KLA-Tencor Corporation: Earnings Preview

| About: KLA-Tencor Corporation (KLAC)

KLA-Tencor Corporation (NASDAQ:KLAC) is scheduled to report its fourth-quarter fiscal 2012 results on July 26. We see upward movements in analyst estimates leading up to the release.

Prior-Quarter Synopsis

KLA-Tencor's third-quarter earnings exceeded the Zacks Consensus Estimate by 17 cents. The quarter's results were driven by higher revenue and solid opex management, partially offset by a decline in orders.

Revenue of $840.5 million was up 30.8% sequentially, 0.8% year over year, and better than the guided range of $770-$830 million. The improvement was backed by improvement in overall demand.

Gross margin was 58.3%, down 6 bps sequentially, as revenue growth was more than offset by unfavorable product mix and product transition-related inventory reserves. However, operating margins were up 845 bps sequentially to 34.7% due to lower-than-expected operating expenses.

Management Guidance

For the fourth quarter of fiscal 2012, KLA expects orders to be down 7.0% to up 14.0%, revenue of between $840 million and $900 million, opex to be slightly up sequentially, other income/expense to be a net expense of $10 million, a tax rate of 26% and a share count of 171 million, resulting in a non-GAAP EPS of $1.20-$1.38.

Detailed earnings results can be viewed here.

Agreement of Analysts

Out of the 14 analysts providing estimates for the fourth quarter and fiscal 2012, two made upward revisions to their estimates for both periods.

The analysts expect a decent fourth quarter, with revenue and earnings at the top end of management's guidance. The analysts believe that with continued yield challenges at the foundries and incremental process steps, KLA will continue to benefit from this trend.

They believe that the eventual shift to 3D device structures in the memory space will also benefit KLA-Tencor over the next few years. The 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 was up by a penny to $1.31 for the fourth quarter and by 2 cents to $4.47 for fiscal 2012.

Over the 90-day period, the Zacks Consensus Estimate witnessed an increase of 7 cents for the fourth quarter and a significant jump of 26 cents for fiscal 2012. Therefore, positive sentiments appear to have outweighed the negative, post third quarter earnings.

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 process technology changes occurring in the industry, since many of the ongoing changes, such as FinFET transistors, 3D vertical devices, advanced wafer level packaging, and EUV are increasing the need for process control.

Recently, KLAC held its Analyst Day, wherein it announced the increase of its quarterly dividend to 40 cents (up from 35 cents). We believe that dividend hikes are a good way of encouraging investor confidence as it returns shareholder value.

However, we cannot ignore the excess capacity that already remains at foundries that could make any improvement in the market 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. (NASDAQ:AMAT) and Hitachi High-Technologies Corporation.

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