KLA Corp (KLAC) — Q3 2024 Earnings Call Transcript

Thank you for joining our earnings call to discuss the March 2024 results and the June quarter outlook. I am joined by our CEO, Rick Wallace; and our CFO, Bren Higgins. We will discuss today's results released after the market close and available on our IR website, along with the supplemental materials. Today's discussion and metrics are presented on a non-GAAP financial basis unless otherwise specified. All full-year references are to calendar years. Earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future investor events, presentations, corporate governance information, and links to the SEC filings including our most recent annual report and quarterly reports on Forms 10-K and 10-Q. Our comments today are subject to risks and uncertainties reflected in the disclosures of risk factors 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 introductory comments followed by Bren with additional financial highlights, including our outlook. I will now turn the call over to our CEO, Rick Wallace. Rick?

Thank you, Kevin. Today, I will review KLA's March quarter results, main highlights, and address the new market share reports as well as a broader industry outlook. KLA's revenue of $2.36 billion was above the midpoint of our guidance range. EPS results, both non-GAAP and GAAP, were above the midpoint of the adjusted guidance we provided on March 18 in conjunction with the decision to exit the flat panel business. Market conditions have stabilized, and we expect our business to improve as we progress through the year. We're encouraged by the improvement in our customers' business across multiple end markets, which is driving discussions with our customers about future opportunities for leading-edge capacity investments. At the start of each year, new global market share reports are published by third parties that provide additional insights into the state of our industry. These reports show consistent, long-term KLA market leadership in process control and demonstrate the strength of our diverse portfolio that offers our customers unique capabilities to address their technology challenges while meeting their productivity demands. This year, following significant gain in 2022, KLA's 2023 market share declined by nearly 1%, driven primarily by a loss in access to approximately 10% of the China market as a result of U.S. government export controls. That said, KLA's consistent market leadership in process control and some of the most critical markets in WFE reflect the success of our customer-focused strategies and the power of our portfolio. We're confident that KLA's quarterly revenues bottomed in the March quarter as expressed in our prior earnings call. In foundry/logic, simultaneous investments across multiple nodes and slowly rising capital intensity continue to be a long-term tailwind. Additionally, the increasing complexity in advanced packaging applications for AI and other advanced technologies drive demand for both our process tool and process control products. Overall demand growth, along with increasing technology requirements will drive the need for more capability from inspection and metrology systems. Our advanced packaging business will generate approximately $400 million in run rate in 2024, and we expect this business to achieve growth rates meaningfully above the growth rate of WFE going forward. In services, our business grew to $590 million in the quarter, up 4% sequentially and 12% year-over-year. Quarterly free cash flow was $838 million, and the last 12 months free cash flow was $3.1 billion with a free cash flow margin of 32% over the period. KLA's quarterly results continue to demonstrate our sustained process control leadership and the success of our broad portfolio and product strategies. Customers continue to prioritize and invest in leading-edge technology transition and this aligns with KLA's highest value product offerings. In this industry environment, KLA will continue to focus on supporting customer requirements, executing on product road maps and preparing for growth at the leading edge. Bren will now discuss the financials and our outlook further.

Thank you, Rick. KLA's quarterly results demonstrated a 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 requirements. Quarterly revenue was $2.36 billion, above the guidance midpoint of $2.3 billion. Non-GAAP diluted EPS was $5.26, above the guidance midpoint of $4.83. GAAP diluted EPS was $4.43, above the guidance midpoint of $4.06. In the March quarter, both non-GAAP and GAAP diluted EPS were negatively impacted by a $62 million charge for excess and obsolete inventory related to the company's strategic decision to exit the flat panel display business announced on March 18. This charge had a $0.40 impact on EPS. Excluding this item, diluted non-GAAP EPS would have been $5.66. Non-GAAP gross margin was 59.8%, above the top end of the revised guidance range. Excluding the FPD charge, non-GAAP gross margin would have been 62.4% and roughly flat sequentially. Non-GAAP operating expenses were flat sequentially at $544 million comprised of $320 million in R&D and $224 million in SG&A. Non-GAAP EPS at the 13.5% guided tax rate would have been $0.04 higher or $5.30. Non-GAAP operating margin was 36.8%. Non-GAAP other income and expense, net, was a $34 million expense and the quarterly non-GAAP effective tax rate was 14.2%. Quarterly non-GAAP net income was $715 million, GAAP net income was $602 million. Cash flow from operations was $910 million, and free cash flow was $838 million. The breakdown of revenue by reportable segments, 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 $4.3 billion in total cash, cash equivalents and marketable securities. Debt of $6.7 billion and a flexible and attractive bond maturity profile supported by strong investment-grade ratings from all 3 agencies. On February 1, KLA issued $500 million of 4.7% senior notes due in 2034 and $250 million of 4.95% senior notes due in 2052. The company expects to use the net proceeds from the notes offering for general corporate purposes, including the repayment of outstanding indebtedness at or prior to maturity. Moving to our outlook. We remain encouraged by constructive customer discussions around their future investment plans, which are further supported by recent reports of an improving end market demand environment and customer profitability. Consistent with these industry trends, as we indicated in last quarter, we believe our business bottomed from a revenue perspective in the March quarter and looking ahead through the balance of calendar '24, growth is resuming in the June quarter, and we expect business levels to improve as we progress through the year. For calendar 2024, our high-level outlook remains unchanged. We still expect WFE demand to be roughly flat to modestly up from 2023 and that the second half of the calendar year will be stronger than the first half. KLA's June quarter guidance is as follows: revenue of $2.5 billion, plus or minus $125 million, foundry/logic revenue from semiconductor customers is forecasted to be approximately 82% and memory is expected to be 18% of semi-process control systems revenue. Within memory, DRAM is expected to be about 78% of the segment mix and NAND the remaining 22%. Non-GAAP gross margin is forecasted to be in the range of 61.5% plus or minus 1 percentage point based on product mix expectations. 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 non-GAAP gross margins to be relatively stable around the mid-61% range. Variability quarter-to-quarter is typically driven by product mix fluctuations. Non-GAAP operating expenses are forecasted in the June quarter to be approximately $550 million as our merit adjustment process occurred in the March quarter. Looking ahead, we continue to expect $5 million to $10 million incremental growth in quarterly operating expenses for the remainder of calendar 2024, supported by expected revenue growth. Other model assumptions for the June quarter include non-GAAP other income and expense net of approximately $38 million expense. GAAP diluted EPS is expected to be $5.66, plus or minus $0.60. And a non-GAAP diluted EPS of $6.07, plus or minus $0.60. EPS guidance is based on a fully diluted share count of approximately 135.4 million shares. In conclusion, as we articulated 12 weeks ago, we are encouraged with the indicators of improvement ranging from our customers' conversations to the public reports over the past few months. KLA remains focused on delivering a differentiated product portfolio that anticipates customers' technology road map requirements and drives our longer-term growth expectations. With 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 solidified our confidence in the increasing importance of process control and enabling technology advancements and optimizing yield across a high semiconductor device design mix, volume production environment. This bodes well for KLA's long-term growth outlook as near-term industry demand trends are continuing to improve. In alignment with this, KLA's business is improving and the long-term secular trends driving semiconductor industry demand and investments in WFE remain intact in both legacy and leading-edge markets. That concludes the prepared remarks. Kevin, let's begin the Q&A.

Thank you, Bren. Operator, can you please provide instructions for the Q&A?

Last year and the first half of this year focused more on mature nodes and infrastructure spending. As we move into the second half of this year, it seems that momentum for advanced nodes is starting to pick up, which is evident in your confidence regarding improving spending outlook for this calendar year. Considering your longer lead times and crucial role in facilitating these advanced technology transitions, how are discussions with customers going, and what does your initial forecast for calendar 2025 look like? I assume it will be more focused on advanced technology next year, which should benefit the team, but I would like to hear your thoughts on this.

Great. Harlan, thanks for the question. This is Rick. Absolutely, we are having different kinds of discussions now than we've had for a while with our leading-edge logic and memory customers. As they prepare for the ramp and we're seeing increased demand, they're talking about tool availability, scheduling of resources, and making sure that they don't get behind—really conversations we haven't had for a while. I think the build-outs are still stable with rising demand through the year, but the real build-out is going to come in 2025 and beyond as we see some of the conversations we're having. So really good indicators, leading indicators include design starts, advanced node discussions, and R&D work. We feel pretty good about the setup.

Great. And did you see continued growth in the services business with industry utilizations clearly on an upward trajectory. You've got a record number of tools coming off warranty customers, I think, wanting more value-added services and offerings just given the complexity challenges ahead? Has the view on the services growth profile improved relative to the last earnings call? I know you talked about being at the upper end of that sort of 12% to 14% sort of target range this year on the last call. Has that changed?

I would say, Harlan, it's Bren. We're continuing to see very strong momentum, and utilization rates are improving. Many tools are coming off warranty and going into contract, and our conversion rate is about 95%, which is very positive. Customers are extending the lives of the systems, which is promising for long-term service growth overall. As we track this, we feel confident about our range, and we're definitely closer to the upper end as we move forward over the next few years.

I guess, first question, a near-term question on the mix you expect for June, which a pretty massive shift to foundry/logic from memory. So, I guess, as part of that, can you speak to some of the underlying drivers? And within that, do you see perhaps a pickup from domestic China memory beyond the June quarter? Or I think in the prior quarter, you talked about revenue receipts pushed to the June quarter. So curious about the moving parts there.

Yes. I would say as far as China memory goes, it's more first half heavy than second half, while we're having very positive conversations with our customers on the memory front, as Rick indicated, in terms of long-term plans, we're seeing their businesses now improve. We're seeing profitability and cash flow starting to improve. But we don't expect any significant investments as we move through the rest of the year. Nothing's could change. But I think that the profile, it might tick up a little bit in the second half overall, non-China but I don't see it changing in a real meaningful way. If you look back at our business, we were a little bit over 70%, maybe logic/foundry in 2023. And I think we're going to be right around 70%. I think it's going to be pretty similar overall mix this year.

Excellent. And then in terms of your commentary around accelerating top line revenues throughout the remainder of calendar '24. I guess, can you speak to the main drivers there as it relates to perhaps 2-nanometer pilot logic in Arizona handset-related EPC? What's really driving that? And is there sort of a percentage growth rate we should be thinking about half-on-half?

Yes. C.J., I think you covered most of them, right? We will see some early investment in 2-nanometer. You have the 3-nanometer build-out. You have the investment that you mentioned in Arizona. So those are all pretty good for logic/foundry segment. Right now, when I look at the overall business first half versus second half, I think the second half is high single digits versus the first half in that ballpark. We're not guiding, but I think it's going to end up in that range as we progress through the year. On EPC front, I think it is a little bit stronger. You do have some seasonality in EPC in the first part of the year. But we'll see some improvement there, I think, as we move through the second half of the year as well. And of course, service is growing quarter-on-quarter. So you've got that effect as well.

I have two questions. First, last quarter, Rick or Bren mentioned that KLA's overall calendar '24 revenues might grow in the mid-single digits based on WFE. Given your exposure in that area, I’m curious about your overall revenue outlook for this year compared to last year. Then I have a follow-up.

Yes. When considering the WFE level and the prospect of it being flat to modestly rising, our assessment is that WFE is likely between $90 billion and $91 billion, and it should either remain stable or see slight growth this year. With WFE remaining relatively flat to slightly increasing, we expect to witness an uptick in services and modest improvement in EPC. We have observed some gains, particularly from the strong performance in March and the additional guidance for June in our semi PC business. Overall, the market share for semi PC is expected to stay fairly consistent, perhaps with a slight increase compared to 2023. This indicates that our semi PC business should perform mostly in alignment with the anticipated market trends for the year.

Got it, that's very helpful. I have a quick follow-up regarding China. Considering your long lead times, how do you view China? You mentioned that memory would be the first to see an upgrade in overall China revenues. Additionally, if I look at the FPD gross margins from March to June, they are down 90 basis points quarter-over-quarter. You indicated this is due to product mix—does this mainly relate to China? I'm curious about this.

Yes, it's primarily due to product mix from quarter to quarter, decreasing because of the FPD adjustment related to our inventory decision. So, it's mainly about the product mix within our semi PC business. There is some growth in services from quarter to quarter, which does dilute the overall gross margin. We believe it contributes positively to the operating margin, but it does have a slight dilutive effect on the gross margin. The remaining factors are the usual product mix we see across the portfolio, which has different margin profiles. As revenue fluctuates in any given quarter, it can lead to some variability. However, I think the guidance range is appropriate; last quarter, we projected around 61.5%, and it ended up above 62%. Depending on how revenue turns out as we engage with customers and ship systems, there's always potential for upside, which is why we provide a range. There isn't anything overly specific to particular customers; it's more about the overall product mix across all regions and the products we're shipping that are gaining acceptance.

Is China's shipment for the rest of the year expected to be in a similar range?

So China is interesting. I think it's probably flattish over the course of the year. Second half is more or less flattish with the first half. The mix is changing a bit in terms of the end market mix. But we see it as a percent of the total come down as we see most of the growth in the year coming from our non-China customers.

Ask a few questions. I guess, it is sort of asked earlier, but with all these CHIPS Act announcements continuing to roll in, has this solidified the timing or magnitude of any of the U.S. greenfields build-out? Or maybe what is your latest thinking on some of these projects?

There have been numerous announcements, which is exciting to see. However, looking at the timing of these projects, such as the one announced today in New York, it will take some time before it materializes. The approval of funding is related to the timing, and the customers we speak with are eager about the opportunity to reshore in the U.S. Still, they are in the process of building their capacity based on market demand, which means it does not significantly influence the overall capacity investment. Their decisions are based on the overall demand. The size of the investment, in terms of how many wafer starts will be added, is driven by the market. Therefore, we maintain our perspective on the business environment, which is relatively independent of the locations where customers choose to make their investments.

Yes. So it's greater than 25%. We're estimating around $300 million in 2023 and close to $400 million for 2024. This is spread across a broad portfolio. We have process control, which we offer to those customers, including inspection of metrology and process tools in our specialty semiconductor business. The contribution from each part of the portfolio is about 50-50. Going forward, we are quite optimistic about seeing a growth rate that is significantly faster than the wafer fabrication equipment market.

Yes. I believe there are several factors contributing to the opportunity. Firstly, customers are quickly ramping up their packaging efforts, which are often pushing the boundaries of technology. We need to ensure that these packaging challenges are addressed with cutting-edge solutions. Currently, there are still many packaging applications in markets where we face competition from lower-end players, which we are not targeting. The pace at which new technologies are being adopted is crucial, and we've noticed an uptick in discussions with key customers regarding this over the past year. Although it’s difficult to predict the exact growth rate at this moment, the demand is evidently significant. Many customers see this as a competitive necessity, particularly in the context of advancing AI applications. This trend is driving substantial engagement with our customers, resulting in numerous requests for new capabilities. We are working closely with them to develop solutions that meet these needs. At present, this market segment is likely to outpace WFE, and we believe it holds potential for even greater growth based on adoption rates and our execution moving forward.

I'm going to ask about N2, Rick. There has been a lot of discussion recently about the significant volume for N2, which is not expected until 2026, although some customers, particularly in crypto, might start ramping in 2025. My question is, how much of a driver do you believe N2 will specifically be for your business? Are you noticing any impact from it yet? Is it more likely to be a factor in the latter half of this year? I'm essentially inquiring about the timing of when it will start to benefit your business.

Yes. Great question. We are definitely discussing timing with key customers. Our optimism stems from the fact that these discussions are accelerating as our customers experience demand from the market. While the majority of volume is expected in '26, we are already seeing these conversations evolve, and we anticipate some significant business activity in '25, with orders expected to come in late '24 as customers work things out. Additionally, we are noticing several advanced design projects for the 2-nanometer node, which is advantageous for power efficiency. Many customers face challenges related to data centers and AI, particularly concerning power limitations for building those sites. Therefore, we believe N2 will be a major factor for our customers going forward. We are already observing activity in this area, and it will increasingly influence our business in '25 and beyond.

Got it. Okay. Perfect. I want to ask about China. Bren, you mentioned that China is expected to remain stable in the latter half of the year. It seems like every quarter China continues to show strength, even though there are expectations for a downturn, which haven't materialized because they can access loans. My question focuses on the situation in China. Is the latter half of the year benefiting from new customers? I understand that around 30 to 40 new facilities are being established as part of major customer relationships. Are these new fabs contributing to the performance in the latter half of the year? Additionally, there has been a lot of discussion regarding potential additions to the entity list. If that occurs, will it negatively impact your projections for the latter half of this year or next year?

Well, Tim, I prefer not to make assumptions about what the U.S. government may or may not decide regarding future export controls. We are working closely with the government and dedicating significant time and resources to ensure compliance with whatever rules are established. The situation is a fairly balanced one. While I mentioned that DRAM is down, I believe the wafer infrastructure will likely experience a slight decline in the second half of the year. In contrast, the reticle infrastructure is expected to show an increase, and overall, the logic and foundry sectors are up. When everything is considered, we're looking at a relatively flat trend. The customer base includes several new projects that are still acquiring systems, alongside established legacy customers in China who are part of the mix. Overall, I think the market will remain healthy throughout this year, and it seems likely that the trends will continue at similar levels into the future. Of course, there will be fluctuations from quarter to quarter, but that’s our perspective at this point.

I want to ask a question to build on what was discussed with the team earlier. So TSMC definitely said that the revenue is going to ramp in 2026 for N2. And you kind of alluded to that, that you think the '26 volume for you will be higher than '25. But if I look at how the 3-nanometer ramps look like, and it occurred to me that 2022, which was minus 1 year in terms of production timeline for the 3-nanometer was a higher volume for you guys compared with probably 2023. So I just really wonder the fact that you said you think that '26 will be a high volume for you compared with '25? Was that coming from some discussion with the customers? And what's changed this time, why they want, kinda I mean, move the capacity to a little bit closer to the high volume at the point of entry to the high-volume production?

Yes, it's an important question. When considering N2, there are several factors to keep in mind. Firstly, our customers have a clear focus on the competition for AI capabilities. As a result, we are witnessing numerous design initiations, not only from familiar players but also from others seeking new capabilities. This has created a different demand landscape. Additionally, we are facing constraints in our capacity, partly limited by our ability to construct new facilities. Another key aspect is the early involvement of KLA in various projects, leading us to be included at the beginning stages since our systems are necessary for qualifying the other components. This situation has created a distinct environment compared to what we've experienced in some time. In our discussions with customers, there is significant concern about meeting the growing demand they are encountering. We anticipate substantial pressure to fulfill the demand by the end of this calendar year as they plan for their production capacities. While we expect to see volume growth in 2026, we will start to recognize increased business towards the end of 2025. It's uncertain how much this will expand in terms of additional design initiations. It is quite notable that there are so many designs focused on a single application at this stage, and this consistency holds true across various discussions with different customers and their clients.

Maybe a second question, I want to ask you about the advanced packaging capability you're building there, it sounds like you're having more of the constructive conversation with your customers maybe to put more of KLA's more advanced process control capabilities into the packaging side of the process control. So I get the overall idea, but just really hopeful you can provide a little bit more color. What kind of areas do you think the customers are facing challenges in terms of maybe ramping up CoWos, maybe wrapping up SoIC? And where do you see from process control perspective, the biggest opportunities for KLA?

Yes. I'll share a couple of stories. Years ago, when we acquired ICOS, we thought it would give us exposure to the back end. I remember meeting with one of our major customers and their back-end team, and they told me that the back end wasn't a KLA market. Fast forward to the end of last year, when Martin and I met with an important customer, and they identified two key issues for discussion. One was our support for EUV and the ongoing ramp-up of EUV designs and capabilities, and the other was advanced packaging. These were the people who typically dealt with the front end. They mentioned that they believe we have the capability in our front-end tools but need adaptations for the back end, as it's crucial for their differentiation. They emphasized that their primary concern right now is capability rather than cost, which is often the case at the start of a new node. This shift in focus is significant, and a major factor driving it is the work related to AI. The demand for advanced packaging as part of those AI solutions is evident. We anticipated that this trend would become increasingly important over the years. Now, we're observing customers from the front end collaborating on back-end challenges and specifically requesting capabilities we offer in the front end to be applied in the back end. We've made some adaptations with our inspection tools, but it's important to modify handling and operating conditions to make that effective. We're definitely seeing this trend, and in some instances, our ability to support and customize those systems will determine our ability to generate revenue, rather than the demand itself, which is strong. From a competitive perspective, we are well-positioned, so we are optimistic about the opportunities, and it remains a major focus area for the company.

This is a follow-up question with regard to memory. And I think I understand what you're saying with regard to this year, perhaps some improvement in non-China memory, but nothing significant. I guess, what are your customers telling you to be prepared for perhaps as you're going into next year. We're starting to see some prices go up, utilization up. What's your expectation for the potential improvement in '25?

Yes, Chris, you're noticing all the positive developments, right? Pricing is improving, and customers are increasing their utilization, which has been quite low. There has been a substantial amount of capacity available. We're observing a rise in profitability, which will eventually lead to enhanced cash flow and expected investments next year. We anticipate more activity in DRAM, particularly driven by advancements in that area, along with factors related to high bandwidth memory. Additionally, the device market is showing improvement this year, which should reflect in next year's investments.

Got it. As a follow-up regarding service, I think last quarter you mentioned your expectation to be at the high end of a 12% to 14% target. Is that still the correct way to view it? We've seen utilization rates improve here. Does that change your perspective on where services will end up for the year?

Well, it's certainly a factor in the growth that we're seeing this year. So I've been pretty open that I thought that we'd be somewhere between $250 million to $300 million of incremental service this year versus in 2023. And I think we're closer to the top end of that range than the bottom. So it is a factor. And given the nature of process control and the complexity of our systems, the mix and the relatively lower volume, our customers tend to rely on us to ensure that they're optimizing their capital, particularly in environments when capital is constrained, yields matter a lot. And so our utilizations never drop as much as process tools where they have more redundancy, but we are seeing it continue to improve. And so I think it's a good sign in terms of the overall market health and our confidence about some of the growth drivers into next year.

Wondering if you can tell me, obviously, you seem pretty positive in terms of just the opportunity looking into next year and thinking about the size of N2 and recovery in the memory market, I guess, how does the conversation with your customers over the last several months and just thinking about your lead times to give you confidence in your ability to reach that 2026 target model?

Our confidence is quite strong. We've invested significantly in the company during 2021 and 2022, enhancing our capacity and ensuring that our key suppliers can meet demand. This is why my inventory levels are currently higher and continue to increase, even as the market has seen some corrections, due to the commitments we've made to maintain supplier capacity. We are optimistic about our ability to capitalize on what we have without needing to make substantial additional investments to support our growth trajectory. However, the investments we made may present some challenges to our margins in the short term. Over time, the opportunity for leverage looks promising if we achieve the growth we anticipate over the next few years.

Okay. As a quick follow-up, Bren, I was wondering if you could give us RPO exiting the quarter?

It wouldn't be a quarterly conference call without your question, Joe. So we're going to file the Q in the morning or sometime tomorrow, I think, $9.9 billion. It was down about $750 million quarter-on-quarter. Deposits are about $677 million.

I think there's been a lot of discussion on the call about advanced packaging, and you guys have talked about how you had conversations already about potentially bringing some of your solutions from the front end to the back end. There's obviously some adjustments to those tools to get them ready. Can you talk about the timing of bringing those solutions there? Obviously, you're seeing a big growth rate in the back end. But from the moment that you say, hey, we want to take a tool and address the back end to when you're actually selling that to a customer, can you talk about how long that takes?

Sure. We have some of our products that are being used in the back end, which started some time ago. We're seeing an increase in discussions about more tools, with some customers specifying exactly what they want. The timeframe can vary significantly depending on the tool, ranging from three months to a couple of years, especially if we are modifying existing applications. However, we already have some tools in place. Part of our $400 million comes from these front-end tools, with about half of that relating to process capabilities from SPTS. Some tools will need upgrades as customers advance technologically, so overall, the situation is positive. It represents a growth segment for us, and we anticipate continued growth. Bren mentioned last year’s growth, which was a significant factor in our decision to pursue the Orbotech acquisition, driven by our belief in the expanding packaging opportunity. The modification timeline is very specific to each tool.

We also have new products that are going to support the substrate transition as the substrate integrates into the package. On the inspection side, as the lines and spaces shrink in the connecting layers. It will drive the need for more capability for more advanced inspection and metrology systems. And so any time you add sensitivity, you add capability, there tends to be a throughput or a volume hit, so it creates an opportunity for us to sell higher ASP systems so they have more capability, but if you're going to maintain the same sampling rate, then you will need more systems. So it's all a factor in terms of all these factors that are all positive in terms of how we think about the long-term opportunities.

Super helpful. And then my second one is just kind of on the guidance that you've given for the year. So you said second half over first half, high single digits and you talked about kind of the mix of foundry/logic being similar to calendar year '23, about that 70%. If you take those clues, you obviously see some really strong growth in memory in the second half. Could you just help us with any color, obviously, from March to June, your DRAM percentage went down a bit in terms of its contribution to memory. But in the second half, how should we be thinking about the DRAM and NAND growth profile?

I believe it may be slightly stronger in the second half compared to the first, but not by much. As I mentioned earlier, I expect the anticipated DRAM investments in China to be lower in the second half than in the first half.

Sorry, I joined a little late, so if these questions have already been asked, I apologize. But I think last quarter, Bren, you had a customer push out that kind of impacted your revenue for the year. I'm just wondering if there's any change or any update to that customer if you're including that in the current year's guidance?

Yes, it affected the March quarter as we had some shifting around, frankly, affected a little bit the December quarter and the March quarter, but the shifting around to make the December quarter work, obviously, the shortfall was in March. So I don't think anything has really changed. I don't expect to see much activity from that customer until we get into '25. I mean, look, things could change, we could see some surprise. But right now, at least from a planning point of view, we put it in '25, and if it pulls in great, we can support it.

Got it. And then on the 2 nanometer, I think your foundry customers are transitioning aggressively to get all around. Obviously, that helps you, but at the same time, I think the EUV layer count is going to be somewhat flattish. So I'm just wondering what sort of impact kind of it will have on process control intensity if you go to GAA and keep the, I guess, EUV kind of flattish in terms of layers, should we expect any impact? Or is it kind of a nonevent for you?

It's an event. Our customers clearly prefer to avoid adding process control intensity if possible, while also wanting to ramp up and yield efficiently. This creates a trade-off. During the prototyping phase or early pilots, they inspect and measure more to debug and ramp the process. The crucial question is how much they need to maintain when ramping, which drives process control. They are certainly utilizing more capabilities upfront and may need to enhance their sampling or measurement to address the challenges of smaller design nodes. Additionally, new capabilities are required due to FinFET. We've previously discussed modifications to a Gen 4 optical inspector to support FinFET, but that's not the only change in the process. EUV layers are important, yet the integration challenges will still persist. When we model this, we anticipate an increase in process control intensity with various scenarios predicting the extent of that increase. For the leaders successfully manufacturing at 3 nanometers, we expect a modest rise in overall process control intensity. However, anyone else attempting to reach that node will experience a significant increase in their process control intensity due to the lack of learning from previous 3-nanometer volume. Overall, depending on the number of companies supporting this over time, it will raise the intensity for our customers. We also foresee a more robust design environment in the initial years than what we encountered at 3 nanometers, likely resulting in a steeper ramp. Beyond the challenges associated with the gate-all-around architecture—including inspection and metrology—there will be an increase in volume and an earlier, steeper ramp, which will make process integration more challenging for customers than when only a few designs are involved. We are optimistic on multiple fronts.

Rick, I just had a follow-up on gate all around. Clearly, you have exposure to your Gen 4 optical inspection and the metrology for High-K metal gate. Is there a way to quantify what you think your gate-all-around revenues could be in calendar '24?

Yes, I'm not sure about that, Chris. We haven’t really analyzed it that way, but we do consider the node requirements. If you think about N2, it would mainly relate to gate-all-around. We're focusing on node intensity for process control and blended aspects. As I mentioned before, there's a slight increase, but we don't have a specific figure related directly to gate-all-around. However, it is the main factor for this change and the reason customers are advocating for N2. We don't have all the answers yet, but it's consistent with our 2026 model, which predicts rising process control intensity and a corresponding increase in share for KLA.

Gen 4 is in high demand across various nodes and is a very customizable system. Recently, we launched a non-upgradable version specifically designed for gate-all-around. This product features a lot of extendibility but has faced challenges in supply, particularly in meeting demand. We anticipate some revenue growth from this system this year, after struggling last year due to limited supply of key components. I expect to see that increase this year, which will be beneficial. Currently, lead times are likely within the 18- to 24-month range for this product, although we are actively managing our resources to ensure we can support all customers. The demand is strong from multiple areas, which highlights its extendability and the advantages of a broadband system that can adapt to meet various inspection requirements across different nodes.

Thank you, Krish. And I do think, Krish, you were referring to what we said about Gen 5, the 7 to 9 months a quarter ago, Bren. So I don't know on Gen 5, if there's any change there, but.

Gen 5 is in the same ballpark.