KLA Corporation
Q2 2021 Earnings Call Transcript

Published: 3 Feb 2021

[Operator:]

Good day. My name is Priscilla, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation December Quarter 2020 Earnings Conference Call and Webcast. All participants’ lines have been placed in a listen-only mode to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I would now turn the call over to Kevin Kessel, Vice President of Investor Relations. Please go ahead.

[Kevin Kessel:]

Thank you. And welcome to KLA’s Fiscal Q2 2021 Quarterly Earnings Call to discuss the results of the December Quarter and our Outlook for the March Quarter. With me today is Rick Wallace, our Chief Executive Officer; and Bren Higgins, our Chief Financial Officer. During today’s call, we will discuss quarterly results for the period ending December 31, 2020, that we released today after the market closed in the form of a press release, shareholder letter and slide deck. All are available on the KLA IR section of our website. Today’s discussion is presented on a non-GAAP financial basis, unless otherwise specified. A detailed reconciliation of GAAP to non-GAAP results is in today’s earnings materials posted on our website. Today’s call also represents the end of the calendar year. We will make references to both 2020 and 2021. Please note all references are for the calendar year. Our IR website also contains future virtual investor conferences, as well as presentations, corporate governance information, and links to our 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 Risk Factor disclosure in our SEC filings. Any forward-looking statements, including those we make on the call today, are also 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. As many of you now know, we changed the format of our earnings two quarters ago to include pre-publishing a detailed shareholder letter that provides updates on our business performance. The pre-publishing allows this call to be efficient by providing more streamlined comments while also freeing up more time for your questions and answers. With that, I’d like to turn the call over to our President and Chief Executive Officer, Rick Wallace.

[Rick Wallace:]

Thanks, Kevin. And thank you for joining us today and for your interest in KLA. As we reflect on the accomplishments of 2020, it’s important for me to first appreciate and acknowledge the global KLA team. Your perseverance, drive to be better and determination enabled KLA to rise to the challenge and deliver for our customers. 2020 was like no other year we have seen and while our teams have not been physically together for the most part; our company continues to demonstrate the great KLA culture of collaboration and innovation and is emerging stronger than ever.

[Bren Higgins:]

Thanks, Rick, and good afternoon, everyone. KLA’s December quarter and 2020 results highlight the soundness and strength of our ongoing strategy. We continue to demonstrate our ability to meet customer needs and expand our market leadership, while growing operating profits, generating record free cash flow and maintaining our long-term strategy of productive capital allocation. 2020 was a year of strong growth and profitability across multiple areas of our business. All of this was accomplished while simultaneously continuing to return high levels of capital to shareholders. Total revenue in the December quarter was $1.65 billion, a very top of the guided range for the quarter of $1.51 billion to $1.66 billion. Non-GAAP gross margin was 61.8%, slightly below the midpoint of the guided range for the quarter of 61% to 63%. Non-GAAP EPS was $3.24, probably, above the midpoint of the guided range of $2.82 to $3.46. GAAP EPS was $2.94. At the guided tax rate of 13%, non-GAAP EPS would have been $0.03 higher or $3.27. Total operating expenses were above the guided range of $393 million, including $228 million of R&D expense and $165 million of SG&A. Non-GAAP operating income as a percent of revenue was strong at 38% and in line with expectations. The higher operating expenses in the quarter were due in part to adjustments in variable compensation programs, as well as the timing of prototype material purchases for product development programs. Based on revenue expectations for 2021, product development requirements, particularly in programs supporting next-generation reticle inspection capabilities and the regionalization of additional customer engagement resources, we expect operating expenses to be approximately $400 million in the March quarter and we are budgeting quarterly operating expenses roughly within the range of $400 million to $405 million over the near-term horizon. Given topline expectations for 2021, we expect that the business will continue to outperform its target operating model in terms of overall profitability and operating margin leverage.

[Kevin Kessel:]

Thanks, Bren. Priscilla, if you could provide the instructions for Q&A?

[Operator:]

We will now take our first question from Patrick Ho with Stifel. Please go ahead.

[Patrick Ho:]

Thank you very much and a belated Happy New Year and congrats to you guys. Rick, maybe first off, in terms of process control intensity, we have seen foundry and logic continue to grow as we go through these node migrations. And NAND flash has obviously seen intensity rise with the increasing layer counts. As we look at DRAM and the projected pickup that you mentioned in your prepared remarks, what types of process control intensity increases are you seeing in that marketplace? Maybe even excluding some of the EUV options that are out there, what other types of process control intensity trends are increasing in DRAM?

[Rick Wallace:]

Sure. I think that there -- if you think about DRAM, what they have really been pushing on and it’s very difficult as you know to do it is to continue scaling and we do think that there is going to be some EUV that comes in. But there is no question that there is scaling happening, and of course, that drives more process control intensity. The other thing that’s pretty clear in DRAM is the overlay requirements continue to get more and more challenging. So we are seeing increased -- trying to understand how to squeeze more capability out of the lithography sets that they have got. And then we do see some, as I say, EUV adoption. So we think there will be incrementally more focus on our more advanced optical inspection tools to be able to support that. So that’s what we are seeing as a trend. It’s not necessarily, obviously, as EUV-heavy as what we would see in foundry/logic, but there is some element of EUV in there. Does that answer your question, Patrick?

[Patrick Ho:]

Hey. It does, Rick. Thank you. Bren, as a follow-up to that question, you guys as you are seeing demand pickup and revenues grow, your working capital metrics have actually also improved. What changes have you made, particularly given that you have added Orbotech over the last few years, but you see the inventory turns actually improving even as demand picks up. What are some of the dynamics there?

[Bren Higgins:]

Well, hey, Patrick. It’s a great question. And certainly adding Orbotech in and I think we have done a pretty good job of improving overall asset velocity in that business so far. I think there is room for us to improve it going forward. But on the KLA side, one of the areas where you could argue that we -- I think we do something in our business to support and I think we get paid for in terms of our profitability, but to support our model. Both in terms of the component differentiation we have that drives our differentiation of our products but also that enables our service business. So we have always tended to carry a lot of inventory because we are supporting these tools that last a long time in the field. And we also have very exclusive relationships and a lot of our key supplier relationships that help us, as I said protect differentiation. So as a result of all that, it does drive higher inventory commitments and we carry that risk, if you will. Although, we never get stuck with extra systems and given the strength of the Service business we tend to move the part. So we think it’s a good sacrifice to make. We think we get paid for it in terms of the profitability and structure of our business. And the volume we have seen has allowed us to improve it a little bit. It’s -- this is not a turns business for the most part. So I think there’s probably an upper limit to it. But we have -- we do focus on and I think we have improved it a little bit over time.

[Patrick Ho:]

Thank you very much.

[Operator:]

We will take our next question from Joe Quatrochi with Wells Fargo. Please go ahead.

[Joe Quatrochi:]

Yeah. Thanks for taking the question. I wanted to go back to your comment about revenues should be relatively consistent quarter-to-quarter in 2021. Is that a process control tool comment as well, I guess what I am trying to understand is, what you are seeing relative to maybe peers talking about WFE being a little bit more first half weighted?

[Bren Higgins:]

Yeah. Joe, so it’s a good question. So what we are trying to do, first of all, it’s really for both groups of our business, if you look at the EPC Group and as well as the process control equipment part of the business. I was really trying to do a few things. First, obviously, we are guiding March and we have got a nice sequential increase to the March quarter. We wanted to provide our view of WFE growth for ‘21 and expectations for KLA in the year. And the third thing was to provide just some context on the demand profile as we move through the year. And as I said in the prepared remarks, it looks relatively consistent. Now I am not guiding the June quarter, I am not guiding September, I am not guiding December, but what I wanted to do is provide a little bit more context. Now we do have tools that cost from $10 million to $20 million, sometimes even more than that. So there is the usual variability that you have related to the timing of a shipment, the customer acceptance, the consignment buyout and so on. But when we look across our business, it looks relatively consistent from a demand profile point of view, and I think starting with the backlog we have, the visibility we have in the funnel and then just the general lead time dynamics of our products, it gives me some comfort with that statement.

[Joe Quatrochi:]

Okay. That’s helpful. And then you talked about the other investments you are making on the product development side, and clearly, you guys are strongly outperforming your long-term profitability targets. I was curious, how do you think about opportunities to maybe even spend a little bit more and accelerate some of the product development projects you have got going on?

[Bren Higgins:]

Sounds like you have been talking to some of our guys inside it. Sometimes Rick and I are the only two people in the company, I think, we ought to spend less. But anyway, to answer your question, look we have a rigorous process where we look at the portfolio of the business and look at how we get returns on that portfolio. So we have ramped up our investments in R&D and product development over the last few years. We think that there are opportunities. One of the biggest drivers that’s driving the uptick that I articulated here as we look at ‘21 is investment in multiple programs supporting reticle inspection, qualification and so on. So I think that that’s been an area of focus for us. But we feel pretty comfortable with our process around R&D and the timing of our road map related to our customer requirements and it’s worked pretty well for KLA. I think what’s driving more of our model upside is more of a gross margin dynamic than a cost dynamic. And so, I think, the gross margin is reflective of the differentiation that we have with our products in the field and I think the value we are adding to our customers. So hopefully that answers your question.

[Joe Quatrochi:]

Yeah. Perfect. Thank you.

[Operator:]

We will take our next question from CJ Muse with Evercore. Please go ahead. Your line is open.

[CJ Muse:]

Yeah. Thank you for taking the question. I guess two questions if I could put them together. The first one would be around EUV shortages at ASML, is that impacting GEN5 optical demand at all? And then, I guess, secondly, I am a little bit surprised that you are guiding Orbotech business is flat half-on-half, typically there is a seasonal uplift into the back half. I am curious if that’s a conservative outlook, whether seasonality has changed or there is something that we should be kind of thinking about? Thank you.

[Bren Higgins:]

Yeah. CJ, nicely done, those are not related at all, those two questions, as you know. But I will take them. The first one, no, we don’t see any slowdown in the EUV impact if the delays that were outlined by ASML in terms of the demand for GEN5, if anything, it’s kind of gone the other way. What’s happened in the last few months is, I think, the realization that some of the yield challenges associated with the EUV are best approach -- best addressed by having more GEN5 capacity and so we are actually maxed out and trying to ramp that in order to support it. So we have very strong GEN5, we don’t see any delay in that and we have a lot of conversations with customers about our ability to support that. In terms of Orbotech, in terms of that, I would say, it’s a complicated business overall to aggregate and so we don’t really see anything, any signs of concern. We do see continued growth in that business. We feel good about where we set out our plans for 2023 in terms of the original model that we outlaid at the Investor Day and we are on track to meet or exceed those. So we feel good about it. We will have to see. This is a little bit newer for us to understand just the dynamics of the Orbotech business. But we feel good about the signs that we are seeing, and as we said, we ended with a strong backlog coming out of 2020. So we feel really good about this year.

[Rick Wallace:]

So, CJ, the only thing that I will add to that is we were guiding it right. This still has the same variability you see quarter-to-quarter as is -- at a different obviously order of magnitude than our Semiconductor Process Control equipment business. But if you look at what’s driving the business overall between 5G infrastructure, mobile and 5G handsets, some of the dynamics within specialty, and then just all -- the overall PCB dynamics and how it’s changing relative to integration and packaging and high performance computing. It’s all of that is driving some nice growth in those businesses. So while the display business is, I expect a down year in ‘21 versus ‘20, the other businesses are more than making up for it. So I think that, overall, it looks pretty consistent more or less as we move through the year.

[CJ Muse:]

Great. Thank you.

[Operator:]

We will take our next question from John Pitzer with Credit Suisse. Your line is open.

[John Pitzer:]

Yeah. Good afternoon and thanks for letting me ask the question. First one is for Bren. Bren, I am wondering if you just give a little bit more detail around what happened to mix in the December quarter that drill gross margins a little bit light relative to revenues being at the high end of the range and as we look out beyond March, are there any other mix considerations we should think about as we think about gross margins?

[Bren Higgins:]

Yeah. John, it’s the usual quarter-to-quarter variability. So it was a little bit weaker in the December quarter and you see a bit of a bounce back into the March quarter. So we were 20 basis points below and we just guided 25 basis points over the midpoint or over that 62%. And as I look at the next several quarters and why I put the comments in the prepared remarks that I feel like we are operating in the 61.5% to 62% range. So it was really just a function of the products that actually revenue in the quarter. It’s a customer acceptance timing dynamic and not any other reason.

[John Pitzer:]

Yeah. That’s helpful. And then, Rick, as my follow up, maybe I will go back to the memory question that Patrick asked first, but ask it a little bit differently. If we are doing the math right, December quarter memory was a new record. You have to go back to kind of June of 2018 to see memory this high, and as you know, we in the investment community always think about that space is being kind of hyper-cyclical. We are willing to underwrite some of the structural drivers in logic and foundry, maybe not as much in memory. When you look at the level of memory business today, how do you kind of parse out where we are in the quote-unquote CapEx cycle for memory versus some of the structural drivers you outlined in Patrick’s answer?

[Rick Wallace:]

Yeah. John, I think, as you know, since we are a little more dependent on technology transition than we are at volume, our answer is a little different, because it has more to do with the migration and the yield challenges associated with advanced nodes and what we see there is a pretty steady commitment toward additional capability to drive next-generation and we are seeing that for multiple players. So I think like a lot of things in this industry KLA’s exposure is -- there is less variability in it based on that fact. And so the volume considerations associated with CapEx impact us less than that. And maybe Bren can give some color on how that looks for the -- as we go through the year.

[Bren Higgins:]

Well, John, it was fairly weak for most of 2020 and we saw this increase in the December quarter, which had some breath to it and we expected to see that, so we weren’t surprised by it and then as we look at ‘21, we expect to see growth overall. We articulated our view earlier about just -- we think the DRAM market overall probably grows at a higher percentage level than in the flash market, but we would expect to see growth in the business into ‘21. But it’s been pretty disciplined. So seen it bounce back in the December quarter and some sustainability here at these levels as we move through the first part, at least here of ‘21, it’s encouraging.

[John Pitzer:]

Thank you.

[Operator:]

We will take our next question from Krish Sankar with Cowen & Company. Your line is open.

[Krish Sankar:]

Yeah. Hi. Thanks for taking my question. I had two of them to Rick. Just to follow along the thought process on memory, it seems like KLA the way it is today is relatively more exposed to NAND than DRAM. Do you think that exposure or process control intensity increases in DRAM as DRAM goes more EUV? And if so, how should we think about KLA’s revenue mix and then I had a follow-up.

[Rick Wallace:]

Yeah. I mean, I think, that the differences are pretty slight, in terms of what the drivers are. It’s actually different products that are getting impacted. So if you think about DRAM, we are more -- obviously scaling is more of a factor there and so you will see more of what we are doing in terms of whether it’s GEN5. You don’t really see that and what’s going on in NAND, but you do have some of the new products, we talked about the X-ray technology is really more applicable of that, some of the challenges associated with metrology. And even how it impacts our wafer business or Surfscan business, because the flatness requirements and the cleanliness for wafers for NAND really get exacerbated when you think about the kind of verticality that those dimensions are going through and the stress that puts on the semiconductor producer for them to be able to manage the yield. So they are different, I think the intensity at this point is slightly higher in the NAND than in the DRAM, but they are both kind of increasing at similar amounts.

[Krish Sankar:]

Got it. Got it.

[Bren Higgins:]

Krish, the only thing I would add on DRAM is, with the introduction of EUV and want to see how that plays out, it does drive some infrastructure. Now that’s one level of investment and is that sustainable over time is I think a challenge for our teams. But as customers start to deploy EUV, it will require EUV related infrastructure to help manage that. So that’s a factor that’s out there that also a -- maybe a change moving forward.

[Krish Sankar:]

Fair enough, Bren. And then another follow up for you on Services. In the shareholder letter, you spoke about how the Services attach rate grew from 70% to over 75% through the course of last year. I am just curious how high can it realistically get or put it another way, Service is running at 25% of total sales, can it get to over 30%? Thank you.

[Bren Higgins:]

Well, Krish, it will. It’s two separate questions. It will because it’s growing faster than the underlying systems business. If you look at our service model, it’s a 9% to 11% growth rate, which is what we articulated at Investor Day and I’d argue that, certainly, the increase in demand we have seen on the system side gives us a tailwind to that growth rate moving forward. There is clearly customers are valuing the service offerings particularly as you are seeing more and more demand at the trailing edge and that with the need for those customers to keep those tools up. A lot of those customers, particularly around automotive are facing increasing reliability requirements and that’s driving more investment and process control and the information that comes off the tools. So those have all been good drivers for us. So I keep thinking -- look 80%, 85%, I think, that’s probably reasonable to think that we could aspire to get there. There is always dynamics of certain customers that prefer billable model and so we will have to deal with that resistance to try to move to a contract structure. At the end of the day, contract structures allow us to optimize the cost structure underneath and we can serve to an entitlement level that drives higher through cycle profitability. So that’s what we aspire to. So I think there’s opportunities but I think there’s always going to be some limit to it where customers are going to -- some customers will prefers a total structure in parts of their installed base.

[Rick Wallace:]

Just to add to that, I mean, one other factor is the tools that are being shipped today, the complexity is such that if you think about a car analogy, it’s pretty much service your own car today, 15 years ago it might have been different. And so you think about over time, the complexity in the associative, more and more of our systems end up having more and more custom design parts throughout the system and it just becomes more economical to rely on us. And then there is no question that a service model -- a customer benefits from having a contract over the long-term. They take the risk out of episodic events and they have more reliability of uptime. So I agree with, Bren, I think it goes up over time. But nothing moves particularly fast in the Services world given the size of the installed base. So it takes a little time for that number to keep creeping up. But we are firmly convinced and committed to driving it.

[Krish Sankar:]

Very helpful. Thanks, Rick. Thanks, Bren.

[Rick Wallace:]

Thank you.

[Operator:]

We will take our next question from Vivek Arya with Bank of America. Your line is open.

[Vivek Arya:]

Thanks for taking my question. I had two as well. First is, if I take your March quarter outlook and annualize it, it suggests this calendar year growth in line with WFE growth. But when I look at some of the investments that are being made and 5-nanometer and then 3-nanometer on the foundry side and then the DRAM, which is more kind of logic like. I am curious what are the prospects of outgrowing WFE? I guess it’s the process control intensity question just asked in a different way, like, what would help you grow above or below WFE this year?

[Rick Wallace:]

So when I look at it, Vivek, I think, that there is -- we have a little bit more memory investment this year than in ‘20 and so that puts downward pressure on process control intensity. But you are right about the opportunities in foundry/logic and some of the product offerings that we expect to have over the course of 2021. So when I look at it and I think that we will at least perform in line with the market. I would expect that we will probably do a little bit better. There’s some headwinds and some tailwinds as we look at ‘21. But overall, I think that that’s where process control intensity kind of plays out. And then from a share if we execute, I think, there’s probably some opportunities for some modest share improvement as well. So I do think KLA’s share of WFE is probably flat to slightly up as we look at ‘21 from where we sit today.

[Vivek Arya:]

Got it. And a follow up is a question on cash returns to shareholders, your profitability is very analog semi like, right, almost 37%, 38% operating margins, but free cash flow returns are -- do leave a lot more room for improvement, even when I look at the buybacks that you had in December, they were somewhat lower than the average we have seen in the last two years. So I am curious, how are you looking at cash returns going forward, if you are going to have such strong growth this year and the longer term trends are there, why not look at 100% free cash flow returns and looking at boosting dividends or the buyback?

[Bren Higgins:]

Well, so if you go back to Investor Day, and I think, even over time it, every time we get the question, we have been very explicit about how we think about the -- about capital allocation in the company and our belief that generally cash doesn’t get valued unless it’s deployed productively. And so when you look at what we are doing going forward, we expect that, at a minimum, we would be able to return 70% and investors can model that as they think about the returns profile over time. We were right around that this year, but this was a little bit of a unique year with some of the COVID dynamics at the beginning of the year. We did build our cash balance a little bit. But you are right, given the growth of the business I would expect that we can deploy more. We do an exhaustive exercise here to understand the liquidity of the company and how much cash we need to run it and we are operating at that level today and so we have to juxtapose those alternatives against opportunities for growth in the company. I think we have done a pretty good job with that. But generally, I think the 70% tends to be a floor, and given the uptick in the business that we are describing, I would expect our quarter-to-quarter share repurchasing to increase as we go forward here. Now, on the dividend side, A, we have raised it 11 years in a row, 35% or so payout ratio target through cycle to enable us to continue to raise it year in, year out and have a payout ratio that gives us the ability to do that and even raise it in difficult years. We are going to grow it in line with the growth rate in free cash flow. And so over time, you can expect that the dividend payout ratio will grow roughly in line with the growth in free cash flow. So that’s our model and we will -- we do our exercise here and each year and we will continue to do it that way, I don’t think anything’s changed.

[Vivek Arya:]

Great. Thank you.

[Operator:]

We will take our next question from Sidney Ho with Deutsche Bank. Your line is open.

[Sidney Ho:]

Great. Thank you for taking my question. My first question is on China. I think China was -- if my math is right, the Chinese revenue was down about 20% quarter-over-quarter after pretty good third quarter but still up very solidly for the year by 20%. What are your expectations for your opportunity in China this year?

[Bren Higgins:]

So, I would expect WFE in China to be flat to up. I am looking at our business levels and they match that. So it -- I would say, it’s very consistent with the profile of 20%, maybe a little bit better and it’s different customers...

[Sidney Ho:]

Okay.

[Bren Higgins:]

…that are investing. But in general, that’s how we see it.

[Sidney Ho:]

Okay. Great. Maybe my follow-up question is related to your target model. You printed operating margin 38%, guiding up to 39% plus, well ahead of your target model and it sounds like you are comfortable with that, you will continue to exceed that. But are there things that we should be aware of that may bring down operating margin as your revenue continue to grow either in next few years in terms of either cost of goods sold side of things, gross margin obviously, offerings expenses side, then we try to normalize a little bit over the next few years? Thanks.

[Bren Higgins:]

Well, there is always quarter-to-quarter fluctuations. But when you look at our long-term plan of growing our top line at least in the 7% to 9% range and dropping 1.5 times that revenue growth rate in terms of EPS growth. But that drives effectively an incremental operating margin that’s between 40% and 50% and that’s how we are going to run the company over time. So you always have the drivers that influence margin -- your gross margin, whether it’s a product mix, obviously, service has a dilutive element at the gross margin line. But we factor that into how we think about the model we put out there. So, yes, we are outperforming the public model. I think the strength and the speed of the growth that we have seen in the last couple of years has helped drive a fair amount of leverage in the business. And I think that a lot of, as I said earlier and said in the prepared remarks, a lot of its sustainable. So that’s our model and we are outperforming it and expect to over the next number of quarters as I outlined.

[Sidney Ho:]

Great. Thank you.

[Operator:]

We will take our next question from Timothy Arcuri with UBS. Your line is open.

[Timothy Arcuri:]

Hi, guys. Thanks a lot. Bren, I am sorry, you might have already talked about this, but I actually jumped on late. So it seems like if you are going to hold WFE share pretty flat, which I think is pretty reasonable in the 6.3% or 6.4% range. It seems like process control shipments are going to be or revenue is going to be in the 1.05% range for March and then it’s going to sort of stay in that range throughout the rest of the year. So you are not going to see this pronounced half-on-half decline that maybe some others will. Is that sort of the right way to think about the semis process piece?

[Bren Higgins:]

So, Tim, yeah, you missed it. I covered it earlier and there were some prepared remarks that I had that were about a sustained or a consistent demand profile over the next number of quarters. So that isn’t guidance but that was just to give some context on how we see the year shaping up. Notwithstanding the issue that we have around, just general ASPs of our tools that can cause some variability quarter-to-quarter. If you look at the March quarter, and again, we run the -- we guide one revenue number, but my expectations around the semi process control business are somewhere between 1.435% and 1.455% including Service, somewhere in that ballpark.

[Timothy Arcuri:]

Including service. Okay. Okay. Got it. Thanks.

[Bren Higgins:]

Yeah.

[Timothy Arcuri:]

And then, I had a question on NAND, so I know you don’t have a ton of visibility there. But your commentary that NAND is going to be sort of the weakest in terms of the relative end markets on a year-over-year basis this year is kind of interesting. I think some others are beginning to try to say the same thing, it sounds like about flat as the growing consensus. There was a pretty big budget flush from one of the big customers in the fourth quarter, so that was higher. But I guess my question is, is your view on NAND is it, because things have been cut, so because the procurement has been cut later on in the year as to why it’s flat or is it because the number’s the same, it’s just as off of the bigger base in 2020? Thanks.

[Bren Higgins:]

Yeah. I think there is some growth in NAND. It’s the lowest percentage growth rate of the three segments that we articulated. So I think it’s probably a mid-single-digit type growth rate and that’s obviously off a bigger base as we look at ‘21.

[Timothy Arcuri:]

But it’s not because things have been cut, Bren, that’s what I guess.

[Bren Higgins:]

No.

[Timothy Arcuri:]

Okay.

[Bren Higgins:]

I am not so sure I understand the question. But I think it’s been fairly consistent I think here. I think it upticked a little bit in the second half to your point and I think that there is some growth next year off of ‘20.

[Timothy Arcuri:]

Cool. Okay. Thanks so much.

[Operator:]

We will take our next question from Harlan Sur with JP Morgan. Your line is open.

[Harlan Sur:]

Good afternoon. Great job on the quarterly execution and strong results. In 2019 in Semiconductor Process Control, you guys gained about 300 basis points of share on the systems side. Revenue-wise you were about 5 times larger than your nearest competitor. It looks like your process control systems business grew about 17% in 2020. Do you guys think you sustained or gained overall process control market share in 2020 and then what areas do you think you drove the most share gains, then on your view of double-digit percentage revenue growth in 2021, what are going to be the fastest growing segments within process control?

[Rick Wallace:]

Harlan, I think, it kind of -- there’s kind of two ways to answer it. What were the end drivers for it and what were the products. And I say that because EUV really drove a lot of our BBP performance, but it isn’t necessarily the only thing BBP is used for. So we feel good about how we finished up the year. As you said, we gained share and we feel like we held it. We will see what the final numbers come out. But you remember, Investor Day we are modeling a slower growth in share than what we are actually seeing. So we feel really good about...

[Harlan Sur:]

Right.

[Rick Wallace:]

…where we are in terms of the BBP adoption and had a very strong year in optical inspection in calendar ‘20. As you shift to ‘21, we feel like we are well-positioned to continue to build on the share gains or process control adoption gains that we had. Again, based as much on end demand as some products that are coming to market that will continue to build that, plus continued adoption. The optical inspection strength is really remarkable and we feel good about how we are positioned there. So I think that you are right, we gained more in ‘19 than in 2020. We held our gains may be built on it a little and I think we are positioned to continue that trajectory as we go towards our ‘23 plan but, certainly, for ‘21. That’s the way the year’s lining up. That’s we are build plans look right now.

[Bren Higgins:]

Yeah. The product families overall…

[Harlan Sur:]

Yeah. Thanks.

[Bren Higgins:]

…all of them are showing growth. I would think that Rick talked a lot about the broadband plasma in the strength there. Because of the memory uptick we are seeing and after a couple of years now of digesting, we are seeing more patterned inspection or unpatterned inspection investment and so that’s a good indicator both to support the wafer output, but also which memory tends to drive wafer so that drives that business. And then the tool monitoring that is done with un-patterned inspectors for any monitor wafers in memory. And then in reticle inspection, I expect to see growth year-over-year above market kind of growth levels in that business as well.

[Harlan Sur:]

Great. Thanks for the insight there. And on the EPC side, I spot very good diversification to the business. Going back to the 2019 Analyst Day, the team’s outlook for EPC was kind of like a 9% to 10% CAGR, $1.4 billion, $1.5 billion in revenues in 2023. Based on the results that you put up in 2020, looks like you guys grew that business about 10%, 11%, if you included the full quarter of Orbotech in your March 2019 quarter. So we can see the team tracking to or slightly ahead of those targets. What sort of growth are you guys expecting for EPC this year, would it be more in line with that 9% to 10% CAGR that you have been targeting or could it be more in line with the overall topline growth of sort of mid-teens and what segments are going to be driving the largest growth in any segments that will lag the growth?

[Rick Wallace:]

Sure. Harlan, great question. We do feel good about where we are positioned. And as you know, I think we are fully integrated now and feel really good about the message we have for our customers. I mentioned in prepared remarks, we feel good about the progress we have made on the synergies. We have seen the target that we laid out in 2023, we are on track. But to your point and Bren mentioned it, FPD will be down in calendar ‘21, which means -- and we think overall, the rest of the business if you take out FPD probably be up closer to 15%. So -- and FPD was relatively weak in ‘20. So the parts of the business that were I think the most levered to in terms of the advanced packaging and a lot of the work that’s going on, where we have overlap with some of our existing front-end customers, really a lot of good progress, and as you know, Oreste is running that. I think he’s confident that we can build on our success as we go forward, based on the interactions that we are having with customers. We feel good about specialty, PCB has been great and we have been really happy with the work that’s going on in the packaging inspection, the ICOS businesses. So those three are really hitting it and feel really good about it. I also mentioned, we are seeing the same operating margin leverage. Obviously those are lower profitability businesses but they have the same leverage in the operating model as the rest of KLA. So we feel good about that as well.

[Harlan Sur:]

Great. Thank you.

[Rick Wallace:]

Thanks, Harlan. Priscilla, looks like we are coming up on time here, I think we have time for one last question.

[Operator:]

We will take our final question today from Quinn Bolton with Needham & Company. Your line is open.

[Quinn Bolton:]

Hey, guys. Someone addressed it in answering Harlan’s question there, but I was looking at the wafer inspection business up 32%. Just wondering if you could give a little bit more detail on what’s driving that strength. Is it mostly GEN5? Is it Surfscan? And in the script, I think, you also mentioned some new applications in optical inspection? So I was just looking for some more color there.

[Bren Higgins:]

Yeah. It’s really related, Quinn, to the optical inspection in GEN4, GEN5. So it’s not just what we are seeing in GEN5. But GEN5 is certainly where we are seeing the increased application around specifically supporting EUV. And there -- that’s -- we laid out that thesis at Investor Day. We haven’t really seen it at that time that we thought the print check. So when customers will print down the EUV and they will validate that image that was going to be an application. We believe there is a big market requirement for. That’s proving to be true and that’s driving a lot of the business success going forward. The other thing that’s happening, of course, as EUV is becoming more prevalent then just in general scaling matters more smaller defects and that pushes the mix toward more GEN5 than perhaps would have been GEN4. So we are benefiting from both of those trends, new applications, additional scaling.

[Quinn Bolton:]

Got it. Thank you.

[Rick Wallace:]

All right. We appreciate everybody’s time and interest. And I will pass the call back over to Priscilla to end.

[Operator:]

This concludes the KLA Corporation December quarter 2020 earnings call and webcast. Please disconnect your line at this time and have a wonderful day.