It has been about a month since the last earnings report for KLA-Tencor (KLAC). Shares have lost about 10% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is KLA-Tencor due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
KLA-Tencor Beats Earnings and Revenue Estimates in Q3
KLA-Tencor Corporation reported third-quarter fiscal 2019 earnings of $1.80 per share, beating the Zacks Consensus Estimate by 17 cents. The figure surged 325% year over year but was down 29.2% sequentially.
Revenues increased 7.4% from the year-ago quarter to $1.097 billion, comfortably surpassing the Zacks Consensus Estimate of $1.07 billion. The figure was at the high end of the company’s updated guided range of $1.025-$1.115 billion.
Products revenues (accounting for almost 72% of the total revenues) decreased 0.6% year over year to $793.2 million.
Services revenues (28% of the total revenues) increased 36.1% from the year-ago quarter to $304.1 million.
During the fiscal third quarter, KLA-Tencor completed the acquisition of Orbotech, an Israeli firm that develops yield management and process-enabling solutions for electronic products. The deal is in sync with the company’s strategy to strengthen business by expanding into adjacent markets. This will allow KLA-Tenor to diversify its revenue base.
The chip maker will now expand its reach in the global electronics value chain, serving customers in fast-growing end markets such as 5G infrastructure, smart mobile and automotive, among others.
Management expects overall process control intensity to grow this year, driven by the expanding value of inspection and measurement in addressing critical customer problems, along with semiconductor industry expansion in China.
However, memory weakness will likely continue to impact customers’ caution toward their equipment investment plans. Management expects WFE to be down approximately 15-20% year over year in 2019, largely due to weaker DRAM demand. Also, NAND investment is expected to decrease this year.
Shipments in the fiscal third quarter were $957 million, down sequentially but above the company’s guided range of $860-$940 million.
Memory accounted for 38% of fiscal third-quarter shipments, 54% of foundry customers and 8% of logic.
In terms of end market, Wafer Inspection, Patterning (including shipments from reticle inspection business), Service and Non semi (comprising back-end component inspection business) contributed 42%, 30%, 24% and 4% of shipments, respectively.
KLA Tencor continues to experience strong growth for Wafer Inspection solutions. Management stated that new capacity addition by Wafer manufacturers and the adoption of more complex architectures by IC customers are driving demand for new bare wafer products. These are needed to support more stringent wafer flatness and process tool cleanliness specifications in advanced technologies.
Management expects foundry and logic investment to increase, driven by the 7-nanometer ramp, EUV development, as well as the steady edge demand to support 5G infrastructure, IoT and automotive applications.
KLA Tencor’s gross margin contracted 830 basis points (bps) on a year-over-year basis to 55.6%.
Total operating expenses increased 37.8% year over year to $367.1 million. As a percentage of sales, both research and development, and selling, general and administrative expenses increased.
As a result, non-GAAP operating margin contracted 1,560 bps to 20.2%.
KLA Tencor ended the quarter with cash, cash equivalents and a marketable securities balance of $1.90 billion compared with $2.69 billion in the fiscal second quarter.
Cash from operations was $163.6 million in the fiscal third quarter versus $282.2 million in the prior quarter.
Fiscal Fourth-Quarter 2019 Guidance
For fourth-quarter fiscal 2019, KLA Tencor expects shipments within $1.235-$1.315 billion. Revenues are expected between $1.21 billion and $1.29 billion.
Memory is expected to be approximately 47% of shipments in the fiscal fourth quarter. Foundry and Logic are expected to constitute around 41% and 12% of its total shipments, respectively, in the quarter.
The company expects non-GAAP gross margin in the range of 58-59% and non-GAAP EPS within $1.55-$1.85.
GAAP EPS is projected within $1.90-$1.39.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -10% due to these changes.
At this time, KLA-Tencor has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, KLA-Tencor has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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