) first quarter earnings missed the Zacks Consensus Estimate by 3
cents, as increased caution at customers impacted all areas of
KLA reported revenue of $720.7 million, which was down 19.2%
sequentially and 9.5% from the year-ago quarter. This was below
the mid-point of the guidance range and was short of the
consensus estimate of $740.0 million.
KLA was impacted by the same macro concerns that have hurt the
entire technology sector. However, being an equipment supplier in
a weak demand environment is probably the worst spot to be in.
Customers are making the most of existing inventory, and
maintaining low utilization rates.
Additionally, since each system is high-valued, there is a
natural customer concentration, which results in great
fluctuations in revenue/orders in times of weak demand. All these
factors were evident from KLA's first quarter results.
Products generated 80% of total revenue, a 23.0% sequential
and 11.7% year-over-year decline. Services revenue comprised the
remaining 20%, more or less consistent with both the previous and
Both defect inspection and metrology products declined
double-digits from the previous and year-ago quarters.
Specifically, defect inspection declined 30.3% sequentially and
10.5% year over year. Metrology revenue dropped 22.3%
sequentially and 26.4% from the year-ago quarter.
The U.S., Japan and Other Asia regions grew revenue 14.4%,
13.8% and 10.8% on a sequential basis, while Korea and Europe
& Israel declined 74.1% and 18.4%, respectively. All except
Taiwan and Other Asia declined double-digits from the year-ago
The caution at customers also led to a 38.8% sequential
decline in orders to $506 million. Despite the weaker sales, the
decline in orders also resulted pulled down the backlog.
The decline in orders was broad-based across customers,
although foundries were the worst impacted (as may be expected),
dropping 56.9% from the June 2012 quarter. Memory was down 44.6%,
while logic declined 22.2%. However foundry and logic revenue
increased 10.1% and 58.5% from last year, compared to an 11.4%
decline in memory revenue.
KLA's fortunes are tied to the foundry segment, first because
the company is more exposed to this market and second, because
its process control equipment is in higher demand at foundries
that are always looking to improve efficiencies in order to drive
Memory customers reined in purchases because of uncertain PC
demand, both with respect to the onslaught of tablets on the core
computing market and the adoption of new ultra-thin and
ultra-light computing systems.
Despite the significant decline in the last quarter, foundries
remain KLA's most important customers, accounting for 54% of its
quarterly revenue. Logic brought in another 30% with the balance
coming from memory.
KLA's strength in the logic segment is tied to its
relationship with Intel (INTC), which is en route to ramping its
The wafer inspection product line saw orders drop 35.0% on a
sequential basis, while growing 89.6% year over year. Reticle
Inspection was down 93.2% sequentially and 94.2% from a year ago.
Metrology was down 58.3% sequentially and up 11.6% from last
year. Solar, storage, HB LED and other products were down 18.4%
sequentially and 53.7% from last year.
The decline in orders was on account of a Taiwanese customer,
with orders increasing across all other geographies. Overall, the
order contribution by geography was as follows: The U.S. 43%,
Europe 13%, Japan 13%, Korea 20%, Taiwan 7% and Other
Asia/Pacific 4%. The relatively higher concentration in Asia is
due to the presence of a larger number of foundries and memory
manufacturers in the region.
The six-month backlog at quarter-end was $1.03 billion, down
16.9% sequentially and 6.7% from the year-ago quarter.
KLA's gross margin shrunk 337 bps sequentially and 143 bps
year over year to 56.6%, due to lower volume. The incremental
gross margin stayed above the targeted 60-70%.
Operating expenses of $211.5 million were up 0.6% from the
previous quarter's $210.1 million. The operating margin was
27.3%, down 917 bps sequentially and 593 bps year over year. All
expenses were significantly higher as a percentage of sales from
both the previous and year-ago quarters because of weak revenue
in the quarter.
Excluding the impact of acquisition-related expenses and
restructuring charges on a tax-adjusted basis, the pro forma net
income came in at $142.4 million, 19.8% of sales, compared to
$254.8 million, or 28.6% in the previous quarter and $198.1
million, or 24.9% of sales in the year-ago quarter.
Including special items, the GAAP net income was $135.4
million ($0.80 per share) compared to income of $247.9 million
($1.46 per share) in the June 2012 quarter and $191.9 million
($1.13 per share) in September of last year.
Inventories grew 6% during the quarter, with inventory turns
down to 1.8X. Days sales outstanding (DSOs) went from 72 to
around 68. KLA ended with cash and short term investments of
$2.64 billion, up $103.6 million during the quarter. The company
generated $245.4 million of cash from operations, spending $20.3
million on capital expenses, $68.3 million on share repurchases
and $66.6 million on dividends during the quarter.
For the second quarter of fiscal 2013, KLA expects orders to
be $550 to $750 million, revenue of between $600 million and $660
million and non-GAAP EPS of between $0.45 and $0.65, well below
the Zacks Consensus Estimate of $0.93.
The technical complexity of manufacturing semiconductors and
increasingly challenging yield issues are long-term revenue
drivers for the leading manufacturer of process control
However, KLA's first quarter results and second quarter
guidance indicate slowing end markets and caution at customers
that could continue for a couple of quarters at least.
The non-semi business also weakened in the last quarter and
solar market issues are also impacting the company. Of course,
the segment still generates a very small percentage of its
orders, so the impact is relatively small.
Estimates for 2013 have moved down over the last 30 days,
although they are trending up for 2014. Therefore, there could be
some weakness in the next few quarters, with demand picking up
KLA shares currently carry a Zacks Rank of #3, implying a
short-term Hold recommendation. Market conditions are clearly
telling on other equipment makers as well, as seen from the Zacks
Ranks of #3 and #4 (Sell), respectively on equipment makers
APPLD MATLS INC (AMAT): Free Stock Analysis
KLA-TENCOR CORP (KLAC): Free Stock Analysis
LAM RESEARCH (LRCX): Free Stock Analysis
To read this article on Zacks.com click here.