KLAC Sees Stronger Semi Markets - Analyst Blog

KLA-Tencor Corporation’s (KLAC) second quarter earnings beat the Zacks Consensus by a penny. With the broad turnaround in the semiconductor capital equipment market underway, both Applied Materials (AMAT) and Lam Research (LRCX) are also expected to report strong results.

Revenue

Revenue of $440.3 million was up 28.5% sequentially and 11.0% year over year. The sequential strength was due to a larger section of customers increasing their capex investments, particularly in advanced technology. The technical complexity in manufacturing semiconductors and increasingly challenging yield issues are the drivers behind these investments. New products also helped growth in the last quarter.

Products generated 72% of total revenue, an increase of 37.4% sequentially and 15.3% year over year. Services revenue comprised the remaining 28%, up 10.6% sequentially and 1.5% year over year.

Orders

Orders were up strongly in the last quarter. The company reported $516 million in net bookings, which was a sequential increase of 4.7% and a year-over-year increase of 112.3%. Other than the investment in technology upgrades, order strength is being spurred by the introduction of a major new product in the Reticle Inspection business.

While the foundry segment (59% of total orders) remained strong in the last quarter, spending in the memory segment gained momentum (with a 17% contribution), while logic customers started making technology purchases (24% of total orders).

Orders by product line were: wafer inspection 42%, reticle inspection 15%, metrology 13% and solar storage high brightness LED and other non-semiconductor 6%. Services were 24% of total orders.

Orders were fairly broad-based across geographies, an indication that the recovery has spread across all regions. The relatively stronger concentration in Asia is due to the presence of more foundries and chip manufacturing companies in the region. Around 33% of total orders came from Taiwan, followed by Korea with 19%, the U.S. with 16%, Japan 14%, rest of Asia 14% and Europe 4%.

The six-month backlog at quarter-end was $759 million, up 16.9% sequentially and 39.8% year over year.

Margins

The pro forma gross margin for the quarter was 55.4%, up 301 basis points (bps) from the previous quarter’s 52.4%. The gross margin benefited from higher volumes and the resultant improvement in fixed cost absorption over the larger sales base.

Operating expenses of $146.6 million were higher than the previous quarter’s $135.7 million. The operating margin was 22.2%, up 931 bps from 12.8% recorded in the previous quarter. All the three components of cost -- COGS, R&D and SG&A -- decreased as a percentage of sales, contributing to the higher operating margin.

Excluding the impact of restructuring charges, acquisition-related expenses and restatement-related charges, the pro forma net income was $49.4 million, or 11.2% of sales, compared to $26.2 million, or 7.6% in the previous quarter and a loss of $19.9 million, or 5.0% in the year-ago quarter. Including the special items, the GAAP EPS was $0.13 compared to $0.12 in the Sep quarter and -$2.57 in the December quarter of last year.

Balance Sheet

Inventories were up 1.5%, although inventory turns increased from 1.9X to 2.2X. Days sales outstanding (DSOs) dropped from 65 to around 62. The company ended with cash and short-term investments of $1.52 billion, up $135.1 million during the quarter. The company generated $164 million in cash during the quarter, including a federal tax refund of around $72 million. Capital expenses were $11 million in the quarter and dividend payouts $0.15 a share.

Guidance

For the third quarter, management expects orders to be up 0-20% sequentially revenue of $450-480 million (up 2-9%). The non-GAAP earnings are expected to be $0.31-$0.37 a share, assuming a tax rate of 30%.

Estimate Revisions

The company has a history of earnings surprises and has beaten the Zacks Consensus by a net 5.92% in the last four quarters. The Zacks Consensus estimate for the March quarter is currently $0.33, compared to a loss of $0.34 in the March 2009 quarter, when results were significantly impacted by the recession. Estimates have been going up over the past three months, with the current estimate indicating a 15.15% upside potential. Therefore, we may expect prices to trend higher over the next few months.

Read the full analyst report on "KLAC"
Read the full analyst report on "AMAT"
Read the full analyst report on "LRCX"
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