Semiconductor manufacturing equipment maker KLA Corporation (NASDAQ:KLAC) reported revenue ahead of Wall Street’s expectations in Q3 CY2024, with sales up 18.5% year on year to $2.84 billion. On top of that, next quarter’s revenue guidance ($2.95 billion at the midpoint) was surprisingly good and 3.5% above what analysts were expecting. Its non-GAAP profit of $7.33 per share was also 4% above analysts’ consensus estimates.

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"KLA's September quarter results demonstrate continued outperformance with results above expectations and consistent with our expectation of sequential quarterly growth in revenue over the course of the current calendar year," said Rick Wallace, president and CEO, KLA Corporation.

Company Overview

Formed by the 1997 merger of the two leading semiconductor yield management companies, KLA Corporation (NASDAQ:KLAC) is the leading supplier of equipment used to measure and inspect semiconductor chips.

Semiconductor Manufacturing

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers, and data storage. The need for technologies like artificial intelligence, 5G networks, and smart cars is also creating the next wave of growth for the industry. Keeping up with this dynamism requires new tools that can design, fabricate, and test chips at ever smaller sizes and more complex architectures, creating a dire need for semiconductor capital manufacturing equipment.

Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, KLA Corporation’s sales grew at an excellent 16% compounded annual growth rate over the last five years. This is a great starting point for our analysis because it shows KLA Corporation’s offerings resonate with customers. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. KLA Corporation’s recent history shows its demand slowed significantly as its annualized revenue growth of 2% over the last two years is well below its five-year trend.

This quarter, KLA Corporation reported year-on-year revenue growth of 18.5%, and its $2.84 billion of revenue exceeded Wall Street’s estimates by 3%. Management is currently guiding for a 18.6% year-on-year increase next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 13.6% over the next 12 months, an improvement versus the last two years. This projection is healthy and indicates the market thinks its newer products and services will catalyze higher growth rates.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, KLA Corporation’s DIO came in at 247, which is 27 days above its five-year average. These numbers suggest that despite the recent decrease, the company’s inventory levels are higher than what we’ve seen in the past.

Key Takeaways from KLA Corporation’s Q3 Results

We were impressed by KLA Corporation’s strong improvement in inventory levels. We were also glad next quarter’s EPS guidance exceeded Wall Street’s estimates. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 1.2% to $700 immediately following the results.

Sure, KLA Corporation had a solid quarter, but if we look at the bigger picture, is this stock a buy? The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.