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KLA Corp
Earnings Call Analysis
Q1-2025 Analysis
KLA Corp
KLA Corporation delivered a strong performance in its September quarter, posting revenues of $2.84 billion, which exceeded the guidance midpoint of $2.75 billion. Both non-GAAP diluted earnings per share (EPS) at $7.33 and GAAP diluted EPS at $7.01 topped the forecast. The company's gross margin was at 61.2%, slightly below the expected range due to a weaker product mix. The overall financial results reflect a robust demand environment, particularly in foundry logic and memory sectors, suggesting increased industry investment.
Looking ahead, KLA's outlook for 2025 remains optimistic. The company anticipates continued growth driven by higher investments in advanced technologies across leading-edge foundry logic and memory sectors. It is forecasting a total revenue of approximately $2.95 billion for the December quarter, plus or minus $150 million, with foundry logic revenue accounting for about 76% and memory for about 24%. KLA expects to maintain its market outperformance driven by investments in process control methodologies.
KLA showcased robust cash flow dynamics with a quarterly free cash flow of $935 million, contributing to a total of $3.2 billion over the past 12 months, reflecting a 31% free cash flow margin. The company is committed to returning capital to shareholders, repurchasing $567 million in shares and distributing $198 million in dividends during the quarter. KLA’s balance sheet remains strong, with $4.6 billion in cash and manageable debt levels of $6.7 billion, indicating financial health and flexibility for future investments.
In the semiconductor landscape, KLA anticipates a secular shift toward more advanced process control to meet the increasing complexities of manufacturing at smaller nodes like 3-nanometer and 2-nanometer. The rise in AI applications continues to boost demand for high-bandwidth memory and advanced logic solutions, which are expected to drive additional process control intensity. KLA is positioned to capitalize on these emerging trends with its innovative offerings in advanced packaging, targeting over $500 million in revenue in this segment for calendar year 2024.
Despite positive overall growth expectations, KLA anticipates challenges in the Chinese market. The percentage of sales from China is expected to decrease from approximately 42% to around 30% in the coming year, largely due to reduced demand in the region as customers digest prior investments. However, this decrease is expected to be offset by increases in other markets and sectors driven by leading-edge technology needs. The company projects its dollar-level revenue to remain stable even with the decline in China as it benefits from an uptick in advanced foundry investment.
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Good afternoon, everyone. My name is Lee, 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.
[Operator Instructions] 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 ir.kla.com 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 IR 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 on Forms 10-K and 10-Q.
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 our CEO, Rick Wallace, I wanted to provide a safe to date for our 2025 Investor Day. It will be held on the morning of June 18, 2025 in New York City at the NASDAQ market site. We will provide more details closer to the event. Now over to Rick.
Thank you, Kevin. KLA 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 the 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.
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 and an improving supply-demand environment are positioning memory makers 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 CY '24 and continue to grow in CY '25. 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, making this the 49th consecutive quarter of growth on a year-over-year basis.
Finally, 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 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 the KLA 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 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 midpoint. 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, Operating expenses were comprised of $322 million in R&D and $238 million in SG&A. Operating margin was 41.5%.
Other income and expense debt 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%. And 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 3 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 '24, supported by recent customer announcements, our expectation is for the WFE market to increase modestly from the mid to the high $90 billion range for the calendar year 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, [indiscernible] 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 the leading edge across all segments. We are confident we can maintain our relative WFE market outperformance in calendar 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% semi process control systems revenue to semiconductor customers. Within memory, DRAM is expected to be about 76% of the segment mix and NAND, remaining 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 are forecasted in the December quarter 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 road map 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 debt of approximately $33 million expense. GAAP diluted EPS is expected to be $7.45, plus or minus $0.60 and non-GAAP diluted EPS of $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 expect annual growth to continue in calendar 2025. KLA remains focused on delivering a differentiated product portfolio that addresses customers' technology road map requirements and drives our longer-term relevancy and growth expectations. KLA's focus on customer success, delivering innovative and differentiated solutions and operational excellence for what drives industry-leading financial and free cash flow performance and allows 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 an optimize yield across high-volume manufacturing environment with high semiconductor device design mix.
In addition, our service business continues to increase its relevance of system lifetime increases and customer expectations for increased tool availability and performance is a growing long-term tailwind. This bodes well for KLA's long-term growth outlook and industry demand trends favoring KLA are continuing to improve. In alignment with this, KLA's business is well positioned and the long-term secular trends driving semiconductor industry demand and investments in WFE are very promising.
That concludes our prepared remarks. Let's begin the Q&A.
Thank you Bren.
Ladies and gentlemen,
Sorry, go ahead, operator. I just going to say please provide the instructions.
Certainly. Thank you Mr. Kessel. [Operator Instructions] We'll go first today to Vivek Arya of Bank of America.
I'm curious, there's a lot of excitement about the leading edge, but how do we square that with the fact that only the leading foundry of payers to want to increase spending, but the next 2 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 is looking for. I was just curious, this excitement. Is it broad-based? Or is it just based on 1 foundry's desire to increase spending?
Thanks, for the question. It's not a foundry question. It's a customer of the foundries question. I think they would obviously -- if there were more suppliers of leading edge, I think that the business would be spread across them. But right now, there's one supplier in the leading edge. And what they're seeing is significant demand above as they indicated in their call, what they anticipated. And a bit of the -- we anticipated 2-nanometer demand to be strong, but the fact that there's additional demand for 3-nanometer lead us to some pretty robust forecast through the rest of this year for the bookings and also into 2025.
So I don't think it's a function of the number of players. I think it's a demand driver. And as you know, it's across a number of players because it's not just in support. I mean, AI is the fastest-growing segment, and that's both for training chips, but also inference trips, and that's really driving this additional demand that we're seeing.
And Vivek, the other thing I would add is severely close to our customers, and they all approach process control in different ways. But generally, we want to make sure that we're collaborating and close enough to them that we have a a pretty good understanding of the overall demand picture. So we think that in terms of assessing what each customer is doing in terms of the demand that they're going to satisfy that Rick articulated, we feel good that we have our or supply that is supporting that aligned 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? And -- maybe just the broader question is, can you maybe dissect 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 or overbid. Just how do you think about China for the next several quarters, whether it's on an absolute basis or whether it's on a percentage of sales basis?
Well, Vivek, understanding China right now this year, it's important to keep in context what happened in '22 and '23 and '24, right? So 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 were able to produce in '22, and we focused on our our more strategic long-standing customers. And as we moved into '23 and '24, because a lot of that activity was greenfield, it wasn't necessarily being put in place to react to supply and demand dynamics. It was basically new fabs that were starting up.
And so while it was funding available, those customers were able to step in and fill a void in '23 and '24 that came from our other customers pulling back pretty meaningfully. So as we look at [ '22 ] -- so it's been at elevated levels for a couple of years. If we look at the fourth quarter, as I said before, I thought we would see the percent come down. And it looks like it is coming down to somewhere in the mid-30s for the fourth quarter. And then so if you look at 2024, it's been elevated into the low [ 40s ]. As a percent. And so when we look into next year, expecting some digestion next year, I would expect that to drop somewhere down to around 30% plus or minus a couple of points or so moving forward. I'm not going to get into the various aspects of the mix from a service other than saying, just from a service point of view, it's a less mature market.
So service is a lower percentage than sort of at corporate average percent as a percent of revenue. So hopefully, that's helpful. But that's all I'll say on that front. As it relates to export controls, we've been getting this question for over a year now in terms of when and if and how much. And so I don't want to speculate on the hypotheticals that are out there and how to think about it. So once we have clarity, if if something happens, we'll assess the impact, and we'll have more to share with you. But for now, I don't want to speculate on anything more than that.
We go next now to Harlan Sur at JPMorgan.
Great job on the quarterly execution. On your qualitative comments on the 2025 view, right, you're calling out growth for next year. You said not much change relative to your new 90 days ago. I assume that in terms of maybe total dollar spending, you did call out lower China revenues next year, right, versus your view on stable previously. So should we interpret the downshift in China as being more than offset by incrementally better spending on advanced foundry and logic and memory on the strong demand trends that Rick articulated earlier?
Yes. I think we started with -- you just go back to what we said a quarter ago that a view of stability, maybe it was going to be up a little bit, down a little bit, but not as clear. I think where we sit today, I would expect that it will be down some, and we think it's being offset by by the leading-edge demand that Rick referred to. So overall, our views on '25 haven't really changed.
Yes. I mean, Harlan, if you think about at the exit rate that we're talking about for Q4 -- that is -- if you keep that rate for '25, that's a higher number. So you could have China be at a similar dollar level but a lower percentage.
Got it. And then on your process control business, right? If I look at wafer inspection and patterning and metrology, right, up 10% year-over-year first 9 months versus a year ago, now within this, inspection is up 18% year-over-year. So very, very strong way for the first 9 months of this calendar year. Patterning, metrology, down about 5% right over that same period of time. But -- looking into next year, right, given the Patterning and metrology sort of intensity increases on things like gate all around, backside power distribution, advanced memory, like would you anticipate your patterning plus metrology business to see an acceleration of growth 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 the films, you're monitoring overlay and so on. So patterning tends to scale up and down with more capacity investments. I think given expectations for design starts, you're also going to see the reticle part of the business. increase next year as well. So I would expect that we'll see growth in metrology and reticle inspection into next year. What's been driving inspection is a lot of this activity given some of the yield challenges that customers have been facing, obviously, into starting to pick up here in the fourth quarter. And then, of course, in advanced packaging, where we've seen an inflection of growth in our inspection offerings for that part of the market as well. So that's been a driver for some of the incremental growth of inspection relative to patterning.
Yes. One other thing, Harlan. I think if you look at capacity constraints that we were more gated on lead times of subsystems such as optics for the inspection business. didn't really have that phenomena in metrology. So those tend to flex as Bren said more with production. So we still have good backlog when it comes to the BBP platforms. and an increasing demand environment for us. So we're also seeing additional capacity coming on to support the growth in 2025, so that, that will allow the BBP product lines to grow.
We'll go next now to Joe Quatrochi at Wells Fargo.
I was wondering I'm 2-nanometers as you think about just the capital intensity process control. Is there any color that you can really share there and how we think about sample rates to 3-nanometer?
Sure. What we're seeing right now is what we expected on to and what we're seeing a little bit on 3 is there's more process the window -- process windows are being squeezed even further. So there are more inspection points being added. So when we think about how many steps and the places that people are inspecting, those are going up. So we have a run part analysis of what it looks like and the tools that it will take. What happens is, let's say, you go from 3 to 2, you might not dramatically increase the number of EUV layers, for example, but there is some increase and associated with that are more places where you have to sample.
So initially, when you're in [ vivo ], you have a higher number -- but then you see -- you're looking at different defects, so you might even be looking at higher sensitivity settings, which means you need more capacity to support it. So we haven't fully quantified because when we work with our customers on that, we're actually looking for efficiency. So you debug and then you see what is left that I have to sample at a higher frequency to be able to ensure process stability during ramp in production. But the initial expectations are -- and what we're seeing is that 2-nanometers will be higher, more sampling at higher levels with more systems with more configurations, driving higher process control intensity, and that's the trend that we're seeing. The other thing is, as Bren mentioned, because they're more -- if you think about what's coming, there are going to be more designs at these advanced nodes than we maybe a few years ago, might have imagined, there's higher variability, so higher mix and higher mix drives a need for more sampling as well.
So Joe, on architectures. When architectures change, it tends to drive process control higher, we saw that with [indiscernible] you go back to the last local high of process control intensity or KLA share of WFE. So as we transition here to a new architecture, it will create not only are there other additional patterning requirements from a metrology point of view, more layers deposited and that creates opportunities for us on the film measurement side. You also have new defect mechanisms because of the nature of the structure. So you have these varying defects, where there's residue that's left over, that's very hard to inspect. And so we've introduced new capability for that very 2 or gate all around specific defect type. And so there's an increment of opportunity there beyond what we would normally expect to see in a node to node transition. So there's a lot of opportunity out there. And if we can execute, we feel very encouraged by what's in front of us.
Well, that's helpful detail. As a follow-up, I think in the past, you guys try to help us how to think about like growth half-on-half, second half versus first half? And I guess as we look into the first half of '25, should we be thinking about similar kind of levels half-on-half growth as we've seen kind of second half versus first half in 2024. How should we think about that?
Well, I would say to Rick's earlier point, that based on our expectations into Q1, we see a pretty stable environment from the current run rates as we move forward. So I won't get into the full half. At this point, we'll have a lot more to say about our views on '25 when we report out for the December quarter and January. But certainly, as we look at the March quarter today, I feel very good about the overall stability and the run rate levels of the business.
We'll go next now to C.J. Muse of Cantor Fitzgerald.
I guess maybe to follow up on that last question and your comment about stability into March. I believe 2 is moving into HVM in Q1. And you talked about expected strength from advanced packaging. And when I look at your foundry logic business in the current quarter, where Taiwan actually fell sequentially. It looks like you're seeing some good business from rapidness and mass currently Intel. So -- can you speak to perhaps the breadth of foundry logic that you're seeing early 2025. And I would think that would be a complete offset to a slowdown in China. Would love to hear your thoughts?
Yes. I would expect, given the -- I'll say this, just given the normal ramp schedule that our leading foundry customer executes against -- but normally, you'd start to see those will start to ship in volume in the first part of the year.
Okay. Great. And then a gross margin question for you. It looks like semi process control gross margins dropped maybe 150 bps sequentially in September and you attribute that to mix. So as we look forward, how should we think about that -- those margins kind of normalizing? And what kind of run rate should we remodel into and through 2025?
Yes. Mix is always a factor, C.J. for me. So I would say that normally, our incremental margin model suggests about a 60% to 65% incremental. The mix variability can cause movement across quarters. But if you look at it over longer periods of time, it tends to stick pretty closely to that. the packaging opportunities have been great opportunities from a growth point of view. But currently, we're selling some lower end systems into that part of the market. So it is affecting the mix a bit, although we're encouraged about the trend there for the need for more capability moving forward. So it's those kinds of issues. I would say that we're operating here in this, I'll call it, 61.5% range.
And at current run rates, as we sort of project out into next year, I think we're likely to be north of that route versus south of that as we move forward. That's probably the best I can do.
We'll go next now to Tom O'Malley at Barclays.
I just wanted to ask specifically on the man market. So you guys are coming off a really low base in September, but there's a bit of a debate right now if you look out into calendar year '25 about where normal capacity is for historical NAND and where you're moving potentially to technology transitions and what that means from an equipment perspective. So I guess maybe the broader question is, what are you seeing in the NAND market? Are you seeing intensity kind of pick up there? Are you seeing customers look to expand lines? Or are you seeing that technology upgrade as well any comments on what is driving that NAND growth into next year? And just your take on the market would be the first one?
Well, at a pretty low base. So as we think about next year, we would expect some incremental investment next year, but again, off of a very low base. Mostly, what we're seeing is utilization rates get better. We're seeing our customers financial performance, improving inventory levels, improving things like that. So we think that translates into some investment into next year. but we don't see it really growing a lot on an absolute dollar basis, but it is operating are coming off a very low level. So I think we're optimistic on some incremental business there as we move into next year. .
Yes, the one technology trend that will help process control intensity for NAND is the wafer to wafer bonding. But other than that, we're not really pushing the technology compared to DRAM or logic.
Got you. Super helpful. And then the second is just on the advanced packaging side. You guys spent a decent amount of time on the last call talking on the topic and I think increasingly, you're seeing the move to hybrid bonding kind of accelerate. So others are kind of saying 2026 time frame. But are you seeing some opportunities in 2025? And -- could you just try to shape like the size of that business today and some of the opportunities that you're kind of reaching down. Some of your smaller competitors are kind of talking about seeing you in some of those areas already, but -- any comments there would be helpful as well?
Yes, you have development activity there, but we don't expect any move from a production point of view to the hybrid bonding as it relates to high-bandwidth memory until probably at least into the '26, '27 time frame. So what's really driving that part of the business for us is mostly on the logic side, although we're encouraged by some of the trends we're seeing in memory in terms of opportunity. HPM devices themselves create higher process control opportunities because not only do you have the silicon trade in terms of bits per wafer, if you will. But you also have higher reliability requirements.
You had the logic circuitry that has to be processed you've got stack the die. So there's a lot of opportunities within that that we are encouraged by as we move forward.
So one of the truisms in our business for inspection metrology is what is the cost of the inspection at any step relative to the cost of the best step. And what I mean by that is if you go back in time and they were making wafers for solar, we never saw there being much opportunity because the cost of the wafer is just not very high. so it couldn't support much inspection. You go to the other end of that and you have the cost of an EUV reticle is so high and the cost of failure is so high, there's a lot of money spent on the inspection. The biggest dynamic that changed in advanced packaging is the relative cost of that step and the fact that the cost can support a much higher level and a need for a much higher level of inspection capability.
So our view is we did not go down to that market. That market came to us because it got much more challenging. And the need for higher level inspection, if you think about HBM and you think about what's at risk for our customers, so they recognize that and they're investing much more heavily to ensure that those steps are clean because the cost of failure there is so high. And that's a big part of what's driving capital intensity and our product portfolio has moved to some of those dynamics. And those will play out over the next several years, but we're already seeing early evidence of that. And the earliest indication of that was when our customers started talking to us about bringing in our front-end tools into the back end because of these challenges.
Thank you. We'll go next now to Srinivas Pajjuri, ahead, Raymond James.
So my question is on N3 versus N2 demand. I know you said both of them were strong. I'm just wondering, in terms of the near-term upside you're seeing -- is that more coming from N3? And if so, just curious if N2 is also tracking in line with your original expectations?
Yes, I would say that what we've seen over the course of the second half of this year has been more N3 upside. We're starting to see billing investment with some shipments this quarter for N2. And most of what's driving next year is very [indiscernible].
Okay. Got it. That's helpful. And then maybe you can speak to the visibility, especially as China comes down next year. I'm just wondering if that has any impact on your bookings and RPO just in general, your level of visibility as we go forward?
Well, so the RPO has flattened out we'll report and you'll see the specifics on it, but it was more or less flat quarter-on-quarter expected probably to a little bit next quarter or further in the December quarter. So I would say that, in general, lead times have generally been coming in. Some of that has been, as Rick mentioned earlier, new supply or new supply capability so we can actually start to ship some tools that we've had some supply constraints relative to the demand. It really -- I would say that as you start to see some of the greenfield projects will cause some of that to pull in, right? It's greenfield gets pulled back as some of the digestions happening. We're waiting for second round on some of those projects that the need to get into the queue earlier is less urgent.
Although when you have new customers, they want to show commitment and so they typically will and want to sure delivery time. So they'll typically try to give us orders and make sure we're planning for them further ahead. So I would say, in general, lead times are generally pulling in, and we've seen the RPO tick down, but now it looks like it's starting to turn around a bit, see how that progresses as we move through the rest of this quarter and into next year.
Thank you, we'll go next now to Krish Sankar at TD Cowen.
First of all, I want to clarify something, Brent. You mentioned that China could go from 40% to 30% of sales next year, but dollar value remains the same. A, is that true? If so, then your overall revenue should still grow pretty strongly compared to what WFE is expected to be. I'm just trying to figure out how to think about those 2 metrics?
Yes, I think it's a trend down. Look, we'll see how the year plays out. But I would expect it could be the same. It could be a little bit less. I think what we were trying to say earlier is that investment levels have been pretty stable. So we'll see how it plays out. It's a little bit difficult to see into the second half of the '25 from here. So I was just trying to give you some sense of directionally where things are moving as we see next year from 1% of the overall.
Got it. Got it. And then just to clarify one other thing. I know you kind of mentioned about how the foundry demand is improving in the leading edge, which kind of makes a ton of sense also from China. And then -- on the DRAM side, I think as mentioned in the past, process control incentives going up from 10% to 11%. Is that helping you next year? Or is most of it already baked in this year?
No, I think it's helping. There's a lot of momentum from certain customers, particularly as it relates to advanced DRAM and high-bandwidth memory that's creating opportunities for us. So we're encouraged with -- and as we said earlier, I said before, is I'm encouraged by an expectation to see more DRAM investment next year and expect to see stronger relevance of KLA and process control in that ramp. So what -- if I go back to my comment about the cost of the semiconductor and the value of inspection. If you think about this trend for AI, it's definitely playing out in DRAM and in packaging.
Right? So the DRAM for HBM is a more expensive technology. It's more critical, it's larger die. These are wafers that are going to have more EUV and they also have less redundancy in them. So the combination of those factors is what will drive our customers to increase their intensity around process control.
Just EUV is a good example of a pretty significant application we have with our Gen 5 is [ printed ] on EUV and that dedication to having -- using a Gen 5 to verify a reticle as it prints. Has been part of the driver of the success of BBP. So if you think about the trends overall, we don't quite know how it's going to play out for advanced DRAM, but the trends are very positive at this point.
Thank you. We go next now to Joseph Moore with Morgan Stanley.
On the topic of export controls, you sort of said you don't want to speculate until we hear it. I guess I'm just -- how do you expect that to get conveyed? Have you had preliminary conversations it sounds like there might be more of an entity list focused this time around where you get surprised. And when you're giving a framework for next year, and as we had a much lower framework, is how much of that is informed by what you're hearing that they might do versus just kind of I guess, work at this point?
Well, so if you go back to the [ 2000 -- 2 ] years ago, there was some notice, but I think for the government itself, they have their own process, which involves multiple number of players. There's not 1 person or 1 group that decides. They have to go through a reconciliation across their own agencies and also when they're trying to do multilateral, they're talking to other places. So I think truly nothing is decided until it's announced. And we don't get much heads up on when that's actually going to happen. So that's why we keep saying we don't know, we can't speculate. There's plenty that's been written -- but if you read all that's been written, this thing would have happened 4 times in the last 9 months, right?
So clearly, something is causing it to not get decided. And so we're not going to speculate on when it does. When it comes to what our peer companies have said, I think our forecast for 2025 hasn't changed, and it's much more in line with where others are now than what it was. So our view has not changed. Nothing about our forecast for next year. has really changed in the last several months as we talk to our customers and we envision what kind of investment environment there's going to be.
That's very helpful. And then within your China business, I know you had kind of catch-up on the DRAM side that were causing DRAM to be elevated. My perception is that fact [indiscernible] -- is it more driven by foundry at this point?
You started to break up there a little bit, Joe. But yes, I think what you were asking about was DRAM memory moving forward versus foundry logic. And yes, there was some catch-up investment that happened. I would expect less memory, memory to be down more in terms of the overall, I think it's going to be down as parts of the market we don't have access to, but in general, in terms of our business, I would expect foundry logic to to modestly adjust but still to be fairly strong. And I think infrastructure more or less continues, but that's more of a radical statement than a wafer statement.
Thank you. We go next now to Yu Shi of Needham.
My first question. I remember a quarter ago, you talked about not just the 3-nanometer for second half this year but also next year, but we'll look at all the headlines about 2 out of your 3-nanometer customers that doesn't look like there is 3-nanometer upside from done, but the 1 large customer that actually the leading 1 they did not rule out more of the 5- to 3-nanometer conversion or even for next year. So my question really is, are you still seeing the 3-nanometer upside for 2025 given the current visibility here?
So we had this question earlier in the call. But yes, [ 3-nanometer ] continues to be strong. And as we said earlier, we would expect 2-nanometer to be a big driver into next year, but there's still a 3-nanometer activity that is been stronger than we anticipated 6 months ago.
The other thing I want to ask you to make a clarification or maybe provide some color, your reported North America revenue for the September quarter seems like pretty high. I go back probably the last 8 years, it looks like it's probably the highest number of revenue you get from North America. Might if you provide some color on what's driving that big uptick in the September quarter?
Yes. So it was stronger and it's more leading edge centric. I'll say that.
We'll go next now to Atif Malik at Citi.
First, on China, is it possible to understand how big your wafer and reticle inspection business in China because I believe that business is a bit different from your peer that are facing maybe restrictions?
Yes, it is -- if it is different, right? We're exposed to those investments. We haven't disclosed the actual amount, though. But I would say, over the last couple of years, I would say it's been somewhere between 25% and 35% of our China systems business. So it's decent, but the preponderance, obviously, is our semiconductor customers.
Understand. And then, Brent, on the services business, given the scenario of a China demand coming down like you laid out will there be an impact on your services growth expectations of 12% to 14% longer term?
Well, we're pretty bullish on service and service opportunity, and we're trending closer to the top end of that range than the bottom end. We're seeing really dynamic trends in terms of useful life and and new value offerings that we have within our service service model that is driving incremental service demand. And of course, at the shipment levels, the new tools going out, high conversion rates, ASPs generally are higher, which drives contract pricing growth. That's part of it, but also the extending useful life. So as we said before, it's a -- it's a high mix, high complexity, relatively low-volume business. There's not a lot of redundancy.
Customers have very high uptime expectations and so they run the tools at very high levels. They have matching requirements across the tools. So these tools are the eyes and ears in the fab. And as a result of that, customers ensure that they're operating and so that drives our service model that drives the contract stream, which is 75% plus of revenue. And yes, there are dynamics around FX, depending on some service businesses priced in local currencies that can affect the revenue line. And if you did have control, those controls affect service opportunities there. But net-net, we still feel very comfortable with our long-term model and feel like we're trending towards the high end of the model versus the low end.
We go next now to Timothy Arcuri at UBS.
Rick, I just want to be kind of clear about how much handicapping you're doing for the export control. It sounds to me like you're not really handicapping much at all, and you're just sort of waiting for it to get announced and once it gets announced, then it will impact your numbers as it does. Is that fair? Because Lam was pretty explosive that they are. They have a base assumption as to what it's going to look like, and that's and that's handicapping our guidance. Is that not the case for you? Or are you making a base assumption for the guidance as to what the exports will look like?
Well, so Tim, I'll take the first part. So as it relates to guidance, and how we're thinking about the fourth quarter, we have a guidance range. And I would say that as we contemplate all the scenarios, and of course, we have energy issues in terms of the size of our tools and so on. From an ASP point of view as we contemplate all the various scenarios, we're comfortable with the guidance range that we provided for the quarter. As it pertains to long-term impact of something that may or may not happen, we'll have to assess what it means in terms of what we have in backlog, what the forecast, how do we look at those customers and their investment plans and so on. So we won't have a detailed information until something happens, if it happens. But as far as it relates to near term, guidance, I think we feel comfortable with the guidance range we provided.
Okay, Bren. Then I guess just the math on next year. So you grew revenue like mid-30s this year for your China revenue, it's up mid-30s. Of your films tiers, 1 grew 20%, the other 1 is barely going to be up. And I think China WP's up about 20% this year. So you're up a lot more than what you're -- so almost peers are. So it doesn't matter what I think China WFE is. But when you think about how fast you grew China versus your peers, do you think there's any pull forward of your China spending maybe because there's no alternative tool that's available from a mastic Chinese company. So why not to some degree stockpile your tools and move them around as these new entities came up consolidate.
So I'm just wondering if you think that the hangover for you could be a little more severe than your peers?
Tim, there's different buying patterns in terms of timing. If you look at 2023, I think we probably -- our China business undergrew our peers. So if you look at any 1 year in isolation, it might drive you to a conclusion, not really accurate. I mean I think if you look at '23 and '24, I think the general activity levels of investment have been, I think, relatively consistent across most companies that have a broader period of time. Process control tends to particularly in greenfield probably get adopted more heavily early on. Because customers are monitoring very, very closely, doing a lot of sampling. So as wafer starts start to grow, then less process control tends to diminish a bit. So there's probably some timing in terms of how they buy overall. And in '25, given where we are today, and we'll see what overall WFE, but to the earlier comments, we do expect some digestion in '25. .
We'll go next now to Toshiya Hari at Goldman Sachs.
I wanted to get your thoughts on customer mix going into '25 and any implications for margins. You mentioned China is down next year within leading-edge foundry and logic, TSMC obviously, share and growing share within WFE as well. So does that -- or could that potentially pressure gross margins? I know your gross margin profile has been remarkably stable over many, many years, if not maybe decades. So I doubt it, but we do get this question quite a bit from investors. So curious how you're thinking about evolution in customer mix and implications for gross margins?
Yes. Our gross margins are not customer dependent. It's more product specific. So our margins don't vary across different customers. Obviously, customers that buy more tend to get volume-related incentives. But beyond obvious volume incentives, there isn't any real difference between between customers or regions in terms of overall margin. Now they all buy process control differently and at different strategies. And so all of our products carry different margins, they're not all the same. So that's one of the product mix factors that tends to drive some variability there. But yes, it's more about products than customers or regions.
Got it. And then as a quick follow-up, another one on China. I was hoping you could give us a little bit more context by application or customer type. I know you service a broader range of customers relative to some of your process tool peers. Customer groups like match shops, wafer suppliers more on the infrastructure side. I'm curious what percentage of total China those guys account for this year? And as you look forward into 2025, what kind of trends are you expecting?
Yes. Earlier on the call, I mentioned percentage is probably somewhere in the 25%, maybe as high as 30% a given year. But in general, from an infrastructure point of view, that's about the mix. And I would expect that to be mostly stable, but more reticle strict than wafer in [ '25 ]. So that's there. I think we mentioned memory earlier. I think memory comes down meaningfully partly due to the investments that have happened partly due to just the lack of market access to some memory investment for us. So -- and then I think foundry and logic corrects, but doesn't correct all that much. .
We go next now to Chris Caso at Wolfe Research.
I guess the first question is on DRAM and kind of what you're thinking about for next year because it does sound like there's some divergence between different customer groups there. Most are expecting the China part of DRAM to be down pretty significantly. Can you give us a view of generally what you're seeing with regard to DRAM investment and kind of pinning from your customers as you go over next year and how that may have changed over the last quarter?
I would say it hasn't changed all that much. This year, it's been much more about our customers' business is getting better, their financial performance improving. And that some of the investment has been somewhat isolated. We mentioned China earlier as an example. We've seen utilization rates improve, which has been good for our service business. And we would expect as it relates to high in DRAM and supporting high bandwidth memory to see some incremental investment in next year. We'll have more to say from a quantitative point of view in terms of expectations around how much growth and how that translates back to KLA in the January call. But from just an overall context point of view, we expect to see a decent step-up in DRAM investment next year.
Okay. Great. My next question is that some investors are starting to ask about. And there's generally implications of what happens if leading edge tends to consolidate more than it has already. And perhaps that could be just because when leading edge customers are just growing so much more quickly than the others. It's probably early to make that call right now. I -- that some of your customers would disagree with that. But thinking about it now, what would the implications be if we saw more consolidation? Would that provide some pressure because just more suppliers than simply more suppliers and customers?
I think it would depend on the drivers. In other words, in a world where there was a single driver for the leading edge, say, take a microprocessor than -- and it had been made at multiple places, then you'd argue, sure, consolidation would be more efficient. What's interesting now is because there are so many advanced designs, the efficiency you need scale to have efficiency and they already have that scale. So I don't think it changes that much. I do think you have some people still making investments to do leading edge, say, in Japan, for example. And there's -- that -- they're hoping to get part of the market -- our assumption is that it remains at about the efficiency and the way we measure that and model for it as we think about what is the capital efficiency or the intensity of capital and process control for that segment as we go forward. And we're not really modeling it to go up significantly because there's a lot of players at the leading edge.
Truthfully, there haven't been. I mean, for years now, we've really had primarily 1 major player at the leading edge. And so that's for most of the volume. So we're kind of already there. If that were to change, that might drive up intensity beyond what we're modeling more so than go the other way. Does that make sense?
Yes. Yes. That's a something we're thinking about. Thank you.
Thank you. And ladies and gentlemen, we do have time for one more question today. We'll take that now from Blayne Curtis of Jefferies.
I feel that would be the last question and giving you this one. But I was just kind of curious to your perspective, you're on in the 3 that kind of does give an outlook for the market. So I appreciate that greatly. We have had a handful of companies already report, I think, generally, consensus is kind of double digits for everybody, and I don't think people have brought them down below that. I was just kind of curious, as you assess the market, I know I guess I appreciate you trying to put something out there, but a low single-digit growth. It just seems low. So I'm just kind of curious, one, I think your numbers are up double digits. It seems like your tone would suggest that, that's maybe the right trajectory. So I'm just kind of curious where that outlook came from. And I think in general, do people have it wrong, I guess?
I'm sorry, what period of time are you talking about?
For '25, all right? I mean the WFE forecast that you put out, I appreciate you putting it out, right? But you said high [indiscernible].
No, we haven't put it out a we provided an update to our '24 view that we actually see '24 in the high 90s versus the mid-90s, which is what we what we said 3 months ago. So as it relates to 2025, we haven't actually put a number out there. The only thing we talked about is in reference to our own business. in our views of current run rate a reasonable amount of stability here moving forward.
I apologize. That was my mistake. I just want to ask on the other one on the China outlook. So thought you were talking about your kind of prospective end markets in China being down. I just want to make sure I heard you. I know you had a couple of questions on this. I apologize for the clarity there as well. But you said December down, I think you said 35% of revenue. So it would be down as a dollar amount, but then you said kind of flat kind of for the rest of the year. And I thought I heard you say that then it still dropped as a percent of revenue, which is another way you can kind of back into, I guess, what you're seeing in growth. So I was just trying to understand if that's the mechanics of what you said. And I guess that's another way you can kind of back into double-digit growth. I know you're trying to put it out there. I just want to understand what you said?
Yes. So maybe -- this is Rick, let me try to clarify our view. We said earlier in the year that we think one of the things we're doing is preparing for growth at the leading edge. That's where we think we are now. We think the growth in the next year is going to come from the leading edge. And that's both in memory as it pertains to high bandwidth and a lot of the work that's going on. It has to do with advanced packaging and it has to do with advanced logic foundry. The other business, such as that we've had, for example, in China, we don't know exactly, but that's not leading edge. That's a mature business. And we think it's too early to say. But when we look to '25 and then look beyond to the model we had for '26 or even what we'll start talking about 2030. We think we're getting back to the historical levels where leading edge is what's driving the growth. It's the largest percent of the business and the legacy will be a smaller percent. When exactly that happens, we don't know.
But that's the trend that we're seeing. And what we're seeing is very good indications of strength in leading edge based on the design starts and based on the conversations with customers. In the last quarter, for the first time in quite a long time, our leading-edge customers have been asking for acceleration, more systems than they'd originally planned for, and they want to make sure we can support them and install them that's what gives us the confidence that '25 is going to be driven by investment in the leading edge.
Thank you, Blayne, and thank you, everybody, for your interest, for your time. We'll be following up with many of you in the following days. And with that, I'll turn the call back over to the operator for any concluding instructions.
Thank you, Mr. Kessel. Ladies and gentlemen, that will conclude the KLA Corporation September Quarter 2024 Earnings Call and Webcast. Please disconnect your line at this time, and have a wonderful day.