KLA (KLAC) Down 6.2% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for KLA (KLAC). Shares have lost about 6.2% 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 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 catalysts.

KLA Corp. Beats Earnings and Revenue Estimates in Q2

KLA Corporation reported second-quarter fiscal 2020earnings per share of $2.66, beating the Zacks Consensus Estimate of $2.55. Moreover, the figure was up 9% year over year and 7.3% sequentially.

Revenues increased 34.7% from the year-ago quarter and 6.8% sequentially to $1.51 billion, surpassing the Zacks Consensus Estimate by 2.1%. The figure was at the higher end of the company’s guided range of $1.435-$1.515 billion.

Management continues to expect overall process control intensity to grow in 2020, driven by expanding value of inspection and measurement in addressing critical customer problems.

Demand for advanced logic nodes is expected to remain healthy through 2020 and in 2021, driven by investment in EUV, competitive dynamics, as well as capacity additions.

Foundry and logic is expected to continue performing well in 2020. The optimistic outlook is driven by next-generation technology development, capacity additions at leading-edge nodes, increasing competitive dynamics and investment in EUV infrastructure.

Management expects WFE demand to improve in 2020, driven by investments, strong foundry demand and improving business conditions in memory.

Top-Line Details

Products revenues (accounting for almost 76% of total revenues) increased 34.3% year over year to $1.14 billion.

Services revenues (24% of total revenues) increased 36.3% from the year-ago quarter to $364.9 million.

In terms of reportable segments, Semiconductor Process Control increased 14% year over year to $1.25 billion, driven by continued strength in foundry and logic.

Specialty Semiconductor Process revenues were $75.1 million, up 9% sequentially.

The segment is expected to benefit from expanding RF demand to support 5G investments and a potential recovery in the automotive electronics market in the second half of the calendar year.

PCB, Display and component inspection revenues increased exponentially from a year ago to $186.3 million and Other revenues were $0.517 million.

KLA Corp 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 bare wafer products. These are needed to support more stringent wafer flatness and process tool cleanliness specifications in advanced technologies.

Operating Details

Per the press release, KLA Corp’s gross margin contracted 550 basis points (bps) on a year-over-year basis to 58%.

Total operating expenses increased 48.4% year over year to $413 million. As a percentage of sales, research and development expenses slightly decreased, while selling, general and administrative costs increased.

As a result, operating margin contracted 890 bps to 28.2%.

Balance Sheet

KLA Corp ended the quarter with cash, cash equivalents and a marketable securities balance of $1.68 billion compared with $1.75 billion in the fiscal first quarter.

Cash from operations was $387.7 million in the fiscal second quarter versus $496.2 million in the prior quarter.

Fiscal Third-Quarter 2020 Guidance

For third-quarter fiscal 2020, revenues are expected between $1.325 billion and $1.525 billion, indicating growth of 3-5% sequentially.

Memory is expected to be 28% of system revenues in the fiscal third quarter. Foundry is expected to constitute 60% of total shipments and Logic is anticipated to account for 12% of semi-process control system revenues.

The company expects non-GAAP gross margin in the range of 59.5-61.5% and non-GAAP EPS within $1.79-$2.57.

GAAP EPS is projected within $2.04-$2.82.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

Currently, KLA has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, KLA has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.