KLA-Tencor (KLAC) , which had gone into earnings up 39% on the year, is down over 6% on Tuesday after delivering results and guidance that -- although complicated a bit by its $3.4 billion purchase of chip and electronics equipment maker Orbotech, which closed in June -- suggested any second-half recovery in chip equipment demand will be a gradual one.
Excluding $161 million in revenue provided by Orbotech following the acquisition's closing, KLA's revenue fell 8% annually during its March quarter. And excluding the $251 million or so in Orbotech revenue it expects this quarter, the midpoint of KLA's June quarter sales guidance implies a 7% annual sales drop.
Those declines are smaller than what many peers are seeing, thanks in part to the fact that KLA is relatively less dependent on a memory industry that has seen capital spending nosedive amid declining DRAM and NAND flash memory prices. Lam Research (LRCX) , by comparison, saw its revenue drop 16% annually in the March quarter, while Applied Materials (AMAT) , which reports on May 16, is expected to report that its April quarter revenue fell 23%.
Regardless, KLA is maintaining a cautious view of near-term industry demand, as have Lam and other industry players that recently reported earnings. On its earnings call, KLA forecast that industry wafer fab equipment (WFE) spend, which it thinks rose by a mid-teens percentage in 2018, will be down 15% to 20% in 2019, as lower DRAM and (to a lesser extent) NAND capex offset higher spending by foundries and logic (processor) manufacturers. Lam, for its part, forecast two weeks ago that WFE spend would be down by a mid-to-high teens percentage.
KLA does say that it expects sales for both Orbotech and its core chip equipment business to be higher during the second half of 2019 than in the first half. And with foundry and logic capex relatively healthy as Intel (INTC) , Taiwan Semiconductor (TSM) and others continue investing in next-gen manufacturing processes, and with many chip suppliers expecting improved second-half demand, such an outlook doesn't look unrealistic.
However, it looks as though memory makers will take their time to boost their capital spending. The DRAM industry, which has largely consolidated around three players that want to collectively keep a lid on industry supply growth, might be especially cautious about ramping spending. Over the long run, rising memory consumption and the growing capital-intensity of next-gen memory manufacturing processes should still propel memory capex higher, but 2019 is clearly looking like a rough year.
This isn't something for investors in chip equipment names to panic over, given that valuations for the group still aren't especially high and markets had clearly become too pessimistic about the industry in late 2018. However, it might justify some profit-taking at a time when KLA and other industry names have rallied to new 52-week highs.
