KLA - Q1 2025

Transcript

Operator (participant)

Good afternoon, everyone. My name is Bo, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation's September Quarter 2024 Earnings Conference Call and webcast. All participant lines have been placed in listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question at that time, please press star one on your telephone keypad. If you wish to remove yourself from the queue, please press star two. Please limit yourself to one question and one follow-up. Lastly, if you should need operator assistance during the call today, please press star zero. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead, sir.

Kevin Kessel (VP of Investor Relations and Market Analytics)

Welcome to our earnings call to discuss the September 2024 Results and the December Quarter Outlook. I'm joined by our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results released after the market closed and available on ir.kla.com, along with the supplemental materials. Today's discussion and metrics are presented on a non-GAAP basis unless otherwise specified. All full-year references we make are to calendar years. The earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains features investor events, presentations, corporate governance information, and links to our SEC filings, including the most recent annual report and quarterly reports on Forms 10-K and 10-Q. Our comments today are subject to risks and uncertainties reflected in the disclosure of risk factors in our SEC filings.

Any forward-looking statements, including those we make on our call today, are also subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. Rick will start with some introductory comments, followed by Bren with financial highlights and our outlook. Before I turn the call over to our CEO, Rick Wallace, I wanted to provide a save-the-date for our 2025 Investor Day. It will be held on the morning of June 18th, 2025, in New York City at the NASDAQ MarketSite. We will provide more details closer to the event. Now over to Rick.

Rick Wallace (CEO)

Thank you, Kevin. KLA's September quarter exhibited strengthening customer demand and solid execution by our global team. Results exceeded expectations and delivered continued relative outperformance with revenue of $2.84 billion, non-GAAP-diluted EPS of $7.33, and GAAP-diluted EPS of $7.01. All results came in at the upper end of their guidance ranges. As expected, we are encouraged by the signs of a strengthening leading-edge logic and memory environment for our top customers, and we remain confident in our plan for steady improvement and continued growth in 2025. The quarter saw a number of highlights, including strong double-digit sequential and year-over-year revenue growth. In Foundry/Logic, the continuation of scaling and incorporation of new technologies and slowly rising capital intensity continue to be a long-term secular tailwind.

In memory, technology development investments supporting AI and High-Bandwidth Memory and an improving supply-demand environment are positioning memory makers for a return to growth for the wafer fab equipment industry in 2025. This quarter continued to demonstrate growing customer adoption for KLA's advanced packaging portfolio, and we remain confident that revenue in this category will exceed $500 million in CY2024 and continue to grow in CY2025. We also continue to see AI as an important driver and enabler of our business. Growth in demand for AI chips supports rising process control intensity, which benefits KLA meaningfully. Additionally, KLA was an early adopter in using and incorporating AI into our products and designing our computer architectures to leverage GPUs. KLA's future product enhancements will leverage AI to improve the performance and customer cost of ownership of our leading-edge systems.

KLA's service business grew to $644 million in the September quarter, up 5% sequentially and 15% year-over-year, making this the 49th consecutive quarter of growth on a year-over-year basis. Finally, the September quarter was strong from a cash flow and capital returns perspective. Quarterly Free Cash Flow was $935 million. Over the last 12 months, Free Cash Flow was $3.2 billion, with Free Cash Flow margin of 31% over the same period. Total capital return in the September quarter was $765 million, comprised of $567 million in share repurchases and $198 million in dividends. Total capital return over the past 12 months was $2.6 billion. We are confident the KLA operating model positions the company well for sustainable outperformance relative to the industry over the long run. I will now pass the call over to Bren to cover financial highlights and our outlook.

Bren Higgins (CFO)

Thanks, Rick.

KLA's September quarter results demonstrate market leadership combined with the consistent execution and dedication of our global team. Quarterly revenue was $2.84 billion, above the guidance midpoint of $2.75 billion. Non-GAAP-diluted EPS was $7.33, and GAAP-diluted EPS was $7.01, both above their respective guidance midpoints. Gross margin was 61.2%, slightly below the midpoint of the guidance range as the system's product mix was modestly weaker than expected. Operating expenses were $560 million. Operating expenses were comprised of $322 million in R&D and $238 million in SG&A. Operating margin was 41.5%. Other income and expense net was a $41 million expense, with the downside from guidance attributed to the mark-to-market effect of a strategic supply investment. The quarterly effective tax rate was 13.2%. Quarterly non-GAAP net income was $988 million. GAAP net income was $946 million. Cash flow from operations was $995 million, and Free Cash Flow was $935 million.

The breakdown of revenue by reportable segments and then markets and major products and regions can be found within the shareholder letter and slides. Moving to the balance sheet, KLA ended the quarter with $4.6 billion in total cash, debt of $6.7 billion, and a flexible and attractive bond maturity profile supported by strong investment-grade ratings from all three major rating agencies. Our debt levels are expected to decline in the December quarter as the company retires its November 2024 bonds at maturity. Moving to our outlook, in the near term, the industry outlook remains positive for our business. Our quarter-to-quarter performance is also consistent with the views we articulated at the beginning of the year.

For calendar 2024, supported by recent customer announcements, our expectation is for the WFE market to increase modestly from the mid to the high $90 billion range for the calendar year, based on our internal analysis of reported results and guidance across our peers and customers. Our perspective on calendar 2025 expectations is mostly unchanged from what we articulated last quarter. While we will not be overly specific on expectations for next calendar year until we report in January, we do continue to expect another year of growth, fueled principally by growth and investment in both leading-edge Foundry/Logic and memory, mostly DRAM, offset by lower China demand as customers absorb the equipment investments made over the past couple of years.

Given KLA's business momentum, market share opportunities, and higher expected process control intensity at the leading edge across all segments, we are confident we can maintain our relative WFE market outperformance in calendar 2025. KLA's December quarter guidance is as follows: total revenue is expected to be $2.95 billion, plus or minus $150 million. Foundry/Logic revenue from semiconductor customers is forecasted to be approximately 76%, and memory is expected to be approximately 24% of Semi Process Control systems revenue to semiconductor customers. Within memory, DRAM is expected to be about 76% of the segment mix, and NAND the remaining 24%. Non-GAAP gross margin is forecasted to be 61.5%, ± one percentage point, or up 30 basis points sequentially at the midpoint on slightly higher revenue and more favorable product mix expectations.

Non-GAAP operating expenses are forecasted in the December quarter to be approximately $580 million as we continue to make important R&D and scaling investments to support expected revenue growth. Looking ahead, we expect approximately $15 million in incremental quarterly spend and operating expenses over the next several quarters, supported by our product development roadmap requirements, revenue growth expectations, and further balanced against our 40%-50% incremental operating margin leverage business model over the long run. Other model assumptions for the December quarter include non-GAAP other income and expense net of approximately a $33 million expense. GAAP-diluted EPS is expected to be $7.45, ± $0.60, and non-GAAP-diluted EPS of $7.75, ±$0.60. EPS guidance is based on a fully diluted share count of approximately 134 million shares.

In conclusion, we are guiding to our third consecutive quarter of sequential revenue growth on improving market demand at the leading edge and expect annual growth to continue in calendar 2025. KLA remains focused on delivering a differentiated product portfolio that addresses customers' technology roadmap requirements and drives our longer-term relevancy and growth expectations. KLA is focused on customer success, delivering innovative and differentiated solutions and operational excellence for what drives industry-leading financial and Free Cash Flow performance and allows us to return capital consistently. The return of semiconductor scaling leads to an increasing complexity and new technologies that have strengthened our confidence in the rising importance of process control for enabling new technology advancements. This is not just in improving time-to-results and process integration and fab ramp, but also in optimizing yield across high-volume manufacturing environments with high semiconductor device design mix.

In addition, our service business continues to increase its relevance as system lifetime increases, and customer expectations for increased tool availability and performance is a growing long-term tailwind. This bodes well for KLA's long-term growth outlook, and industry demand trends favoring KLA are continuing to improve. In alignment with this, KLA's business is well-positioned, and the long-term secular trends driving semiconductor industry demand and investments in WFE are very promising. That concludes the prepared remarks. Let's begin the Q&A.

Operator (participant)

Thank you. Ladies and gentlemen.

Kevin Kessel (VP of Investor Relations and Market Analytics)

Oh, no. Sorry. Go ahead, Robert. I was just going to say, please pass. Please provide the instructions.

Operator (participant)

Certainly. Thank you, Mr. Kessel. Ladies and gentlemen, at this time, if you would like to ask a question, please press star one on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing star two. We remind you to please unmute your line when introduced, and if possible, please pick up your handset for optimal sound quality. In the interest of time, we ask that you please limit yourself to one question and one follow-up. We'll go first today to Vivek Arya of Bank of America.

Vivek Arya (Managing Director)

Thanks for taking my question. Vivek, I'm curious. There's a lot of excitement about the leading edge, but how do we square that with the fact that only the leading foundry appears to want to increase spending, but the next two want to cut spending? So is this TSMC spending good enough to drive up leading-edge investments by the double-digit or so pace that everyone is looking for? Just curious, this excitement, is it broad-based, or is it just based on one foundry's desire to increase spending?

Rick Wallace (CEO)

Thanks, Vivek, for the question. It's not a foundry question. It's a customer of the foundry's question. I think they would obviously, if there were more suppliers of leading edge, I think that the business would be spread across them. But right now, there's one supplier in the leading edge, and what they're seeing is significant demand above, as they indicated in their call, what they anticipated. And a bit of the, we anticipated two nanometer demand to be strong, but the fact that there's additional demand for three nanometer leads us to some pretty robust forecasts through the rest of this year for the bookings and also into 2025. So I don't think it's a function of the number of players. I think it's a demand driver. And as you know, it's across a number of players because it's not just in support.

I mean, AI is the fastest-growing segment, and that's both for training chips but also inference chips, and that's really driving this additional demand that we're seeing.

Bren Higgins (CFO)

Hey, Vivek, the other thing I would add is we sit very close to our customers, and they all approach process control in different ways. But generally, we want to make sure that we're collaborating and close enough to them that we have a pretty good understanding of the overall demand picture. So we think that in terms of assessing what each customer is doing in terms of the demand that they're going to satisfy that Rick articulated, we feel good that we have our supply that is supporting that aligned with that demand expectation.

Vivek Arya (Managing Director)

Thanks. Very helpful. And for my follow-up question on your China exposure, about 42% in September, curious what you are expecting or what's baked in for December. And maybe just the broader question is, can you maybe dissect what the exposure is in China? How much is product services? How much is resilient, or how much might be exposed to any potential restrictions or overbuild? Just how do you think about China for the next several quarters, whether it's on an absolute basis or whether it's on a percentage of sales basis? Thank you.

Rick Wallace (CEO)

Vivek, understanding China right now this year, it's important to keep in context what happened in 2022, 2023, and 2024, right? So if you go back to 2022, we took a lot of orders for greenfield projects and had supply constraints and strong demand from our other non-China customers that effectively limited what we were able to produce in 2022, and we focused on our more strategic long-standing customers. And as we moved into 2023 and 2024, because a lot of that activity was greenfield, it wasn't necessarily being put in place to react to supply and demand dynamics. It was basically new fabs that were starting up. And so while there was funding available, those customers were able to step in and fill the void in 2023 and 2024 that came from our other customers pulling back pretty meaningfully.

So as we look at 2020, so it's been at elevated levels for a couple of years. If we look at the fourth quarter, as I've said before, I thought we would see the percent come down, and it looks like it is coming down to somewhere in the mid-30s% for the fourth quarter, and then so if you look at 2024, it's been elevated into the low 40s% as a percent, and so when we look into next year, expecting some digestion next year, I would expect that to drop somewhere down to around 30%, ± a couple of points or so moving forward. I'm not going to get into the various aspects of the mix from a service other than saying just from a service point of view, it's a less mature market.

So service is a lower percentage than our sort of corporate average percent as a percent of revenue. So hopefully that's helpful, but that's all I'll say on that front. As it relates to export controls, we've been getting this question for over a year now in terms of when and if and how much. And so I don't want to speculate on the hypotheticals that are out there and how to think about it. So once we have clarity, if something happens, we'll assess the impact, and we'll have more to share with you. But for now, I don't want to speculate on anything more than that.

Operator (participant)

Very good. Thank you. Thank you. We go next now to Harlan Sur at JPMorgan.

Harlan Sur (Executive Director of Equity Research)

Good afternoon. Great job on the quarterly execution. On your qualitative comments on the 2025 view, right, you're calling out growth for next year. You said not much change relative to your view 90 days ago. I assume that's in terms of maybe total dollar spending. You did call out lower China revenues next year, right, versus your view on stable previously, so should we interpret the downshift in China as being more than offset by incrementally better spending on advanced foundry and logic and memory on the strong demand trends that Rick, you articulated earlier?

Bren Higgins (CFO)

Yeah. I think we started with, if you just go back to what we said a quarter ago, a view of stability. Maybe it was going to be up a little bit, down a little bit, but not as clear. I think where we sit today, I would expect that it'll be down some, and we think it's being offset by the leading edge demand that Rick referred to. So overall, our views on 2025 haven't really changed.

Rick Wallace (CEO)

Yeah. I mean, Harlan, if you think about the exit rate that we're talking about for Q4, that is a, if you keep that rate for 2025, that's a higher number. So you could have China be at a similar dollar level, but a lower percentage.

Harlan Sur (Executive Director of Equity Research)

Got it. And then on your process control business, right, if I look at wafer inspection and patterning and metrology, right, up 10% year-over-year first nine months versus a year ago. Now, within this, inspection is up 18% year-over-year, so very, very strong, right, for the first nine months of this calendar year. Patterning, metrology, down about 5%, right, over that same period of time. But looking into next year, right, given the patterning and metrology sort of intensity increases on things like Gate-All-Around, Backside Power Distribution, advanced memory, would you anticipate your patterning/metrology business to see an acceleration of growth as we move into next year?

Bren Higgins (CFO)

Yeah. That's our current view. Metrology is very closely linked to process tool purchases because you're monitoring the films, you're monitoring overlay, and so on. So patterning tends to scale up and down with more capacity investments. I think given expectations for design starts, you're also going to see the reticle part of the business increase next year as well. So I would expect that we'll see growth in metrology and reticle inspection into next year. What's been driving inspection is a lot of this in-fab activity given some of the yield challenges that customers have been facing. Obviously, N2 is starting to pick up here in the fourth quarter. And then, of course, in advanced packaging, where we've seen an inflection of growth in our inspection offerings for that part of the market as well.

So that's been a driver for some of the incremental growth of inspection relative to patterning.

Rick Wallace (CEO)

Yeah. One other thing, Harlan, I think if you look at capacity constraints, we were more gated on lead times of subsystems such as optics for the inspection business. Didn't really have that phenomenon in metrology, so those tend to flex as Bren said more with production. So we still have good backlog when it comes to the BBP platforms and an increasing demand environment for those. So we're also seeing additional capacity coming on to support the growth in 2025 so that that will allow the BBP product lines to grow.

Harlan Sur (Executive Director of Equity Research)

Yeah. Great insights. Thank you.

Operator (participant)

We'll go next now to Joe Quatrochi at Wells Fargo.

Joe Quatrochi (Director and Equity Research Analyst)

Yeah. Thanks for taking the questions. I was wondering on two nanometers, you think about just the capital intensity of process control. Is there any color that you can really share there and how we think about sample rates relative to three nanometer?

Rick Wallace (CEO)

Sure. What we're seeing right now is what we expected on two and what we're seeing a little bit on three is there's more process. The process windows are being squeezed even further, so there are more inspection points being added. So when we think about how many steps and the places that people are inspecting, those are going up. So we have a run part analysis of what it looks like and the tools that it will take. What happens is, let's say you go from three to two, you might not dramatically increase the number of EUV layers, for example, but there is some increase, and associated with that are more places where you have to sample.

So initially, when you're in debug, you have a higher number, but then you see you're looking at different defects, so you might even be looking at higher sensitivity settings, which means you need more capacity to support it. So we haven't fully quantified because when we work with our customers on that, we're actually looking for efficiency. So you debug, and then you see what is left that I have to sample at a higher frequency to be able to ensure process stability during ramp and production. But the initial expectations are, and what we're seeing is that two nanometers will be higher, more sampling at higher levels with more systems, with more configurations, driving higher process control intensity. And that's the trend that we're seeing.

The other thing is, as Bren mentioned, because they're more, if you think about what's coming, there are going to be more designs at these advanced nodes than we maybe a few years ago might have imagined. There's higher variability, so higher mix, and higher mix drives a need for more sampling as well.

Bren Higgins (CFO)

So Joe, on architectures, when architectures change, it tends to drive process control higher. We saw that with FinFET if you go back to the last local high of process control intensity or KLA share of WFE. So as we transition here to a new architecture, it will create not only are there additional patterning requirements from a metrology point of view, more layers deposited, and that creates opportunities for us on the film measurement side. You also have new defect mechanisms because of the nature of the structure.

So you have these buried defects where there's residue that's left over that's very hard to inspect. And so we've introduced new capability for that very N2 or Gate-All-Around specific defect type. And so there's an incremental opportunity there beyond what we would normally expect to see in a node-to-node transition. So there's a lot of opportunity out there, and if we can execute, we feel very encouraged by what's in front of us.

Joe Quatrochi (Director and Equity Research Analyst)

Well, that's helpful detail. As a follow-up, I think in the past, you guys have kind of tried to help us kind of think about growth half on half, second half versus first half. And I guess as we look into the first half of 2025, should we be thinking about a similar kind of level of half on half growth as we've seen kind of second half versus first half in 2024? How should we think about that?

Bren Higgins (CFO)

I would say to Rick's earlier point that based on our expectations into Q1, we see a pretty stable environment from the current run rates as we move forward. So I won't get into the full half at this point. We'll have a lot more to say about our views on 2025 when we report out for the December quarter of January. But certainly, as we look at the March quarter today, I feel very good about the overall stability and the run rate levels of the business.

Joe Quatrochi (Director and Equity Research Analyst)

Thank you.

Operator (participant)

We'll go next now to C.J. Muse of Cantor Fitzgerald.

C.J. Muse (Senior Managing Director and Semiconductor Research Analyst)

Yeah. Good afternoon. Thank you for taking the question. I guess maybe to follow up on that last question and your comment, Bren, around stability into March, I believe N2 is moving into HBM in Q1. And you talked about expected strength from advanced packaging. And when I look at your Foundry/Logic business in the current quarter, where Taiwan actually fell sequentially, looks like you're seeing some good business from Rapidus and at least currently Intel. So can you speak to perhaps the breadth of Foundry/Logic that you're seeing early 2025? And I would think that would be a complete offset to a slowdown in China. Would love to hear your thoughts.

Bren Higgins (CFO)

Yeah. I would expect, given the, I'll say this, just given the normal ramp schedule that our leading foundry customer executes against, that normally you'd start to see those tools start to shift in volume in the first part of the year.

C.J. Muse (Senior Managing Director and Semiconductor Research Analyst)

Okay. Great. And then a gross margin question for you. It looks like Semi Process Control gross margins dropped maybe 150 basis points sequentially in September, and you attribute that to mix. So as we look forward, how should we think about those margins kind of normalizing, or what kind of run rates should we model into and through 2025?

Bren Higgins (CFO)

Yeah. Mix is always a factor, C.J., for me. So I would say that normally our incremental margin model suggests about a 60%-65% incremental. The mix variability can cause a movement across quarters, but if you look at it over longer periods of time, it tends to stick pretty closely to that. The packaging opportunities have been great opportunities from a growth point of view, but currently we're selling some lower-end systems into that part of the market, so it is affecting the mix a bit, although we're encouraged about the trend there for the need for more capability moving forward. So it's those kinds of issues. I would say that we're operating here in this, I'll call it 61.5% range.

And at current run rates, as we sort of project out into next year, I think we're likely to be north of that versus south of that as we move forward. That's probably the best I can do.

C.J. Muse (Senior Managing Director and Semiconductor Research Analyst)

Very helpful. Thank you.

Operator (participant)

We'll go next now to Tom O'Malley at Barclays.

Tom O'Malley (Director of Equity Research)

Hey, guys. Thanks for taking my question. I just wanted to ask specifically on the NAND market. So you guys are coming off a really low base in September, but there's a bit of a debate right now if you look out into calendar year 2025 about where normal capacity is for historical NAND and where you're moving potentially to technology transitions and what that means from an equipment perspective. So I guess maybe the broader question is, what are you seeing in the NAND market? Are you seeing intensity kind of pick up there? Are you seeing customers look to expand lines, or are you seeing that technology upgrade as well? Just any comments on what is driving that NAND growth into next year and just your take on the market would be the first one.

Bren Higgins (CFO)

It's off a pretty low base. So as we think about next year, we would expect some incremental investment next year, but again, off of a very low base. Mostly what we're seeing is utilization rates get better. We're seeing our customers' financial performance improving, inventory levels are improving, things like that. So we think that translates into some investment into next year, but we don't see it really growing a lot on an absolute dollar basis. But it is operating or coming off a very low level. So I think we're optimistic on some incremental business there as we move into next year.

Rick Wallace (CEO)

Yeah. The one technology trend that'll help process control intensity for NAND is the wafer-to-wafer bonding. But other than that, we're not really pushing the technology compared to DRAM or logic.

Tom O'Malley (Director of Equity Research)

Gotcha. Super helpful. And then the second is just on the advanced packaging side. You guys spent a decent amount of time on the last call talking on the topic, and I think increasingly you're seeing the move to hybrid bonding kind of accelerate. So others are kind of saying 2026 timeframe, but are you seeing some opportunities in 2025? And could you just try to shape the size of that business today and some of the opportunities that you're kind of reaching down? Some of your smaller competitors are kind of talking about seeing you in some of those areas already, but any comments there would be helpful as well. Thank you.

Bren Higgins (CFO)

Yeah. You have development activity there, but we don't expect any move from a production point of view to hybrid bonding as it relates to High-Bandwidth Memory until probably at least into the 2026, 2027 timeframe. So what's really driving that part of the business for us is mostly on the logic side, although we're encouraged by some of the trends we're seeing in memory in terms of opportunity. HBM devices themselves create higher process control opportunities because not only do you have the silicon trade in terms of bits per wafer, if you will, but you also have higher reliability requirements. You have the logic circuitry that has to be processed. You've got to stack the die. So there's a lot of opportunities within that that we are encouraged by as we move forward.

Rick Wallace (CEO)

So one of the truisms in our business for inspection metrology is, what is the cost of the inspection at any step relative to the cost of that step? And what I mean by that is if you go back in time and they were making wafers for solar, we never saw there being much opportunity because the cost of the wafer was just not very high, so it couldn't support much inspection. You go to the other end of that and you have the cost of an EUV reticle is so high and the cost of failure is so high, there's a lot of money spent on the inspection. The biggest dynamic that changed in advanced packaging is the relative cost of that step and the fact that the cost can support a much higher level and a need for a much higher level of inspection capability.

Our view is we did not go down to that market. That market came to us because it got much more challenging. The need for higher-level inspection, if you think about HBM and you think about what's at risk for our customers. They recognize that, and they're investing much more heavily to ensure that those steps are clean because the cost of failure there is so high. That's a big part of what's driving capital intensity, and our product portfolio has moved to some of those dynamics. Those will play out over the next several years, but we're already seeing early evidence of that. The earliest indication of that was when our customers started talking to us about bringing in our front-end tools into the back-end because of these challenges.

Operator (participant)

Thank you. We'll go next now to Srini Pajjuri, Raymond James.

Srini Pajjuri (Managing Director and Senior Research Analyst)

Thank you. Hi guys. So my question is on N3 versus N2 demand. I know you said both of them were strong. I'm just wondering, in terms of the near-term upside you are seeing, is that more coming from N3? And if so, I'm just curious if N2 is also tracking in line with your original expectations.

Bren Higgins (CFO)

Yeah. I would say that what we've seen over the course of the second half of this year of 2024 has been more N3 upside. We're starting to see pilot line investment with some shipments this quarter for N2, and most of what's driving next year is very N2-centric.

Srini Pajjuri (Managing Director and Senior Research Analyst)

Okay. Got it. That's helpful. And then maybe you can speak to the visibility, especially as China comes down next year. I'm just wondering if that has any impact on your bookings and RPO and just in general your level of visibility as we go forward?

Bren Higgins (CFO)

The RPO has flattened out. We'll report and you'll see the specifics on it, but it was more or less flat quarter-on-quarter. Expected probably to increase a little bit next quarter or in the December quarter. So I would say that in general, lead times have generally been coming in. Some of that has been, as Rick mentioned earlier, new supply or new supply capability. So we can actually start to ship some tools that we've had some supply constraints relative to the demand. I would say that as you start to see some of the greenfield projects, we'll cause some of that to pull in, right? As greenfield gets pulled back, as some of the digestion's happening, we're waiting for second rounds on some of those projects, that the need to get into the queue earlier is less urgent.

Although when you have new customers, they want to show commitment, and so they typically will and want to ensure delivery time. So they'll typically try to give us orders and make sure we're planning for them further ahead. So I would say in general, lead times are generally pulling in, and we've seen the RPO tick down, but now it looks like it's starting to turn around a bit. See how that progresses as we move through the rest of this quarter and into next year.

Srini Pajjuri (Managing Director and Senior Research Analyst)

Right. Thank you.

Operator (participant)

Thank you. We'll go next now to Krish Sankar at TD Cowen.

Krish Sankar (Managing Director)

Yeah. Hi. Thanks for taking the question. First of all, I want to clarify something, Bren. You mentioned that China could go from 40%-30% of sales next year, but dollar value remains the same. A, is that true? If so, then your overall revenue should still grow pretty strongly compared to what WFE is expected to be. I'm just trying to figure out how to think about those two metrics.

Bren Higgins (CFO)

Yeah. I think it's a trend. Look, we'll see how the year plays out. But I would expect it could be the same. It could be a little bit less. I think what we were trying to say earlier is that investment levels have been pretty stable. So we'll see how it plays out. It's a little bit difficult to see into the second half of 2025 from here. So I was just trying to give you some sense of directionally where things are moving as we see next year from a percent of the overall.

Krish Sankar (Managing Director)

Got it. Got it. And then just to clarify one other thing, you kind of mentioned about how the foundry demand is improving on the leading edge, which kind of makes a ton of sense. Also with some China. And then on the DRAM side, I think you mentioned in the past process control intensity is going up from 10%-11%. Is that helping you next year, or is most of it already baked in this year?

Bren Higgins (CFO)

No, I think it's helping. There's a lot of momentum from certain customers, particularly as it relates to advanced DRAM and High-Bandwidth Memory that's creating opportunities for us. So we're encouraged with the, and as we said earlier, or I've said before, I'm encouraged by an expectation to see more DRAM investment next year and expect to see a stronger relevance of KLA and process control in that ramp.

So if I go back to my comment about the cost of the semiconductor and the value of inspection, if you think about this trend for AI, it's definitely playing out in DRAM and in packaging. So the DRAM for HBM is a more expensive technology. It's more critical. It's larger die. These are wafers that are going to have more EUV, and they also have less redundancy in them.

Rick Wallace (CEO)

So the combination of those factors is what will drive our customers to increase their intensity around process control. Just EUV is a good example of a pretty significant application we have with our Gen-5 is Print Check on EUV. And that dedication to using a Gen-5 to verify a reticle as it prints has been part of the driver of the success of EUV. So if you think about the trends overall, we don't quite know how it's going to play out for advanced DRAM, but the trends are very positive at this point.

Krish Sankar (Managing Director)

Got it. Thanks, Rick. Thanks, Bren.

Rick Wallace (CEO)

Thank you.

Operator (participant)

Thank you. We go next now to Joseph Moore with Morgan Stanley.

Joseph Moore (Managing Director)

Great. Thank you. On the topic of export controls, you sort of said you don't want to speculate until we hear it. I guess I'm just curious, how do you expect that to get conveyed? Have you had preliminary conversations? It sounds like there might be more of an entity list focus this time around where you get surprised. And when you're giving a framework for next year and ASML had a much lower framework, how much of that is informed by what you're hearing that they might do versus just kind of guesswork at this point?

Rick Wallace (CEO)

If you go back to 2022, two years ago, there was some notice, but I think for the government itself, they have their own process which involves a multitude of players. There's not one person or one group that decides. They have to go through a reconciliation across their own agencies. And also when they're trying to do multilateral, they're talking to other places. So I think truly nothing is decided until it's announced. And we don't get much heads up on when that's actually going to happen. So that's why we keep saying we don't know. We can't speculate. There's plenty that's been written. But if you read all that's been written, this thing would have happened four times in the last nine months, right? So clearly something is causing it to not get decided. And so we're not going to speculate on when it does.

When it comes to what our peer companies have said, I think our forecast for 2025 hasn't changed, and it's much more in line with where others are now than what it was. So our view has not changed. Nothing about our forecast for next year has really changed in the last several months as we talk to our customers and we envision what kind of investment environment there's going to be.

Joseph Moore (Managing Director)

Yeah. That's very helpful. Thank you. And then within the China business, I know you had kind of catch-up on the DRAM side that was causing DRAM to be elevated. My perception is that's back to announcement levels. Is that more driven by foundry at this point?

Bren Higgins (CFO)

You started to break up there a little bit, Joe, but yeah, I think what you were asking about was DRAM memory moving forward versus Foundry/Logic. And yes, there was some catch-up investment that happened. I would expect less memory to be down more in terms of the overall, I think it's going to be down. There's parts of the market we don't have access to. But in general, in terms of our business, I would expect Foundry/Logic to modestly adjust, but still to be fairly strong. And I think infrastructure more or less continues, but that's more of a reticle statement than a wafer statement.

Joseph Moore (Managing Director)

Great. Thanks so much.

Operator (participant)

Thank you. We go next now to Charles Shi of Needham.

Charles Shi (Senior Analyst)

My first question, I remember a quarter ago, you talked about not just a three nanometer for second half this year, but also next year. When we look at all the headlines about two out of your three nanometer customers, it doesn't look like there is a three nanometer upside from them. The one last customer, actually the leading one, they did not rule out more of the five nanometer-three nanometer conversion for even next year. My question really is, are you still seeing the three nanometer upside for 2025 given the current visibility here?

Bren Higgins (CFO)

We had this question earlier in the call, but yes, three-nanometer continues to be strong. As we said earlier, we would expect two-nanometer to be a big driver into next year, but there's still three-nanometer activity that has been stronger than we anticipated six months ago.

Charles Shi (Senior Analyst)

Got it. The other thing I want to ask you to make a clarification or maybe provide some color. You reported that North America revenue for the September quarter seems like pretty high. I go back probably the last seven, eight years. It looks like it's probably the highest number of revenue you get from North America. Mind if you provide some color on what's driving that big uptick in the September quarter?

Bren Higgins (CFO)

Yeah, so it was stronger, and it's more leading-edge-centric. I'll say that.

Operator (participant)

Thanks. We'll go next now to Atif Malik at Citi.

Atif Malik (U.S. Specialty Semiconductors Analyst)

Thank you for taking my questions. First on China, is it possible to understand how big your wafer and reticle inspection business is in China? Because I believe that business is a bit different from your peers that are facing maybe restrictions.

Bren Higgins (CFO)

Yeah. It is, Atif, it is different, right? We're exposed to those investments. We haven't disclosed the actual amount, though. But I would say over the last couple of years, I would say it's been somewhere between 25% and 35% of our China systems business. So it's decent, but the preponderance obviously is our semiconductor customers.

Atif Malik (U.S. Specialty Semiconductors Analyst)

Understand. And then, Bren, on the services business, given the scenario of China demand coming down like you laid out, will there be an impact on your services growth expectations of 12%-14% longer term?

Bren Higgins (CFO)

We're pretty bullish on service and service opportunity, and we're trending closer to the top end of that range than the bottom end. We're seeing really dynamic trends in terms of useful life and new value offerings that we have within our service model that is driving incremental service demand. Of course, at the shipment levels, the new tools going out, high conversion rates, ASPs generally are higher, which drives contract pricing growth. That's part of it, but also the extending useful life. As we've said before, it's a high mix, high complexity, relatively low volume business. There's not a lot of redundancy. Customers have very high uptime expectations, and so they run the tools at very high levels. They have matching requirements across the tools. These tools are the eyes and ears in the fab.

And as a result of that, customers ensure that they're operating. And so that drives our service model. It drives the contract stream, which is 75% plus of revenue. And yes, there are dynamics around FX, depending on some service business is priced in local currencies that can affect the revenue line. And if you did have controls, those controls affect service opportunities there. But net net, we still feel very comfortable with our long-term model and feel like we're trending towards the high end of the model versus the low end.

Atif Malik (U.S. Specialty Semiconductors Analyst)

Thank you.

Operator (participant)

Thank you. We go next now to Timothy Arcuri at UBS.

Timothy Arcuri (Managing Director)

Thanks a lot. Rick, I just want to be kind of clear about how much handicapping you're doing for the export control. It sounds to me like you're not really handicapping much at all, and you're just sort of waiting for it to get announced. And once it gets announced, then it'll impact your numbers as it does. Is that fair? Because Lam was pretty explicit that they have a base assumption as to what it's going to look like, and that's handicapping their guidance. Is that not the case for you, or are you making a base assumption for the guidance as to what the exports will look like?

Bren Higgins (CFO)

Tim, I'll take the first part. So as it relates to guidance and how we're thinking about the fourth quarter, we have a guidance range. And I would say that as we contemplate all the scenarios, and of course, we have inter-year issues in terms of the size of our tools and so on from an ASP point of view, as we contemplate all the various scenarios, we're comfortable with the guidance range that we provided for the quarter. As it pertains to long-term impact of something that may or may not happen, we'll have to assess what it means in terms of what we have in backlog, what's in forecast, how do we look at those customers and their investment plans, and so on. So we won't have any detailed information until something happens if it happens.

But as far as it relates to near-term guidance, I think we feel comfortable with the guidance range we provided.

Timothy Arcuri (Managing Director)

Okay, Bren, thanks. Now, I guess just to math on next year, so you grew revenue like mid-30s% this year for your China revenue. It's up mid-30s%. Of your firm's peers, one grew 20%. The other one's barely going to be up. And I think China WFE is up about 20% this year. So you're up a lot more than what your firm's peers are. So it doesn't matter what I think China WFE is. But when you think about how fast you grew China versus your peers, do you think there's any pull forward of your China spending? Maybe because there's no alternative tool that's available from a domestic Chinese company. So why not, to some degree, stockpile your tools and move them around as these new entities can consolidate?

So I'm just wondering if you think that the hangover for you could be a little more severe than your peers? Thanks.

Bren Higgins (CFO)

Tim, there's different buying patterns in terms of timing. If you look at 2023, I think we probably our China business undergrew our peers. So if you look at any one year in isolation, it might drive you to a conclusion. It's not really accurate. I mean, I think if you look at 2023 and 2024, I think the general activity levels of investment have been, I think, relatively consistent across most companies over a broader period of time. Process control tends to, particularly in greenfield, probably get adopted more heavily early on because customers are monitoring very, very closely, doing a lot of sampling. So as wafers start to grow, then less process control tends to diminish a bit. So there's probably some timing in terms of how they buy overall.

In 2025, given where we are today, and we'll see what overall WFE, but to the earlier comments, we do expect some digestion in 2025.

Timothy Arcuri (Managing Director)

Okay, Bren. Thank you.

Operator (participant)

We'll go next now to Toshiya Hari at Goldman Sachs.

Toshiya Hari (Managing Director)

Hi. Thank you so much for taking the question. I wanted to get your thoughts on customer mix going into 2025 and any implications for margins. You mentioned China's down next year. Within leading edge, foundry and logic, TSMC obviously is growing share and growing share within WFE as well. So does that or could that potentially pressure gross margins? I know your gross margin profile has been remarkably stable over many, many years, if not many decades. So I doubt it. But we do get this question quite a bit from investors. So curious how you're thinking about evolution in customer mix and implications for gross margins.

Bren Higgins (CFO)

Yeah. Our gross margins are not customer-dependent. It's more product-specific. So our margins don't vary across different customers. Obviously, customers that buy more tend to get volume-related incentives. But beyond obvious volume incentives, there isn't any real difference between customers or regions in terms of overall margin. Now, they all buy process controls differently and have different strategies. And so all of our products carry different margins. They're not all the same. So that's one of the product mix factors that tends to drive some variability there. But yeah, it's more about products than customers or regions.

Toshiya Hari (Managing Director)

Got it. Thank you. And then as a quick follow-up, another one on China. I was hoping you could give us a little bit more context by application or customer type. I know you service a broader range of customers relative to some of your process tool peers. Customer groups like fab shops, wafer suppliers, more on the infrastructure side. I'm curious what percentage of total China those guys account for this year. And as you look forward into 2025, what kind of trends are you expecting? Thank you.

Bren Higgins (CFO)

Yeah. Earlier in the call, I mentioned percentage is probably somewhere in the 25%, maybe as high as 30% a given year. But in general, from an infrastructure point of view, that's about the mix. And I would expect that to be mostly stable, but more reticle-centric than wafer in 2025. So that's there. I think we mentioned memory earlier. I think memory comes down meaningfully, partly due to the investments that have happened, partly due to just the lack of market access to some memory investment for us. And then I think foundry and logic corrects, but doesn't correct all that much.

Toshiya Hari (Managing Director)

Helpful. Thank you so much.

Operator (participant)

Thank you. We go next now to Chris Caso at Wolfe Research.

Chris Caso (Semiconductor Analyst)

Yeah. Hi. I guess the first question is on DRAM and kind of what you're thinking about for next year because it does sound like there's some divergence between different customer groups there. Most are expecting the China part of DRAM to be down pretty significantly. Can you give us a view of generally what you're seeing with regard to DRAM investment and kind of opinion from your customers as you go into next year and how that may have changed over the last quarter?

Bren Higgins (CFO)

I would say it hasn't changed all that much. This year has been much more about our customers' businesses getting better, their financial performance improving, and that some of the investment has been somewhat isolated. We mentioned China earlier as an example. We've seen utilization rates improve, which has been good for our service business. And we would expect, as it relates to high-end DRAM and supporting High-Bandwidth Memory, to see some incremental investment next year. We'll have more to say from a quantitative point of view in terms of expectations around how much growth and how that translates back to KLA in the January call. But from just an overall context point of view, we expect to see a decent step up in DRAM investment next year.

Chris Caso (Semiconductor Analyst)

Okay. Great. My next question is something some investors are starting to ask about and generally, the implications of what happens if your leading edge tends to consolidate more than it has already and perhaps that could be just because one of the leading edge customers is just growing so much more quickly than the others. It's probably early to make that call right now. I bet some of your customers would disagree with that, but thinking about it now, what would the implications be if we saw more consolidation? Would that provide some pressure because just more suppliers than simply more suppliers than customers?

Rick Wallace (CEO)

I think it would depend on the drivers. In other words, in a world where there was a single driver for the leading edge, say, take a microprocessor, and it had been made at multiple places, then you'd argue, sure, consolidation would be more efficient.

What's interesting now is because there are so many advanced designs, the efficiency you need scale to have efficiency, and they already have that scale. So I don't think it changes that much. I do think you have some people still making investments to do leading edge, say, in Japan, for example, and they're hoping to get part of the market. Our assumption is that it remains at about the efficiency. And the way we measure that and model for it is we think about what is the capital of efficiency or the intensity of capital process control for that segment as we go forward.

And we're not really modeling it to go up significantly because there's a lot of players at the leading edge. Truthfully, there haven't been. I mean, for years now, we've really had primarily one major player at the leading edge. And so that's for most of the volume. So we're kind of already there. If that were to change, that might drive up intensity beyond what we're modeling more so than go the other way. Does that make sense?

Chris Caso (Semiconductor Analyst)

Yeah. Yeah. That's helpful. Something we're thinking about. Thank you.

Operator (participant)

Thank you. And ladies and gentlemen, we do have time for one more question today. We'll take that now from Blayne Curtis of Jefferies.

Blayne Curtis (Managing Director)

Hey, thanks for squeezing me in. I feel bad being the last question and giving you this one. I'm just kind of curious your perspective. You're one of the few that kind of does give an outlook for the market. I appreciate that greatly. We have had a handful of companies already report. I think generally consensus is kind of double-digits for everybody. I don't think people have brought them down below that. I'm just kind of curious as you assess the market. I know, like I said, I appreciate you trying to put something out there, but a low single-digit growth just seems low. I'm just kind of curious. One, I think your numbers are up double-digits. It seems like your tone would suggest that that's maybe the right trajectory. I'm just kind of curious where that outlook came from.

I think in general, do people have it wrong, I guess?

Bren Higgins (CFO)

I'm sorry. What period of time are you talking about?

Blayne Curtis (Managing Director)

For 2025, all right? I mean, the WFE forecast that you put out, I appreciate you putting it out, right? But you said high 90s.

Bren Higgins (CFO)

No, we haven't put one out, Blayne. We provided an update to our 2024 view that we actually see 2024 in the high 90s versus the mid-90s, which is what we said three months ago. So as it relates to 2025, we haven't actually put a number out there. The only thing we've talked about is in reference to our own business and our views of current run rates, a reasonable amount of stability here moving forward.

Blayne Curtis (Managing Director)

All right. All right. I apologize. That was my mistake. I just want to ask on the other one on the China outlook. I thought you were talking about your kind of perspective and markets and China being down. I just wanted to make sure I heard you. I know you had a couple of questions on this, so I apologize for the clarity there as well. You said December down. I think you said 35% of revenue. So it would be down as a dollar amount, but then you said kind of flat kind of for the rest of the year. I thought I heard you say that then it would still drop as a percent of revenue, which is another way you can kind of back into, I guess, what you're saying in growth.

So I was just trying to understand if that's the mechanics of what you said. And I guess that's another way you can kind of back into double-digit growth. I know you're not trying to put it out there. I just want to understand what you said.

Rick Wallace (CEO)

Yeah. So maybe just let me try to clarify our view. We said early in the year that we think one of the things we're doing is preparing for growth at the leading edge. That's where we think we are now. We think the growth in the next year is going to come from the leading edge. And that's both in memory as it pertains to high bandwidth and a lot of the work that's going on. It has to do with advanced packaging. It has to do with advanced logic foundry. The other business, such as that we've had, for example, in China, we don't know exactly, but that's not leading edge. That's mature business. And we think it's too early to say.

But when we look to 2025 and then look beyond to the model we had for 2026 or even what we'll start talking about in 2030, we think we're getting back to the historical levels where the leading edge is what's driving the growth. It's the largest percent of the business. And the legacy will be a smaller percent. When exactly that happens, we don't know. But that's the trend that we're seeing. And what we're seeing is very good indications of strength in the leading edge based on the design starts and based on the conversations with customers. In the last quarter, for the first time in quite a long time, our leading edge customers have been asking for acceleration, more systems than they'd originally planned for. And they want to make sure we can support them and install them.

That's what gives us the confidence that 2025 is going to be driven by investment in the leading edge.

Blayne Curtis (Managing Director)

Thanks for that.

Kevin Kessel (VP of Investor Relations and Market Analytics)

Thank you, Blayne. And thank you, everybody, for your interest, for your time. We'll be following up with many of you in the following days. And with that, I'll turn the call back over to the operator for any concluding instructions.

Operator (participant)

Thank you, Mr. Kessel. Ladies and gentlemen, that will conclude the KLA Corporation September quarter 2024 earnings call and webcast. Please disconnect your line at this time and have a wonderful day.