KLA Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2024, ended December 31, 2023. Comparisons below are with the corresponding periods of fiscal 2023 unless noted. Amounts are in U.S. dollars.
Business context and results
KLA supplies process-control, inspection, metrology and related products and services to semiconductor and electronics manufacturers. Its reportable segments are Semiconductor Process Control, Specialty Semiconductor Process, and PCB, Display and Component Inspection.
| Metric | Q2 FY2024 | Q2 FY2023 | Change |
|---|---|---|---|
| Revenue | $2.487 billion | $2.984 billion | Down 17% |
| Product revenue | $1.922 billion | $2.463 billion | Down 22% |
| Service revenue | $565 million | $520 million | Up 9% |
| Gross margin | 60.7% | 59.5% | Up 1.2 percentage points |
| Net income attributable to KLA | $583 million | $979 million | Down 40% |
| Diluted EPS | $4.28 | $6.89 | Down 38% |
For the six months ended December 31, revenue was $4.884 billion, down 14%; net income was $1.324 billion, down 34%; and diluted EPS was $9.69, versus $14.09. Six-month gross margin was 60.6%, unchanged year over year. In Q2, improved product and service mix and lower other service and manufacturing costs lifted gross margin, partly offset by lower volume.
Segment and geographic performance
- Q2 Semiconductor Process Control revenue fell 17% to $2.194 billion; Specialty Semiconductor Process fell 5% to $150 million; PCB, Display and Component Inspection fell 16% to $143 million.
- Service revenue growth reflected a larger installed base. Product weakness reflected a macro-driven semiconductor slowdown, industry inventory rebalancing, and customers’ reduced capacity-expansion spending.
- China represented 41% of Q2 revenue, compared with 23% a year earlier. Taiwan represented 15%, compared with 26%; Korea represented 12%, compared with 20%.
Cash flow, liquidity and debt
- Six-month operating cash flow was $1.506 billion, down from $1.700 billion. Management attributed the decline mainly to lower collections, higher income-tax payments and higher interest payments, partly offset by lower accounts-payable payments and increased interest income.
- Six-month investing cash outflow was $480 million; financing cash outflow was $1.296 billion. Cash and cash equivalents declined by $263 million from June 30.
- At December 31, cash and cash equivalents were $1.665 billion and marketable securities were $1.678 billion, totaling $3.343 billion. Working capital was $4.18 billion, down from $4.63 billion at June 30.
- Debt carrying value was $5.893 billion, including $750 million of 4.65% notes due November 2024 classified as short-term debt. Cash, cash equivalents and marketable securities exceeded debt by approximately $2.55 billion. KLA had no borrowings under its $1.50 billion revolving credit facility and reported compliance with debt covenants; its leverage ratio was 1.39 to 1.00 against a 3.50 maximum.
- Six-month share repurchases totaled approximately $901 million and dividends paid totaled $378 million. The quarterly dividend was $1.45 per share. Approximately $3.02 billion remained authorized for repurchases at December 31.
Material changes, outlook and risks
- KLA recorded a $219 million impairment charge in Q2: $192.6 million for goodwill and $26.4 million for purchased intangible assets, following a significant deterioration in the long-term outlook for its PCB and Display businesses. KLA began evaluating strategic options for the Display business. Further impairment is possible if valuation assumptions weaken.
- Management cited persistent macro-driven softness, lower customer capital spending and possible order pushouts or cancellations. It said it was moderating spending to reflect the changing environment while continuing investment in technology and R&D. The filing does not provide a clear numerical revenue or earnings forecast.
- Remaining performance obligations were $10.65 billion at December 31. KLA expects approximately 45% to 50% to be recognized as revenue beyond the next 12 months; the estimate is subject to change. Longer lead times and customer reassessment of orders create risk of modifications, pushouts and cancellations.
- U.S. export controls, including additional rules effective November 2023, restrict sales and services to certain China-based customers absent licenses. KLA is applying for licenses but cannot assure they will be granted; denial could affect shipments, support, revenue, RPO and customer deposits.
- Other key exposures include semiconductor cyclicality and customer concentration, supply-chain disruption, geopolitical and operational risks, interest-rate and currency movements, litigation and tax examinations. Management stated that available liquidity and expected operating cash flows should cover requirements for at least the next 12 months.
- Purchase commitments were estimated at approximately $2.1 billion, mostly due within 12 months; actual spending may vary and some agreements may permit cancellation or renegotiation. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the semiconductor-demand slowdown and customer spending reductions continue, and how they affect product revenue, margins and cash generation.
- Whether China export licenses are obtained and how evolving controls affect shipments, RPO, deposits and reported geographic revenue.
- Whether PCB and Display outlook or strategic decisions lead to further impairments or restructuring charges.
- How the $750 million November 2024 debt maturity will be funded or refinanced, alongside ongoing dividends and repurchases.
- Whether RPO converts on the expected timetable, given customer cancellation, modification and delivery risks.
- Developments in tax audits, legal matters and the company’s significant purchase commitments.