It has been about a month since the last earnings report for KLA-Tencor Corporation KLAC . Shares have added about 12.6% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is KLAC due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
KLA-Tencor Beats Earnings and Revenue Estimates in Q3
KLA-Tencor Corporation reported third-quarter fiscal 2018 earnings of $2.02 per share, beating the Zacks Consensus Estimate by 4 cents. The figure surged 25% from the year-ago quarter and rose 3% sequentially.
Revenues increased 5% from the year-ago quarter to $1.021 billion, comfortably surpassing the Zacks Consensus Estimate of $1.001 billion. The figure was within management's guidance of $970 million and $1.03 billion.
Products' revenues (almost 78% of total revenues) increased 10.6% year over year to $797.8 million. The figure was better than the consensus estimate of $790 million.
Services revenues (22% of total revenues) increased 15.9% from the year-ago quarter to $223.5 million. The figure was also better than the consensus estimate of $211 million.
Last month, the company agreed to acquire Orbotech, Limited. The deal will allow KLA to be a diversified technology leader in process and yield management solutions and services.
Management expects overall process control intensity to grow this year, driven by the expanding value of inspection and measurement in addressing critical customer problems and semiconductor industry expansion in China.
KLA's shares have returned 2.7% in the past 12 months, underperforming the 29.8% rally of the industry. Shipments Detail
Shipments in the fiscal third quarter were $1.041 billion, down 3% sequentially and within the guidance of $945 million to $1.025 billion.
Memory accounted for 78% (in line with guidance) of fiscal third quarter shipments, 13% of foundry customers and 9% of logic.
In terms of end market, Wafer Inspection, Patterning (includes shipments from reticle inspection business), Service and Non semi (includes back-end component inspection business) contributed 45%, 29%, 22% and 4% of shipments, respectively.
KLA continues to experience strong growth for its Wafer Inspection solutions. Management stated that new capacity addition by Wafer manufacturers and adoption of more complex architectures by IC customers are driving demand for new bare wafer products. These are needed to support more stringent wafer flatness and process tool cleanliness specifications in advanced technologies.
The company witnessed strong growth in China. Management said that China was strong in terms of both process control adoption and market share gains.
Also, orders from native Chinese customers remained solid and this momentum is expected to continue in 2018. Operating Details
KLA's gross margin expanded 150 basis points (bps) on a year-over-year basis to 63.9% and came in above the guided range of 63.5-64.5%. The growth was driven by a favorable product mix.
Total operating expenses increased 17.8% year over year to 26.1%. As a percentage of sales, both research and development, and selling, general and administrative increased.
As a result, operating margin expanded 90 bps to 35.8%. Balance Sheet
KLA ended the quarter with cash, cash equivalents and a marketable securities balance of $2.89 billion compared with $2.76billion in the previous quarter. Cash from operations was $352.6 million in the quarter and free cash flow was $338 million. Fiscal Q4 Guidance
For fourth-quarter fiscal 2018, KLA expects shipments of $1.01 to $1.09 billion. Revenues are expected between $1.02 billion and $1.08 billion. The Zacks Consensus Estimate for revenues is pegged at $1.01 billion.
Management expects foundry orders to be approximately 24% of shipments in the fiscal fourth quarter. Memory shipments are anticipated in the range of 60% to 70%, while Logic is currently projected to be 8% of the shipment.
KLA expects gross margin in the range of 64% and 65%. Non-GAAP diluted EPS is expected in the range of $2.02 to $2.26, while GAAP diluted EPS projection is$2 to $2.24. The Zacks Consensus Estimate for earnings is $1.96 billion.
How Have Estimates Been Moving Since Then?
In the past month , investors have witnessed an upward trend in fresh estimates. There have been five revisions higher for the current quarter. In the past month, the consensus estimate has shifted by 9.3% due to these changes.
KLA-Tencor Corporation Price and Consensus
KLA-Tencor Corporation Price and Consensus | KLA-Tencor Corporation Quote
At this time, KLAC has a great Growth Score of A, though it is lagging a bit on the momentum front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is more suitable for growth investors than those looking for value and momentum.
Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. Notably, KLAC has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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