KLA Corporation (NASDAQ:KLAC) Surprises With Q2 Sales But Quarterly Guidance Underwhelms

Radek Strnad /
2023/01/26 4:11 pm EST

Maker of equipment for semiconductor manufacturing, KLA Corporation (NASDAQ:KLAC) reported Q2 FY2023 results beating Wall St's expectations, with revenue up 26.8% year on year to $2.98 billion. However, guidance for the next quarter was less impressive, coming in at $2.35 billion at the midpoint, being 5.95% below analyst estimates. KLA Corporation made a GAAP profit of $978.7 million, improving on its profit of $717.5 million, in the same quarter last year.

Is now the time to buy KLA Corporation? Access our full analysis of the earnings results here, it's free.

KLA Corporation (KLAC) Q2 FY2023 Highlights:

  • Revenue: $2.98 billion vs analyst estimates of $2.82 billion (5.5% beat)
  • EPS (non-GAAP): $7.38 vs analyst estimates of $7.10 (4.01% beat)
  • Revenue guidance for Q3 2023 is $2.35 billion at the midpoint, below analyst estimates of $2.49 billion
  • Free cash flow of $594.6 million, down 35.8% from previous quarter
  • Inventory Days Outstanding: 191, down from 210 previous quarter
  • Gross Margin (GAAP): 59.4%, down from 61.3% same quarter last year

"The December quarter marked another strong period of growth and profitability, as we navigated through marketplace volatility and supply chain challenges," said Rick Wallace, president and CEO of 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.

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

Sales Growth

KLA Corporation's revenue growth over the last three years has been strong, averaging 26.1% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $2.35 billion to $2.98 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

This was a decent quarter for KLA Corporation as revenues grew 26.8%, topping analyst estimates by 5.5%.

KLA Corporation' appears to be headed for a downturn. While the company is guiding to growth of 2.67% YoY next quarter, analyst consensus sees 13.3% declines over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business 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 inventory days came in at 191, 11 days below the five year average, showing no indication of an excessive inventory buildup at the moment.

Key Takeaways from KLA Corporation's Q2 Results

Sporting a market capitalization of $59.8 billion, more than $2.86 billion in cash and with positive free cash flow over the last twelve months, we're confident that KLA Corporation has the resources it needs to pursue a high growth business strategy.

We were very impressed by the strong improvements in KLA Corporation’s inventory levels. And we were also excited to see that it outperformed Wall St’s revenue expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and gross margin deteriorated a little. Overall, this quarter's results still seemed mixed. Investors might have been expecting more and the company is down 3.43% on the results and currently trades at $414 per share.

Should you invest in KLA Corporation right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.