Dear Shareholders,
Fellow Stockholders:
KLA’s fiscal 2022 was exceptional as the company continued to execute against our long-term strategic objectives. As strong industry demand persisted, KLA outperformed to meet customer requirements while navigating a challenging market landscape. Once again, our global KLA team persevered through dynamic and complex situations to produce record results. KLA’s strength in adapting to deliver on commitments reflects the unique KLA culture, which is grounded in our value to Drive to be Better. Through this, KLA had record results, upon which we will build our future growth for customers, employees, stockholders, and partners. As we continued to execute against our commitments to customers, we also made important strides in our environmental, social and governance (ESG) commitments, including updating and improving our greenhouse gas (GHG) inventory baseline and achieving third-party verification of our inventory and renewable energy use. In August 2022, we also announced new targets for reducing our emissions, and we continue to challenge ourselves to find new ways to fulfill our mission of being positive stewards and living our values.
Record Results In A Strong Broad-Based Demand Environment
Fiscal 2022 was a record year for revenue, profitability, and free cash flow. We continued our commitment to deliver for customers while innovating and maintaining our new product introduction cadence despite ongoing supply chain challenges.
KLA revenue grew 33% to $9.2 billion in fiscal 2022, marking the seventh consecutive year of growth. Non-GAAP diluted earnings per share rose 45% to $21.15 per share, and free cash flow grew 54% to $3.0 billion. Continuing our capital return commitment, we returned $5.5 billion, or 183% of free cash flow to shareholders, including $639 million in quarterly dividends and total stock repurchases of $4.9 billion, which includes a $900 million forward contract related to our accelerated share repurchase (ASR) program. Additionally, in June 2022, our Board of Directors authorized a 24% increase in our quarterly dividend level to $1.30 per share, marking KLA’s 13th consecutive annual dividend increase on a calendar year basis.
Our Board of Directors also authorized a $6 billion share repurchase program in June of 2022, of which $3 billion is via the ASR program mentioned above. Additionally, we increased our long-term targeted capital returns to greater than 85% of free cash flow, up from 70%. KLA remains focused on returning excess capital to stockholders via our dividend and stock repurchase programs, as we see it as fundamental to augmenting stockholder returns in KLA.
Looking at KLA’s segment results in fiscal 2022, revenue from our Semi Process Control segment grew by 38% to $7.9 billion, driven by solid demand across our product portfolio, particularly for our market-leading inspection and metrology solutions. KLA’s Specialty Semiconductor Process segment grew 24% to $457 million, and our Printed Circuit Board (PCB), Display and Component Inspections segments rose 2% to $832 million. The latter two businesses comprise KLA’s Electronics, Packaging and Components (EPC) Group. Growth in automotive, advanced packaging, 5G, and high-performance computing technologies primarily drove the increase in revenues for the EPC Group.
Our balance sheet remains very strong, with $2.7 billion in total cash, cash equivalents and marketable securities, $6.7 billion in debt, and an attractive bond maturity profile supported by investment-grade ratings from all three agencies. KLA’s investment grade credit ratings underscore the strength of our balance sheet and the sustainability of our business and financial performance. We will remain disciplined in executing our capital management strategy: investing at a high level to strengthen our competitive advantages, growing free cash flow, and targeting returns to stockholders of at least 85% of free cash flow over the long term.
June 2022 Investor Day Highlights KLA’s Sustainable Outperformance and Drivers for Growth
At our June 16, 2022, Investor Day in New York City, we discussed how the company is well positioned for sustainable outperformance and to deliver exceptional long-term total stockholder returns. Key themes focused on how the semiconductor industry has become essential to many industries and geographies and is expected to grow and change in ways that benefit KLA.
To demonstrate how KLA will benefit from these long-term industry secular growth drivers, we detailed KLA’s positioning, differentiation, and long-term growth targets for each of our major business units and how the business success fuels our ability to deliver long-term, sustainable outperformance for the company.
For Semi Process Control, we illustrated how KLA’s portfolio and market leadership propels the company’s long-term growth strategies as Process Control becomes even more critical to semiconductor innovation. We saw increasing adoption of Process Control reflected in fiscal 2022, with KLA delivering strong relative growth versus industry peers, driven by 38% growth in our Semi Process Control segment fueled by 51% growth in Wafer Inspection Systems revenue. Our strong relative performance results from KLA’s high investment in R&D, which drives our market leadership in many of the largest and fastest-growing markets in the Wafer Fabrication Equipment (WFE) industry.
For KLA’s EPC group, we reviewed how it is driving growth and diversification for KLA as part of our long-term growth and market leadership. With EPC, KLA is intensifying our efforts to fuel growth in new markets such as Advanced Packaging and Automotive electronics. The success of EPC and its growth opportunities also demonstrate the strength of the KLA Operating Model in successfully integrating new companies and driving collaboration, innovation, and execution across the entire electronics ecosystem to fuel KLA’s growth objectives.
For Services, KLA unveiled a new 12-14% revenue growth rate target through calendar 2026. A rapidly growing installed base, increasing customer adoption of long-term service agreements, higher utilization rates, and expansion of Service opportunities in legacy nodes underpin this increased growth rate. KLA’s Services business stands out among our peers as having nearly all our Service revenue generated from “Pure Services,” or service contracts and break-fix maintenance, and does not include other revenue sources such as equipment upgrades or sales of refurbished systems. Boosted by growth throughout our installed base, and with over 75% of Semi Process Control service revenue now being generated from subscription-like service contracts, KLA’s total Service revenue grew 14% to $1.9 billion in fiscal 2022.
Throughout the event, key members of the KLA executive team detailed how the company’s resilient business model, powered by our portfolio strategy and diversified revenue streams, strong free cash flow generation, and assertive capital allocation continues to deliver best-in-class financial performance and long-term total stockholder returns. Overall, we reinforced how our long-term track record of solid execution and sustained outperformance demonstrates the strength of the KLA Operating model.
New Financial Targets For Calendar 2026
As a final highlight of our June 2022 Investor Day, KLA introduced new long-term financial targets for calendar 2026. Consistent with our stockholder return commitment, we also announced a series of capital return updates, including a significant share repurchase and dividend increase mentioned above. KLA’s new 9-11% revenue growth objective through calendar 2026 features strong relative growth in each of our major businesses over that period and includes the upwardly revised long-term revenue growth target of 12-14% CAGR in our Services business driven by growth in the installed base, and new value-added service offerings. Our long-term model assumes a baseline semiconductor industry growth CAGR of 6 - 7% through 2026. This growth rate aligns with many forecasts today for the semiconductor market to grow at this rate and ultimately exceed $1 trillion by 2030.
Secular Trends Driving Long-Term Industry Growth; KLA’s Focus on Innovation Fuels Market Leadership and Sustained Outperformance
Although the near-term industry environment experienced in fiscal 2022 recognized supply chain challenges impacting shipments and overall growth, the long-term secular growth factors propelling industry growth remain strong. The broad electronics and semiconductor markets continue to experience accelerated adoption of several industry growth drivers that we have been tracking for the past few years. Technology is transforming how we live and work, and the data-driven economy fundamentally changes how businesses operate and deliver value. Technology is enabling secular demand drivers such as High-Performance Computing (HPC), Artificial Intelligence (AI), Machine Learning (ML), and rapid growth in new automotive electronics and 5G communications markets. These secular trends are driving investments and innovation in advanced Memory and Logic semiconductor devices and new and increasingly more complex Advanced Packaging and Printed Circuit Board (PCB) technologies. With KLA’s market leadership in Process Control and growth and expansion to new markets like Specialty Semiconductor Process equipment, PCB, and finished die inspection in our EPC group, KLA is essential to enabling an increasingly digital world. KLA is in an advantageous position when we look at how the industry demand environment is evolving. We have many tailwinds and strong secular growth drivers creating momentum for our business and industry.
In parallel to the rising demand driven by the accelerating digitization across multiple industries and end-markets, KLA continues to invest at a high level to drive innovation and create next-generation technologies and ideas that transform our future and shape our lives.
KLA invested over $1.1 billion in Research and Development in fiscal 2022, far outpacing our competition in Process Control. Total R&D investment grew 19% over the past year. This high level of investment in addressing the most complex challenges in our industry help sustain and grow KLA’s leadership in Process Control, where our market share continues to grow to an impressive level of greater than four times the nearest competitor, as reported by Gartner Research in April of 2022. KLA’s broader position within the electronics ecosystem through the EPC businesses, and the contribution of our large and growing Services business, also contributes to the company’s sustained outperformance.
Enduring Excellence Guided by Experience: The KLA Operating Model
We have learned from experience that passion alone is not enough to successfully implement our strategic objectives. KLA’s strength is a function of the unique KLA culture and expertise that has evolved over the decades into what we define as the KLA Operating Model. First articulated to investors in September 2019, the KLA Operating Model codifies our corporate values, strategic thinking, key performance metrics, and operating principles, providing a framework for executing our long-term strategic objectives.
The three disciplines that come together to define the KLA Operating Model remain unchanged. First, we apply common practices in a disciplined way to ensure consistent strategy and execution. Second, we manage by metrics and operate with an expectation of continuous improvement. Third and finally, we make sure to always operate the company with financial discipline and rigor that creates a constant focus on enhancing stockholder value. These disciplines helped guide our strong results this year against the backdrop of continued challenges and uncertainties from the pandemic. Our results are a further testament to how the KLA Operating Model provides a reliable, resilient framework to execute our strategic objectives.
ESG is in our DNA
KLA has been working on complex global challenges for over four decades. We take on these challenges to serve our customers and make a meaningful impact on our world. In this context, our commitment to corporate citizenship is interwoven with our values and our business. We are proud of the work we are doing to reduce our environmental footprint and support efforts to combat climate change, provide a safe and healthy workplace for employees, advance inclusion and diversity, and make positive contributions to the communities in which we live and work.
Just as we are enabling more sustainable semiconductor technology, we are taking action to contribute to a more sustainable world. Within the past year (in December 2021), KLA announced a goal to use 100% renewable electricity across our global operations by 2030. This goal formalizes KLA’s commitment to supporting the transition to a clean energy economy by setting GHG emission reduction targets and reporting climate-related information to stakeholders following the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).
In August 2022, KLA published a new Global Impact Report and announced new climate targets to achieve 50% reductions in scope 1 and 2 emissions by 2030 and net zero Scope 1 and 2 emissions by 2050. The report also highlighted the most recent ESG progress and goals for the company, with the purpose of promoting the sustainable growth of the business and informing KLA’s stakeholders about our approach to managing and measuring our ESG performance. KLA has been expanding our efforts across ESG topics most relevant to our business. We continue to build our long-term ESG strategy to reduce climate impact, increase disclosure and deepen the positive impact we produce through our company and community engagement.
To ensure that ESG is prioritized across the enterprise, KLA’s ESG strategy is led by an ESG Steering Committee of leaders from across the business and is responsible for creating strategies and programs to achieve our goals. The Board oversees ESG issues through its Nominating and Governance Committee.
KLA’s ESG activities are integral to the company’s mission to advance humanity through devices and ideas that transform our future and shape our world.
Looking Ahead with a Continuing Focus on Delivering Sustained Outperformance
KLA’s fiscal 2022 results exhibited sustainable outperformance in a year of strong industry growth. Our achievements in the past year also demonstrated the critical nature of KLA’s products and services in enabling the digital transformation of our lives, the resiliency of the KLA Operating Model in navigating the challenging global conditions and delivering on our commitments, and KLA’s ongoing productive capital allocation.
At KLA, we are optimists who create technology that energizes the world around us. KLA is exceptionally well positioned at the forefront of technology innovation, and investment in the long-term remains a critical priority for us, as we believe it is an essential ingredient in the recipe that drives our sustained success and outperformance. The semiconductor and electronics landscapes are constantly changing, and we are seeing broadening customer interest driven by more technology innovation than ever at the leading edge.
We expect KLA to continue to benefit from numerous secular factors driving long-term industry demand. At the same time, our strategy of driving diversified growth with strong long-term operating leverage will drive robust cash flow generation and consistent capital returns to our stockholders.
We are proud of the results we are producing, guided by the KLA Operating Model and reflecting the extraordinary commitment of our global teams. On behalf of all of us at KLA, we thank you for your ongoing support and investment.
Sincerely,
Richard P. Wallace
President and Chief Executive Officer
Read the original letter here.
