EUR 850.00 For Business Accounts Only

Morningstar | KLA-Tencor Brushes off Near-Term Headwinds with Double-Digit Revenue Growth and Solid Guidance

KLA-Tencor reported solid fiscal first-quarter results, modestly exceeding our expectations thanks to service revenue upside. The process diagnostic and control, or PDC, leader is on track to record its third consecutive calendar year of double-digit equipment revenue growth. We note shares of KLA and its peers have fallen in recent weeks as a result of broad-based negative sentiment plaguing the semiconductor space. CEO Rick Wallace echoed remarks made by his counterpart at Lam Research provided last week that postulated the first half of 2019 will be above the second half of 2018 in terms of wafer fab equipment spending. Consequently, we think shares of KLA and some of its peers (including Applied Materials and Lam Research) appear attractive at current levels.

We reiterate our wide-moat rating and $128 fair value estimate for KLA, particularly as complexity across logic, foundry, and memory end-markets is poised to keep increasing, thus garnering more advanced PDC tools from the firm.

KLA generated first-quarter revenue of $1.09 billion, up 13% year over year, due to the aforementioned outperformance by the service segment and growth in equipment spending in China, at leading-edge foundries, and in bare wafer inspection by memory customers. Memory and foundry shipments were 57% and 38% of total shipments, respectively, with Taiwan and China accounting for 58% of the total, implying TSMC and indigenous Chinese customers as big spenders during the period. Gross margins expanded 40 basis points to 65% thanks a slightly better product mix.

Management expects fiscal second-quarter sales to be at a midpoint of $1.07 billion, which would imply 10% year-over-year growth. As we approach 2019, we assume that the wafer fab equipment market will see growth in logic and foundry spending, stemming from 10-nanometer and 7-nm-related investments at the leading-edge.

We think KLA is well positioned, as PDC is more intensive in logic and foundry segments, while the insertion of EUV lithography into leading-edge foundry processes will also require advanced inspection and metrology tools that only KLA can provide. Wallace noted the firm is relatively agnostic with respect to how many EUV tools are sold (ASML forecast 30 tools in 2019), given the level of scaling pursued by customers will need more advanced PDC tools regardless of method (EUV lithography versus a combination of immersion lithography and multiple patterning).