KLA Corporation (NASDAQ:KLAC) Q2 Sales Beat Estimates But Stock Drops

Jabin Bastian /
2024/01/25 4:12 pm EST

Semiconductor manufacturing equipment maker KLA Corporation (NASDAQ:KLAC) announced better-than-expected results in Q2 FY2024, with revenue down 16.7% year on year to $2.49 billion. On the other hand, next quarter's revenue guidance of $2.3 billion was less impressive, coming in 6.5% below analysts' estimates. It made a non-GAAP profit of $6.16 per share, down from its profit of $7.38 per share in the same quarter last year.

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KLA Corporation (KLAC) Q2 FY2024 Highlights:

  • Market Capitalization: $87.03 billion
  • Revenue: $2.49 billion vs analyst estimates of $2.46 billion (1.1% beat)
  • EPS (non-GAAP): $6.16 vs analyst estimates of $5.88 (4.7% beat)
  • Revenue Guidance for Q3 2024 is $2.3 billion at the midpoint, below analyst estimates of $2.46 billion
  • Free Cash Flow of $545.4 million, down 33.1% from the previous quarter
  • Inventory Days Outstanding: 283, down from 289 in the previous quarter
  • Gross Margin (GAAP): 60.7%, up from 59.5% in the same quarter last year

"KLA's December quarter results were ahead of our expectations and capped a solid year that included strong relative margins and free cash flow growth despite a persistently soft market. While market conditions remain challenging in the near-term, with limited visibility regarding the timing of a resumption in sustainable demand, we believe our business has stabilized around current revenue levels," said Rick Wallace, president and CEO, KLA Corporation.

Formed by the 1997 merger of the two leading semiconductor yield management companies, KLA Corporation (NASDAQ:KLAC) is the leading supplier of equipment used to measure and inspect semiconductor chips.

Semiconductor Manufacturing

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers, and data storage. The need for technologies like artificial intelligence, 5G networks, and smart cars is also creating the next wave of growth for the industry. Keeping up with this dynamism requires new tools that can design, fabricate, and test chips at ever smaller sizes and more complex architectures, creating a dire need for semiconductor capital manufacturing equipment.

Sales Growth

KLA Corporation's revenue growth over the last three years has been solid, averaging 18.5% annually. But as you can see below, its revenue declined from $2.98 billion in the same quarter last year to $2.49 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

KLA Corporation Total Revenue

Even though KLA Corporation surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 16.7% year on year. This could mean that the current downcycle is deepening.

KLA Corporation's revenue growth has slowed over the last three quarters and its management team projects revenue to fall next quarter. As such, the company is guiding for a 5.5% year-on-year revenue decline, but Wall Street thinks there will be a recovery next year. Analysts' estimates call for 4.7% growth over the next 12 months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

KLA Corporation Inventory Days Outstanding

This quarter, KLA Corporation's DIO came in at 283, which is 71 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.

Key Takeaways from KLA Corporation's Q2 Results

We enjoyed seeing KLA Corporation exceed analysts' revenue and EPS expectations this quarter. This beat was driven by strong outperformance in its largest division, semiconductor process control. On the other hand, its free cash flow missed Wall Street's estimates, and its revenue and EPS guidance for the next quarter fell short. Overall, this was a mixed quarter for KLA Corporation. The company is down 6% on the results and currently trades at $603 per share.

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