Zacks_Analysts' Blog : Earnings Preview: KLA-Tencor Corporation - Analyst Blog

KLA-Tencor Corporation (KLAC) is scheduled to report its second-quarter fiscal 2012 results on January 26, 2012.

Prior-Quarter Synopsis

KLA-Tencor’s first-quarter earnings came in line with the Zacks Consensus Estimate. The quarter’s results were impacted by a broad-based revenue decline, supported by a lower tax rate.

Revenue was down 10.8% sequentially, but up 16.7% year over year. The sequential decline was due to market softness, as well as significant order decline from the previous quarter.

Gross margin was 58.0%, down 268 basis points (bps) sequentially and 412 bps year over year. The sharp decline from both the previous and year-ago quarters resulted from significantly lower volumes and higher excess inventory reserves.

Management Guidance

For the second quarter of fiscal 2012, KLA expects orders to be up 25-45%, revenue of between $600 million and $650 million, gross margin of 57-58%, opex of $200-205 million, other income/expense to be a net expense of $10 million, tax rate of 26% and a share count of 169 million, resulting in non-GAAP earnings in the range of 56 cents to 72 cents.

The Zacks Consensus Estimate for the second quarter is currently pegged at 66 cents.

(Detailed earnings results can be viewed in the blog titled: KLA Sees Trough in Q4

Agreement of Analysts

Out of the 15 analysts providing estimates for the second quarter, none have revised in the last 30 days. Over the same period, one analyst made an upward revision for fiscal 2012.

Analysts expect a decent second quarter, with revenue and earnings coming in line with management’s guidance. They believe that KLA-Tencor will benefit from the pickup in foundry capex spending in the near term. Given Samsung's doubling of foundry capex year over year, analysts expect Taiwan Semiconductor Manufacturing Company (TSM) and Global Foundries to increase their proposed spending toward process control tools, leading to an increase in foundry orders.

As per the analysts, KLA will gain from most of the process technology changes occurring in the industry. The yield issues faced by the foundries will drive increased orders and sales of process control tools.

Additionally, the eventual shift to 3D device structures in the memory space will also benefit KLA-Tencor over the next few years. Analysts believe that the challenges involved in these new device structures will spur additional process control sales.

Magnitude of Estimate Revisions

In the past 30 days, the Zacks Consensus Estimate for the second quarter did not change, but it was up by a penny to $3.55 for fiscal 2012.

Since the first quarter earnings announcement, the Zacks Consensus Estimate witnessed a significant decline of 28 cents for the second quarter and 38 cents for fiscal 2012. Therefore, negative sentiments appear to have outweighed the positive post first-quarter earnings.

KLA-Tencor is benefiting from early 28nm technology capex from Foundries, particularly for yield improvement, but such orders may not be sustainable, given the overcapacity that exists in the Foundry segment. Additionally, the lack of visibility and low utilization rates at Foundries could be the primary reasons for the expected decrease in estimates.

Our Recommendation

KLA-Tencor is a supplier of process control and yield management systems for the semiconductor and related microelectronics industries.

In the near term, we believe that KLAC will benefit from the pickup in foundry capex spending and the process technology changes occurring in the industry.

However, we cannot ignore the excess capacity that already remains at foundries, which increases the risk that any improvement in the market could be short lived. Hence, we believe that significant growth in KLA’s business is not likely until semiconductor demand gains momentum, driving foundries to capacity expansion.

Although KLA-Tencor is a leader in process control, it faces competition from other large equipment suppliers, such as Applied Materials Inc. (AMAT) and Hitachi High-Technologies Corporation.

KLA-Tencor shares carry a Zacks #2 Rank, implying a Buy rating in the near term (1-3 months).