KLA-Tencor (KLAC) Q3 Earnings: Is a Surprise in the Cards?

KLA-Tencor CorporationKLAC is set to report third-quarter fiscal 2017 results on Apr 27 after the bell.

The company has a Zacks Rank #2 (Buy) and an Earnings ESP of 0.00%, a combination that constrains surprise prediction. This is because per our proven model, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) to beat estimates.

We don't recommend Sell-rated stocks (Zacks Rank #4 or #5) going into the earnings announcement.

You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

However, KLA-Tencor's surprise history has been pretty impressive. It has beaten estimates in each of the last four quarters with an average beat of 14%. Year to date, the stock has outperformed the Zacks Semiconductor Equipment - Wafer Fabrication industry. It has gained 28.2% compared with the industry's gain of 22.2%.

What Happened in the Second Quarter?

The company's earnings per share (EPS) and revenues exceeded the Zacks Consensus Estimate. Revenues and earnings grew 23.5% and 46.2% year over year, respectively driven by strong demand in wafer fab equipment market and customer acceptance for the company's new products.

At the call, management was found upbeat on KLA's technology leadership position and the pace of execution of a product strategy focused on innovation and differentiation.

KLA-Tencor Corporation Price and EPS Surprise

KLA-Tencor Corporation Price and EPS Surprise | KLA-Tencor Corporation Quote

Expectations for the Third Quarter

We expect strong demand for more efficient manufacturing processes and the preference for mobile to work in favor of the company. The technical complexity of manufacturing semiconductors and increasingly challenging yield issues remain revenue drivers for this leading manufacturer of process control equipment.

Note that since each system is high valued, customer concentration is obviated, which results in significant fluctuations in revenue/orders in times of uncertain demand.

For the third quarter, KLA expects shipments of $850-$930 million, up 0.34% sequentially at the mid-point. Quarterly revenues are expected between $860 million and $920 million, reflecting an increase of 1.5% sequentially at the mid-point. Non-GAAP EPS is expected in a range of $1.42 to $1.62.

Bottom Line

KLA's comprehensive product line, cost reduction initiatives and strong balance sheet remain positives that will generate growth whenever cyclical pressure permits. Though competition and a concentrated customer base increase execution risk, accelerated process control spending across foundry, memory and logic players through 2017 and beyond will enable KLA to deliver stronger results. This therefore holds true for the soon-to-be reported quarter.

Stocks to Consider

Seagate Technology plc STX , with an Earnings ESP of +3.77%, and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here.

Fiserv Inc. FISV , with an Earnings ESP of +0.85% and a Zacks Rank #2., Inc. AMZN with an Earnings ESP of +10.68% and a Zacks Rank #3.

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Seagate Technology PLC (STX): Free Stock Analysis Report, Inc. (AMZN): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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