KLA Earnings: Good End to the Fiscal Year in a Soft Market; Maintain $410 Fair Value Estimate

We maintain our $410 per share fair value estimate for wide-moat KLA KLAC after it reported strong fiscal fourth-quarter results and good fiscal first-quarter guidance that fit our model. Front-end wafer fabrication equipment, or WFE, is in the midst of a downturn in calendar 2023, with both memory and logic chipmakers reducing spending with lower end demand. However, KLA’s services revenue grew nicely in the quarter, showing continued use by customers despite lower capital expenditure, which mirrored good results from peer Lam Research last night. With a dominant position in the process diagnostic and control market that results in a wide moat rating, we’re confident KLA will capture demand when the WFE market rebounds. We find valuation challenging at the moment, and would recommend investors wait for a pullback before buying in.

Fiscal fourth-quarter sales declined 5% year over year and 3% sequentially to $2.4 billion. System sales drove the decline, with KLA’s marquee wafer inspection tools declining in a softer market. This is the first year-over-year decline for KLA’s sales in the current downturn, and we foresee more quarterly declines before a recovery. Services sales rose 5% year over year, which we view positively. KLA’s ability to earn revenue with its services helps cushion downcycles and contributes to a virtuous cycle of knowledge-sharing with its customers that contributes to its wide moat, in our view.

GAAP gross margin dropped 150 basis points year over year but rose 40 basis points sequentially to 59.1%. Margin was buoyed by lower supply-related costs in the quarter, but remains slightly below what we consider a healthy level for KLA with depressed volumes.

Fiscal first-quarter guidance for sales of $2.35 billion at the midpoint would represent a slight sequential decline, but we anticipate services to grow slightly once again. Management is also guiding for roughly flat gross margin levels through fiscal 2024.