment still generates less than 10% of its orders, so
the impact is relatively small.
There have been no changes in estimates over the last few months
and expectations for fiscal 2013 remain higher than those for
fiscal 2012, indicating improving trends.
KLA shares currently carry a Zacks Rank of #2, implying a
short-term Buy recommendation. We are also positive about other
equipment providers, such as Novellus Systems
(NVLS), although we are slightly less positive about
Applied Materials (AMAT) given its exposure to
solar.
APPLD MATLS INC (AMAT): Free Stock Analysis Report
INTEL CORP (INTC): Free Stock Analysis Report
KLA-TENCOR CORP (KLAC): Free Stock Analysis Report
NOVELLUS SYS (NVLS): Free Stock Analysis Report
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