KLAC • 10-K • FY 2024 • Positive

KLA Navigates Semiconductor Slowdown with Strong Services Growth Despite Revenue Dip

August 05, 2024 • 1 min read

TL;DR

KLA Corporation faced headwinds in FY2024 with revenues declining 6.5% to $9.81B, though services revenue grew 10% to $2.33B showing resilience. The company recorded a significant $289.5M impairment charge while maintaining robust margins and R&D investment at 13% of revenue. Product revenues declined 10.7% to $7.48B reflecting semiconductor industry cyclicality. Strong balance sheet with $4.5B in cash and marketable securities positions KLA well for the expected industry recovery in 2025.

Financial Performance Overview: Revenue declined 6.5% YoY to $9.81B, with product revenue down 10.7% to $7.48B while services grew 10% to $2.33B. Gross margins remained resilient at 60%, down just 90bps YoY despite lower volumes. Operating income (excluding impairment) was $3.63B representing a 37% margin. The company's focus on high-value inspection and metrology solutions helped maintain pricing power despite industry downturn. Service revenue growth demonstrates increasing installed base value and recurring revenue strength.
Strategic Initiatives and Operational Changes: KLA maintained R&D investment at $1.28B (13% of revenue) despite market headwinds, focusing on AI/ML integration in inspection tools. The company recorded a $289.5M impairment charge related to EPC business, signaling strategic portfolio optimization. Management expanded services capabilities and introduced new product platforms for advanced packaging and specialty semiconductors. These initiatives position KLA for growth in emerging semiconductor technologies while maintaining leadership in core markets.
Market Position and Competitive Dynamics: KLA maintained dominant >50% market share in process control, benefiting from increasing complexity in semiconductor manufacturing. Deferred revenue grew 51% YoY to $1.78B, indicating strong customer commitment and future revenue visibility. The company expanded its SAM through new product introductions in specialty semiconductors and advanced packaging. Rising semiconductor capital intensity and increasing process steps per wafer continue driving demand for inspection and metrology solutions.
Operational Efficiency and Profitability: Despite revenue decline, KLA maintained strong profitability with 60% gross margins and 37% operating margins (ex-impairment). Inventory levels increased 5.5% to $3.03B, reflecting strategic buffer for expected recovery. Operating cash flow remained robust at $3.2B with 116% conversion rate from net income. The company's differentiated products and high barriers to entry enable premium pricing and sustained profitability through cycles.
Growth Catalysts and Material Risks: Key growth drivers include AI-driven demand for advanced semiconductors, expansion of specialty markets, and increasing process complexity. Geographic concentration risk with China representing significant revenue and ongoing export controls presents challenges. R&D execution risk in maintaining technology leadership amid rapid industry evolution. Strong balance sheet with $4.5B cash provides buffer against cyclicality and enables continued investment through downturn.

Revenue

$9.81B ( YoY) with services growing to $2.33B

↓ -6.5%

Rd Spend

$1.28B (-1.4% YoY) representing 13% of revenue

Net Income

$2.76B ( YoY) with net margin

↓ -18.5%

Gross Margin

(-90bps YoY) showing pricing power retention

↑ 60.0%

Free Cash Flow

$3.2B with conversion rate

↑ 116%

Operating Margin

ex-impairment (-200bps YoY)

↑ 37.0%

Growth Indicators

$3.03B ( YoY)

↑ +5.5%

Deferred Revenue ↑$1.78B (+51% YoY)

Services Revenue ↑$2.33B (+10% YoY)

Key Risks

China exposure and export controls threatening significant revenue source
R&D execution risk in maintaining technology leadership
Semiconductor industry cyclicality impacting capital spending
Geographic concentration in Asia manufacturing

Key Opportunities

AI-driven demand increasing process complexity and inspection requirements
Specialty semiconductor markets expansion adding $1B+ TAM
Services business growth providing recurring revenue stability
Advanced packaging adoption driving new tool demand

Bottom Line

Omitted for length