KLA Corp (KLAC), a prominent player in the semiconductor equipment industry, has faced selling pressure despite surpassing both top and bottom-line estimates in its Q2 (Dec) earnings report. This unexpected market response stems from relatively subdued guidance for the next quarter. KLAC’s midpoint earnings forecast for Q3 (Mar) fell short of analyst estimates, and its sales outlook missed estimates altogether. This deviation from expectations led to profit-taking, despite KLAC having achieved new record highs in the days leading up to its earnings report.
A Glimpse at the Bright Spots
KLAC did deliver some noteworthy achievements in its Q2 earnings report. Adjusted EPS came in at $6.16, significantly surpassing analyst expectations, marking a double-digit beat. Equally impressive was KLAC’s adjusted gross margins, which stood at 62.6%, surpassing the high end of the company’s projected range of 60.5% to 62.5%. These strong figures contributed significantly to the substantial earnings beat for the quarter.
It’s worth noting that KLAC has maintained a track record of exceeding bottom-line expectations for over five years, setting a precedent for favorable earnings surprises.
The Revenue Downturn
However, the picture was less rosy when it came to revenue. KLAC reported a 16.7% year-over-year decline in revenue, amounting to $2.49 billion. This represented a further deterioration from the 12% decline observed in Q1 (Sep). Despite this dip, KLAC, like its counterparts in the semiconductor equipment industry, managed to register a modest sequential improvement of 3.8%.
Navigating Challenging Waters
KLAC’s outlook for 2023 echoed sentiments expressed by its peers, including ASML and Lam Research. The company anticipates a subdued demand environment throughout the year, with expectations of a bottoming out in Q3 (Mar) and gradual improvement thereafter. However, it cautioned that wafer fab equipment (WFE) spending, a vital segment for KLAC, would remain subdued in CY24, with a slight year-over-year uptick, mirroring LRCX’s forecast.
KLAC expressed optimism about stronger demand in 2025, aligning with the views of its industry counterparts. However, challenges remain on the horizon in 2024. The company highlighted uncertainties regarding the timing of a sustainable resurgence in WFE growth, with customers’ profitability and cash flowThe cash flow statement provides a detailed overview of the cash inflows and outflows of a company over a specified period of time. It includes cash received from operations, inves... More generation expected to remain under pressure in the short term.
Digging deeper, KLAC pointed out that the NAND and DRAM markets have yet to reach the growth levels necessary to restore factory utilization to the elevated levels seen in previous years. This, in turn, is constraining new WFE spending. This trend aligns with observations made by Texas Instruments (TXN) and STMicroelectronics (STM) earlier this week.
Interpreting KLAC’s Q3 Guidance
KLAC’s Q3 guidance reflects the near-term uncertainty the company faces. It forecasts adjusted EPS in the range of $4.66 to $5.86, alongside revenues spanning $2.175 billion to $2.425 billion. The midpoints of these ranges both point to sequential declines, providing further evidence of a potential bottom in the following quarter.
In conclusion, while KLAC’s Q2 earnings report did not significantly differ from those of its peers in the semiconductor equipment industry, the market’s response underscores the challenges of managing investor expectations. KLAC’s stock price had surged by over 35% since November, setting the stage for potential profit-taking. Therefore, the decline in share value following the earnings report may be attributed more to an overheated stock price rather than any fundamental issues with KLAC’s business.
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