KLA Company (NASDAQ:KLAC) Q2 2022 Earnings Convention Name January 27, 2022 5:00 PM ET
Firm Individuals
Kevin Kessel – Vice President of Investor Relations & Market Analytics
Rick Wallace – Chief Govt Officer
Bren Higgins – Chief Monetary Officer
Convention Name Individuals
John Pitzer – Credit score Suisse
Harlan Sur – JPMorgan
CJ Muse – Evercore
Vivek Arya – Financial institution of America Securities
Timothy Arcuri – UBS
Patrick Ho – Stifel
Joe Moore – Morgan Stanley
Operator
Right now, I wish to welcome everybody to the KLA Company December Quarter 2021 Earnings Convention Name and Webcast. All participant strains have been positioned in a listen-only mode to forestall any background noise. After the audio system’ remarks, there shall be a question-and-answer session. [Operator Instructions] Please restrict your self to at least one query and on follow-up. [Operator Instructions] Thanks.
I’ll now flip the decision over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please, go forward.
Kevin Kessel
Thanks, Leo, and welcome to KLA’s Fiscal Q2 2022 quarterly earnings name to debate the outcomes of the December quarter and the outlook for the March quarter. With me on at the moment’s name is Rick Wallace, our Chief Govt Officer; and Bren Higgins, our Chief Monetary Officer.
Throughout this name, we’ll talk about quarterly outcomes for the interval ended December 31, 2021, launched this afternoon after the market closed. You’ll find the press launch, shareholder letter, slide deck and infographic on the KLA IR part of our web site.
At this time’s dialogue is introduced on a non-GAAP monetary foundation except in any other case specified. And each time we make references to full 12 months enterprise, efficiency, it may be understood to be a calendar 12 months. An in depth reconciliation of GAAP to non-GAAP outcomes is within the earnings supplies posted on our web site.
Our IR web site additionally incorporates future investor occasions in addition to shows, company governance info and hyperlinks to our SEC filings, together with the newest Annual Report and quarterly studies on Varieties 10-Ok and 10-Q.
Our feedback at the moment are topic to dangers and uncertainties mirrored within the threat elements disclosure in our SEC filings. Any forward-looking statements, together with these we make on the decision at the moment, are additionally topic to these dangers, and KLA can not assure these forward-looking statements will come true. Our precise outcomes could differ considerably from these projected in our forward-looking statements.
Let me now flip the decision over to our Chief Govt Officer, Rick Wallace. Rick?
Rick Wallace
Thanks, Kevin. Earlier than summarizing KLA’s outcomes for calendar 12 months 2021 and for the December quarter, I would prefer to first acknowledge and thank the worldwide KLA workforce, the dedication and laborious work of our groups by no means wavered, regardless of difficult situations, delivering for patrons and managing round a posh world provide chain throughout a interval of unprecedented {industry} shortages.
It was the day-to-day drive to be higher that drove KLA’s market management, leading to document progress and monetary efficiency throughout the board for the corporate within the December quarter and for 2021.
KLA additionally delivered document returns to shareholders in 2021 by means of our dividend and share repurchase packages, with returns to shareholders totaling over $2 billion. KLA’s robust outcomes reveal our observe document of relative energy and income progress and superior monetary efficiency, in contrast with semiconductor {industry} friends in a dynamic and rising wafer fab gear {industry}, in addition to the long-term worth created by worker and constantly refining our KLA working mannequin.
Since our founding in 1976, KLA’s mission has been centered on utilizing our experience and revolutionary considering to beat monumental technological challenges. KLA is advancing humanity with applied sciences and concepts that encourage motion. Our leads to the December quarter and for 2021, reveal ongoing success of those methods. So thanks to all our groups for contributing to KLA’s enduring success.
2021 was one other 12 months of document progress, profitability and free money stream for KLA as we efficiently navigated unprecedented challenges within the market, responding to document demand throughout the overwhelming majority of our markets, whereas adapting to the evolving operational complexities related to the worldwide pandemic.
By way of all of it, we stay centered on delivering to our prospects’ necessities and driving robust returns to shareholders in a quickly rising {industry} demand setting. In 2021, income grew 34% to $8.2 billion, marking the sixth consecutive 12 months of income progress. KLA’s robust income progress in 2021 was pushed by 46% progress within the semiconductor course of management methods. Income from the companies enterprise grew 14% within the 12 months, with over 75% of the income generated from recurring subscription like contracts, reflecting the rising worth of added course of management methods and companies in our product portfolio.
KLA additionally demonstrated robust working leverage on our income progress in 2021 with non-GAAP working revenue and non-GAAP earnings per share rising 54% and 61%, respectively. Incremental working margin on the income progress in 2021 was 57%, constantly above our goal working leverage mannequin of 40% to 50% for the second 12 months in a row. Free money stream additionally grew a wholesome 43% in 2021 to a document $2.5 billion, in line with our long-term strategic aims, KLA delivered on our ongoing dedication to return worth to shareholders, together with our twelfth consecutive dividend enhance introduced in July 2021, together with an extra $2 billion share repurchase program.
Whole returns to shareholders in 2021, together with dividend and share repurchases, topped simply over $2 billion or roughly 79% of free money stream. This progress demonstrates success in strengthening our market management throughout our enterprise that we will proceed to construct upon to drive adoption of KLA options within the essential markets we serve.
Inside the Electronics, Packaging and Part inspection or EPC Group, the Specialty Semiconductor Course of section grew 11% in 2021, and the printed circuit board Show and Part inspection grew 17% within the 12 months. The robust relative efficiency for KLA displays our market management and diversification and was pushed by secular {industry} progress developments throughout a number of finish markets.
We ended 2021 with an exceptionally robust backlog and commenced what we anticipate being a seventh consecutive 12 months of progress for KLA. We entered 2022 executing at a excessive degree and working from a place of energy in our market regardless of persistent provide chain challenges. This momentum units the stage for KLA to proceed outperform the market whereas demonstrating superior monetary efficiency and sustaining our capital returns.
Turning now to concentrate on the December quarter outcomes the place we noticed diversified energy throughout our enterprise. At this time, demand setting continues to reveal accelerated adoption of a broad spectrum of semiconductor and digital {industry} progress developments. Know-how is remodeling how we reside and work and the data-driven financial system is basically altering how companies function and ship worth. This digital transformation is enabling secular demand drivers resembling high-performance computing, synthetic intelligence, progress in new automotive electronics and robust progress in knowledge facilities and 5G communication markets. Every of those secular developments are driving funding and innovation and superior reminiscence and logic semiconductor gadgets, in addition to new and more and more extra complicated superior packaging and PCB applied sciences.
With our market management in course of management, and progress and enlargement in new markets like Specialty Semiconductor Course of gear, PCB and completed die inspection in our EPC group, KLA is crucial to enabling our rising digital world. To make this occur, KLA continues to prioritize and spend money on R&D, which totaled $1 billion in calendar 2021, double the extent of 5 years in the past and rising at a 15% compound annual progress fee.
With this favorable backdrop and our demonstrated observe document of investing closely in R&D to drive product differentiation and constantly assembly or exceeding our commitments to prospects and shareholders, our efficiency enabled KLA to outperform the 2023 long-term monetary mannequin targets that we set two years in the past, two years forward of expectations.
Transferring alongside to the highest highlights from the December 2021 quarter. First, we noticed continued energy and consistency in foundry logic buyer income for each vanguard and legacy applied sciences within the December quarter. As anticipated, reminiscence demand additionally grew within the interval.
Calendar 2022 is setting as much as be one other 12 months of robust progress for WFE. We see demand momentum all through 2022 throughout our main finish markets. The energy and the demand we’re seeing displays KLA’s important function in supporting our prospects’ drive to innovate and proceed to spend money on future expertise nodes.
In foundry and logic, simultaneous investments throughout a number of nodes and rising capital depth continues to be a tailwind. In reminiscence, demand stays broad-based throughout a number of prospects, and we anticipate one other 12 months of double-digit progress in 2022 with NAND rising sooner than DRAM; second, KLA is seeing robust demand throughout the breadth of our industry-leading optical inspection portfolio as now we have maintained our momentum in one of many fastest-growing markets in WFE.
Wafer inspection methods revenues grew 54% in 2021, far outpacing the WFE market, which is estimated to have grown 40%. We’re experiencing robust progress throughout our wafer inspection portfolio from broadband plasma, laser scanning, unpatterned, their wafer inspection, macro inspection and e-beam merchandise. This quarter, we spotlight macro inspection, which is rising at a tempo of 1.5x WFE, pushed by progress in automotive and different specialty markets, the place KLA has defensible market management with a platform uniquely positioned to deal with rising technical complexity and tighter design guidelines; third, success in KLA’s strategic progress and market diversification methods are being demonstrated by progress in EPC.
Methods income from KLA’s Electronics, Packaging and Parts, or EPC group, grew 20% in 2021. With EPC, KLA is diversifying our market management with a portfolio of options addressing fast-growing new markets within the electronics worth chain, together with RF, specialty semiconductors, automotive, PCB, superior packaging and show; fourth, service income grew 14% in 2021 to $1.8 billion and continues to maintain a progress fee above its long-term goal of 9% to 11%.
For the quarter, companies income was $457 million or 19% of whole income. Annual companies income is rapidly approaching $2 billion and has grown 81% previously three years. This progress has been pushed by the rising put in base and rising adoption of subscription-like contracts.
Over 75% of service income within the Semiconductor Course of Management section, and over 90% of companies within the printed circuit board enterprise come from recurring subscription-like contracts.
Lastly, the December quarter was one other distinctive one from a free money stream perspective, capping a 12 months during which KLA generated over $2.5 billion in free money stream and returned over $2 billion to shareholders.
Within the December quarter, we generated robust quarterly free money stream of $746 million, which helped drive 43% progress in free money stream in 2021. We have additionally maintained concentrate on returning capital to shareholders by way of our dividend and share repurchase program, which rose 63% year-over-year on a mixed foundation.
Earlier than Bren will get into higher element on our monetary highlights and steering, let me briefly summarize. Regardless of the persistent disruption and continued challenges related to the pandemic, significantly across the provide chain and part availability, KLA is constantly delivering robust income progress, monetary outcomes and returns to shareholders. KLA is properly positioned on the forefront of technological innovation with a complete portfolio of merchandise concentrating on probably the most demanding inspection and measurement challenges within the market.
I additionally need to present a fast replace on our ESG actions. On December 16, KLA introduced setting a purpose to make use of 100% renewable electrical energy throughout our world operations by 2030. Managing the impacts of our enterprise by way of ESG stewardship is an integral a part of KLA’s mission to advance humanity. This contains contributing to making a extra sustainable future.
With that, I will move the decision over to Bren to cowl our monetary highlights, outlook and steering. Bren?
Bren Higgins
Thanks, Rick. KLA’s December quarter and 2021 outcomes spotlight the continuation of robust execution in a dynamic and difficult market setting. We proceed to reveal our skill to fulfill buyer wants and broaden our market management, whereas rising working earnings, producing document free money stream and sustaining our long-term technique of productive capital allocation.
The December quarter capped off a 12 months in 2021 that was outlined by robust progress and profitability throughout a number of areas of our enterprise. We additionally invested virtually $1 billion in R&D to maintain our success and $250 million in capital expenditures to develop our world infrastructure to assist our {industry} progress thesis. All this was completed whereas concurrently persevering with to return excessive ranges of capital to shareholders.
Whole income within the December quarter was $2.35 billion, above the midpoint of the guided vary of the quarter of $2.225 billion to $2.425 billion and up 13% sequentially versus the September quarter. Non-GAAP gross margin was 63.1%, simply above the midpoint of the guided vary of 62% to 64%. GAAP diluted EPS was $4.71 and non-GAAP diluted EPS was $5.59, every throughout the steering vary.
Gross margins had been 63.1% and consistent with expectations, as product combine and manufacturing unit bills ended the quarter largely as deliberate. KLA’s gross margin displays the worth we ship to {the marketplace} and our aggressive differentiation.
To enhance on our skill to fulfill our buyer wants, we’re additionally making significant investments in our world workforce, provide chain and manufacturing unit infrastructure to place KLA to ship our merchandise on this rising demand setting.
Whole non-GAAP working bills had been barely beneath the midpoint of the guided vary of $465 million, together with $265 million of R&D expense and $200 million of SG&A. Non-GAAP working earnings as a share of income was 43.4% within the December quarter. KLA’s innovation is key to our go-to-market technique and centered on differentiated options. R&D is on the coronary heart of what we do and stays a key aspect in driving our portfolio technique, new product introduction cadence and product differentiation. This in flip helps maintain our expertise and market management.
Given the speedy progress of the enterprise over the past couple of years and our income expectations going ahead, we anticipate the corporate’s working bills to proceed to develop as we spend money on world infrastructure and methods to scale the KLA working mannequin, in addition to new product improvement packages and quantity dependent assets to assist our enterprise enlargement.
Moreover, we, as most firms are seeing a robust labor market driving price strain throughout our world workforce and inside outsourced companions. In consequence, we anticipate working bills to develop sequentially to roughly $495 million within the March quarter, and we forecast sequential progress in working bills to proceed by means of calendar 2022.
Whereas working bills are modeled increased going ahead as we’ll make the required investments to scale our enterprise to assist our long-term structural {industry} progress thesis, we’ll proceed to dimension the corporate based mostly on our goal working mannequin, which delivers 40% to 50% incremental working margin leverage on income progress over a normalized time horizon.
Different curiosity and expense within the December quarter was $39 million, and the non-GAAP efficient tax fee was 13.3%. So we all the time have some variability in our tax fee given the timing and affect of discrete gadgets and the geographic distribution of income and revenue. We consider it stays prudent to keep up our long-term tax planning fee at 13.5% going ahead.
Non-GAAP web earnings was $851 million. GAAP web earnings was $717 million. Money stream from operations was $811 million, and free money stream was $746 million. This resulted in a free money stream conversion of 88% and a really wholesome free money stream margin of 32%. The corporate had roughly 152 million diluted weighted common shares excellent exiting the quarter.
Income for the Semiconductor Course of Management section, together with its related service enterprise, was $2.05 billion, up 49% in contrast with the December 2020 quarter and up 15% sequentially. Semiconductor Course of Management methods and repair grew 39% in calendar 2021 versus calendar 2020.
Foundry logic was 71% of the approximate Semiconductor Course of Management system buyer section combine within the December quarter and reminiscence was 29%. Inside reminiscence, the enterprise was break up roughly 54% DRAM and 46% NAND. Income for our Electronics, Packaging and Parts Group continues to be pushed by energy in 5G cellular and infrastructure in addition to continued demand in automotive. Extra particularly, the Specialty Semiconductor Course of section, which incorporates its related service enterprise generated document income of $113 million, up 24% over the prior 12 months and up 10% sequentially. Specialty Semiconductor Course of methods and repair grew 11% for calendar 2021. PCB, Show and Part Inspection income was $188 million, up 5% year-over-year, however down 7% sequentially. On a full calendar 12 months foundation, it grew 17%. Our breakdown of income by main merchandise and area might be discovered within the shareholder letter, so I will not cowl these right here.
Turning to the steadiness sheet, KLA ended the quarter with $2.8 billion in whole money, whole debt of $3.4 billion and a versatile and enticing bond maturity profile supported by investment-grade rankings from all three businesses. We stay dedicated to our long-term technique of money returns to shareholders, executing a balanced strategy break up between dividends and share repurchases, concentrating on long-term returns of 70% or extra of free money stream generated.
In 2021, KLA exceeded our long-term capital returns goal, returning over $2 billion to shareholders, together with $601 million in dividends paid and $1.4 billion in share repurchases. We consider our observe document of delivering robust capital returns is a key part of the KLA funding thesis and affords predictable and compelling worth creation for our shareholders.
KLA has a historical past of constant free money stream technology, excessive free money stream conversion and robust free money stream margins throughout all phases of the enterprise cycle and financial situations. Through the December quarter, we repurchased $430 million of frequent inventory and paid $160 million in dividends.
As we start the New 12 months, our view is that the WFE market will develop within the excessive teenagers, topping $100 billion off a baseline of roughly $86 billion for 2021. WFE demand continues to be constrained by the {industry}’s skill to produce. Sturdy {industry} progress momentum in 2022 throughout all finish markets is predicted to drive progress with the strongest share progress coming from foundry logic prospects. And reminiscence funding shall be led by 3D NAND.
Now wrapping up with our outlook and steering. Wanting forward, our backlog stays robust and gross sales funnel visibility over the near-term horizon is nice. Nevertheless, rising product lead instances pushed by elevated provide chain constraints is limiting our near-term output. These points are lowering our income expectation by 8% to 10% for the March quarter.
Particularly, COVID-related disruptions at various single-source suppliers have exacerbated what has already been a troublesome provide state of affairs the place these suppliers have been challenged to fulfill demand by operating their manufacturing at max capability. These disruptions are inflicting delays in elements supply timing throughout a number of product platforms.
As well as, quite a few digital part sourcing challenges have turn out to be extra acute over the previous month as these are standardized elements and in demand throughout a number of industries. We anticipate that the COVID-related affect will start to abate shortly and new capability or provide options are anticipated to turn out to be accessible as we transfer by means of the calendar 12 months. Whereas these points might be fluid and troublesome to foretell within the brief run, we anticipate the March quarter income to signify the low level for calendar 2022, and we stay exceedingly assured within the sustainability of our present demand profile for the 12 months.
Given present expectations for progress in WFE and different electronics markets, we really feel assured in our skill to develop all year long with whole firm income progress exceeding 20% and semiconductor course of management methods income to outperform WFE progress once more. Our confidence relies on present backlog ranges, aggressive positioning, robust buyer engagement, and steps we proceed to take so as to add capability to deal with output constraints in what continues to be a strong demand setting.
Our March quarter 2022 steering is as follows: Whole income is predicted to be within the vary of $2.2 billion, plus or minus $100 million. Foundry logic is forecasted to be about 59% of Semiconductor Course of Management methods income. Reminiscence is predicted to be roughly 41%.
We forecast non-GAAP gross margin to be within the vary of 61.5 to 63.5, as general income ranges declined modestly on a sequential foundation and product combine dilutes gross margins by roughly 50 foundation factors versus the prior quarter. To supply some shade for the calendar 12 months, given increased income quantity, product combine expectations throughout our numerous segments offset by anticipated price pressures inside our provide chain, we’re modeling gross margins to be roughly 63% for the 12 months, plus or minus 50 foundation factors.
Different mannequin assumptions for the March quarter embrace working bills of roughly $495 million, curiosity and different expense of roughly $41 million and an efficient tax fee of roughly 13.5%.
Lastly, GAAP diluted EPS is predicted to be $4.54, plus or minus $0.45, and non-GAAP diluted EPS of $4.80 plus or minus $0.45. The EPS steering relies on a totally diluted share depend of roughly 151 million shares.
In conclusion, now we have exceptionally robust and diversified finish market dynamics propelling semiconductors and the important WFE investments required to make them. Moreover, we’re seeing income progress alternatives as extra innovation happens and expertise complexity will increase in specialty semiconductors, superior packaging and different electronics markets.
Lastly, our companies choices proceed to ship extra worth to our prospects in our Semiconductor Course of Management enterprise and there are evolving alternatives to additional broaden our price proposition in our acquired companies. Our document backlog is supported by stable buyer demand throughout finish markets and at a number of expertise nodes.
2022 is setting as much as be the third consecutive 12 months of double-digit progress for WFE and the seventh consecutive 12 months of progress for KLA. The KLA working mannequin fuels KLA’s strategic aims and positions us to outperform the {industry} by way of progress and monetary efficiency.
These aims gas our progress, operational excellence and differentiation throughout an more and more extra numerous product and repair providing. In addition they underpin our sustained expertise management, huge aggressive moat and robust document of free money stream technology and capital returns to shareholders.
With that, I will now flip the decision again over to Kevin to start the Q&A session. Kevin?
Operator
Go forward, Mr. Kevin.
Kevin Kessel
You go forward and queue for questions. Sorry about that.
Query-and-Reply Session
Operator
No worries. [Operator Instructions] Within the curiosity of time, we ask that you simply please restrict your self to at least one query and one follow-up. We’ll now take our first query from John Pitzer of Credit score Suisse.
John Pitzer
Sure. Good afternoon, guys. Thanks for letting me ask the query. Rick, as you identified in your ready feedback, you guys have been dealing and the {industry} has been coping with a troublesome provide state of affairs all 12 months, however that is the primary quarter that you simply and others have seen to have a significant affect on the enterprise.
And I am form of curious as to what particularly occurred within the final 90 days to make issues worse. And I assume, extra importantly, as you name March on the backside, what provides you confidence that these issues will not persist even longer?
Rick Wallace
Hello, John. Thanks for the query. Sure, we really feel fairly good about how we have navigated by means of the pandemic. A few elements for KLA particular, I believe, to consider. One is, we had been up within the December quarter. And once more, enormous buyer demand, so working to work that off.
We talked previously about securing essential parts, essential elements from key suppliers that really continues to be in fine condition, the place we had some challenges in the previous few weeks. And proper now, as we’re really working by means of them, needed to do with not essentially our essential provide, however simply generalized provide throughout the {industry}. I believe as most firms are speaking about.
So we’re seeing a few of that, that aren’t distinctive, as Bren mentioned in his feedback, to KLA. The rationale we really feel extra assured is, even in the previous few days, we have seen some strain being launched in that system, that it will not be in time for what we’d have most popular to ship on this quarter, we clearly have the backlog, we might have shipped extra if we had it. However it’s being resolved. So we really feel fairly good concerning the go ahead after we get by means of March.
And I will let Bren add some shade since he is spending a very good a part of his time working a few of these points himself.
Bren Higgins
Hey John, how are you? So simply so as to add to Rick’s remark, I believe one of many issues you must think about is most of our strategic buffer that we have construct whether or not now we have it in stock ranges on the firm, whether or not it is a list or lengthy lead time supplies that we have both procure or suppliers are procured over the past 15 months or so, given the energy of demand, now we have labored by means of a good quantity of that. And that is one of many challenges now we have is we’re extra dependent at the moment on the predictability of timing, to begin with, but additionally quantity of high quality. And so I believe these are points that we proceed to work by means of.
As Rick mentioned, in our complicated methods, we typically have a reasonably clear view of the place that demand is, though everyone seems to be struggling to fulfill the demand setting that we’re dealing with at the moment. However it’s in our increased quantity however single supply kind merchandise the place we have seen a few of these pressures. We didn’t anticipate a COVID variance and what that will do to these factories by way of individuals having to go away both due to contact or publicity.
So that you had amenities which can be already operating 100% max that rapidly needed to take care of this disruption in a number of circumstances, a reasonably significant disruption within the first a part of the month. We predict that, that is abating. And we’re getting a way that that is bettering. And this COVID setting, we’ll have to determine and navigate our means by means of. We do not know what the long run holds. However no less than by way of the near-term setting, we really feel fairly good about that.
After which making an attempt to supply and discover all {the electrical} parts, that are deeper in our construct of fabric and inside our provide chain. There’s much less visibility, however there’s additionally various both various provides, qualifying new elements in some circumstances, leveraging third events, which we have been doing, and that is even changing into extra challenged by way of distributors and others that is perhaps different which have these elements.
So we’re managing by means of this. We’re escalating the place acceptable. And as we have a look at it and stroll by means of what we anticipate to see shifting ahead, we expect the March quarter units up on the backside, and we anticipate — given the steering we gave that we’d see progress by means of the 12 months and anticipate the corporate to be someplace in extra of 20%, as we mentioned within the ready remarks. So there’s all the time some questions or unpredictability right here by way of simply the place issues are, however that is the very best of how we see it at the moment.
John Pitzer
After which, Bren, simply as my follow-up. You gave some very particular steering for OpEx even past the March quarter, rising sequentially all year long, however nonetheless throughout the mannequin of 40% to 50% incremental gross — working margin, sorry. I am simply form of curious, I’ve to think about that this 12 months, the availability constraints are inflicting some extra prices that may bleed down over time as provide will get higher. And there is a larger mismatch, I am assuming between income assortment and funding this 12 months. In order you begin to recapture a few of this income as provide will get higher, ought to we assume that incremental op margins nearer to the upper finish of that 40% to 50%, or how ought to we take into consideration that as income progress accelerates past March?
Bren Higgins
Sure. No, you are occupied with it proper. As we see income progress, it ought to speed up to the upper finish of the vary. The commentary was actually about how we glance and dimension the corporate on an annual foundation or over a long run horizon. And if you happen to have a look at 2019 to our 2022 planning, we could have had incremental working margins given the expansion we have seen in extra of fifty%, about 52%. So my level was that we’d anticipate income to develop. We’re additionally anticipating OpEx to develop. However on the finish of the day, as we’re sizing 2022, we anticipate to be in our goal vary of 40 to 50.
John Pitzer
Thanks.
Rick Wallace
Thanks.
Operator
We’ll take our subsequent query from Harlan Sur of JPMorgan.
Harlan Sur
Good afternoon, guys. Thanks for taking my query and nice execution by the operations workforce. In calendar 2021, your Course of Management Methods enterprise outgrew WFE by about 8 share factors. So robust efficiency there. In order we have a look at your WFE outlook for this 12 months, proper, up 16% to $100 billion, bearing in mind rising price of management depth, your portfolio of latest merchandise, how ought to we take into consideration your Course of Management Methods progress profile relative to WFE this 12 months? It is clearly going to outperform, however ought to we anticipate the same kind of out efficiency such as you noticed in 2021 or perhaps even higher? Simply given the shopper combine and the complexity challenges? And is it going to once more be led by wafer inspection?
Rick Wallace
Harlan. Good query. Sure, 2021, we really feel actually good about how we carried out in 2021. I believe we talked about a number of instances, simply the energy, particularly of optical wafer inspection was extraordinary within the 12 months. And likewise, once we look to our order guide, we received great curiosity in these merchandise that we’re seeing nice alternatives in 2022 as properly. I believe that is a good combine for the 12 months for 2022 and — based mostly on the success and the best way that they are being acquired by prospects, we anticipate that we’ll be in a very good place to construct on our market management place as we go ahead. So we’re anticipating continued progress in share, albeit on the form of fee that we outlined a number of years in the past.
So I believe the mix of these elements plus the continuation of the drive in design roles are all good indicators and good drivers for KLA to outperform, which is what we’re forecasting. We by no means actually know at this level of the 12 months, the way it’s really going to — the small print of what it is going to look, however we expect Course of Management is in an important place for 2022, and we’re in an important place inside Course of Management. And Bren can add some shade to that.
Bren Higgins
Sure, Harlan. I believe that what we’ll see by way of combine, I’d anticipate foundry logic to develop sooner grew sooner than the expansion fee in WFE. And on account of that, that shall be a good combine. So to Rick’s level, I believe that, that shall be a driver for us. From a share perspective, we really feel fairly good about the place we’re definitely wafer inspection, as you talked about, has been the most important driver. It has been the fastest-growing enterprise within the firm. We now have a really robust place there.
I’ve mentioned many instances, I believe it is perhaps one of many fastest-growing markets in all of WFE. I’d anticipate to proceed to see momentum in that general market. So we mentioned within the ready remarks that we had been about — we thought we had been round 46% for semiconductor methods in 2021. It will get the market of 40% or 41%. After which as we have a look at excessive teenagers kind progress charges in WFE this 12 months, I’d anticipate we’ll have the same enchancment over the market or related outperform, someplace in that mid-single-digit vary based mostly on how we’re it at the moment.
Harlan Sur
And I respect the insights there. After which on the gross margin entrance, I perceive the availability challenges and different logistics-related dynamics which can be impacting your shipments right here. However relative to your friends, I imply, your gross margins are holding up extraordinarily properly, proper? I imply you guys are solely guiding for roughly a 50 foundation level decline sequentially in gross margins right here within the March quarter. And it really seems like that is extra combine and quantity associated, proper? And within the midst of all of those potential price dynamics, you are still guiding full 12 months gross margins to 63%.
So assist us perceive the higher sustainability of gross margins on this difficult interval. I imply, are you guys simply passing alongside — exercising some pricing energy and simply passing alongside a few of these prices to your prospects?
Bren Higgins
That is an important query, Harlan, and I will begin and perhaps Rick will need to add a number of feedback right here. However our pricing mannequin is basically based mostly on pricing to worth. It is priced on the worth we consider that our instruments add to our prospects. And so, that is finally how we worth the merchandise. It is not a value based mostly mannequin, it’s extra of a worth based mostly.
You’re proper, as you have a look at the March quarter, what’s declining is Semiconductor Course of Management income quarter-to-quarter, we’re really anticipating some progress in our EPC enterprise and each quarter service grows. So it’s a little bit of a mixture impact and a quantity impact on the March quarter.
Going ahead, we’re seeing strain on prices. We’re not implying that we aren’t and I have been fairly open with the truth that I believe there’s 100 foundation level headwind associated to price will increase. As everyone knows, all the pieces appears to be costing extra. Labor is costing extra and positively the ramp in investments our prospects — or suppliers are having to make is driving incremental price into the mannequin, however that is factored in.
So absent that, I believe given the combo expectations we’d have shifting into 2022 with the expansion fee of semi PC, in line with what, your final query, then we’d see margins enhance. However we’re feeling somewhat little bit of strain.
So I believe we maintain 63%, plus or minus in any given quarter, you may see somewhat little bit of variability. However on the finish of the day, I additionally suppose it is simply — it is a reflection of the worth that we’re including, I believe it additionally a mirrored image of the differentiation that now we have throughout the portfolio within the market.
Rick Wallace
Sure. Only one different factor so as to add to Bren, I imply, I believe it is actually necessary that we proceed to grasp the worth we’re creating for our prospects, and we share in that worth in our pricing. I believe that is the best way to consider it. For them, they’re very, very motivated to get these merchandise in as quickly as they will, as a result of the payback is extraordinarily fast.
What you’ll in all probability see in a extra normalized — if you did not have an setting that was a provide constrained — with the rise in quantity, you’d really see the price dynamics go the opposite means. So I believe, what Bren talked about, the little little bit of headwind that we get is due to a number of the pricing will increase, but it surely’s not a lot in our general enterprise.
However in a historic context, if you happen to went up as a lot as our revenues have, we’d see quantity discounting taking place with our suppliers, which might carry down a number of the prices, and that is probably not taking place on this setting.
However our start line is basically good, and our new merchandise are extremely properly acquired by our prospects. So not solely can we just like the margin profile, however our prospects actually need to get the brand new merchandise. So we’re in a reasonably good place because it stands proper now.
Harlan Sur
Sure. Thanks.
Operator
We’ll take our subsequent query from CJ Muse of Evercore.
CJ Muse
Sure. Good afternoon. Thanks for taking the query. I assume one other gross margin query, if we actually drilled down simply the Course of Management, you grew gross margins there, 64% in 2020 to 65% in 2021.
And I am cognizant of the truth that there’s clearly some challenges close to time period. However as you consider the combo that you simply’re seeing and the worth add that you simply bringing, the place do you suppose Course of Management gross margins can go in a extra normalized setting as soon as the availability chain normalizes?
Rick Wallace
Sure, CJ, it is an important query. You are proper. We’re within the mid-65% vary, if you happen to have a look at the method management section general. In order we transfer into definitely 2022, I’d anticipate that to be roughly flat given what we simply mentioned, perhaps somewhat bit higher, however typically in that vary and simply given the issues we simply talked about.
Quite a lot of it relies upon general on — you’ve got received the service combine, which service gross margins have improved over time as that enterprise scales, however it’s dilutive. So in the long term, if service is rising sooner than methods that does put somewhat little bit of strain on margins.
So I believe we’re fairly comfy with the degrees that they are at. I can see them ticking up. We all the time discuss 60% to 65% kind incrementals on our semi course of management enterprise. So I’d anticipate to see one thing in line with that. However if you happen to’re approaching 65% or perhaps somewhat bit increased on the high finish of that, you begin to hit the ceiling by way of how excessive you’ll be able to go. So I believe we’re in all probability in that mid-60s vary, perhaps creeping up somewhat bit from there. However I do not see it bettering far more than that.
CJ Muse
That is useful. As my follow-up, I assume, are you able to touch upon whether or not you anticipate to be constrained within the June quarter? And as we take into consideration second half whole revenues versus first half on a calendar foundation, ought to we be considering low to mid-double-digit progress half-on-half?
Bren Higgins
Sure, I believe that is the best way to consider it. Definitely, the second half shall be stronger than the primary half. And look, I believe we’re all constrained proper now by way of the flexibility to get elements. What we have supplied is our anticipated chance of all the assorted points we’re managing by way of an general view. However provided that March shall be decrease, I’d anticipate sequential progress as we transfer by means of the 12 months. And the second half general for the corporate, sure, low to mid-double digit is an affordable means to consider it.
CJ Muse
Nice. Thanks.
Operator
We’ll take our subsequent query from Vivek Arya of Financial institution of America Securities.
Vivek Arya
Thanks for taking my query. I really wished to ask the final query in a barely totally different means. In order you go into June, so I believe you are suggesting a few $200 million affect within the March quarter. Can you acknowledge that $200 million in June, or is that unfold into the again half of the 12 months?
Bren Higgins
Sure. Vivek, it can present up within the June quarter. So these are shipments that slipped out after which are within the June quarter. However when you may have suppliers which can be operating at max capability in a number of circumstances, they usually have a disruption. I believe the making up of that misplaced time will take a while by means of the 12 months, proper? I do not suppose that they’re going to be capable of make all of it of it as soon as. So there’s somewhat little bit of a cascading that occurs each time you may have a disruption in a facility that is already operating full out, I imply, gear is operating 24/7, individuals are working as much as authorized limits by way of extra time.
So making an attempt to squeeze extra capability within the brief run is somewhat bit more durable. However over time, I’d anticipate that we’ll see that creep out. We additionally anticipate capability to enhance or have options to materialize as we transfer by means of the 12 months. So it is a mixture of these results. However sure, I’d anticipate it to maneuver into the June quarter.
Rick Wallace
So only one — just a bit extra shade to consider. What we noticed with Omicron is extra individuals being impacted and dropping work days, fortuitously not severely impacted, however sufficient that they needed to not be on the workforce. And as Bren mentioned, these factories had been ramped up. So it is laborious to make that up, but it surely’s additionally — they’re already coming again. So now we have a number of confidence within the provide chain returning to extra supportive ranges for our enterprise going ahead.
Vivek Arya
All proper. And for my follow-up, I understand that tremendous, tremendous early, however I used to be simply hoping if you happen to might give us a taste of buyer discussions about 2023, WFE previously has form of grown for 2 to 3 years, and there’s a interval of absorption. This time, now we have already had — or this would be the third 12 months of progress. Do you suppose it is attainable to have a fourth 12 months of progress? And what could be the high-level form of places and takes, simply in order that buyers get a way for is that this the height 12 months for WFE, or are there nonetheless prospects for added progress subsequent 12 months?
Rick Wallace
Vivek, nice query. I believe, satirically, maybe the present slowdown in our skill as an gear {industry} to supply will stretch this out into 2023 anyway. And so that you see that plus various high-profile initiatives, which have been mentioned not too long ago by our prospects do not actually order gear in 2022 or perhaps they place POs, however we definitely do not see deliveries.
So if you consider a number of the large new greenfield initiatives which have been introduced, these are 2023 initiatives, not 2022. So I believe the mix of these which can be associated to each assist from the regionalization efforts pushed by issues just like the CHIPS Act within the US ought to that come to move. However even the opposite initiatives, which are not depending on that, are actually far more about 2023 than they’re about 2022. In order we do have fairly good visibility out by means of the top of the 12 months and even into the primary elements of subsequent 12 months for the demand to proceed to be very supportive of our enterprise.
Bren Higgins
Sure. Vivek, the opposite factor I’d add to that’s that now we have very excessive ranges of backlog. In a number of circumstances, we’re reserving slots for patrons into 2023 now. And so on account of that, we really feel fairly assured within the sustainability of what we’re seeing.
I made some feedback earlier concerning the second half and as we mannequin by way of how we’re planning the corporate and the way we’re planning capability, we anticipate to see that — these ranges of enterprise maintain as we transfer ahead. So it is a good distance out if issues can change. However definitely, we do not see something that reveals any slowing down anytime within the horizon. And definitely, prospects are asking for extra and sooner.
Vivek Arya
Very useful. Thanks.
Operator
We’ll take our subsequent query from Timothy Arcuri of UBS.
Timothy Arcuri
Thanks lots. I had two, Bren, one form of on the identical tack because the final query. So it looks like the WFE within the first half of the 12 months had been kind of getting into March a bit decrease than what most of us would have thought simply due to a few of these constraints. However the again half goes to be lots larger. In case you simply take your quantity, you are going to do like — I imply, perhaps even 19 by way of course of management shipments system, shipments within the again half of the 12 months.
And if you happen to mainly take your — to be share, that is like $110 billion annualized WFE. So my query is — once you kind of take into consideration that quantity and also you return and also you attempt to decide what the demand actually helps by way of WFE kind of have a look at the initiatives and also you have a look at the expertise transitions and whatnot. How do you handicap kind of like the place you are fairly on kind of the place the WFE run fee turns into too excessive? And do you agree with the 1.85 or someplace in that vary of system quantity for the again half of the 12 months? Thanks.
Bren Higgins
Tim, on the final a part of your query, given the steering we gave round second half, you are in all probability not that far off. It is in all probability in that 18 vary, plus or minus, kind of. So we’ll need to see the way it performs out. Look, we spent a number of time wanting on the numerous main indicators of what we’re seeing from prospects. And naturally, we have a look at our prospects, the discussions now we have with them, there’s the profitability ranges. We have a look at these finish markets and a number of the challenges that exist there.
In order we undergo it, you have a look at our prospects are spending greater than they ever have. They’re extra worthwhile than they’ve ever been. So we really feel fairly good about the place they’re at and the place the demand is. So we will — we’ll proceed to observe it. However proper now, at this level, we — our prospects are persevering with to ask for methods.
As I mentioned earlier, I believe WFE is constrained by provide. And over the long term, we consider that WFE, given rising capital depth will develop sooner than semiconductor income by way of a future pattern. So I believe that is how we’re modeling the corporate. Definitely, it is how we’re planning once we take into consideration provide and investments we have to make. However that is how we’re occupied with it proper now.
Timothy Arcuri
Thanks, Bren. After which, simply perhaps a much bigger image, Rick, I am kind of curious what your view is. I get a number of questions round, as you go to kind of scaling that is somewhat extra verticalized versus utilizing litho to scale, whether or not you are speaking about CFET or 3D DRAM, issues like that.
It is not precisely what occurred in NAND, however litho does turn out to be somewhat bit perhaps much less of a driver for really — to scale going ahead. Are you able to simply discuss how you consider how that impacts you both positively or negatively, kind of, by way of your skill to maintain on gaining WFE share? And perhaps what you are hooked up to litho is, kind of, how you consider that larger image? Thanks.
Rick Wallace
Sure. Thanks, Tim. Good query. I believe, that it is attention-grabbing if you happen to use the instance of NAND as a — there, you really went backwards in lithography. And but the Course of Management depth, it went down somewhat bit, however we really thought it will go down extra, as a result of what occurred was two issues.
And if we would had options, it in all probability would not have gone down in any respect, as a result of there have been different integration issues that we had been unable to unravel at the moment. However even there, it went backwards and there was not an enormous change in Course of Management depth, albeit at decrease ranges.
What we’re seeing now already in conversations with prospects, as we have a look at new gadget varieties. The Course of Management challenges are going to be huge. And plenty of of them, sure, defect is an enormous a part of it, however you may have EUV, which is driving extra use circumstances. You’ve gotten the registration overlay challenges, which has created fairly a big market, and we additionally see the necessity for increasingly inspection layers utilizing totally different wavelengths.
In order that Gen 4 is being prolonged. I believe we talked about final quarter, Gen 4 really outperformed Gen 5 by way of income in 2021. And we really see that persevering with due to the usefulness of that product and that wavelength. So we really suppose, the actual query is, are there going to be integration challenges which can be going to drive our prospects.
When there’s a number of gamers competing at the vanguard, that is all the time a very good factor for KLA. I believe we went by means of a interval the place there was actually one foremost driver, they usually had one actual finish gadget driving that logic, that’s now not the case. So we really feel fairly good concerning the architectures that we’re seeing.
We now have Course of Management groups which can be working with our prospects. And so far as we will see out by means of a number of years, we expect we’re properly positioned with loads of alternative and now we have a number of options we’re investing in, as Bren mentioned, we’re investing at a big degree in R&D to be positioned to assist these going ahead.
So we do not see actually a rest in Course of Management depth as we go ahead. Will it proceed to rise? We’re not anticipating that it goes up lots. And in order that’s not in our fashions; that will be upside to our mannequin as that occurs, however that is not what we’re working off of.
Bren Higgins
Hello Tim, two issues. First, once we transfer from planar to vertical and NAND, if you happen to use NAND as a proxy, we noticed a few level enchancment general in course of management depth. And it got here actually in our metrology companies as a result of if you happen to suppose you are beginning to construct the buildings vertically, it creates a complete new set of metrology challenges. So we noticed an inflection there for metrology and you then even have defect mechanisms associated to excessive facet layers — high-aspect ratio buildings and so forth. So that’s — if it is a proxy, we really feel fairly good about alternatives there as a number of the defect mechanisms, and metrology challenges change, however course of management depth general was a optimistic.
Our 2023 plan by way of course of management or KLA share of WFE was to see course of management depth enhance KLA share of WFE to develop about 75 to 100 foundation factors from 2019. And we really feel like we’re proper on that trajectory as we go ahead right here. In order Rick mentioned, we do not anticipate it to develop lots, however we do anticipate to see it persevering with to develop, and that ought to create alternatives for us to, for probably the most half, constantly outgrow the market right here over the following few years.
Timothy Arcuri
Thanks Bren.
Operator
We’ll transfer subsequent to Patrick Ho of Stifel.
Patrick Ho
Thanks very a lot. Rick, perhaps simply following up on that query by Tim by way of course of management depth by way of gadget structure. As we have a look at gate throughout, and I do know you’ve got talked about it from an enormous image perspective of a number of the alternatives there. However given the supplies depth, how do you see, I assume, extra semiconductor engineering supplies kind of developments benefiting course of management depth. And particularly, I am simply considering gate throughout, the gates now being surrounded by a number of supplies. How do you have a look at it from each an inspection and possibly from an overlay metrology perspective, do you see one or the opposite core benefiting from these modifications on the supplies entrance?
Rick Wallace
Sure, Patrick, good query. I believe that, once more, we have been in conversations with prospects about these superior architectures for a while and the challenges that they face. Fortuitously, we frequently have extra time than we initially thought to get our options prepared as a result of these usually take longer to get to market than had been initially anticipated. So we’re really in fairly fine condition by way of offering options for that.
Particularly to gate throughout, bear in mind, for inspection, there are actually a pair issues that now we have to — issues that now we have to unravel. Essentially the most important one usually misplaced on individuals is it is a distinction query. It is not as a lot as a decision as distinction and get throughout with totally different supplies creates a unique distinction problem, which is why the wavelength issues lots, which is why we’re extending Gen 4, and we’re seeing good modeling outcomes from that.
The opposite factor that occurs, after all, is the registration, each technology, I believe, could also be misplaced on, individuals are the extra challenges in registration and overlay each gadget expertise and the rise in sampling is simply dramatic in that enterprise and in movies basically.
Once more, extra challenges related to that. We now have a very good modeling effort that goes on very, very robust within the firm so we will mannequin and perceive what these gadgets are going to seem like and what they’ll want by way of functionality. So we’re very well-positioned to deal with that. I believe that you will see will increase in each inspection wants, but additionally in metrology barely in several methods. And in metrology, you are already sampling at so many ranges. It is extra about rising the sampling at these ranges.
In different phrases, extra steps or extra measurement factors per die and per wafer. In inspection, it finally ends up. You had various inspection steps within the course of versus the realm inspected, which is normally already predetermined and that in all probability will not change. So I believe that they’re going to each develop however for various causes in that.
And once more, our prospects — our relationship with our prospects is such that we have been engaged on these issues for some time as a result of now they know they want the assist of inspection and metrology early within the improvement part if they’ve an opportunity of ramping these new applied sciences. So we really feel fairly good about our perception into these.
Patrick Ho
Nice. That is useful. And only a fast follow-up. The present setting, clearly is seeing very excessive utilization throughout fabs for each vanguard and trailing edge given the availability chain points, and I do know not all elements and parts are the identical for each new methods and name your spare elements enterprise, your put in base enterprise. However how are you balancing a number of the procurement points that you simply’re coping with at the moment by way of the place do I take this part elements? Must you go into the spare elements bucket, or ought to it go into a brand new system? How are you balancing that at the moment?
Rick Wallace
Sure, Patrick, it is an important query and it is one thing that we spend a number of time on internally, significantly as Brian Lorig runs our service enterprise factors out to me on a regular basis that do not overlook about spares. So it’s completely a balancing act. Fortuitously, now we have fairly good thought of when issues will fail that round sure parts, and we will plan for that. However we — by way of stocking ranges. However we’re very — now we have had conditions the place we’ll pull elements off of methods, if now we have to, to assist the sphere, we have made dedication to prospects, these prospects worth these methods, and we have got to maintain them up and operating.
So in a number of these circumstances, we will typically prioritize service if we will not determine a approach to work round it, which we have for probably the most half been in a position to do. However it’s a continuing balancing act, and it is one thing that we watch very intently.
Patrick Ho
Thanks.
Operator
We now have time for one final query, and we’ll take Joe Moore of Morgan Stanley.
Joe Moore
Nice. Thanks. I ponder if you happen to might discuss somewhat bit extra concerning the provide constraints by way of how a lot planning had been you in a position to do round it? Did you get shocked by these part points? And are you typically simply form of assembly commitments to your prospects however the lead instances are getting pushed out, or was there form of a decommitment due to disruptions in your individual provide chain?
Rick Wallace
Sure. Joe, that is an important query. So I will say a few issues right here. First, sure, there have been some surprises, proper? As we had been shifting by means of December and into the early a part of January, the COVID affect was a shock by way of the affect on a few of these suppliers. So we additionally had some points that materialize, as I mentioned within the ready remarks round, I will name them, extra lower-value commodity elements that we additionally procure in a number of circumstances, the place these are as now we have suppliers, suppliers which can be making an attempt to amass these elements to then ship them to us to our direct suppliers for will get to us. So it is somewhat bit more durable to have visibility down at these ranges.
Now with sufficient time, you’ll be able to usually handle round a few of these points both by discovering options, qualifying options. It does have an effect on on-time supply, to your level, and so the explanation we had been in a position to quantify the affect of 8% to 10% on the leads to March was actually what we thought we had been as we ended the December quarter and the place we ended up at the moment.
So we had a reasonably good visibility to the affect and so we’re in a position to quantify it. On-time supply is what’s struggling although. However we’re managing round it to the extent we will. And I believe prospects, whereas there’s great strain within the system, there is a actuality examine of the challenges that I believe I can converse for everyone that we’re all coping with right here.
Joe Moore
Nice. Thanks very a lot.
Kevin Kessel
Nice. Thanks, Joe and thanks everyone, for becoming a member of us. We all know it is a busy week of earnings, a busy day of earnings. We actually respect everybody’s time and a focus. I am positive we’ll be catching up with lots of you all through the quarter. With that, I will move the decision again over to Leo to finish the decision.
Operator
This concludes the KLA Company December quarter 2021 earnings name and webcast. Please disconnect your line right now. Have a beautiful day.