KLA Corporation’s (NASDAQ:KLAC) Q1 Sales Top Estimates, Next Quarter Sales Guidance Is Optimistic

Maker of equipment for semiconductor manufacturing KLA Corporation (NASDAQ:KLAC)
reported Q1 FY2024 results topping analysts’ expectations, with revenue down 12% year on year to $2.4 billion. Guidance for next quarter’s revenue was also optimistic at $2.45 billion at the midpoint, 2.81% above analysts’ estimates. Turning to EPS, KLA Corporation made a non-GAAP profit of $5.74 per share, down from its profit of $7.06 per share in the same quarter last year.

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KLA Corporation (KLAC) Q1 FY2024 Highlights:

• Revenue: $2.4 billion vs analyst estimates of $2.35 billion (1.95% beat)
• EPS (non-GAAP): $5.74 vs analyst estimates of $5.37 (6.87% beat)
• Revenue Guidance for Q2 2024 is $2.45 billion at the midpoint, above analyst estimates of $2.38 billion
• Free Cash Flow of $815.7 million, similar to the previous quarter
• Inventory Days Outstanding: 289, up from 272 in the previous quarter
• Gross Margin (GAAP): 60.5%, down from 61.8% in the same quarter last year

“KLA’s September quarter results were at the high-end or above the midpoint of the guidance ranges for revenue and earnings per share, demonstrating the strength of KLA’s market leadership and operational execution, while also delivering solid free cash flow generation,” said Rick Wallace, president and CEO, KLA Corporation.

Formed by the 1997 merger of the two leading semiconductor yield management companies, KLA Corporation (NASDAQ:KLAC) is the leading supplier of equipment used to measure and inspect semiconductor chips.

Semiconductor ManufacturingThe semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers, and data storage. The need for technologies like artificial intelligence, 5G networks, and smart cars is also creating the next wave of growth for the industry. Keeping up with this dynamism requires new tools that can design, fabricate, and test chips at ever smaller sizes and more complex architectures, creating a dire need for semiconductor capital manufacturing equipment.

Sales GrowthKLA Corporation’s revenue growth over the last three years has been strong, averaging 20.7% annually. But as you can see below, its revenue declined from $2.72 billion in the same quarter last year to $2.4 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Even though KLA Corporation surpassed analysts’ revenue estimates, this was a slow quarter for the company as its revenue dropped 12% year on year. This could mean that the current downcycle is deepening.

KLA Corporation’s revenue growth has decelerated over the last three quarters and its management team projects growth to turn negative next quarter. As such, the company is guiding for a 17.9% year-on-year revenue decline while analysts are expecting a 4.07% drop over the next 12 months.

Product Demand & Outstanding InventoryDays Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand.
In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power.
Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, KLA Corporation’s DIO came in at 289, which is 80 days above its five-year average, suggesting that the company’s inventory has grown to higher levels than we’ve seen in the past.

Key Takeaways from KLA Corporation’s Q1 Results
With a market capitalization of $64.1 billion, a $3.35 billion cash balance, and positive free cash flow over the last 12 months, we’re confident that KLA Corporation has the resources needed to pursue a high-growth business strategy.

We were impressed by how significantly KLA Corporation blew past analysts’ EPS expectations this quarter, driven by strong cost controls and better-than-expected top-line results in its semiconductor process control divisions. We were also glad next quarter’s revenue guidance came in higher than Wall Street’s estimates. On the other hand, its inventory levels materially increased and its gross margin decreased. A notable event occurred on September 5th, when the company announced an increase in its quarterly dividend from $1.30 per share to $1.45 per share. This was the 14th consecutive annual dividend increase since its inception in 2006. Overall, this quarter’s results still seemed fairly positive and shareholders should feel optimistic. The stock is flat after reporting and currently trades at $454.84 per share.

The author has no position in any of the stocks mentioned in this report.