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KLA Misses Q1 Earnings Estimate

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KLA-Tencor Corporation (KLAC - Free Report) reported first-quarter 2014 earnings of 68 cents a share, missing the Zacks Consensus Estimate by 5 cents, or 6.8%.


KLA reported revenues of $658.3 million, down 8.6% sequentially, 8.7% from the year-ago quarter, within the guided range of $600-750 million and in line with our estimate.

KLA-Tencorremains an equipment supplier in a weak demand environment, which 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, customer concentration is obviated, which results in great fluctuations in revenue/orders in times of weak demand. All these factors were evident in KLA’s fourth-quarter results.

Products generated 76% of total revenue, down 12.0% sequentially and 12.6% year over year. Revenue declined across product lines, with most notable weakness in defect inspection, followed by metrology. Other revenues were also down significantly off a much smaller base.

Services revenues comprised the remaining 24%, up 4.6% sequentially and 6.8% year over year.

North America, Taiwan and Korea declined 30.4%, 43.9% and 9.0%, respectively on a sequential basis, while Japan, Europe & Israel and Other Asia grew. Revenue from Taiwan and Japan remained below year-ago levels. Europe & Israel was the strongest, growing triple digits from both the previous and year-ago quarters. Overall, North America, Taiwan, Japan, Europe & Israel, Korea and Other Asia/Pacific generated 27%, 18%, 12%, 18%, 12% and 12% of quarterly revenue, respectively.


New orders in the first quarter were $790 million, up 10.8% sequentially and 56.1% year over year. On the other hand, shipments declined from both the previous and year-ago quarters. As a result, the backlog increased 9.1% sequentially and 17.0% from last year.

Overall, the order contribution by segment was as follows: memory 47%, foundry customers 45% and logic 8%.

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 down costs.

Historically, KLA has had low exposure to the memory segment, but management’s focus on the area and declines in other segments have made it a more significant contributor. The relative softness in the logic segment was expected because the company’s largest logic customer, Intel Corp (INTC - Free Report) had been equipping for 14nm production that was completed in the last two quarters.

Both wafer and reticle inspection product lines grew strongly from the year-ago quarter. However, while wafer inspection also grew on a sequential basis, reticle inspection dropped off slightly. Other product orders declined from both the previous and year-ago quarters, while service orders grew from both periods. Products were 80% of total orders with services accounting for the balance.

North America, Japan and Other Asia/Pacific saw significant declines with Europe, Korea and Taiwan offsetting this weakness. Overall, the order contribution by geography was as follows: North America 22%, Europe 8%, Japan 10%, Korea 18%, Taiwan 26% and Other Asia/Pacific 16%. 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 up 43 basis points (bps) sequentially and 160 bps year over year to 58.2%. A favorable product mix and lower inventory charges offset the negative impact of lower volumes in the last quarter.

Operating expenses of $227.9 million were up 2.3% sequentially and 7.8% from a year ago. The operating margin shrank 324 bps sequentially and 368 bps from last year due to higher R&D and SG&A as a percentage of sales that more than offset the stronger gross margin in both comparisons.

The pro forma net income was $114.9 million, or 17.5% of sales compared to $138.6 million, or 19.2% in the Jun 2013 quarter and $142.4 million, or 19.8% in the Sep quarter of last year. Including one-time items such as restructuring and acquisition-related charges on a tax-adjusted basis, the GAAP net income was $111.2 million ($0.66 a share) compared to $134.8 million ($0.80 a share) in the previous quarter and $135.4 million ($0.80 a share) in the year-ago quarter. 

Balance Sheet

KLA ended with cash and short term investments balance of $2.95 billion, up $33.0 million during the quarter. The company generated $177.2 million of cash from operations, spending $21.8 million on capital expenses, $60.5 million on share repurchases and $74.6 million on dividends during the quarter.


For the second quarter of fiscal 2014, KLA expects orders of $800-950 million and shipments of $800-860 million. Quarterly revenues are expected to be between $670 million and $730 million, gross margin flat sequentially, 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 $0.67 - $0.87, below the Zacks Consensus Estimate of $0.92.

In Summary

KLA’s first quarter results and second quarter guidance indicate that the key foundry segment will gain momentum over the next six months.

The underlying drivers (process node transition and strong demand for smartphones and mobile computing devices) should increase capex spending in the second half of the year.

The technical complexity of manufacturing semiconductors and increasingly challenging yield issues remain revenue drivers for this leading manufacturer of process control equipment.

KLA shares currently have a Zacks Rank #3 (Hold), similar to equipment maker Lam Research (LRCX - Free Report) , both of which look safer than equipment maker Applied Materials (AMAT - Free Report) , which has a Zacks Rank #4 (Sell).

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