Morningstar | KLA-Tencor Offers Compelling Avenue to Invest in Greater Technology Complexity; Shares Undervalued. See Updated Analyst Note from 30 Jul 2018
KLA-Tencor reported strong fiscal fourth-quarter results, modestly exceeding our expectations thanks to service revenue upside. As expected, KLA recorded its second consecutive double-digit revenue growth year in fiscal 2018. Although there have been some well-chronicled memory-related equipment pushouts, we remain very positive on the long-term prospects for the wafer fabrication equipment space. Given increasing complexity across logic, foundry, and memory structures, we foresee a sharp rise in process diagnostic and control, or PDC, intensity that will thus significantly benefit KLA. We are raising our fair value estimate to $128 per share from $125 for wide-moat KLA and believe shares look attractive at current levels.KLA generated fiscal fourth-quarter revenue of $1.07 billion, up 14% year over year, due to the outperformance by the service segment and growth in foundry spending for the 7-nanometer process and the bare wafer inspection market stemming from capacity expansion at memory customers. As memory technologies advance, more strenuous requirements for cleanliness and uniformity on bare wafers is required, thus necessitating more superior inspection tools from KLA. Memory and foundry shipments were 69% and 22% of total shipments, respectively, with Korea and China accounting for 66% of the total. Consequently, we surmise TSMC, Samsung, and SK Hynix were major customers during the period. For fiscal 2018, the firm enjoyed 16% top line growth in addition to gross margin expansion of 110 basis points to 64.1% due to a more favorable product mix.
Management expects fiscal first-quarter sales to be at a midpoint of $1.065 billion, which would imply 10% year-over-year growth. For calendar 2018, the September quarter will mark the trough of the year due to the memory-related pushouts to the December quarter. Meanwhile, the ongoing ramping of the 7-nm process will lead to foundry accounting for a larger portion of shipments during the quarter (36%).
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.
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