With more than 50% market share, KLA-Tencor' (NASDAQ:KLAC) is the global leader of process diagnostics and control (PDC). KLA provides quality assurance tools in the form of testing equipment and software that can be used during various points in the semiconductor manufacturing process to increase yield and minimize defects. Semiconductor fabrication facilities (fabs) are more expensive than ever and chip design is becoming smaller and more complex. For these reasons, there is increased demand for PDC in order to increase production yield and minimize costly and time consuming defects.
Semiconductor demand has been elevated by the Commoditization of PCs, advanced chip design, and also increased demand from China. China is the world's largest emerging market and like most developing countries, China's rapid economic growth has created high demand for semiconductors and electronics. KLA's products are used by almost every major wafer and semiconductor manufacturer. Although KLA has maintained over 50% market share, the industry it competes in remains highly competitive. KLA faces competition from both established and new market entrants both of which could take valuable market share. This is an industry that relies heavily on improvement of product rather than lowering costs and competitors with greater resources could have an advantage.
KLA's products are used in semiconductor manufacturing, wafer manufacturing, and data storage. KLA helps manufacturers efficiently and effectively increase yield in the fabrication process through inspection and minimization of production defects. KLA is completely devoted to PDC and is the leading expert and innovator in this field.
KLA deals with metrology (measurement), inspection, and analysis of the production cycle. KLA provides its services in primarily two ways: software and equipment. KLA sells software that collects and interprets data from the production cycle in order to help maximize yield. KLA also sells process control equipment in which chips are sent through and inspected. Service and expertise from KLA engineers is also available at nearly every fab in the world. Several KLA products include:
In 2009, KLAC earned a total of $1.52 billion in total revenues. This was a significant decline from its 2008 total revenues of $2.52 billion. As a result, this had a severe negative impact for KLAC's net income. Between 2008 and 2009, KLAC's net income declined from a net profit of $359 million in 2008 to a net loss of $523 million in 2009.
The semiconductor industry is subject to extreme volatility. Fluctuations in the global electronics market can cause a subsequent downturn or upturn in the semiconductor market. The demand and lifecycles of notable technologies such as the iPod/iPhone, next generation video game consoles, PDA's, and the newest computer systems can impact the quantity of semiconductors needed in a given year. In addition, semiconductor sales have shown about an 80% correlation with GDP growth trends, meaning a downturn in GDP growth could very likely be accompanied by a downturn in semiconductor sales.
KLA benefits hugely from the constant progression of chip design and, consequently, design complexity. Complex chip design has significantly increased the cost of building a fab (around $3 billion). The higher costs, in turn, forces semiconductor manufacturers to achieve higher production yields. This in turn benefits KLAC directly, because it increases the demand for KLAC's products. Similarly, manufacturing the chips has become more difficult and is more prone to errors. This too increases the need for PDC tools to minimize defects and wasted time.
About 66% of KLA revenues come from Asia due to the concentration of fabs there. Many semiconductor manufacturers are building fabs or outsourcing to fabs in parts of Asia, particularly Taiwan. Asia has lower overhead costs, and it is also convenient to be located near major electronics markets such as Japan and China. The large growth potential in China could be a major factor for semiconductor demand in years to come.
KLA commands over a 50% market share in PDC. KLA's sole focus and resources are for PDC. KLA has the largest PDC R&D budget and top tier expertise in the field. Some of KLA's largest competitors include: