KLA-Tencor (KLAC) Beats on Earnings and Revenues in Q2

KLA-Tencor Corporation KLAC reported second-quarter fiscal 2017 earnings of $1.52 a share, topping the Zacks Consensus Estimate of $1.41. Earnings were up a massive 46.2% from the year-ago quarter.

Following the better-than-expected results, shares were up 3.29% in yesterday’s after-hour trading.

The year-over-year increase was driven by higher revenues and strengthening gross margins on the back of strong demand in wafer fab equipment market.

Over the last one year, the stock has underperformed the Zacks Semiconductor Equipment - Wafer Fabrication industry. It gained 29.21% compared with the industry’s gain of 63.31%.

Underlying demand remains strong given high demand for more efficient manufacturing processes and the preference for mobile. The technical complexity of manufacturing semiconductors and increasingly challenging yield issues remain revenue drivers for this leading manufacturer of process control equipment.

At the call, management was found upbeat on KLA’s technology leadership position and the pace of execution of product strategy focused on innovation and differentiation.

Note that since each system is high-valued, customer concentration is obviated, which results in great fluctuations in revenue/orders in times of uncertain demand.

A look at the numbers

Revenues

KLA reported revenues of $876.9 million, up 16.8% sequentially and 23.5% from the year-ago quarter. Revenues were above the Zacks Consensus Estimate of $838.0 million and at the high end of management’s guidance, courtesy of strong customer acceptance for the company’s new products.

Orders

Shipments in the second quarter were $887 million, up sequentially and above the guided range.

Order contribution by segment was as follows: memory accounted for 61% of new system orders, foundry 37% and logic 2%.

Management said that foundry contribution is expected to decline to 63% of total system orders in the third quarter. Memory orders are expected to be 34% and Logic is expected to stay flat in the fiscal third quarter.

Margins

KLA’s gross margin surged 66 basis points (bps) sequentially and 317 bps year over year to 63.8%. The better-than-expected year-over-year gross margin was backed by a favorable mix of products and services and strong operating leverage in manufacturing and service operations.

Operating expenses of $220.7 million were up 0.5% sequentially and 8.1% from the year ago-quarter. Operating margin increased 476 bps sequentially and 674 bps from last year helped by cost management. 

Pro forma net income was $238.2 million, or 27.2% of sales compared with $181.7 million, or 24.2% in the September quarter and $161.8 million, or 22.8% in the December quarter of last year. Including restructuring and merger-related charges, GAAP net income was $238.251 million ($1.52 a share) compared with $181.7 million ($1.173 a share) in the previous quarter and $161.8 million (98 cents a share) in the year-ago quarter.

KLA-Tencor Corporation Net Income (TTM)

KLA-Tencor Corporation Net Income (TTM) | KLA-Tencor Corporation Quote

Balance Sheet

KLA ended the quarter with cash and short-term investments balance of $2.59 billion, up 4% sequentially. Account receivables were $663.9 million, up from $654.7 million in the fiscal first quarter.

During the quarter, the company generated $222.4 million of cash from operations after spending $8.6 million on capital expenses, $84.5 billion on dividends and $40.0 million to repay its debt.

Guidance

For the third quarter of fiscal 2017, KLA expects shipments of $850–$930 million, up 0.34% sequentially at the mid-point. Quarterly revenues are expected between $860 million and $920 million, reflecting an increase of 1.5% sequentially at the mid-point. The Zacks Consensus Estimate stands at 853.4 million. Non-GAAP EPS is expected in a range of $1.42 to $1.62. The Zacks Consensus Estimate is pegged at $1.42.

Zacks Rank

Currently, KLA-Tencor is Zacks Rank #3 (Hold) stock.

Better-ranked stocks in the broader technology sector include NVIDIA Corporation NVDA, Linear Technology Corporation LLTC and Intersil Corporation ISIL, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

For the current year, the estimates for NVIDIA stayed unchanged while the same for Intersil and Linear Technology went up 1.75% and 1.83% respectively in the past 60 days.

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