KLA Corp (KLAC) — Q2 2024 Earnings Call Transcript

Thank you for joining the earnings call to discuss the December 2023 results and the March quarter outlook. I'm joined by our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results release after the market close and available on our IR website, along with supplemental materials. Today's discussion is presented on a non-GAAP financial basis, unless otherwise specified. Our full year references all relate to calendar years. A detailed reconciliation of GAAP to non-GAAP results in the earnings material posted on our website. KLA's IR website also contains future investor events as well as presentations, corporate governance information, and links to our SEC filings, including our most recent annual report and quarterly reports on 10-Q and 10-K. Our comments today are subject to risks and uncertainties reflected in the risk factor disclosure in our SEC filings. Any forward-looking statements, including those we make on the call today, are subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. Rick will begin the call with some comments and quarterly highlights. Bren will conclude with our financial highlights, including our guidance and outlook. I will now turn the call over to our CEO, Rick Wallace. Rick?

Thank you, Kevin. I will briefly summarize KLA's performance for the 2023 calendar year and the December quarter and then set up our view for 2024. For 2023, KLA revenue was almost $9.7 billion, down 8% versus the prior year. This was higher than our expectations coming into the year as strength from legacy node customers and semiconductor infrastructure offset weaker-than-expected leading-edge investments in both logic and memory. While overall WFE spending was down for the year, there were areas of growth in the KLA business segments, including the infrastructure business supporting wafer and mass manufacturers, automotive, and specialty semiconductor process equipment. KLA's service business grew 7% to $2.2 billion for the year. The company continued to deliver strong industry-leading margins, with non-GAAP gross margins of 62% and a non-GAAP operating margin of 39%. Free cash flow grew 6% in 2023 to a record $3.2 billion. Moving to KLA's December quarter results, which were ahead of expectations as revenue improved 4% sequentially to $2.49 billion. Quarterly non-GAAP net income was $839 million. GAAP diluted earnings per share was $4.28 and non-GAAP diluted EPS was $6.16. We saw sequential growth in all 3 of KLA's business segments. You can find specific details in our shareholder letter released earlier today. Additional highlights in the quarter include growing adoption for KLA's 8900 Series platform for high-throughput macro inspection, increased demand in the legacy node and advanced packaging categories made the platform one of the best performing product lines in our optical inspection portfolio in 2023. Continued growth in AI enables KLA's differentiation and helps drive industry growth. We continue to deploy deep learning and physics-based algorithms across KLA's inspection and metrology product portfolio. This has improved signal and noise recognition and reduced process learning cycles as customers resolved critical yield challenges. KLA's service business grew 1% on a sequential quarterly basis to $565 million and remained on track to resume the targeted 12% to 14% annual revenue growth trajectory in calendar 2024. As we look at CY '24, I'm encouraged by recent reports from many of our customers that the demand environment is expected to continue to gradually improve throughout the calendar year. Through collaboration with customers, KLA is focused on preparing our teams for a return to growth as the leading edge and leveraging the KLA operating model to ensure readiness to support our customers' needs as the demand environment improves. In the near term, we see the March quarter at the low point for the year; we expect business levels to improve as we progress throughout the year. The KLA team will, as always, prioritize commitments to our customers and executing on our product growth maps.

Thanks, Rick. Our results demonstrated the consistent execution of our global team. Despite the challenges and complexity of the current industry environment, KLA continues to show resourcefulness and the ability to adapt to meeting customers' changing and fluid requirements. Revenue was $2.49 billion, slightly above the guidance midpoint of $2.45 billion. Non-GAAP diluted EPS was $6.16, above the midpoint of the guided range of $5.26 to $6.46. GAAP diluted EPS was $4.28. GAAP EPS was negatively impacted by $1.59 for goodwill and purchased intangible asset impairment charge. Non-GAAP gross margin was 62.6%, just above the high end of the guidance range of 60.5% to 62.5%. Non-GAAP operating margin was 40.7%. Quarterly non-GAAP net income was $839 million; GAAP net income was $583 million. Cash flow from operations was $622 million, and free cash flow was $545 million. As I just mentioned, during the quarter, KLA recognized a goodwill and purchase of intangible asset impairment charge of $219 million for the PCB and display reporting unit attributed to a weaker long-term outlook, primarily for the flat panel display business. We have begun investigating strategic alternatives for this business, which accounted for 1.4% of total revenue in calendar 2023. The breakdown of revenue by reportable segments and end markets and major products and regions can be found within the shareholder letter and slides. Turning to the balance sheet, KLA ended the quarter with $3.3 billion in total cash, cash equivalents, and marketable securities, debt of $5.95 billion, and a flexible and attractive bond maturity profile supported by strong investment-grade ratings from all 3 agencies. In December 2023, Fitch rating upgraded KLA's debt rating to A from A- with a stable outlook. Moving to our outlook. Looking ahead to calendar 2024, the exact timing of a meaningful and sustainable resumption in WFE investment growth continues to remain uncertain. Though there are signs of improvements in some end markets, this improvement is off low levels, impacting our customers' profitability and cash flow generation in the near term. KLA's overall demand is stabilizing around current business levels, plus or minus the guidance ranges. As of now, this translates into KLA revenue bottoming in the March quarter, driven mostly by a customer project delay occurring in the last couple of months. Based on current schedules and our June quarter shipment plan, we expect sequential growth to return in the June quarter and continue for the remainder of the calendar year. For calendar 2024, we currently expect WFE demand to be in the mid- to high $80 billion, roughly flat to modestly up from the anticipated level in calendar year 2023. We expect that the second half of the calendar year will be stronger than the first half for WFE investment. This WFE estimate reflects our current top-down assessment of industry demand as follows: In memory, we expect WFE investment to be slightly up from low levels with investments focused on high bandwidth memory capacity and leading-edge node development. Both NAND and DRAM fabs are still at low utilization levels as consumer markets have not yet returned to the growth levels needed to bring factory utilization back to the high levels seen in recent years. Once customers consume this excess capacity and focus on node migration, we would expect to see new investments. Foundry/logic is expected to be slightly up with leading-edge investment returning to modest growth levels. Legacy investment declining versus 2023 and China legacy node investments remaining relatively flat to current levels. As for guidance, KLA's March quarter guidance is as follows: Revenue is expected to be $2.3 billion, plus or minus $125 million. Foundry/logic is forecasted to be approximately 60%, and memory is expected to be 40% of Semi Process Control systems revenue. Within memory, DRAM is expected to be about 85% of the segment mix and NAND the remaining 15%. Non-GAAP gross margin is forecasted to be in a range of 61.5% plus or minus 1 percentage point as product mix weakens quarter-to-quarter due to lower overall semiconductor process control systems revenue. For calendar 2024, based on current industry outlook, top-line growth expectations, higher forecasted growth in services, and expected systems product mix, we are modeling gross margins to be relatively stable around the mid-61% range to what we delivered in 2023. Variability quarter-to-quarter is typically driven by product mix fluctuations. Operating expenses are forecasted in the March quarter to be approximately $545 million, relatively flat from the December quarter. Our calendar 2024 operating expenses, we expect $5 million to $10 million incremental growth per quarter beyond the March quarter, in line with expected sequential growth in revenue. Prototype material purchases can drive variability quarter-to-quarter. For the calendar '24 tax rate based on current forecast, we do not expect material changes. You should continue using the 13.5% effective rate for modeling purposes. Other model assumptions for the March quarter include other income and expense net of approximately $45 million. GAAP diluted EPS is expected to be $4.93 plus or minus $0.60. A non-GAAP diluted EPS of $5.26 plus or minus $0.60. EPS guidance is based on a fully diluted share count of approximately 135.6 million shares. In conclusion, we are optimistic that most end markets are showing signs of improvement. KLA will remain focused on supporting customers, executing on our product roadmap, and positioning the company for a return of growth at the leading edge. The visibility into the precise timing of a sustainable demand recovery is still unclear, KLA is running the business to ensure delivery of a differentiated product portfolio that meets customers' technology roadmap requirements and to execute our business in line with our longer-term growth expectations. The KLA operating model guiding best-in-class execution; KLA continues to implement strategic objectives, which are geared to drive outperformance. With a focus on customer success, delivering innovative and differentiated solutions and operational excellence, KLA is able to deliver industry-leading financial and free cash flow performance and return capital consistently. The past few years have strengthened our confidence in the increasing importance of process control and enabling technology advancements and optimizing yield at a high design mix volume production environment. This bodes well for KLA's long-term growth outlook despite still challenging near-term demand trends. In the meantime, KLA business continues to stabilize, and the long-term secular trends driving semiconductor industry demand and investments in WFE remain very compelling. That concludes the prepared remarks. Kevin, let's begin the Q&A.

Thanks, Bren. Chelsea, if you can just give the instructions and set up the queue.

It looks like relative to your prior view, the March quarter came in lower by roughly about $200 million. I know you talked about a customer project delay that materialized just over the last couple of months. It looks like based on your December quarter end market mix and expected March quarter mix that it's a foundry/logic customer. Was that a leading edge or mature node customer? Was the delay more technology-related or just weak demand trends? And does the sequential growth outlook beyond March assume that this customer comes back this year?

Yes, as mentioned in our prepared remarks, we had a project planned that was expected to generate around a couple of hundred million dollars, but it has been delayed by approximately 12 months. We might see it materialize by the end of 2024 or possibly early 2025. This project was primarily focused on leading-edge technology. Consequently, as we seek to fill this gap with other business, we noticed that the percentage of our revenue from China increased slightly more than we anticipated when we provided guidance at the start of the quarter. This situation arose late in the quarter; however, it did not impact Q4 due to adjustments involving other customers and slots, but it will certainly influence Q1. As we look forward to sequential improvements in the June quarter, we also face part of our revenue recognition policy that requires us to gain acceptance from new customers to ensure our tools meet specifications for reliability and performance. Some shipments at the end of Q4 and those scheduled for the March quarter align with new customer projects where their facilities are opening late in the quarter. Therefore, our ability to secure those acceptances and finalize that process could be limited. We expect to see that revenue recognized in the June quarter once the performance is established, which would allow for revenue recognition upon shipment moving forward with that customer. However, we are encountering some unique factors that are impacting us in the first half. This gives me some confidence regarding our sequential growth guidance as we approach June, but it is affecting our projections for the March quarter in line with our revenue recognition policy.

No, I appreciate the insights there. Your total process control systems business outgrew WFE yet again, right, in calendar '23. Within that, Inspection significantly outperformed, right? It was only down 5%, but your Patterning business was down almost 20%, which is actually worse versus WFE. And it's like most of that full year underperformance was due to the sharp drop-off in patterning just in the December quarter. So was that tied to the customer pushout dynamics, as you mentioned? Or is it just the lumpy shipment trends in patterning? And I guess, do you guys expect the process control systems business to outgrow WFE this year?

Yes, that's a great question, Harlan. If you consider our business and its composition, Inspection, particularly leading-edge Inspection, is closely linked to the development of new technology, whether it's in the pilot phase or even ramping up. In contrast, some aspects of our metrology business are more dependent on capacity. Therefore, when there’s a decrease in capacity, it has a greater effect on metrology than on Inspection. This was evident in 2023.

Harlan, it's Bren. We feel confident about our overall performance, considering the significant legacy business from the past year and the typical decline in leading-edge activity, which often results in increased process control intensity. This year in WFE was also distinct due to the notable carryover from 2022 among several peers, which manifested in 2023 as activity that originated in 2022. Taking these elements into account, alongside our strong performance in 2022 compared to the broader market - we achieved a growth rate that was four times that of the market. The fact that we are performing in line, or slightly better, than the overall market in 2023 is a positive indicator of the increasing process control intensity we are enthusiastic about at KLA.

I just wanted to go back to the pushout. So that I just sort of understand, if we were to adjust for the couple of hundred million that's now pushed into the June quarter and assumed it was still in the March quarter, I guess, would you still expect that the June quarter would be up quarter-over-quarter? Or would it be more flattish like we were thinking or talking about last quarter, just the first half kind of still being a similar run rate of the business?

Yes. I think it's more the latter, right? We've obviously got a lot of moving parts in how it affects the quarters. But as we talked about last quarter, we saw the business generally continuing at guided level. We guided was $2.450 billion right? We ended up outperforming by $40 million or so. So it would have been probably flattish, more or less. But this adjustment coming out obviously has the kind of impact, and I like sized it earlier. So flattish, and then we would expect to see the second half start to improve. Yes. So RPO was down about $200 million. I expected you to ask that question, Joe. So yes, $200 million quarter-to-quarter and with about 50%. So that takes you to about $10.6 billion, 45% to 50% of it to ship beyond 12 months. And then within that, we have about just short of $800 million in customer deposits.

I guess, first question, can you speak to domestic China? And I guess, to what degree '23 was helped by bare wafer and reticle inspection and your thoughts on how that progresses in '24. And I guess with the mix shift to perhaps incrementally more DRAM. And I don't know in terms of the really core legacy some shift is there. How are you seeing your kind of implied market share '24 versus '23?

For China, it appears to be relatively stable year-over-year. We benefited from infrastructure investments that I discussed extensively over the past year. I anticipate that segment of the business may decline somewhat as we experience more adjustments on the wafer side compared to the reticle side. However, this should be offset by slightly higher demand. I foresee the memory segment potentially shifting to another customer, which could also lead to overall stability. I'm optimistic about the direction of the Chinese market despite some variability in our average selling prices. Throughout the year, I expect consistency across quarters, though this will depend on the timing of specific fabrication projects and the completion of construction schedules. As we approach the second half of the year, I think we'll see a decrease in percentages as other customers contribute to our anticipated growth.

No, you covered it. I guess, for my follow-up, as you think about kind of second half stronger than first half, how would you kind of rank order leading-edge foundry logic versus DRAM in terms of the key drivers for you?

I believe we will experience some growth this year, though I anticipate it will be quite modest as we progress. It appears to be fairly balanced throughout the year. I expect DRAM to also be balanced from a leading-edge perspective, and overall, I think both areas will show a slight increase as we move into the second half of the year.

I have 2 of them too. One is, I was just kind of curious, Rick, if you can kind of give color on how to think about China revenues this year ex EPC?

Well, Bren just covered that in the last question, but essentially it's flat. That's the general view for China this year. It's flat, with a little less infrastructure than we saw, especially in wafer and reticle, which continues to remain level at this current run rate.

I understand. As a follow-up, could you provide an update on the status of your optical inspection? You mentioned that revenue is expected to improve over time. What are the current lead times compared to three or six months ago, and what do you anticipate for the coming months?

I will begin with the update on optical inspection. We are still experiencing constraints with Gen 4 due to demand exceeding our supply. However, I anticipate an increase in supply this year. Our performance is expected to surpass the overall market as we enter 2024. Currently, we have seen some normalization in lead times for Gen 5, which are typically between 7 and 9 months. In contrast, lead times for Gen 4 are still over a year, although new capacity is set to come online. This new capacity will not suffice for our expectations over the next year to one and a half years, but we do anticipate additional capacity becoming available as we progress toward 2026. Overall, we are optimistic about our capacity, both within KLA and our supply chain, to support the anticipated growth as we move into 2025 with significant WFE growth. Our financial targets for 2026, which we presented at our Investor Day in 2022, remain in focus.

I would like to ask a few questions. I believe someone may have addressed this earlier, but regarding your outlook for wafer fabrication equipment, which you expect to be flat to modest based on your 2023 baseline, can you elaborate on your revenue expectations? Do you anticipate a pickup in the second half of the year to achieve low to mid-single-digit growth for wafer fabrication equipment? Additionally, I am curious about whether you view the intensity of process control spending this year as neutral, higher, or lower compared to that spending profile. How does this affect your revenue?

Yes. No, you're right in terms of the math, right? As we look at the first half of this year, which is we'll call maybe slightly down versus the second half of '23 and then an acceleration in the second half would put you somewhere in the, I'll call it, high single-digit growth. That assumes that WFE is marginally up more or less from 2023. And so against that backdrop, with slight improvement in memory, I would expect our process control intensity to be roughly flat. So we were in the 7% depending on your WFE number, but assuming you're $87 billion to $88 billion in WFE in '23, about 7.6% or so. So I would expect it to be similar as we move into '24. And as we expect to see more growth in leading-edge investment as we move into '25, then we'll start to see favorability in terms of leading-edge dynamics that tend to drive our business and higher process control intensity overall. So I think that's how to think about it right now. In terms of our benefits from memory investment, we certainly see a positive dynamic in DRAM with the increased investment and the introduction of EUV. We observed an increase in process control intensity with the implementation of EUV in DRAM, making it one of the larger positives for us. As technology conversions occur rather than new capacity, investment may be somewhat subdued. However, we anticipate that our customers will continue to invest in leading-edge development for the upcoming nodes, which we believe will be the primary driver for our business.

I guess, the first question is kind of looking beyond 2024, and obviously, don't expect you to provide any guidance there, but take any opinion that you have. Some of the other equipment suppliers that have had longer lead times were starting to express a little more confidence on a turn on '25. I don't expect that you've seen that in your order book yet, but interested to see what your customers may be talking about.

It's a great question. And we have definitely had those conversations. I think that customers are looking at from a couple of perspectives. One, we do have long leads on the most advanced optical tools, but there's also a lot of development that we're doing right now to make those tools even better for the advanced logic ramps that are coming. So we're actually engaged quite a bit in R&D and in pilot with those customers. So we have a pretty good sense. They're all bullish about '25. I can't think of a customer that we have on a leading edge that isn't bullish about '25. But as you say, we're not going to see the orders for those yet. But we're certainly having those conversations. But more importantly, we're seeing the discussions happen around capability that we're demonstrating as they do pilot. The other thing is we're seeing a trend toward more designs, and we talked about this for the past several years. One of the leading indicators for us is the advanced designs because that's an indicator of how broad a node is going to be. And we're seeing that continue, and that will drive both reticle business but also is a good leading indicator for the strength of '25. That's why one of the objectives for the company is to prepare for growth as leading edge because that's what we believe will happen over the next 24 months. As Bren indicated, not the next 6 months, we should start to see the green shoots of that toward the end of the year, and then we'll see it in '25 as the way we're modeling the business and our investment right now.

It's a little bit of capacity, too. I mean '23 was down, right? And so we're seeing some expansion in our capacity. The big node ramps aren't really happening as much this year, which is part of why the WFE gets driven up. And you heard TSM's call, and I think they are fairly bullish on their forecast, but we'd have to see what happens in the early parts of '25 for those ramps on, especially, the newest technologies.

We anticipate that the non-China legacy business will be lower in 2024 compared to 2023. This decline is being balanced by some improvements from our leading-edge investments, although the non-China legacy segment is decreasing slightly. This forms the basis of our forecast. As we engage in discussions with our customers, we are planning for capacity accordingly. We'll continue to monitor the situation throughout the year to determine when these shipments will commence.

You talked about memory utilization remaining low. And, I guess, I feel like you guys kind of talked about that relatively early, and then you saw it kind of static. We've heard from memory customers, all kinds of things about different times that they brought it down and like some of them bought it up. I just want to confirm that you're seeing that as kind of a steady trend? And then can you talk about how that affects your services revenue you can get from those guys?

Yes. I've recently met with several memory customers, and I've noticed a significant change in their attitude. Last year, they expressed many concerns because they anticipated a much higher demand for memory. Now, it seems they are beginning to improve their outlook. We do observe advancements in conversion technology, although overall utilization rates haven't changed much. Our service levels remain above historical averages, as customers, even those who could reduce usage, have opted not to. This has been a key strength for us, which is why KLA's services performed well in '23, and we anticipate that growth will return to the targets we set a few years ago for '24 and beyond. Overall, the situation feels different, and we expect this positive trend to strengthen throughout the year.

The customers don't have the same level of redundancy with what they buy from KLA versus a lot of process equipment. And when you're focused on trying to be as efficient with your capital as you can, you'll tend to really focus on trying to drive yield. So the way they buy process control, they don't buy a lot of extra. So they take capacity offline for a process, they tend to run process control much more consistently. The customers that cut more in terms of utilization earlier have come back more. I think overall, to Rick's statement, it's been fairly flat overall. And DRAM has tightened a bit because of some of the AI drivers for that. But on the flash side, I think it's been fairly stable. And like I said, some improvement from folks who cut more aggressively early on.

Bren, you talked about strategic alternatives for the display business. Can you help us out how big the display business was last year? And then in general, on the EPC business, there are kind of auto is starting to return, mobility is getting better. Can you just talk about how you're looking at the EPC business, excluding display?

You're breaking up a little bit there, Atif. So in regards to the comments on display, it's about 1.5% of the revenue of the company. And there are parts of the display, they are more commodity-based and there's aspects of that industry structurally where profitability is more challenged. And then there's some interesting parts of it too in terms of some of the future roadmap opportunities and where some of the higher-end customers are moving. So we will have more to say about that as we assess the alternatives we're considering. The rest of EPC is kind of the tale of two businesses overall. The specialty semiconductor business has done exceptionally well as we talked about in the shareholder letter. Really outperforming WFE overall. I think it's a combination of customer engagement, more applications, new products. So we're really pleased with where we're performing there and the ability to differentiate. And I would expect that to be roughly flat and with some mix shift. It has some diversity in terms of end markets between automotive and mobile and advanced packaging. So you could see a shift where automotive weakens, we'll see more investment on the advanced packaging side. So we're pretty positive on that. ICOS, we're already starting to see some improvement there, which tends to be a little bit of a leading indicator in terms of finished components. And so we're more optimistic about how that will translate back into the other parts of our business, given that that's a short lead-time, more capacity-centric business. So again, back to our views of some improvement as we move into the second half. PCB has been more mobile-centric in terms of in more consumer markets more capacity-centric. So that business has been weaker but I would expect it to be a little bit better this year as well. And there are some product offerings that we have coming that start to take advantage of opportunities at high-end PCB and substrates as those integrate into heterogeneous packages. So we expect the APC business overall to be up, we'll call it, maybe high single digits, a little less lead time over there. So a little harder to forecast off of the year we had in 2023.

Great. And then as my follow-up, Rick, you talked about uncertainty in leading edge with some pushout. If your foundry customers decide to focus more in putting these investments of fabs in Japan versus U.S., is there an impact to your business?

The work being done in Japan isn't at the forefront of our industry, but it is part of their overall investment strategy, aside from the Japanese company that's involved there. It represents a different aspect of our business, which is significant. However, the cutting-edge work in the foundries is not currently taking place there, except for one instance. We're observing that development for this leading-edge work is underway. The key question is when they will be ready to scale up this effort. Our confidence in future growth stems from our engagements, the design initiations we've noted, and the plans they have been discussing. We feel optimistic about our position as we approach the end of this year and look ahead to next year.

First off, I really just want to ask for some clarification about the service business expectation for calendar 2024. I think that you talked about higher forecasted growth in service. Is it higher than what you thought at the 12% to 14% this year? Or if you're just talking about higher growth compared with your systems business? Just a quick clarification.

Yes, we are aligning more closely with our long-term target model of 12% to 14%, leaning towards the upper end of that range. This improvement is largely driven by the expected increase in utilization as the year progresses. As our customers’ businesses improve, they experience greater demand and begin to utilize their existing capacity. With the rise in their profitability, we anticipate they will start investing in new equipment. We expect to see these trends play out as the year continues. Additionally, we will start benefiting from the tools shipped in 2021 and 2022, as they transition from warranty to contract status, which should contribute to service growth next year. Overall, we are planning to align back with our target model for the business next year. The positive aspect of service growth is its continuous nature, although it does slightly dilute our overall margins, which I mentioned in the context of our 2024 gross margin outlook. While we expect to see a revenue increase, there may be some pressure on margins. However, the accounting methods we use make it beneficial at the operating margin level, so it remains a positive aspect, despite its impact on gross margin fluctuations.

You're right. Historically, customers have always tried to reuse whatever they could. There are a couple of factors that will impact this going forward. One is the technology they will need for 3 and 2, which is upgraded from what they currently have at 5. The second factor is that they still have volume at 5. The question will be how this historically has been most pronounced during significant shifts from an existing node to a new one. In our conversations and modeling, we see it remains consistent with what we have observed in recent years, though not as high as the reuse rates from several years ago. This drives us to continually enhance our tools to encourage them to adopt the new technology or upgrade their existing systems. There is nothing particularly new about this next generation of technology, but it is definitely something customers are always looking to optimize in their footprint.

Bren, I wanted to ask about book-to-bill. So it's below 1 for the fifth quarter in a row. It's up a little bit. It's up to like 0.9. So you're reaching some sort of steady state. But it's a much different dynamic of what's sitting in RPO than what used to sit in backlog because you used to have 4 to 5 months worth of backlog. And now if you assume half of the stuff is parked outside of 12 months and half is inside of 12 months, I mean it's not, I guess, that different than it was before, but you still have this $5 billion plus that's parked beyond 12 months and that was never there before. So as we look pre-COVID and post-COVID, what changed? Why is there this $5 billion worth of bookings or RPOs just parked beyond 12 months? Because it isn't like your lead times have gone out that far. And I understand that with those long lead times, but it has always been long lead times. So what's kind of changed for you?

Yes. The easiest way to understand this is that it relates to customers placing orders connected to facilities for upcoming greenfield projects. The project timelines influence the orders, which are driven by lead times. For example, if a customer has a project set to launch in 2025, they want their tools available by the scheduled opening. Many of these orders, along with deposits from some China business, are linked to these timelines. This is the primary factor affecting our situation, and you're correct that it's somewhat of a new occurrence. We began noticing this trend after the significant surge from 2019 to 2022. Each quarter, we have consistently addressed some of that backlog, which has remained roughly around 50%. In the most recent quarter, the deferred systems revenue on the balance sheet increased slightly, reflecting a situation where shipments exceeded revenue, impacting the remaining performance obligations. However, the book-to-bill ratio compared to revenue was positive. This does not alter the general trend line you inquired about. It has shown slight improvement and aligns with our expectations, depicting a more favorable outlook in the December quarter.

Yes. Yes. I mean it was up, definitely. But I guess just my follow-up on that is what's the advantage? If I'm that customer and if your lead times are well inside of that, what's the advantage if I'm a Chinese customer to booking something that's kind of sit in your backlog, but parked beyond 12 months? I mean, unless I'm worried about export control and maybe, I think, because I have something I've given you a down payment that entitles me to get the tool, like is that part of it? I still don't know why I would park something like way, way beyond your lead times?

If you're a new customer establishing a relationship with us, it's important to demonstrate credibility. You need to engage and allocate resources to support the fab, which takes time. Often, this involves making deposits for a portion of the orders. Essentially, if you want to ensure that there are no bottlenecks or obstacles when your fab opens, you might need to act early. While some newer customers may not book orders far in advance, certain customers want to guarantee that we are ready to support their plans, which is why they place orders to affirm their commitment.

I have 2 as well. The first one is on high NA. There seems to be a bit of a disconnect among some of your customers in terms of, I guess, their appetite to take tools and to develop using those tools. Curious, how you're thinking about your potential insertion of high NA over the medium to long term? And how should we think about the positive impact to your business from an intensity standpoint?

Our views on the timing for high NA technology remain unchanged. We are pleased to see the shipments of the tools that received significant attention. It will naturally take time, as with any new technology, to transition those tools into production. Therefore, our perspective on when it will proceed to the pilot phase and then to high volume has not altered. However, it is evident that the increased adoption of high NA and EUV is beneficial for KLA. The expansion of its applicability in memory also presents more opportunities, particularly in the reticle area, as we face greater challenges with deep activity as we start printing smaller features.

That's very helpful. And then as my follow-up, maybe one for Bren. Just on the display business, so it's 1.5% of revenue last year. I'm curious if you could speak to the profitability of that business. I mean, to the extent you do end up, say, selling the business, how should we think about accretion to gross margins and bottom line earnings?

Yes, profitability is less than 1.5% of KLA's revenue.

Thank you, Chelsea, and thank you again, everyone, for your time. We know it's a busy day of earnings, a busy week. We appreciate it. We'll be in touch with sure all of you over the coming days and weeks. And with that, back to you, Chelsea, to provide any final instructions.