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What the KLA-Tencor Corp (NASDAQ:KLAC) Report Tells Us About the Chip Cycle

KLA-Tencor Corp (NASDAQ:KLAC) is the latest piece of evidence to help us sort out the continuing murder mystery known as the semiconductor cycle circa Q3 2018. KLAC was another INTC or XLNX, a good guy, a straight ace, for the bulls.

The company turned in a solid result for its Q1 (Sep Q), reporting EPS of $2.46, easily beating the $2.21 consensus, as analysts had taken an overly bearish stance on the company. It was, in fact, its largest EPS beat since 4Q16, with EPS also jumping by 37% on a yr/yr basis. One key factor in its strong bottom line performance is that gross margin came in slightly above the projected range it provided during its Q4 conference call. Specifically, KLAC generated gross margin of 65.2% versus its 64-65% guidance. The upside was mainly driven by favorable product mix, consistent with recent trends.

KLA-Tencor Corp (NASDAQ:KLAC) frames itself as a company that designs, manufactures, and markets process control and yield management solutions for the semiconductor and related nanoelectronics industries worldwide.

The company offers chip and wafer manufacturing products, including defect inspection and review systems, metrology solutions, in situ process monitoring products, computational lithography software, and data analytics systems for chip manufacturers to manage yield throughout the semiconductor fabrication process.

It also provides reticle manufacturing products, such as reticle inspection, metrology, and data analytics systems for mask shops; and packaging manufacturing products comprising standalone and cluster inspection and metrology systems that include wafer-level packaging inspection/metrology and component inspection/metrology products for various applications in the field of semiconductor packaging.

In addition, the company offers compound semiconductor, power device, light emitting diode, and microelectromechanical system manufacturing products for the display market; data storage media/head manufacturing products, which comprise process control equipment, test equipment and surface profilers, and metrology and defect inspection solutions; and optical and stylus profilers, and in situ process monitoring products for general purpose/lab applications.

Further, it provides refurbished systems, remanufactured systems, and enhanced and upgraded systems under the K-T Pro name; and service engineering, technical support, and knowledge management system services.

The company offers its products and services for use by various bare wafer, integrated circuit, reticle, and hard disk drive manufacturers.


The Deep Dive

As noted above, KLAC just dropped its Sep Q earnings, noting that demand was significantly better than expected for the quarter. Previously, the company said that it expected shipments to fall by about 10% to $935-$1.015 bln. For Q1, KLAC posted shipments of $1.007 bln, also at the high end of its expectations.

Sales growth was much better than anticipated, up 12% to $1.093 bln versus the $1.074 bln consensus. The driver: Strength in memory (MU, take note) and an expected sequential increase in shipments to foundry customers.

If you were on the call, you heard KLAC management completely downplay fears about an upcoming down-cycle for the semicap space.

This is possibly the most significant part of the story. We have seen several plays come out and frame poor performance in the Q on a downcycle in the space (TXN?). To hear KLAC and XLNX come out and throw this the other direction at least brings up the possibility that there were some more company-specific execution failures rather than a chip cycle funeral on our hands in Q4.

Naturally, time will tell. But this was an interesting case study report and conference call.

For instance, management said that excluding the recent delays in logic spending in 2H18, there are a number of long-term factors that will support demand for wafer fab equipment. These factors include more diversified end markets for semiconductors, ongoing innovation and technology upgrades, which are requiring its customers to invest significantly in capex, and market-driven capacity planning.

At the end of the day, it helps us continue to build an understanding of where we stand. The stock rallied nicely on the report despite a shaky Nasdaq tape.

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