First Principles Partners is an equity research analyst specializing in technology, innovation, and sustainability investment. My unique approach, "First Principles," involves breaking down complex problems to their most basic elements in terms of financial and technology, enabling me to uncover overlooked investment opportunities.With a strong background in investment, private equity and venture capital, I have a proven track record of delivering strong returns for readers. Articles on Seeking Alpha focus ...

For those looking to find strong Computer and Technology stocks, it is prudent to search for companies in the group that are outperforming their peers. KLA (KLAC) is a stock that can certainly grab the attention of many investors, but do its recent returns compare favorably to the sector as a whole? A quick glance at the company's year-to-date performance in comparison to the rest of the Computer and Technology sector should help us answer this question.KLA is a member of the Computer and Technology sector. ...

Company Performance - KLA's stock closed at $708.84, reflecting a +1.38% change from the previous trading day, but lagged behind the S&P 500's gain of 1.59% [1] - The stock has decreased by 5.83% over the past month, underperforming the Computer and Technology sector's loss of 3.43% and the S&P 500's loss of 2.42% [1] Upcoming Earnings - KLA is expected to report an EPS of $8.07, indicating a 53.42% growth year-over-year, with revenue projected at $3.01 billion, a 27.4% increase compared to the same quarter last year [2] - For the entire fiscal year, earnings are estimated at $31.59 per share and revenue at $11.91 billion, reflecting changes of +33.07% and +21.35% respectively from the previous year [3] Analyst Estimates and Rankings - Recent estimate changes for KLA are seen as a positive indicator of the company's business outlook, with the Zacks Consensus EPS estimate moving 4.1% higher over the past month [5] - KLA currently holds a Zacks Rank of 2 (Buy), indicating a favorable investment outlook [5] Valuation Metrics - KLA is trading at a Forward P/E ratio of 22.13, which is a premium compared to the industry's average Forward P/E of 19.49 [6] - The company has a PEG ratio of 1.42, aligning with the Electronics - Miscellaneous Products industry's average PEG ratio of 1.42 [6] Industry Context - The Electronics - Miscellaneous Products industry, part of the Computer and Technology sector, ranks 158 out of over 250 industries, placing it in the bottom 38% [7] - Historically, the top 50% rated industries outperform the bottom half by a factor of 2 to 1 [7]

Core Viewpoint - KLA Corporation (KLAC) has significantly outperformed its peers and the broader market in 2023, driven by strong demand for advanced semiconductor technologies and AI applications [1][2][17]. Financial Performance - In the second quarter of fiscal 2025, KLAC's revenues reached $3.08 billion, exceeding the guidance midpoint of $2.95 billion, attributed to rising demand for advanced semiconductor equipment and services [5]. - For the third quarter of fiscal 2025, revenues are projected to be $3.0 billion, with non-GAAP earnings expected at $8.05 per share, indicating strong growth potential [12]. Market Position and Growth Drivers - KLAC's growth is fueled by strong demand for leading-edge logic, high-bandwidth memory, and advanced packaging solutions, particularly in the context of AI-driven semiconductor demand [2][8]. - The company's advanced packaging revenues are expected to grow from approximately $500 million in 2024 to over $800 million in 2025, driven by the need for heterogeneous chip integration [7]. Product and Service Innovations - KLAC has introduced a comprehensive suite of process control solutions for integrated circuit (IC) substrate manufacturing, enhancing its competitive edge in the market [9]. - The company's portfolio, including the Corus and Serena direct imaging platforms, aims to optimize yield and profitability for customers in the advanced packaging sector [10]. Valuation and Investment Outlook - Despite strong performance, KLAC's stock is considered overvalued, with a forward price/sales ratio of 8.37X compared to the industry average of 3.68X [14]. - The company maintains a Zacks Rank 2 (Buy), suggesting it is an attractive investment opportunity for potential investors [18].

Core Insights - Zacks Premium provides various tools for investors to enhance their stock market engagement and confidence [1][2] Zacks Style Scores - Zacks Style Scores are indicators that assist investors in selecting stocks likely to outperform the market within 30 days, rated from A to F based on value, growth, and momentum characteristics [3] - The Value Score focuses on identifying undervalued stocks using financial ratios like P/E and Price/Sales [4] - The Growth Score emphasizes a company's financial health and future growth potential, analyzing projected and historical earnings and cash flow [5] - The Momentum Score helps investors capitalize on price trends, utilizing factors like weekly price changes and monthly earnings estimate shifts [6] - The VGM Score combines all three Style Scores, providing a comprehensive view of stocks with attractive value, growth forecasts, and momentum [7] Zacks Rank - The Zacks Rank is a proprietary model that uses earnings estimate revisions to simplify portfolio building, with 1 (Strong Buy) stocks achieving an average annual return of +25.41% since 1988, significantly outperforming the S&P 500 [8][9] - There are over 800 stocks rated 1 or 2, making it essential for investors to select those with high Style Scores for optimal success [10] Stock Highlight: KLA Corporation - KLA Corporation, based in San Jose, CA, specializes in process diagnostics and control equipment for semiconductor manufacturing [12] - KLA holds a 2 (Buy) rating on the Zacks Rank, with a VGM Score of B and a Momentum Style Score of A, having seen a 7.2% increase in shares over the past month [13] - Recent upward revisions in earnings estimates by seven analysts for fiscal 2025 have raised the Zacks Consensus Estimate by $0.88 to $31.59 per share, with an average earnings surprise of 6.4% [13][14]

Core Insights - KLA Corporation's second-quarter fiscal 2025 Semiconductor Process Control revenues reached $2.76 billion, exceeding the Zacks Consensus Estimate by 5.17% and reflecting a 25.6% year-over-year increase [1][4] - The company's adjusted earnings of $8.20 per share surpassed the Zacks Consensus Estimate by 6.08%, marking an 11.9% year-over-year growth [2] - Total revenues for the quarter were reported at $3.08 billion, showing a 23.7% year-over-year growth and exceeding the Zacks Consensus Estimate by 4.88% [2] Revenue Segments - KLA operates primarily in three segments: Semiconductor Process Control (89.6% of total revenues), Specialty Semiconductor Process, and PCB and Component Inspection (both contributing 5.2% each) [3] - The Semiconductor Process Control segment generated revenues of $2.76 billion, reflecting a 26% year-over-year increase driven by demand for advanced semiconductor manufacturing solutions, particularly in AI and high-performance computing [4] Advanced Packaging Growth - Advanced packaging revenues reached approximately $500 million in calendar year 2024 and are projected to exceed $800 million in calendar year 2025, an increase from the previously estimated $750 million [5] Market Drivers - Key growth drivers include ongoing scaling, new technology, larger die sizes, and increasing capital intensity in Foundry/Logic, along with investments in AI and high bandwidth memory in DRAM [6] - Strong growth in advanced packaging is attributed to investments in AI and high-performance computing, which are increasing the demand for complex chip integration [7] Future Guidance - For the third quarter of fiscal 2025, KLA expects revenues to be around $3.0 billion, plus or minus $150 million, indicating a 27.57% year-over-year growth [8] - Non-GAAP earnings are expected to be $8.05 per share, plus or minus 60 cents, reflecting a 48.29% year-over-year growth [9] Geopolitical Challenges - KLA faces significant challenges due to geopolitical risks, particularly U.S. export controls affecting its business in China, which accounts for 36% of its revenues [11] - The company estimates a $500 million revenue impact from recent export controls in China for calendar year 2025, with 70% of this impact expected to affect its systems business [12]

Core Insights - KLA's international operations are crucial for understanding its financial resilience and growth potential, especially given its extensive global presence in the semiconductor manufacturing equipment sector [1][2][3] Revenue Performance - KLA's total revenue for the quarter reached $3.08 billion, marking a 23.7% year-over-year increase [4] - Korea contributed $357.43 million, representing 11.62% of total revenue, which was a -19.21% surprise compared to the consensus estimate of $442.44 million [5] - Taiwan generated $881.21 million, accounting for 28.64% of total revenue, with a +99.17% surprise against the projected $442.44 million [6] - Japan's revenue was $228.61 million, or 7.43% of total revenue, with a -22.49% surprise compared to the expected $294.96 million [7] - China contributed $1.09 billion, making up 35.51% of total revenue, with a +5.83% surprise against the forecast of $1.03 billion [8] - Europe & Israel generated $134.27 million, constituting 4.36% of total revenue, which was an -8.96% surprise compared to the expected $147.48 million [9] Future Projections - Analysts project KLA's total revenue for the current fiscal quarter to be $3.01 billion, reflecting a 27.6% increase from the same quarter last year, with specific contributions from various regions [10] - For the entire year, total revenue is forecasted at $11.89 billion, an improvement of 21.2% from the previous year, with detailed regional contributions outlined [11] Market Context - The interconnected global economy makes international market engagement vital for financial success, influencing consistent earnings and growth prospects [2][3] - KLA's reliance on international markets presents both opportunities and challenges, necessitating close monitoring of revenue trends to forecast future performance [12][13]

Demand and Market Environment - The company reported a significant increase in demand for semiconductors driven by advancements in AI, 5G technology, and the electrification of the automotive industry[160] - The semiconductor industry environment has improved, with foundry/logic customers increasing capital intensity and technology development investments supporting AI and high bandwidth memory[161] - The company continues to invest in technological innovation despite potential delays from customers in adopting new chips and technology methods[161] Financial Performance - Total revenues for the three months ended December 31, 2024, reached $3,076.9 million, a 24% increase from $2,486.7 million in the same period of 2023[180] - Product revenues increased from $1,921.8 million to $2,409.5 million, representing a 25% growth year-over-year for the quarter[180] - Service revenues rose from $564.9 million to $667.4 million, an 18% increase for the same quarter[182] - Net income for the three months ended December 31, 2024, was $824.5 million, compared to $582.5 million in the same period of 2023[169] - Diluted net income per share for the quarter was $6.16, up from $4.28 in the same quarter of the previous year[171] - Total revenues for the six months ended December 31, 2024, were $5,918.4 million, a 21% increase from $4,883.7 million in the same period of 2023[181] - Total revenues for reportable segments increased by $590.1 million, or 24%, to $3,077.2 million for the three months ended December 31, 2024, compared to $2,487.2 million for the same period in 2023[184] Segment Performance - Semiconductor Process Control segment revenues increased by $561.7 million, or 26%, for the three months ended December 31, 2024, and accounted for approximately 90% of total company revenue[186] - Wafer Inspection revenues grew by $396.1 million, or 34%, to $1,562.6 million for the three months ended December 31, 2024, compared to $1,166.5 million in 2023[185] - Specialty Semiconductor Process revenues remained relatively flat, accounting for approximately 5% of total revenues for both the three and six months ended December 31, 2024[186] - PCB and Component Inspection segment revenues increased due to a settlement related to a technology project cancellation, contributing to the decision to exit the Display business[187] Expenses and Margins - Gross margin for the quarter was 60.3%, slightly down from 60.7% in the previous year[180] - Gross margin decreased to 60.3% for the three months ended December 31, 2024, down from 60.7% in the same period of 2023, primarily due to a less profitable mix of products and services sold[188] - R&D expenses increased by $25.7 million, or 8%, to $346.2 million for the three months ended December 31, 2024, primarily due to higher employee-related expenses[193] - SG&A expenses rose by $29.8 million, or 13%, to $267.1 million for the three months ended December 31, 2024, driven by increases in employee-related and facility-related expenses[196] - SG&A expenses for the six months ended December 31, 2024 increased by $13.2 million in employee-related expenses, $8.1 million in facility-related expenses, $5.2 million in travel expenses, $4.8 million in promotional expenses, and $4.2 million in consulting costs compared to the same period in 2023[198] Goodwill and Impairments - The company recorded a goodwill impairment charge of $239.1 million for the three months ended December 31, 2024[170] - A goodwill and purchased intangible assets impairment charge of $239.1 million was recorded in the PCB and Component Inspection segment during Q2 FY25, compared to a $219.0 million charge in Q2 FY24[199] Cash Flow and Capital Structure - Net cash provided by operating activities was $1.84 billion for the six months ended December 31, 2024, an increase of $338.8 million from $1.51 billion in the same period of 2023[215] - Cash, cash equivalents, and marketable securities totaled $3.78 billion as of December 31, 2024, a decrease of $723.6 million from $4.50 billion as of June 30, 2024, primarily due to stock repurchases and debt repayment[211] - The total amount of regular quarterly cash dividends paid during the three months ended December 31, 2024 was $226.8 million, compared to $196.9 million in the same period of 2023[213] - As of December 31, 2024, the company had $5.95 billion in Senior Notes, with $750.0 million repaid in November 2024[217] - The company had no outstanding borrowings under its $1.50 billion Revolving Credit Facility as of December 31, 2024, maintaining compliance with all covenants[218] Regulatory and Compliance - The U.S. government has tightened export controls, impacting the company's ability to sell products to certain customers in China, which is a major region for semiconductor manufacturing[162] - The 2023 BIS Rules impose new export licensing requirements that could affect the company's ability to provide products and services to customers in China[165] - The company is continuously assessing the impact of government regulations on its financial results and operations, particularly concerning export licenses[167] Internal Controls and Governance - The CEO and CFO concluded that the Disclosure Controls were effective at a reasonable assurance level as of the end of the reporting period[233] - No changes in internal control over financial reporting were identified that materially affected or are likely to materially affect the internal control over financial reporting during the most recent fiscal quarter[237] - Disclosure Controls are designed to ensure timely recording, processing, summarizing, and reporting of required information under the Exchange Act[235] - The effectiveness of Disclosure Controls is limited by inherent constraints, including the possibility of errors or fraud not being detected[236] - The evaluation of Disclosure Controls was conducted under the supervision of management, including the CEO and CFO[234]

Core Insights - KLA Corporation reported strong second-quarter fiscal 2025 results, with non-GAAP earnings of $8.20 per share, exceeding estimates by 6.08% and reflecting an 11.9% year-over-year increase [1][2] - Revenues rose 23.7% year over year to $3.08 billion, surpassing the Zacks Consensus Estimate by 4.88%, leading to a 3.71% increase in share price during pre-market trading [2] Segment Performance - Semiconductor Process Control revenues, which account for 89.6% of total revenues, increased 25.6% year over year to $2.76 billion, with a sequential growth of 7% [3] - Specialty Semiconductor Process revenues were $160.4 million, up 6.9% year over year and 25% sequentially, while PCB and Component Inspection revenues increased 12.6% year over year to $161.1 million [4] Revenue Breakdown - Product revenues, making up 78.3% of total revenues, increased 25.4% year over year to $2.41 billion, while service revenues rose 18.1% year over year to $667.4 million [5] - Wafer Inspection revenues increased 34% year over year to $1.56 billion, while Patterning revenues rose 23% year over year to $531 million [6] Geographic Revenue Distribution - Revenue contributions came primarily from China (36%) and Taiwan (29%), followed by Korea (12%), North America (9%), Japan (7%), Europe (4%), and the rest of Asia (3%) [6] Operating Metrics - Non-GAAP gross margin was reported at 61.7%, exceeding guidance by 20 basis points [7] - R&D expenses increased 8% year over year to $346.2 million, while SG&A expenses rose 12.6% year over year to $267.1 million [8] Financial Position - As of December 31, 2024, cash and cash equivalents totaled $3.78 billion, down from $4.63 billion as of September 30, 2024, with long-term debt remaining at $5.88 billion [9] - Cash flow from operating activities was $849.5 million, down from $995.2 million in the prior quarter, with free cash flow at $757.2 million [9] Future Guidance - For the third quarter of fiscal 2025, KLA expects revenues of $3.0 billion, with non-GAAP earnings projected at $8.05 per share, indicating a year-over-year growth of 45.06% [11][12]

Core Insights - KLA Corp reported better-than-expected second-quarter financial results, with earnings of $8.20 per share, surpassing the analyst consensus estimate of $7.75 per share, and quarterly sales of $3.08 billion, exceeding the estimate of $2.94 billion [1][2] Financial Performance - The December quarter results were above the midpoint of guidance ranges, indicating strong performance despite challenges from new U.S. government export controls [2] - KLA anticipates third-quarter total revenues of $3.0 billion +/- $150 million and adjusted EPS of $8.05 +/- $0.60 [2] Market Reaction - KLA shares increased by 4.1%, closing at $742.43 following the earnings announcement [3] - Analysts adjusted their price targets for KLA, with Deutsche Bank raising it from $725 to $850 and Needham increasing it from $800 to $830, both maintaining a Buy rating [5]