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Why Is KLA-Tencor (KLAC) Up 10.5% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for KLA-Tencor (KLAC). Shares have added about 10.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is KLA-Tencor due for a pullback? 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 Q4

KLA-Tencor Corporation reported fourth-quarter fiscal 2019 earnings per share of $1.78, beating the Zacks Consensus Estimate by 7 cents. The figure was down 19.8% year over year and 1.1% sequentially.

Revenues increased 17.6% from the year-ago quarter to $1.26 billion, surpassing the Zacks Consensus Estimate of $1.25 billion. The figure was within the company’s guided range of $1.21-$1.29 billion.

Management continues to expect 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.

Foundry and logic is expected to continue performing well through the second half of 2019 and in 2020. The optimistic view is driven by next-generation technology development, capacity additions at leading-edge nodes, increasing competitive dynamics and investment in EUV infrastructure. However, memory weakness will likely continue to impact customers’ caution toward equipment investment plans. Management continues to expect WFE to be down in 2019, largely due to weaker DRAM demand.

Top-Line Details

Products revenues (accounting for almost 73% of the total revenues) increased 9.2% year over year to $917.6 million.

Services revenues (27% of total revenues) increased 48.5% from the year-ago quarter to $340.8 million.

In terms of end market, Wafer Inspection and Patterning (including shipments from the reticle inspection business) contributed 32% and 23% to revenues, respectively. PCB display and component inspection revenues accounted for 10% of revenues. Specialty semiconductor processes, others (including solar, instruments and the KLA pro mature products enhancements business) and Service contributed 4%, 4% and 27% to revenues, 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.

Shipments in Detail

Shipments in the fiscal fourth quarter were $1.354 billion, increasing sequentially and exceeding the company’s guided range of $1.235-$1.315 billion. Semiconductor process control shipments were approximately $1.080 billion in the quarter.

Memory accounted for 51% of fiscal fourth-quarter shipments, 35% of foundry customers and 14% of logic.

Operating Details

Per the press release, KLA Tencor’s gross margin contracted 1,180 basis points (bps) on a year-over-year basis to 52.9%.

Total operating expenses increased 47.9% year over year to $396.8 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 1,960 bps to 18.4%.

Balance Sheet

KLA Tencor ended the quarter with cash, cash equivalents and a marketable securities balance of $1.74 billion compared with $1.90 billion in the fiscal third quarter.

Cash from operations was $325.5 million in the fiscal fourth quarter versus $163.6 million in the prior quarter.

Fiscal First-Quarter 2020 Guidance

For first-quarter fiscal 2019, revenues are expected between $1.31 billion and $1.39 billion. 

Memory is expected to be approximately 42% of shipments in the fiscal first quarter. Foundry is expected to constitute around 44% of total shipments and Logic is expected to remain flat in the quarter.

The company expects non-GAAP gross margin in the range of 60-61% and non-GAAP EPS within $2.04-$2.34. GAAP EPS is projected within $1.75-$2.05.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 9.42% due to these changes.

VGM Scores

At this time, KLA-Tencor has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise KLA-Tencor has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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