Why Is KLA-Tencor (KLAC) Up 5.2% Since Last Earnings Report?

A month has gone by since the last earnings report for KLA-Tencor (KLAC). Shares have added about 5.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is KLA-Tencor due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

KLA-Tencor Beats Earnings and Revenue Estimates in Q1

KLA-Tencor Corporation (NASDAQ:KLAC) reported first-quarter fiscal 2019 earnings of $2.46 per share, beating the Zacks Consensus Estimate by 26 cents. The figure also surged 36.7% year over year and 10.8% sequentially.

Moreover, revenues increased 12.8% from the year-ago quarter to $1.09 billion, comfortably surpassing the Zacks Consensus Estimate of $1.07 billion. The figure was within management’s guided range of $1.030-$1.110 billion.

Products’ revenues (almost 76% of the total revenues) increased 9% year over year to $829.2 million.

Services revenues (24% of the total revenues) increased 26.5% from the year-ago quarter to $264 million.

Management expects overall process control intensity to grow this year, driven by the expanding value of inspection and measurement in addressing critical customer problems, along with semiconductor industry expansion in China.

Shipments Detail

Shipments in the fiscal first quarter were $1.01 billion, down approximately 5.6% sequentially but were at the high end of the company’s guided range of $935 million to $1.015 billion, driven by strength in memory and sequential increase in shipments to foundry customers.

Memory accounted for 57% of fiscal first-quarter shipments, 38% of foundry customers and 5% of logic.

In terms of end market, Wafer Inspection, Patterning (including shipments from reticle inspection business), Service and Non semi (including back-end component inspection business) contributed 48%, 27%, 22% and 3% of shipments, respectively.

KLA-Tencor continues to experience strong growth for its 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 new bare wafer products. These are needed to support more stringent wafer flatness and process tool cleanliness specifications in advanced technologies.

The company registered strong growth in China. Management stated that China was strong in terms of both process control adoption and market share gains.

Operating Details

KLA-Tencor’s non-GAAP gross margin expanded 150 basis points (bps) on a year-over-year basis to 65.2% and came in above the guided range of 64-65%. The growth was driven by a favorable product mix.

Total operating expenses increased 4.6% year over year to $263 million. As a percentage of sales, both research and development, and selling, general and administrative expenses decreased.

As a result, non-GAAP operating margin expanded 330 bps to 41.1%.

Balance Sheet

KLA-Tencor ended the quarter with cash, cash equivalents and a marketable securities balance of $2.78 billion compared with $2.88 billion in the last reported quarter. Cash from operations was $381.4 million in the quarter.

Fiscal Second-Quarter 2019 Guidance

For second-quarter fiscal 2019, KLA-Tencor expects shipments within$985 million to $1.065 billion. Revenues are expected between $1.03 billion and $1.11 billion.

The company expects non-GAAP gross margin in the range of 63.5-64.5%. Non-GAAP diluted EPS is expected in the range of $2.02-$2.34, while GAAP diluted EPS is projected within $1.88-$2.20.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, KLA-Tencor has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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