) reported third-quarter 2014 earnings of $1.23 a share, beating
the Zacks Consensus Estimate by 13 cents, or 11.8%.
KLA reported revenues of $831.6 million, up 17.9%
sequentially, 14.1% from the year-ago quarter, within the guided
range of $790-$850 million and 1.0% higher than our estimate.
Products generated 81% of total revenue, up 23.1% sequentially
and 15.6% year over year. Defect inspection, metrology and other
product lines grew 26.2%, 22.8% and -35.8%, respectively, on a
sequential basis. They grew 16.4%, 17.9% and -24.3% from a year
Services revenue comprised the remaining 19%, up 0.4%
sequentially and 8.2% year over year.
Korea and Europe & Israel were the weakest, declining
47.3% and 35.0%, respectively on a sequential basis, while North
America, Taiwan, Japan and Other Asia grew strong double-digits.
Revenue from North America and Europe & Israel remained below
year-ago levels, while other regions grew. Overall, North
America, Taiwan, Japan, Europe & Israel, Korea and Other
Asia/Pacific generated 21%, 29%, 12%, 5%, 10% and 22% of
quarterly revenue, respectively.
New orders in the second quarter were $702 million, down 3.6%
sequentially and 4.9% year over year. Management said that the
weakness versus expectations was on account of temporary weakness
at leading edge fabs.
Shipments also declined sequentially, but remained above
year-ago levels. Backlog increased 2.3% sequentially and 12.5%
from last year. Backlog excluding the value shipped but not
recognized as revenue declined 10.0% sequentially but was
consistent with year-ago levels.
Overall, the order contribution by segment was as follows:
foundry customers 56%, memory 23%, and logic 21%. Foundry demand
was weaker than expected because one large customer delayed 20nm
deployment, while another delayed capacity addition. New capacity
by NAND makers and technology purchases by DRAM makers will drive
Logic demand was in line with expectations and management
stated that deployments for 20nm and below were already 63% of
orders in the last quarter. KLA's most important logic customer
Metrology products had a particularly bad quarter, with
revenue declining 34.3% and 28.7% from the previous and year-ago
quarters, respectively. Wafer inspection grew 3.2% and -14.2%
from the previous and year-ago quarters, respectively. Reticle
inspection products however saw extreme strength growing 14.0%
sequentially and 106.1% from the year-ago quarter. Products were
77% of total orders with services accounting for the balance.
Europe, Korea and Other Asia/Pacific declined. Overall, the
order contribution by geography was as follows: North America
36%, Europe 10%, Japan 11%, Korea 5%, Taiwan 25% and Other
Asia/Pacific 13%. The relatively higher concentration in Asia is
due to the presence of a larger number of foundries and memory
manufacturers in the region.
KLA's gross margin was down 80 basis points (bps) sequentially
and up 109 bps year over year to 59.0%. KLA saw
lower-than-expected installation, warranty and retrofit costs in
Operating expenses of $225.7 million were down 1.1%
sequentially and up 6.0% from a year ago. The operating margin
expanded 441 bps sequentially and 315 bps from last year. All
expenses as a percentage of sales were either flat or down
sequentially and down from last year.
The pro forma net income was $206.2 million, or 24.8% of sales
compared to $143.1 million, or 20.3% in the Dec 2013 quarter and
$171.3 million, or 23.5% in the Mar quarter of last year.
Including one-time acquisition-related charges on a tax-adjusted
basis, the GAAP net income was $203.6 million ($1.21 a share)
compared to $139.2 million ($0.83 a share) in the previous
quarter and $166.5 million ($0.98 a share) in the year-ago
KLA ended with a cash and short term investments balance of
$3.03 billion, consistent with the previous quarter. The company
generated $237.7 million of cash from operations, spending $18.2
million on capital expenses, $18.0 million on acquisitions, $59.9
million on share repurchases and $74.8 million on dividends
during the quarter.
For the fourth quarter of fiscal 2014, KLA expects orders of
$625-825 million and shipments of $700-760 million. Quarterly
revenues are expected to be between $700 million and $760
million, gross margin of 57-58% and opex in a range of $225-230
million. The tax rate is expected to be 23%, yielding non-GAAP
EPS in the range of $0.75 - $0.95, well below the Zacks Consensus
Estimate of $1.12.
KLA managed to beat expectations, but the guidance was very
weak, given order pushouts into the second half of 2014. We
should bear in mind that these are not orders lost but orders
delayed due to yield issues and other production concerns as most
customers transition to smaller geometries. We therefore do not
think that a lot of pessimism is warranted.
We note that underlying demand remains strong given the high
demand for more efficient manufacturing processes and the
preference for mobile. The technical complexity of manufacturing
semiconductors and increasingly challenging yield issues remain
revenue drivers for this leading manufacturer of process control
At the same time, since each system is high-valued, customer
concentration is obviated, which results in great fluctuations in
revenue/orders in times of uncertain demand.
KLA shares currently have a Zacks Rank #3 (Hold), so it's
better to go for peers like
), both of which have a Zacks Rank #2 (Buy).
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