Morningstar | KLA on Track to Strong 2019 Despite Industry Headwinds, Thanks to Favorable Logic/Foundry Exposure
KLA reported impressive fiscal second-quarter results bolstered by the early pull-in of $65 million worth of shipments from the March quarter to the December quarter. However, this pull-in combined with a delay in delivery dates for two memory customers has created a trough in the March quarter. Management was adamant that sequential revenue growth should resume in the June quarter and continue for the remainder of calendar 2019 thanks to healthy logic and foundry demand for KLA’s process diagnostic and control equipment and continued growth in service revenue. Given its more favorable end-market exposure (logic and foundry) in an overall weaker wafer fab equipment spending environment, combined with its technology leadership, we expect KLA to outperform relative to WFE peers in 2019. The shares appear compelling, in our view, relative to our unchanged $128 fair value estimate for the wide-moat company.Second-quarter revenue rose 15% year over year to $1.12 billion. Logic and foundry shipments grew 75% and 26% year over year, respectively, more than offsetting a 10% decline in memory shipments for the quarter. As leading-edge logic and foundry customers such as TSMC, Intel, and Samsung ramp their latest process technologies, we anticipate momentum to continue throughout 2019 for KLA for its wafer and mask inspection products that enable greater wafer cleanliness in the bare wafer market and tighter geometries for extreme ultraviolet and non-EUV production lines. Service revenue grew 25% year over year to $268 million, with 2019 service sales on track to exceed the $1 billion mark for the first time, thanks to a growing installed base and higher utilization of new and legacy tools. Third-quarter sales are expected to be at a midpoint of $920 million, down 10% year over year due to the aforementioned pull-in and memory delays.
We remain optimistic on KLA’s prospects as the company plays a vital role in enabling key technologies. The firm’s "Gen 5" inspection system is primarily used in development applications today, with KLA hitting its shipment target of 17-18 systems in 2018 for the tool. As 5-nanometer processes ramp in the coming years, we foresee KLA benefiting immensely via its cutting-edge process diagnostic and control tools as its Gen 5 tool is deployed into production.
For more information on our thoughts on the WFE space in 2019 and beyond, please see our recent Select presentation, "Buy the Chip Equip Dip."
KLA is a supplier of process control and yield management solutions for the semiconductor and related nanoelectronics industries. The company provides process control and process-enabling solutions for manufacturing and testing wafers and reticles, integrated circuits, packaging, light emitting diodes, power devices, compound semiconductor devices, microelectromechanical systems, data storage, printed circuit boards (PCBs), and flat and flexible panel displays, as well as general materials research. The company has four reportable segments which include Semiconductor Process Control; Specialty Semiconductor Process; PCB, Display and Component Inspection; and Other.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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