KLA Corporation (KLAC) Earnings Call Transcript & Summary

Good afternoon. Hi, this is Tim Arcuri. And I'm happy to have KLA with us as the next presenter. I was looking back to my notes, and 2 years ago when we initiated coverage at UBS, we laid out the case for KLA as a new industrial tech stock, and it's taken some time to get traction on the thesis. But for the second straight year, I'm very, very pleased to have KLA at our industrials conference, and very pleased to have Rick Wallace, who is the CEO and President. And Rick is going to run through a series of slides that I think really lays this out nicely. And then maybe there will be time for 1 or 2 questions at the end. So I'll turn things over to you, Rick.

Thanks, Tim. And thanks again for the opportunity. As you say, 2 years ago, we started this process, and we've learned a lot. We've had interesting discussions and gained some traction, I think. And today, I think we're in a great position to share our story. I'm going to start with the safe harbor. Obviously, we're covered by the safe harbor statement and that's in the material that we put out, and you can always refer to our website for latest updates. What I'm going to talk about today is a little bit of why we're at an industrial's conference. And talk about the evolution of the data era, in particular, how it has accelerated with COVID-19. I'll talk about the KLA operating model and how we use that to drive success. And also talk about our competitive position and how we invest so that we continue to have a large competitive moat. And then lastly, talk about our cash flow and capital returns. So the question of why at an industrial conference: I attempted to lay out this case a couple of years ago. We also heard from some investors and even some Board members that were new to the company and new to the industry, and they said, "Boy, the way semiconductors are going, it really -- they are increasingly powering the overall economy." That's relatively new from the beginning of the semiconductor industry. KLA is clearly critical to enabling the industry, and we'll talk about market share as well as our breadth. And we have many qualities. And in fact, we've positioned the company, and we now run the company to be consistent with a lot of the qualities and financial metrics that are valued by industrial investors. And I think that this latest economic cycle is demonstrating that ability. There's no question that we're in an evolution of the data era. And many of the trends that are often talked about, whether they be 5G technology, Industry 4.0 or artificial intelligence are enabled by capabilities that KLA brings to the industry. And these are going to transform not just the traditional IT markets but they're also in the process of transitioning almost every industry. So if you look back in history, there's not really -- any device today, an electronic device that doesn't go through KLA equipment in the manufacturing process of it. And of course, the history of the semiconductor industry, we'll talk about in a little while, but it used to be very much specific to devices on the next big thing, and now it really has -- it's ubiquitous in terms of where semiconductors show up. What do we do is often a little bit harder to explain. So I'll try to do it in this slide. The semiconductor manufacturing process is a very complex one. And it takes weeks to deliver a semiconductor, it's the most manufacturing-intense process in the world. It's the most complicated. And you start at the beginning of the process not knowing if you're going to have good product at the end. So the thing that our customers focus very heavily on is, how fast can they get their semiconductor fabs to yield, that means good die when they are producing good chips. So what we do is we enable that by providing many different technologies to inspect in the process to identify problems so that they can be rapidly fixed. And those take the form both of looking and physically comparing and making sure that there are no flaws or also making measurements to make sure that things are in the right proportion and dimension. And the great thing for us is that every generation, every 10, 12 months, there are changes from our customer standpoint that make these challenges even increasingly difficult, which means we continually provide capability to allow them to do it. Very simply put, you can't fix what you can't find, and we help you find it. And if you don't fix it, you can't get product to the market, that's for our customers, across the entire industry. And you can't control things that you can't measure. And I think the idea of diagnostics inside a semiconductor factory is another way to think about this. We provide the diagnostics so that people can make improvements and get the semiconductor fabs, which the semiconductors go into all these devices, all these technologies, get them to be productive. And the way we do that, the next chart talks about -- takes a look at 3 dimensional section of one of our pieces of equipment. For those of you who remember high school physics or maybe college physics, if you think about a microscope, essentially what many of our pieces of equipment are microscopes with computers attached to them. But over time -- and in fact, in the beginning, when I first joined the company, for example, they were all off the shelf. So these were things that you could order catalog devices from different producers and buy the components and put them together. And at that point, KLA was an integrator of existing technology. But over time, in order to make our systems relevant to the challenges, we had to develop expertise and our own capabilities for developing all the subsystems of what you would think of as a microscope. The optics, which means the illumination, so how you shine light on it, how you collect that light. But increasingly, and for several years now, the other challenge that we've had was driving information out of all that data and a term that we've been dealing with for quite a while used to be called big data, now it's called AI. And these were the things that KLA was enabling for years. In fact, we worked with many of the pioneers in driving the capability, the processing capability. So we have expertise in all aspects of producing these systems, and we offer a portfolio of systems, which means our technologies that we -- the core of KLA scales across our entire portfolio, which is what gives us such great leverage in terms of our operating efficiency as a company. So we have a lot of innovative capabilities across many disciplines. And we have leadership in the world in these disciplines as they apply to these critical challenges. The company was founded in 1976. And at this point, we're 10,000 employees, over $5 billion of revenue. One notable feature for KLA is the amount that we spend on R&D on a percentage basis is very high. Now that counters to the fact that we spend very little on sales and marketing because the semiconductor industry, if you're going to build a $10 billion to $15 billion factory, we know where it is. We don't have to do a lot of prospecting. And so our ability to support those customers means we can spend our money in research and development, which creates great competitive moat. What we don't have to do is spend in sales and marketing where we're trying to reach customers or influence them because we have such tight relationships with them. Another component of our business that is exciting, and we found was very exciting to industrial investors was the percent of our business that is service based. And this is because that installed base of 46,000 tools, the life of these tools is very long. And if you bought a tool 20 years ago from KLA and you're making semiconductors for older devices, chances are that tool is still in use, and we're still providing service for that tool so that it extends the useful life of that. What that means is we have a 25% of our business roughly, 24% is based on a recurring revenue model because what we sell our subscription-like offering for our customers to do that. Our revenue mix, what's relevant about revenue mix, the most important thing is our market share is basically the same everywhere in the world. So sometimes you have companies that have a large share in one region of the world but not as high in others. Our market share represents and our geographical distribution represents where semiconductors are made. And so if that changes, if those moves, if you move from one region of the world to another region of the world, our market share, we will not be disadvantaged and our geography will react accordingly. And if you go back in time, of course, there was very -- when I joined, it was the U.S. and Japan and other regions have come on. So we're everywhere in the world where our customers are supporting them. And to do that, our workforce is global in nature for 2 reasons: one, to support our customers around the world and also to find the best talent for research and development. So we look for the best talent in the world, and we'll do R&D wherever that talent is as well as do operations in support of our customers. So most of our customer base is in Asia, but a large part of our engineering is in United States, a good percent in Israel and also in Europe, and this chart shows that. Additionally, we have a lot of advanced degrees. Because of the nature of what we do is so challenging and demanding, we can attract and retain really high-quality talent because they're working on the most challenging problems in the world. And so that's how we've done this. Now notably, this has changed significantly. When I joined the company, I'd say we were 95% based in the U.S. And so we've expanded quite a bit in terms of -- and grown over time. Let me talk about the data era. If you look at the slide that shows the growth of semiconductors from the beginning of the PC era. Really, the semiconductor industry was developed originally to support the space program for the U.S., the Apollo program, where they needed to have small-enough devices to be able to provide capability. But the first commercial application of semiconductors, the first one, were really -- think about TI watches, but after it, calculators. But the ones that really started using a lot of semiconductors were PCs, personal computers. And that era was the beginning and there was -- there were a lot of players, of course. We all remember a lot of growth, but there was a fair amount of cyclicality because it was really one device. Then networking happened, the Internet happened, mobile. And now we're really in the data era. And you can see the semiconductor industry itself has grown significantly over time and has become -- no -- there's no more one big thing. And if you look at what COVID-19 is doing in the next chart, it's really accelerating this growth. And some of these were an example today of that. This conference was held in person last year, and more and more people are doing things virtually. But some of the drivers that were the same, artificial intelligence, there's no change in the trajectory of AI, but it's certainly the case that some of these other trends like virtual interactions, work-from-home, gaming is all being accelerated by COVID-19. So we're probably getting several years of digital transformation as being pulled forward as companies and people realize what they're capable of doing. The other thing that's changing is, of course, the data center is where data resides, so that continues to be a very strong driver for the industry. Health care is certainly changing, both in terms of support of the diagnostics that's going with a lot of the need to have increased testing and increased monitoring, but also remote telemedicine is happening in places now that's brand new. 6 months ago, it didn't happen. The other trend that we're seeing is industrial automation. One of the reasons the semiconductor industry was so resilient has been during this COVID-19 is we're a highly automated industry. So we don't rely on a lot of people in close proximity to each other. You're all aware, there are industries where that has been a challenge. And every expectation we have says that they will move toward automation. Because increasingly, I think the capabilities were being demonstrated, and there's a lot of interest by our customers in supporting people that are doing that. So we think all those drivers are continuing. And our market leadership has actually expanded. This chart, the one that shows market leadership in semiconductor process control. We're talking to investors, and there were some that very astute, and they said, "Look, you're 4x bigger than your nearest rival. That's huge." And for us, of course, we've been in our own industry with newer market leaders, but it is true. We have 3 kind of competitors that are in the 10% of process control. We're not the biggest semiconductor equipment company, but we are by far the leader in the space that we support, which is the process control. And we do that, and we've done that historically, this shows 10 years, but you could go back much longer, by working closely with our customers, making sure we understand what their needs are. And sometimes, they don't understand what we're capable of, but we try to understand what their problems are and then making sure that we deliver that value. And we do that by collaborating with them, we drive have -- our innovation process is very robust. And then we have to be flawless in our execution. And our execution, as an example, during COVID-19, has really been noted by our customers at how strong it's been. They've been surprised at our ability to continue to support them through this period. Which brings me to the operating model, which is really the foundation for our success. We start with our mission, which is to make sure that we're enabling our customers to complete their mission to support the digital era. Our strategy has always been and will always be to focus on having differentiated products that are relevant to our customers' success, and we do that by working closely with them, driving innovation and executing. And we measure those things. If you go to the next chart. We measure them based on our leadership and making sure that we're a leader in every market that we serve. So that's the core to our strategy, the operating model, and it focuses, do we have market leadership? And do we have investments so that we can sustain leadership over time? And do we have a legitimate competitive moat? Early in my career, somebody asked me what technical right do you have to win? And we always thought about, not just that we did a good job of convincing customers, but we had a technical backing, a technical differentiation that our customers -- if they did a complete evaluation, we would win the business. We have a great leadership team. The structure of the company has allowed us to promote heavily from within and to use that. And then we focus a lot on generating cash and returning cash to shareholders, and I'll talk about that a little bit as well. The next chart talks about our 4 objectives. And we use that for every one of our operating businesses, what is the market leadership? Overall, we want to have 4x our rivals in aggregate. But in each product area, we look at how do we have our leadership? What's our market share? And how do we drive it higher? We do that, and we want to make sure we have differentiated products, and we measure that by gross margins to make sure that, that's a real test of how differentiated your products are. And of course, we've got to drive our operational excellence so that we do that flawlessly. And none of that happens without talent and talent that's engaged and working hard collectively as a group. The next chart talks about corporate social responsibility. I would say that this area has become increasingly important to companies, certainly, in general, but also at KLA, whether it's focused on environment. And as a company, we don't have a huge impact on the environment other than some of the natural things that we do, but we do focus on how do we continue to make improvements. We do have a lot of impact on our corporate programs and initiatives around community. And certainly, we've seen that in COVID-19 reaching out and making sure we're working with community leaders. And then always a strong focus on governance, and we benefited from having a diverse independent Board that's got a real understanding of how great corporations run. And our compensation system is very aligned with the shareholders. I will say that CSR has also become very important for recruiting. And so when you look for the next generation of talent, they are asking these questions as well as investors are increasingly asked. So we take this very seriously. When we look at our competitive moat, one of the metrics we've consistently looked at is, what's our gross margin. And early on in my career, I had a CFO that basically said, "Your gross margin is your measure of your differentiation." And so we've kind of always taken that to heart is what is it. And this compares us to some pretty strong companies in our -- the other companies all bigger than us, but we have stronger margins. And then that translates to operating margin with how efficiently do we run the company. And so this chart shows over time as that comparison. We also thought it was important to compare that to a broader universe, especially as some investors in this area. When we start talking to industrials, they said, "How do you compare broadly?" And so we looked at ours over time against Tier 1 semiconductors, which usually are historically, and certainly recently, great in terms of operating margin, semi-cap, other companies and large tech capital companies, large tech capital being listed out in the bottom. And you can see, there we screen very well also. We've also been asked and we had investors tell us they -- obviously, everybody's got their screens, and so some of the things people look at is, what is your commitment to returning cash? How expensive is it to run your business relative to CapEx per revenue? And ours is not very high, and we're pretty efficient in that. Obviously, we talked about non-GAAP operating margin and how do we compare. So we gave a selection of industrials here and then compared ourselves in all of them. And in every area, we screen very well. There are always areas for improvement, and one of our values as a company is a drive to be better to continuously focus on that. But one thing, and maybe this is why we had such interest from investors, was given the valuation metrics versus tech industrial, we screen at a place that feels like we've got to do a better job of telling our story because we have so many attributes that are similar to these industrials, and yet, we haven't done a good job convincing or good-enough job convincing people. We've had some uplift in our multiple, but we think if we continue to tell our story and continue to execute as we are in this very challenging 2020, that will help then tell our story. When we think about this innovation that drives all our performance, we invest heavily in R&D to maintain leadership in our markets. And we feel that's really critical in this year, in calendar '20, we're committed to continuing to invest in R&D. And you could see here it's an increase even from 2019. And again, our goal is to maintain leadership in order to support our customers as they go forward. We feel responsibility as market leaders that we need to continue to make sure that we help move the industry forward. So the other measure of competitive moat, some people have asked us to compare is our level of revenue compared with our peers, and then we look at our R&D, and in every -- almost every case, our R&D is about similar to their revenue. So we have a very strong moat, partly because we have the innovation, but then we continue to heavily invest for the future to make sure we continue to maintain that lead. And that leads to a discussion about cash flow and returns. Years ago, we had this -- we were the first, I think, in our space to introduce a dividend as part of returning free cash flow. We had a Director years ago. As you know, many companies often are searching for high-growth rates. And the characteristics of our business is, we generate a lot of cash and we had a Director who say, "Don't be -- don't apologize for generating cash. Think about it as how does that make you compelling." And so that's what we focused on, what are the uses of cash. Obviously, we want to invest in our business, make sure we have leadership, but a very important part became the conversion and how we think about generating free cash and then what we do with that. So we look at how do we maintain our leadership in generating cash. And then in the next chart, we'll talk about how we can compare with others, and we look at that and we say, "We do a good job there." We're not at the top. There are some people that are higher, so we'll continue to drive that forward. But it's an upward trajectory. And if you look over time, it became more important to us as a company. It’s part of the incentive system is relative free cash flow margin for management. So when we think about research and development, when we think about acquisition, we always come back to does it generate free cash flow over time. We'll make long-term investments, but they have to -- they're not going to be speculative in terms of whether a market might appear or not. They're going to be based on firmly rooted in the sense that we'll get paid for those. And then if you look at the next chart. I talked about service business earlier. This is to us a really important component of our story is the services is an annuity-like business. And if you think about that growth rate, we've had one down year, in '20, this year. Our estimates based on what we see out there are continuing to see growth in services in spite of all the challenges in 2020. We had a big bump in 2019, partly through an acquisition where the business we acquired had services plus our own service business grew. And we said in our Analyst Day, we'll say later we have a commitment, expected growth rate of our services business at 9% to 11% over time. And of course, services generate very strong free cash flow. And if you look at the next chart, it talks about our returns. So we have done repurchases over time. And the other thing is the annual dividend increase, and we talked to a lot of investors and they felt over time. And as we became more of a dividend company, we got more investors that were interested in the dividend, and we are committed as a management team not only to have the dividend but of course to grow the dividend, so they can be valued appropriately. We think about the percent of the free cash flow that we use for dividend to make sure that it's sustainable, and that is what's shown here. It's about a 35% is the target. And then, of course, the buybacks have come at different times on 10b5-1 programs, and you could see the average price there since 2010. When we look forward, one of the things that's changed the most is the cyclicality of our business and WFE is wafer frontend or how our customers invest. That's declined, the cyclicality has declined over time. And partly because the industry has gotten bigger and more expensive. So there are a fewer speculators in the industry and a little bit more rational. But the other thing that's been clear is the end-use of semiconductors is moving away from being consumer-based solely or largely toward all the other industry sectors that semiconductors are impacting. So as a result, what you have is an industry that's more stable based on what we're seeing and what we're forecasting. In terms of our balance sheet, we were the first, I think, in our space to put debt on the balance sheet. When you look at our service business early on, once we understood the characteristics, the obvious thing became, we just took services as a business, what you do is put some debt on that and you pay a dividend off of it. And this shows that as a company, we've done this. We had a very fortunate retiming this year to retire some debt. And if you look we now have no bond maturities until 2024 and feel pretty good about where we are, our investment-grade balance sheet. Our long-term model, we updated at our Analyst Day last year. 2017 model was what we had going in. And we talked about the diversification and the acquisition that we did drove a new model that we produced at the Analyst Day in September last year. We talked about what the growth drivers are, our ability to gain share, and we've been demonstrating that as well as services. And so the 2023 model shows a 7% to 9% growth rate based on these different factors of the industry growth, our ability to continue to demonstrate share gain and the growth of our services business. So the long-term targets shown on the next slide, talk about -- this was what laid out, the $7 billion to $7.5 billion in 2023, and operating margins of 36% and EPS centered around $15 a share with a capital allocation as we've discussed. And these are based on the assumptions that are listed here, both macro and assumptions as well as some of the business assumptions. So with that, I'll summarize, just to say that the world certainly continues to evolve with semiconductors becoming more and more critical. I think that the data era that we talked about last year is, if anything, being accelerated by what we're seeing in COVID-19. The company is very well positioned with both our product portfolio, our customer intimacy and our services business. And we're demonstrating that resiliency as we go through these choppy waters. And with all that, we have a very strong record of returning cash and demonstrating profitability and returning our shareholders -- rewarding them appropriately. So with that, I'd like to thank you all for sharing this time and allowing us to tell our story. Thanks, Tim.

Thanks a lot, Rick. We have time for a couple of questions. I don't see any from the audience. So I always have questions for you, Rick. So maybe I can start by sort of opening up the discussion of one of the sort of emerging stories is the big trade imbalance in China in semiconductors. It's obviously the second biggest trade imbalance they have behind oil. So they're trying to basically rectify that and build out a lot of captive manufacturing capacity in China. And your business obviously is built on helping customers to maximize their yields. So it seems that when you have an entire country trying to get off the ground and building semiconductors, that's a pretty good backdrop for you. So can you just talk about that trend and sort of how it plays into your business?

Sure, Tim. I mean it is definitely true that there is investment, and as we said, we're basically -- our distribution of our revenue kind of goes to where that investment is. And as you say, China is investing. So overall, they are investing, but it's not really leading edge. I mean, so most of what we're seeing in China for the domestic manufacturing for that base is to fill out some of the trailing edge. So it's not as overall the similar amount of capital in what we'd see in other regions of the world. But obviously, it's important. And as I think, as you also know, there's a lot of talent in China that came from other countries that use KLA equipment. So we're well positioned to support those engineers because they had prior experience with us. So yes, it's been an important part of our business. It's not leading edge, but it's also -- there are a number of sites and fabs across China that are working hard to try to bring up their domestic capability.

And I guess, Rick, just on that front, this is just a very, very high-level question. How do you sort of -- if you fast forward 3 to 5 years down the road and not -- and just sort of get like out of the noise that's happening today on trade. If you look 3 to 5 years down the road, how do you foresee your business in China? Do you think that there will be an effort within China to basically replicate what you do? And do you think it would be possible that there would ever be a Chinese company that could try to pick off some of what you're doing? I guess I'm asking you for kind of the big picture view in terms of how your business in China looks in, say, 3 to 5 years?

Yes. No, I think it's a great question. And as, Tim, somebody has followed the industry for a long time, this is not the first time a country has tried to develop their equipment base. There's over 100 equipment companies in Korea. And they've been heavily supported by local semiconductor manufacturers. Of course, our business has had to compete heavily in Japan for years, where often those Japanese competitors had a home-field advantage in some ways. And the Chinese have had equipment companies for a number of years. I think the challenge that's different in this industry versus most is that in order to afford their R&D to be competitive, especially in this industry to be productive, you really need to service the entire market. So unlike other companies or countries history with different industries, you can't have a domestic market that makes you competitive in semiconductor equipment. It just has never happened because you need to have the revenue across all of them. So if there's an issue where the Chinese -- we know there's this ongoing tension, let's say they can't get access to leading equipment, that capacity will go somewhere else because there's enough, it's fundamentally being driven by the semiconductor demands around the world. So I don't think there is a risk at the leading edge, provided we continue to innovate and execute. And that's been really our strategy throughout time is to make sure that we keep evolving. And it's even true on our trailing edge projects. I mean the things that service the older generations we continue to evolve. We provide service capability. So we're not afraid of companies and regions trying to develop capability. It's just really very difficult to do in semiconductor equipment. And so I think 3 or 5 years from now, I think it will be a similar story, provided the companies that are competitive there continue to invest and execute. And ultimately, if you want to be -- semiconductors are the cheapest thing in the world to ship. So if you want to be globally competitive, you've got to be productive, and our equipment enables that.

Got it. Got it. Maybe I'll just continue. There's probably some people on the call that aren't that familiar with the assets that you bought from Orbotech here recently. So obviously, now you're serving a bunch of end markets, not just semiconductors. I think that's what the whole beauty now of this deal is. You're servicing the flat panel display business. You're servicing the MEMS filter business, RF filters, PCBs. So I guess the question is, how leverageable have you found your R&D to be if you look across those different end markets? Have you been able to leverage your some cost in semis in those end markets?

We're working on it. I would say that the biggest development for us, surprise if you will, a little bit, the synergies are going to be better than we model. So that's encouraging, and that's part of as we get in and understand. The other thing is that there's actually revenue synergy for the specialty semiconductor business that you know is SPTS because there were large players in -- that were KLA customers that wouldn't necessarily buy from a smaller division of a smaller company to support leading-edge packaging trends, which are a big part of innovation. So we're actually seeing and we made an announcement, we're putting a long time -- or we have put a long time KLA exec in charge to support that because customers ask for it, frankly. They said, we want to buy from you, but we want to make sure that it's KLA we're buying from. So we think there's some revenue synergies. That's not technology synergies. In the PC board, we do think there are technology synergies. It will take a little while for those to come out. But there are some really exciting products in direct imaging of semiconductor PCB boards, which we can definitely add value to. But it's -- as you might imagine, there's an engineering program that has to come out as a result. So yes, we think there are definitely synergies. The revenue ones are probably going to actually happen sooner than the engineering ones ironically because we're already seeing pull from that. The engineering just takes a little longer.

Got it. Got it. Maybe I don't want to get too far in the weeds. I've covered the company for a long, long time. But one trend that I think people don't always get is that the company, if you look at the foundry and logic, if you just sort of double-click on semiconductor and if you look at the foundry logic spending pool and you look at the memory spending pool, historically, you captured a larger share of the foundry and logic dollar pool that you did of the memory dollar pool. And if you look at that trend, that's actually normalizing in the past couple of years. So you've really done a good job of gaining share in the -- or gaining share of the memory spending dollars in the past couple of years. Can you just talk about what you're doing in memory? And maybe how the memory production process is changing such that you can access more of those dollars?

Yes, that's a good question. And thanks for noticing, Tim. I think the biggest change became -- there are 2 things. One, the memory guys got a bit of a break when they first went to NAND flash by going backwards in technology. And there was a belief that there was going to be a relaxation of process control needs. And the other thing is there were needs, but we didn't necessarily have products to service those needs. So it was kind of twofold. There was less intensity, and there was a bit of a slowdown in technology development, both in DRAM and in NAND. Those both have changed, and we have some products to address them, which customers are starting to find valuable. Even our most recent high-volume, leading-edge optical inspection tool, known as Gen 5, is seeing traction in the DRAM space because of the capabilities that it enables. So we have seen a larger percent. It's still not where a pure foundry would be investment-wise, but it is the trajectory or the intensity increased amount of budget for process control that we hope for, if we would execute on our programs and we have. And I think the other thing is, we've just engaged more closely understanding some of those challenges that our customers have. So we do think that trend will continue as we continue to bring out the new products. Some of them are still in the early days of adoption. And so we think there's more to come.

Great. Maybe we have time for just one more question. Again, I don't want to get too much in the weeds, but definitely one of the bigger sort of technology adoption trends over the next few years is going to be EUV on the semiconductor side. So can you just talk a little bit and maybe inform people how you attach to that trend. Is that -- is EUV net positive for you? Or is it a net negative? And can you kind of go through why you think?

Yes. Sure. So EUV is the next generation of lithography or the printing of wafers that's being used by leading-edge customers, now mainly for foundry logic but also there'll be some memory to. What it does for KLA is, it enables us to service new challenges and with new tools because with the scaling or the smaller devices, they are smaller defects and they're more critical dimensions to be measured. So it's driving our intensity for inspection and the most obvious one is how do you make sure that this EUV reticle is defect free. And historically, that's been done pretty straightforward with the KLA tools, but now you need additional tools to check it when you print it. So it's driving additional inspection adoption in the fab. It's also driving in the mass shop, but it's also driving additional metrology requirements. So net-net, it's increased intensity and process control for those who adopt EUV. That's what we're seeing so far based on our ability to execute in some of these things, like this print check, if you will, the Gen 5. So overall, it's a good trend for us. It also means that scaling has resumed, which is probably a very good trend for the industry because the industry continues going to next-generation devices because now with EUV, they're economical. And that's a trend that's got very much of a lifetime ahead of it because they are next-generation tools coming out in the next 3 to 4 years that will continue to drive that.

For sure, for sure, Rick. Well, thank you for the time. We've reached the end of the session, but I really do appreciate you coming to our conference, and it's a great message. Thank you, again, Rick.

Thanks, Tim.

Good bye.