KLA Corporation (ticker: KLAC), a leading provider of process control and yield management solutions for the semiconductor industry, has outlined an ambitious growth strategy during its recent earnings call.
CFO Bren Higgins detailed the company's financial targets, aiming for $38 in earnings per share (EPS) and a revenue growth rate of approximately double that of global GDP by 2026. KLA anticipates the semiconductor industry to expand by 6% to 7% annually and is preparing for increased capital intensity, with particular emphasis on logic and foundry sectors.
Key Takeaways
- KLA sets a goal of $38 EPS and revenue growth roughly 2x GDP by 2026.
- Semiconductor industry growth projected at 6% to 7%; capital intensity to rise.
- Process control, especially optical inspection, seen as a growth driver for KLA.
- Service business expected to grow 12% to 14% in 2024, EPC business by around 10%.
- Company targets gross margins in the low 60s and an operating margin of 40% to 50%.
- Plans to return approximately 85% of cash flow to shareholders.
- Management of supply chain in 2022 helped navigate challenges and deferred revenue.
Company Outlook
- KLA expects semiconductor consumption to be driven by improvements in handsets, PCs, data centers, and AI.
- Memory utilization improvement anticipated, signaling a need for capacity expansion next year.
- China business forecasted to remain flat, with some logic and foundry investment.
- Geopolitical factors influencing China's push for semiconductor self-sufficiency.
- Interest in advanced technologies like 3-nanometer nodes and custom silicon for high-performance computing noted.
- High NA technology expected to benefit KLA's high-end inspection and precision film measurement solutions.
Bearish Highlights
- No major rush to move to 3-nanometer nodes as companies are hesitant to be first adopters.
- DRAM spending may increase, but capacity investment is expected to remain relatively low.
- NAND investment anticipated to stay subdued, with focus on driving layer counts higher.
Bullish Highlights
- KLA's strong position in process control and advanced packaging expected to drive growth.
- High NA technology adoption to enable more scaling and use of EUV lithography.
- KLA's effective supply chain management and strong supplier relationships are seen as advantageous.
- Services segment showing good growth rates, contributing to incremental revenue.
Misses
- Specific challenges or misses were not highlighted in the provided summary.
Q&A Highlights
- KLA aims to scale into a $1 billion business across multiple products by the latter half of the decade.
- Improved DRAM utilization and importance of HBM in process control advancements discussed.
- Services business growth attributed to improved utilizations and tools coming off warranty.
- Company's portfolio, customer collaboration, and software capabilities driving market share gains.
- Adoption of High NA tools may lead to more pitch shrink and tighter transistor density, presenting opportunities for KLA.
KLA's executives expressed confidence in the company's ability to capitalize on the increasing complexity and demand within the semiconductor market. With a strong emphasis on process control and a robust service business, KLA is positioning itself to take advantage of the industry's evolution towards more advanced technologies and packaging methods. Despite the cautious investment in DRAM and NAND, the company's strategic focus on logic, foundry, and service segments, coupled with effective supply chain management, is expected to underpin its growth trajectory in the coming years.
InvestingPro Insights
KLA Corporation (KLAC), a semiconductor industry leader, has been demonstrating a strong financial performance with ambitious growth targets. To provide a more comprehensive view of the company's current market position, we have curated some key metrics and insights from InvestingPro.
InvestingPro Data:
- Market Capitalization: $97.07 billion USD, showcasing the company's significant presence in the market.
- P/E Ratio: Currently standing at 36.5, which indicates a high earnings multiple, suggesting that investors have high expectations for future earnings growth.
- Revenue Growth: The last twelve months as of Q2 2024 saw a revenue decline of 7.75%, which aligns with analysts' anticipation of sales decline in the current year.
InvestingPro Tips:
1. KLA has a history of consistent dividend growth, having raised its dividend for 8 consecutive years. This could be an attractive point for income-focused investors.
2. The stock's RSI suggests it is in overbought territory, which could indicate a potential pullback or consolidation in the near term.
For those interested in a deeper analysis, there are 21 additional InvestingPro Tips available for KLA Corporation, including insights on valuation multiples, profitability, and stock performance. These tips can provide valuable information for making informed investment decisions. Access these tips by visiting https://www.investing.com/pro/KLAC and get an additional 10% off a yearly or biyearly Pro and Pro+ subscription with the coupon code PRONEWS24.
Full transcript - Kla-tencor Corp (KLAC) Q1 2023:
Joseph Moore: Great. Thank you, everybody. Welcome back. I'm Joe Moore. Very happy to have with us today, the CFO of KLA, Bren Higgins. So Bren, maybe you could start out just with a little bit of an overview. We'll dig a little bit deeper into your targets and so forth. But maybe first, just give me a sense for your corporate priorities at this point.
Bren Higgins: Okay. Well, Joe, thanks for having me here, excited to be here and spend a little bit of time talking about what we think is a pretty compelling opportunity moving forward. You mentioned our 2026 financial targets, which are -- for those who don't know, we have revenue and $38 in earnings per share. And when you back up and just decompose that a bit, it starts with a view of semiconductor revenue growth that's roughly 2x GDP. So we'll call it 6% to 7% aligns to the McKinsey study of $1 trillion Semiconductor revenue in 2030. Capital intensity underneath that is -- has been climbing since about 2013, 2014. So we've seen a nice, steady increase in capital intensity. And of course, over the last few years, it's been even more elevated with some of the investment that's happened in China. But in general, as you just look at long-term expectations for capital intensity, we would expect WFE to grow a little bit faster than Semiconductor revenue. If you look at the mix of WFE, we believe that you'll see memory generally about GDP plus kind of growth rates. Memory tends to be a little more episodic and more minimum driven as a little more cyclicality to it. And that foundry logic will likely grow faster. And as a result of that, you'll end up with a mix, that's roughly 60%, maybe a little bit higher of logic foundry. And that matters a lot to companies like KLA within process control because process control intensity is meaningfully higher in logic and foundry than it is in Memory. So that should enable the process control part of the market to grow a little bit faster than overall WFE. KLA's position in process control is a very strong position, and we believe that the markets that will inflect over time, as we continue to see robust adoption of leading-edge design rules, will drive certain parts of the market to grow faster, where we already have a very strong position. Things like optical inspection, which if you just look at '19 to '22, grew at about 1.7x what WFE grew. So a very, very strong growth profile, driven by the adoption of EUV and ultimately, more and more scaling of devices. So that should enable KLA to continue to gain a little bit of share on top of our already strong position. Our Service business is growing 12% to 14%, expected to grow at that level in 2024. For very specific reasons about the growth of service, KLA's service business is a -- is a high mix, high complexity, relatively low-volume business, lower redundancy for our customers. They expect high uptime. They expect matching performance. When they buy KLA process control is very hard, given that volume dynamic for them to build the capability to do their own self-service, which you see with a lot of process companies, also the complexity of the products that we build, factors into that. And as a result, our customers tend to buy contracts. These contracts are usually at least 3 years. 75% of the revenue stream is contract, the other 25% is billable. And so that consistency and predictability, even upturn and downturns allow this business to grow over time. And in 2024, I would expect Service to grow even faster as the tools we shipped in '21 and '22 come off of warranty. Our EPC business, which is our Electronics Packaging (NYSE:PKG) and Components business, should grow about 10%. We have product offerings. The strongest part of that business is Specialty Semiconductor, which has exposure to compound semi, but also Advanced Packaging. We have a PCB business that also has exposure to Packaging, and so we should get about 10% out of that. So you add it all up, you end up somewhere in that $14 billion range. Gross margins are in the low 60s. We have a target of 63%, drop-through in terms of operating margin of 40%, 50% incremental operating margin. Capital structure actions should enable us to drive the EPS level about 1.5x the revenue growth rate. And we're going to return about 85% of the cash flow that we generate. So we think it's pretty compelling model, and the team is pretty prepared for us as we start to see our customers start to spend again as we move through this year and into next year to make sure we're prepared for growth at the leading edge. And what will drive and enable this model that we think is pretty compelling.
Q - Joseph Moore: Great. So I'd like to -- sorry, a little loud -- I'd like to dig into a few of those things. Maybe if we could start with the process control intensity, I guess you talked about a 1.7x from '19 to '22, '23, we sort of had a year where there was a lot of focus on capacity additions in the trailing edge that probably went against you. Like how do you see that? It seems like we're now shifting to focus back to the cutting edge and in particular, a lot of new technologies and things like that, that would seem very process control intensity.
Bren Higgins: Yes. So the 1.7x was for the Optical Pattern Inspection business. So overall, if you just back up and say, okay, process control intensity in 2021 was in the low 6%. So it depends on what denominator you use, we'll call those 6% and in 2023, it was in the high 7s. 2022 and 2023 are a little noisy because of some of the challenges that a lot of our peer companies had, in terms of the timing of WFE, given some of the supply chain challenges. But in general, if you adjusted and shifted the money around, you're kind of seeing a nice trajectory of somewhere from the low 6s into the high 7s. Obviously, mix is a big factor in that, and that's why it was important for me to talk about the mix dynamics. But I think one of the things that we've seen is we've always seen a nice level of adoption of our systems in R&D, when customers are developing process. And then they -- once they start to work through their process and they start to ramp it and they introduce the element of volume, and that tends to drive more inspection because you sample and measure -- inspect and measure more. And then as you get into production, typically, historically, what customers have done is they tend to back off because they tend to be in a more mature state, and you would see less adoption. And that generally is still the way that it flows. But because of the design environment, because of the iterations in each process node, you starting to see and have seen over the last couple of years more what we call HBM adoption, which high-volume production adoption. And so that's been a nice driver of incremental growth that's fueled the process control intensity that we've seen that increase. And that's very different than what we saw if you go back to the middle of the last decade, where Moore's Law wasn't scaling all that quickly. EUV is being delayed. There wasn't the end market adoption. Incremental scaling was fairly limited. And so customers were able to be very efficient with their capacity, in terms of trying to reuse it from node to node, that all kind of broke down at 7-nanometer with the proliferation of design, which we've seen continue as we move here through 5-nanometer and 3-nanometer and expectations for 2-nanometer here moving forward. So we feel pretty good that where we are today in that sort of high 7s that we'll be able to increment that over time, given some of the growth drivers, we think are out there in terms of incremental scaling, changes in architecture, power distribution and some of these things that we think will drive interesting challenges from a process point of view and then, of course, maybe stronger competitive dynamics moving forward in terms of the drivers of leading edge.
Joseph Moore: Yes. Okay. Great. And then on the way to the path to that 2026, you guys have talked about WFE in the mid- to high 80s. This year, I believe, kind of flat to modestly up. Can you talk us through your views there? I know there's some puts and takes. Maybe talk about your big picture first.
Bren Higgins: So '23, we think was somewhere around $87 billion to $88 billion. We don't know yet. We're kind of waiting to see how all the numbers get added up, but we think it was somewhere in that ballpark. And as we look at 2024, we see it roughly flattish and high -- kind of high 80s kind of level. I guess if WFE ends up coming -- ended up in the mid-80s and maybe the growth expectation is a little bit higher. A little more second half loaded, in terms of our expectations. If you back up and look at leading edge, I'd expect leading edge to be up. And I think we saw significant adjustments in 2023 from high levels of investment in '21 and '22 from our major customers. And so I would expect to see the leading edge start to improve, most of it driven by 3-nanometer activity. On the Memory side, a little bit better, mostly in DRAM. Talked about HBM and advanced DRAM as drivers, a little less so on the Flash side, but maybe some modest growth in Memory fueled by DRAM. Legacy investment, off a little bit, compared to a very strong last year overall. And then I think what we've seen in terms of activity levels in China to be more or less flat, some changes in the mix of that business between what we call infrastructure, which is reticle and wafer infrastructure coming down a little bit, particularly on the wafer side and then the logic foundry piece being a little bit higher. But overall, roughly flat. And so it translates into we'll call it flattish to maybe up a little bit for the year.
Joseph Moore: Okay. Okay. And then how do you think about that? I mean, so now you have a couple of years to go between that and the 2026 guidance. It's -- ordinarily, I feel like it's clear if we're troughing or peaking. Like right now, we have some businesses dropping and some businesses speaking at the same time. So how do you think about 2025 in that context? Do you -- is there a baseline that we should have growth next year?
Bren Higgins: Well, I think some of the bigger drivers of Semiconductor consumption, we're starting to see the markets move, right, and improve, particularly in Handsets and PCs, more data center investment. Obviously, AI is growing faster, and that's driving stronger data center, much more semiconductor-intensive compute requirements. And so that's a good driver there. I think Memory, as we start to see the Memory business and utilization start to improve this year, and they'll do some -- we'll still continue to see some tech investment in terms of driving shrinks. We'll start to get to a point where you need to add capacity into next year. So -- and then if you back up and you say, okay, if you start thinking about the 2-nanometer ramp, ATA ramp and some of the competitive dynamics driving the leading edge, would expect to see some meaningful capacity investments there. So when you take it all together, I'm -- while I'm not guiding quantitatively, I feel with along with a lot of others that we'll see a step-up in investment as we move into '25 driven by these factors. I think the China business is probably flattish. It's a little hard to tell, at this point, but we'll see how that plays. I don't associate it falling off a lot. And I think the legacy, which will be weaker this year, I think we'll start to see that improve a little bit, too, as you move into '25. I think one thing that's clear in that part of the market is that those customers have to invest more than they used to. They aren't used in excess equipment to service that part of the market. And so you have a lot of new investment that's happening, and that should be good for WFE investment as well.
Joseph Moore: China piece is a pretty big debate at the moment. And I guess, to me, the bullish case would be you step back and look at a region trying to develop self-sufficiency in semis, and they're going to have to spend a lot more to do that. The cautionary side of it would be they don't necessarily have products to fill those factories with yet. So there's a little bit more of a building ahead or maybe building at the same time. So how do you think about the role of geopolitics in China? And I know you've talked about revenue declining from not very high levels in the back half of last year. But just how do you think about China in general?
Bren Higgins: Yes, I agree with you that I think there's -- when you have a number of projects around some of the investment, that's in the logic and foundry space, subscale, the customers are doing R&D, not very efficient, trying to prove out process, introduce some volume, prove to customers that they can deliver that they've got a road map. And that -- there's a fair amount of inefficiency in some of that. Now there's also some investment from a lot of the normal customers we've had there for a long time. I think that's more supply supported or demand supported, if you will. The infrastructure investment has been a -- was a choke point both in terms of wafer access and reticle access. So I know there's a desire to have more control over that, where a lot of the wafers were tied up in long-term contracts, reticles, you'd have to go to the merchants. Merchants haven't really invested. So it was a challenge. So I think there's a desire, a, to meet self-sufficiency and have a little more control from, call it, wafer and reticle all the way through the process, supporting that but also supporting the export economy in China as well. In the long run, when we back up, we think generally, you can have periods of what we'll call inefficiency in terms of investment and over time, some of that will have to rationalize, whether it's because of there's some consolidation or whether there's funding tied to the next increment of investment or whether it's technical milestones that have to be hit. But over time that you would expect some normalization there, although the activity does create a little bit of inefficiency. Going back the way I talked about 2026 is that, look, our view in terms of how we're running the company and how we're sizing the company, in terms of how we invest is back to that view that at the end of the day, we believe WFE is generally going to grow a little bit faster. It's not going to grow a lot faster, no matter how healthy it is if it grows too much faster in terms of overall profitability. And that's how we're going to size the company. If you end up with a permanent tier of inefficiency that exists because you just have either strategic investment or regionalization investment that spreads the footprint out, and that's a little bit harder to rationalize over time in terms of getting supply just right relative to demand drivers that have some fluidity to them. If you end up with a permanent tier, that's -- in my view, that's upside, to the plan and the model. We've proven over time that we can execute against incremental opportunities. But as I back up, I kind of think about it that way. Look, in the near term, we see -- we've seen a nice cushion relative to the drop-off we've seen from our other customers. And over time, we'd expect to see some rationalization in how that plays out.
Joseph Moore: And as it comes to -- as it pertains to export controls, I'm not going to speculate on what changes the government might make, you can, if you want, but you probably don't want to either. But like how does that frame the conversation? Is that -- do you think Chinese companies are anticipating further controls and spending in front of that? Do you think anybody is -- we're sort of assuming that we sort of achieved the status quo, and we're not going to have further tightening? Just -- I'm not asking for your prediction what the government is going to do, but what is today's behavior predicated on?
Bren Higgins: Yes. So I'm not going to speculate either. What I would say is that it's really hard to -- I hear investors ask me a lot about stockpiling. And its like as it relates to process control equipment. You typically don't see that behavior. We're installing the tools, the tools are running. They have to be supported by us. And if they're not supported by us, it's very, very difficult for our customers to get value out of them. So it doesn't really make sense to buy the tools and not install them and start to use them.
Joseph Moore: Yes. That makes sense. But they're very -- it's a very long tail investment from their standpoint. I mean that they're not investing in the cutting edge, where you're obsolete in 5 years, we have a 20-year life of these...
Bren Higgins: And then there's -- to the point of sales efficiency, there's a number of IoT markets. There's the electrification market that a number of the new projects are compound semi-driven projects. So -- Yes, I think it's a long-term plan. And if it's one of those things where -- one thing about this industry is you have to keep spending, right? R&D never really stops. And if you've got a desire to move from very old design rules, even as you move through the legacy parts of the node, it's new to you, there are challenges, unique aspects of certain products that require you to continue to invest, if you're going to try to get a customer to make a commitment and be committed to a road map over time.
Joseph Moore: Okay. Great. And then just last China question. China DRAM, I think everybody had talked to, there was a pretty high second half of last year because customers came off of an export control, and so there was a little bit of an inflation. But then you have a second customer spending. I guess what do you anticipate from China DRAM going forward? Do you think there will be more customers and even in NAND? I mean the one company that builds NAND, is on the [indiscernible], so I know nobody is doing business with them. But do you see...
Bren Higgins: U.S. companies are, but ...
Joseph Moore: Yes, the non-U.S. Yes.
Bren Higgins: Yes, the non-U.S. companies right? So on the DRAM side, I think it's more or less flattish, you described the environment pretty clearly. Not a lot of sort of financial efficacy to trailing-edge DRAM generally over time. So I don't think you'll see a lot of incremental investment from new suppliers there. In my mind, I think it's always been tough to make a value case for trailing edge memory. And so I think it's probably limited. And then on the one customer, they're bumping up against the technology threshold that was established. And so is there another product cycle? Maybe there is. And I think that I would expect this year to be lower than what that customer spent last year.
Joseph Moore: I mean, I take your point on that, but you also -- it may not be economically viable, but if there's enough subsidization and the government wants domestic Memory, you can still do it. I mean you can still build high-quality expensive memory with those trailing nodes. Okay. And then on the advanced technology, it feels different to me the last 2 or 3 years, maybe just because Intel (NASDAQ:INTC) is pretty loud about their progress on these new technologies. But it feels like there's an active debate now among investors, who's going to have the best node and things like that. That would seem to be a really good construct for you. And it would seem like people -- not to get into anyone customers, but some of these customers had been dormant for a while, from the standpoint of major investments in process control. And now you see an arms race where really 3 companies are trying to do gate-all-around on a timely basis. It seems like that would be a good setup for you guys.
Bren Higgins: It's a very good setup. Yes, and really good end market interest in the nodes, right? 3-nanometer has strong interest. Our big customers indicated 2-nanometer has similar interest at the same level. So I think that's one of the biggest drivers for us, is you've got good competitive dynamics, you've got technology transition and you got end market adoption. So yes, it's a very good constructive setup for process control, where we're -- I don't want to say agnostic, in some ways agnostic to how it plays out in the overall market as long as those dynamics are happening.
Joseph Moore: Yes. But on that note, obviously, 3-nanometers are really good node and a lot of people are interested, but there doesn't seem to be the same interest in being the pipe cleaner that we saw 2 cycles ago, we had Huawei and Apple (NASDAQ:AAPL) pushing really hard on the cutting edge. Now it's kind of like -- there's a lot of customers that want to move to 3-nanometer, but maybe not -- nobody wants to be the first. Does that matter to you if it plays out that way?
Bren Higgins: Well, I think one of the good things that's also happening is not just mobile driving leading-edge process node adoption, right? You're seeing more and more custom silicon, in terms of high-performance compute opportunities. So I think that tends to -- you're having to support more designs earlier in a process node life and that can be good for process control. It puts pressure on yields, as you're trying to ramp that fab. You're already seeing customers over the last few nodes, tending to ramp at less mature levels than they used to before. And I think that's also been a factor in overall adoption of process control. So I think that you've got multiple markets driving, driving these leading-edge nodes and how they're coming to market. And I think you get maybe a bigger commitment, hopefully, earlier in terms of the process node life and it's much harder for customers to try to reuse the previous node, as they're trying to ramp at a faster slope for the leading edge nodes. So I think it's a good setup as we move beyond mobile as the principal driver.
Joseph Moore: Yes, that makes a lot of sense. And then you saw a lot of enthusiasm from investors when ASML (AS:ASML) had a really big order book for High NA, which is something that's really beyond the road map that most of your customers have talked about. Can you talk about that generally how you see High NA benefiting KLA?
Bren Higgins: Well, the good thing about High NA is that it continues -- the scaling road map, right, that we're going to continue to see scaling and we're going to see more adoption of EUV. As you get to High NA, you start to see a pitch shrink, which enables more scaling on the reticle, which is an opportunity today. And as we get there and it will continue to drive what tends to be the biggest driver for us is with scaling smaller and smaller feature sizes on wafers that drive our high-end inspection. It drives more precision film measurement. So we think it's sort of validation of the road map that continues to enable scaling, which has been a big driver in the last few years once we saw EUV introduced, and we would expect it to continue.
Joseph Moore: Okay. Great. Maybe shifting gears a little to talk about your own supply chain. First of all, you've mentioned that you didn't get tripped up in 2022, which actually mattered a lot as it turned out because a lot of the '22 to '23 dynamic was people that had deferred revenue pushing out. But I feel like maybe you guys didn't get the credit that you deserved for managing through that, so effectively in 2022. So maybe just talk about that. I mean you have much more of a Semiconductor intensive bill of materials than your competitors do? How do you manage through that so well?
Bren Higgins: Yes, it is we certainly didn't do what our customers asked us to do, right? We still had our challenges. And I think that the nature of our supply chain is a little bit different. You talk about it compute-intensive, but actually the longest lead time components we tend to have -- tend to be around optical components. And the lead time on those can be upwards of 18 to 24 months, depending on the equipment and the amount of capacity. So I think it validated a lot of the sort of partnership drivers we have with our suppliers, in terms of our willingness to invest in their capacity or co-invest to make sure that they have what we believe we will need over time because of these lead time challenges. We tend to trade a fair amount. We're pretty good customers with our key suppliers. We want them to work with just us on a lot of these capabilities, and we're willing to invest. And we make commitments, and we keep them. I think it's one of the reasons why I have the levels of inventory we have, we're over $3 billion of inventory. It's one of the things that I am trading, in terms of enabling my differentiation and my willingness or ability to serve with the fact that I'm going to make commitments, and I'm going to follow through. So I think these were factors in how we managed through. It's not a transactional supply chain. We don't get wrapped up with our suppliers and who carries the inventory and how do you think about payment terms and things like that? It's much more about enabling our differentiation. We think it matters, think it's reflective in the gross margins that we're able to command. I think we get paid for the actions we take. And as a result of that, I think it played through pretty well. And our suppliers they work with us in a lot of cases, they don't work with others, at least around a lot of the same types of supply, and I think that was helpful through that period of time. So I think we're very well positioned in terms of our ability to ramp the business to the plan we talked about earlier. We made a number of investments. I talked about Investor Day a couple of years ago, that we're somewhere in excess of $150 million of investment with suppliers, to ensure we have the capacity that we need. We're going to continue to do things like that. And I think I'm in a place where I can scale to -- from $10 billion to the $14 billion in a few years.
Joseph Moore: What if it's better ...
Bren Higgins: Or the commitments we made...
Joseph Moore: What if it's better than that, I mean how -- can you respond to that within that?
Bren Higgins: We think about flexibility and what we need beyond that and some of these relationships. I think depending on when you get that, the clarity of when it's going to be better and how much is X factor in it. But I think we've -- our history has shown that we tend to react pretty well to it. I think we're very well positioned without a lot of incremental investment to deliver on those commitments. We're still short on certain components, right? High-end optical inspection is one of those areas, where optics take a long time to increase capacity. We have some capacity coming online this year, which is why I'm more bullish on some growth in that part of the market this year. I think it's a testament to the demand for the Gen 4 product line, which is our shortest product, both in terms of it being the production workhorse, where it balances the wavelengths and the sensitivity that it has as a broadband tool with cost of ownership for customers. There's a special version that has new capability for gate-all-around, that's coming to market. And it also has some deconfigured capability that we can take backward to support automotive as an example, or where we're able to get more revenue and even some of the legacy nodes, we're able to get more revenue at those design rules, then we were able to get back when that was the leading edge... And so the customer gets a tool with an upgrade path and more capability from an economic point of view, and we get more revenue. So I think we're in pretty good position with that product. I think we're going to be short for a little while longer because grinders and polishers for optics take a very long time to get in place and the training that's involved, the automation with our customers to be able to enable optics that have the precision that's required for what we do. So it will take some time to get there. But I think we're in a good position to see some come on this year. And then as we move into '26 or so, we'll see another step-up in supply capability.
Joseph Moore: Okay. Great. And then upfront, you had mentioned advanced packaging and obviously, the Orbotech acquisition has added a lot to your capabilities in that area as that's become much more important to everybody. So can you talk a little bit about KLA's position there and kind of what growth drivers you see going forward?
Bren Higgins: Yes. So it's interesting. It's across multiple products across the portfolio. So we have inspection and metrology, which has been a driver, which is not related to the Orbotech acquisition, but generally, the inspection capability that we've sold, particularly around GPU heterogeneous integration and like CoWoS process and so on that we've been able to do pretty well there. Over time, you're seeing rising complexity. The back end is starting to look more and more like the front end, which is interesting here and that you start to see a pitch shrinking, right? So the density of lines and spaces shrinking. And so scaling affects in how these packages are put together. And so that drives both current inspections, but we think over time, will drive higher-end inspection requirements. And given the trade-off between sensitivity and throughput, what will end up happening is you'll need more capability, the speed of the tools will slow down, right, because of that higher capability. So you'll have to -- if you're going to keep the same sampling strategy, you'll see a unit growth opportunity, too. So ASP, higher for a higher-end tool but also more tools to support a similar level of speed and volume. As you start to think about some of the applications, there's more metrology requirements, wafer-to-wafer bondings, example, you have overlay anytime you're trying to put wafers together. You've got to make sure the wafer is clean and particle free. So it's driving a number of different products. On the process side, we have plasma dicing. We have [indiscernible]. We have some RDL layer support that we do in terms of some of the deposition capability of the company. So it's a number of applications in the package that drives our -- the SPTS, specialty semiconductor part of KLA, which came through Orbotech. And then you've got what's the evolving substrate part of the market that gets addressed through our PCB business, and we've got a couple of new products that will be coming to market. Both for imaging but also inspection and how that substrate integrates into the package and then integrates into the PCB board. If you add it all up, about $350 million to $400 million of revenue in last year. And I think this year, we're going to be somewhere in that $400 million. And I think you're looking at growth rates that are probably at least 2x WFE growth rates going forward. So I think you have an opportunity to do to scale into a $1 billion business, as we move sort of into the back half of this decade, across multiple products.
Joseph Moore: Great. So maybe we could talk a little bit about Memory. For DRAM, you had mentioned China, you mentioned HBM, but core DRAM CapEx seems healthy at this point. Do you think we can continue to grow from there? And I would also ask you, I know you have insight into utilization on DRAM, if you've seen that utilization come back.
Bren Higgins: Well, so in DRAM, we've seen it come back a little bit, not much, but we've seen it improve a little bit. I think customers that cut the most, we've seen them respond more than others. I think, as I said earlier, you're going to continue to see shrink investment, that will happen to try to drive incremental bid supply through technology shrink. I think WFE will be up a little bit. I don't think it's going to be up a lot, in that part of the market. But I do think we'll -- it's probably more of a 25% effect in terms of more capacity investment. HBM has been a nice driver as it relates to process control, of course, advanced DRAM has EUV. I think going forward, as we talked about, you're going to see more EUV layers, in terms of DRAM and investing there. And so that should be a pretty good driver as it relates to HBM, you -- reliability is higher. You want to make sure each of the chips or the die all function correctly before you integrate them together. So you've got advanced die, you've got this reliability challenge. They're bigger, which tends to consume some capacity. The bit trade is less for an HBM die versus an advanced DRAM die. So I think there are drivers there that are ultimately going to drive these utilizations up. We'll see pricing improve, customers' profitability, cash flow will get better, and I think we'll start to see them invest, as we move through the second half of this year and into next year.
Joseph Moore: And on the NAND side, I mean the spending has been really low, and everybody has reasons, why it won't come back, but it feels like, to me, people are paying attention to some of those other stuff first, but that NAND ultimately has a pretty good chance to come back. Are you seeing ...
Bren Higgins: Maybe more into next year.
Joseph Moore: Next year. Okay.
Bren Higgins: I think you're still seeing some of the shrink focus, right? I think you're going to see continued pressure on trying to drive layer counts higher, opportunities for us in terms of wafer flatness. You're trying to inspect the shape profiles. You're trying to -- you've got high aspect ratio inspection requirements. All those I think are overly. Overlays becoming more of a challenge there in terms of overlay registration, as you do double stacks and so on. So I think it's creating some opportunities from a tech point of view, but I don't think you're going to see a lot of capacity investment. Again, I think it's going to follow a similar path into next year.
Joseph Moore: Great. So then last thing you mentioned that I want to double-click on the services, and then I'll open it up to the audience for any questions. The services piece, you've had pretty good growth rates there, and you've talked about the fact that some of these utilizations are starting to come up. So it seems like that should be helpful. And I feel like you almost have a unique view into what Services actually look like because you don't have spares, there's no risk of stockpiling like you're actually just collecting Service revenue. So can you talk about the sustainability on that?
Bren Higgins: Yes. Against our peer companies, our Service business tends to be all traditional service. There are no systems in the Service numbers, which you can skew it in an upturn, you skew it the other direction maybe in a downturn. So it's very consistent, I'll call sort of break and fix and supporting the systems. I talked a little bit about the dynamics that drive it. Utilizations will improve, and so that should be good for over the course of this year for more Service revenue. And then we shipped a lot of tools. Those tools will come off of warranty. We're greater than 90% in terms of our attach rate on Services going into contract, as they come off of warranty. And so it gives us pretty good visibility into what's coming. And I've been pretty open with an expectation that in '24, we'll see $250 million or more of incremental revenue just associated with those drivers, the utilization improvement and tools coming off of warranty. So the structure we have and how they buy process control is pretty important. And I think it -- because of the complexity of what we do and the fact that it's relatively low volume, high mix. All the tools look the same in the fab, but then you start to look and if you take off the white skins with the purple stripes and you start to see different -- not only different product types, but even within the same product family, as customers are mix and matching depending on the various applications in the production process. So trying to build the ecosystem to support all that, very hard for a customer to do, I think they'd rather outsource it to us. And allows us to set up that contract structure that gives us good visibility. I think pretty good profitability relative to the overall. It's one of the reasons why we've been able to do what we've been able to do with capital structure and capital allocation over the last decade or 1.5 decades is that, that visibility provides a pretty clear cash flow stream that supports dividends and debt service. And so I think that's increased our comfort related to those decisions, which I believe generally are kind of a revocable decisions and that it can be supported by the Service business that we have.
Joseph Moore: Great. So with that, let me open it up to the audience. Are there any questions or I'll keep going?
Unidentified Analyst: What are the sort of form of your business, say, sort of resurgent Japanese industry do? A lot of your share gains have come at the expense of a couple of local players there. And is it sort of you winning in sort of e-beam, package and spec, where is the winning coming from relative to some of those Japanese guys? I'm trying to figure out the incremental opportunity, as that country really steps on the gas.
Bren Higgins: Yes. I don't want to talk about specific customers, but I'll just talk about just what drives our share is that one thing about KLA is we go to market with a portfolio of solutions that allow our customers to balance their there's sensitivity and technology requirements with their economic needs as they go from an R&D to a ramp and into a more mature volume production environment. Most of our competitors tend to be point product competitors. And so they have to try to figure out how do I take a certain technology and try to figure out broader use cases, where we can be fairly agnostic to have which platform or capability our customers choose because we're able to offer them, offer them all. Now we collaborate with our customers, about their problems and how to get close to what we think they'll need. It takes us a long time to develop the systems that we have. We invest, we invest more generally than most of our competitors. And I think the portfolio and then being able to tie it together with more software capability to do review and classification and do simulations and other data analytics, allows us to, I think, provide more actionable time to results than what a lot of our competitors are able to provide. Our position in process control has continued to grow. We gained a few points of share last year or in the market we're in, about 57% is recorded by Gartner (NYSE:IT). I think this year is roughly flattish or so against that number. It tends to come in -- not increments each year necessarily, but in bigger chunks. But we think that if we continue to invest in areas where we don't have a stronger position, we have a number of investments that are happening in some Electronic markets. We think our position in certain markets like optical inspection will inflect and that will drive more share opportunity, as well in terms of just the relative growth rate of that part of the market versus the rest of it. That we're in a pretty good position to see it continue to grow a little bit more over time as we go forward.
Unidentified Analyst: I have a question on how you think about process control steps and attach rates within the high High NA road rap directionally, do you think there will be more process intensity for the same amount of capacity versus a Low NA multi-patterning?
Bren Higgins: I think as you continue to drive -- you might see some substitution in there -- here and there as it's being adopted, right? Some customers and around certain layers, you may choose a High NA tool. But has some challenges with reticle field and costs potentially and certain steps to our customer will try to leverage double battery. I think either way, you start to have more and more EUV layers. You usually seeing more pitch shrink, you certainly will as you get to High NA. So I think what it does and you back up is it tends to, I think, create a scaling road map. That's usually a good driver for tighter transistor density and therefore, smaller defects matter and precision measurements required and so on. So I think we're pretty early in it. I think there's a lot of capability and complexity in EUV masks, that you'll see it play out differently than what we saw when multi-patterning was introduced at fairly mature deep UV lithography levels and reticles that really weren't worth changing all that much. I think as you move into a High NA environment, you're not going to see that. I think you're going to see higher levels of complexity. I think it's going to create some interesting opportunities for us.
Joseph Moore: Great. Well, that brings us up to the end of our time...
Bren Higgins: Yes. Thank you for having me.
Joseph Moore: Thank you.
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