KLA-Tencor (KLAC) Q1 2021 Earnings Call Transcript

KLA-Tencor (KLAC -4.95%)
Q1 2021 Earnings Call
Oct 28, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day. My name is Priscilla, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation first-quarter fiscal year 2021 earnings conference call and webcast. [Operator instructions] I will now turn the call over to Kevin Kessel, vice president of investor relations.

Please go ahead.

Kevin Kessel -- Vice President of Investor Relations

Thank you, Priscilla, and welcome to KLA's Fiscal Q1 2021 quarterly earnings call to discuss the results of the September quarter and our outlook for the December quarter. Joining me today is Rick Wallace, our chief executive officer; and Bren Higgins, our chief financial officer. During today's call, we will discuss quarterly results for the period ending September 30, 2020, that we released today after the market close in the form of a press release, shareholder letter and slide deck. All of these documents can be found on the IR section of our website.

Today's discussion of our financial results and outlook is presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation of GAAP to non-GAAP results is in today's earnings material posted on the KLA IR website. Our IR website also contains a calendar of future virtual investor events, as well as presentations, corporate governance information, including our quiet period and links to KLA's SEC filings, including our most recent annual report and quarterly reports on forms 10-K and 10-Q. Our comments today are subject to risks and uncertainties reflected in the risk factors disclosure in our SEC filings.

Any forward-looking statements, including those we make on the call today are also subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. We changed the format of these calls last quarter to include pre-publishing a shareholder letter that provides deeper insights into our business. We will also start by providing some streamline highlights from our full prepared remarks while still providing more time overall for your questions and answers.

With that, I'd like to turn the call over to our president and chief executive officer, Rick Wallace. Rick?

Rick Wallace -- Chief Executive Officer

Thanks, Kevin. And welcome to everyone joining us today. As we rapidly approach the end of the calendar year, it's amazing, and I start to think how much has changed over the last 12 months. I hope you and your families are safe and in good health, and I appreciate your continued interest in and support for our company.

I want to make sure I begin my remarks today by conveying my appreciation for the worldwide KLA team. It's your perseverance, strive to be better and determination that exemplify KLA's core values and enable us once again to meet our commitments and to deliver exceptionally strong financial performance in the September quarter. On behalf of the entire KLA executive team, I want to thank you. In this quarter's shareholder letter that was published today, we highlighted how our results demonstrate the resourcefulness of our global workforce, the resiliency of our business model and our continued commitment to returning value to our shareholders.

As many of you may have already seen, our September quarter revenue and non-GAAP EPS, both finished at the upper end of our guidance, a result of continued strong demand from customers, exceptional execution by our global teams and the enduring strength and resiliency of the KLA operating model and guiding our strategic objectives. I'm pleased to say that we are continuing this momentum into the December quarter and nearing the end of what truly has been an unprecedented year in calendar 2020. Most importantly, we're executing at a high level, operating from the position of strength in our marketplace and are solidly on track to meet or exceed our 2023 financial targets. In terms of the resourcefulness of our global workforce, we just completed the third quarter of operating through the pandemic.

COVID-19 has presented an unexpected opportunity to showcase KLA's resilience and resourcefulness in these unprecedented times. We have begun proactively taking steps to mitigate disruption in our business and remain vigilant of the risk posed by the virus to our people. We've done this by adopting strict safety protocols to protect our workforce, while innovating in new ways to collaborate with customers and partners. As demonstrated by our strong performance throughout 2020, we are successfully meeting customer needs, executing our R&D road map and operating our worldwide manufacturing facilities efficiently.

We continue to evaluate and adapt at various facilities in accordance with local regulation, prioritizing employee health and safety. Our worldwide teams deserve praise for never losing sight of what our customers want and need to improve their businesses and to drive better yield management. We benefited from them being exceptionally resourceful and, as always, remain committed to customer satisfaction and meeting our commitments. While we consider the challenges our worldwide teams are facing today, we recognize that they extend well beyond the workplace, which makes us intently focused on ensuring that we're supporting our teams and our people in every possible way.

Lastly, investment in the long term remains an important priority for us. We're confident that our R&D programs will help strengthen our technology and market leadership. And we're gratified by the effectiveness of our business continuity actions, which has allowed R&D activities to adapt, although not without challenges, and to continue through this pandemic. Now, turning to the industry demand environment.

In the September quarter, we saw broad diversified strength across each of our segments. Semiconductor process control revenue was solidly above plan, and our services business delivered strong operating leverage and is on track to deliver double-digit growth in 2020. We also ended the quarter with strong backlog, reflecting the enabling role KLA plays in our customers' technology road map and investment. Driven by the secular industry trends and the ongoing commitment by our customers to invest in R&D for next-generation technology, the stage is set for KLA to outgrow our market in calendar 2020.

Today's environment continues to accelerate the adoption of several industry growth drivers that we originally outlined in our 2019 investor day. The integration of digital technology into our lives is transforming the way we live and work, resulting in fundamentally change to how businesses operate and deliver value to customers. This digital transformation is fueling secular demand drivers, such as high-performance computing, artificial intelligence and accelerated migration to the cloud from on-prem applications, as well as 5G communication, driving investments and innovation in advanced memory and logic device technologies. Process control is on the critical path of enabling this digital transformation, driving our growth and long-term revenue and profitability.

And the addition of the Orbotech in 2019 to our business portfolio has expanded our exposure to the compelling industry trends. We're all driving this all important digital transformation in our own business as well, including adopting new productivity tools to improve collaboration with our global teams and customers. For example, our customer service organization has been working closely with customers to expand remote service technologies, which augment our in-country service and installation engineers. We've also recently adopted and integrated a new cloud-based platform for managing our global HR management systems that should continue to benefit us as we scale.

Finally, we're also integrating cloud-based manufacturing and service planning tools to increase the visibility of our parts demand to our suppliers and to allow us to more proactively respond to customer service requirements. These are just a few examples of the accelerated digital transformation that we ourselves are experiencing inside of KLA as we adapt to this new environment. Here are five top highlights from our most recent quarter. First, as expected, we saw continued strength in breadth in foundry and logic demand in the September quarter.

These customers are benefiting from investment in digital transformation to support the secular growth drivers that we mentioned earlier. And we expect this demand to remain healthy in 2021. In memory, tool utilization is high and memory customers continue to drive down device inventories and plan for higher bit growth in 2021 to meet expected improvement and then demand. We expect higher business levels across a broader range of customers in December quarter, with momentum continuing into 2021.

Second, we ended the quarter with strong backlog demonstrating momentum in the marketplace across multiple product platforms in both the semiconductor process control and EPC Groups, fueled by new applications in our optical inspection portfolio, such as EUV print check for Gen 5 and the success of our new offerings, including the eSL10 and e-beam inspection platform, we're seeing strong adoption of our patterned wafer inspection product suite, driving our market leadership, and what we expect will be a year of growth for process control. Third, our service business continues to perform well and is positioned for double-digit growth in 2020. KLA's service revenue is 25% of the total quarterly revenue and is delivering long-term growth at a rate that's double the underlying industry WFE growth rate. Fourth, it was another strong quarter for Electronics, Packaging and Components Group, or EPC, highlighted by the record demand of our PCB division.

The strong growth in PCB was driven by EPC's high exposure to the 5G infrastructure and smartphone market. The SPTS and ICOS divisions are also benefiting from the transition to 5G, along with increasingly more complex advanced semiconductor packaging. Finally, in keeping with our commitment to deliver strong and predictable capital returns to our shareholders, we announced back in July that our board of directors approved our 11th consecutive annual dividend increase. During the September quarter, we returned $329 million to investors via dividends and buybacks.

Over the past 12 months, we've returned $1.3 billion to shareholders or 82% of free cash flow. We believe our track record of delivering strong capital returns is a key component of the KLA investment thesis and offers predictable and compelling value creation for our shareholders. Before I hand it over to Bren to get into greater detail on our financial highlights, let me briefly summarize. Despite the disruption and unforeseen challenges in the year associated with the pandemic, KLA has benefited from the resourcefulness of our global workforce.

We've adapted well, and we're very well positioned for a strong finish to 2020. This demonstrates the critical nature of our products and services in enabling the digital transformations of our lives, the resiliency of our business model, and the return of value to our shareholders. We believe the secular factors driving our industry demand that we identified at last year's investor day are as relevant now as they were then. And they'll help us enable us to achieve our 2023 financial targets.

At the same time, our strategy of driving diversified growth with strong long-term operating leverage should fuel consistent returns for our shareholders. And with that, I'll turn it over to Bren.

Bren Higgins -- Chief Financial Officer

Thanks, Rick, and good afternoon, everyone. KLA's September quarter results once again demonstrated both the soundness and strength of our ongoing strategy. We continue to exhibit our ability to meet customer needs and expand our market leadership, while growing operating profits, generating strong free cash flow and maintaining robust capital return strategies. Total revenue was $1.54 billion.

Non-GAAP gross margin was 62.1%, at the upper end of the guided range for the quarter of 60.5% to 62.5%. Non-GAAP EPS was $3.03, at the high end guided range of $2.42 to $3.06. GAAP EPS was $2.69. Gross margin of 62.1%, was 60 basis points above the midpoint of guidance as higher process -- semiconductor process control product mix, lower inventory reserve requirements due to strengthening demand and services leverage drove the upside realized in the quarter.

Revenue for the semiconductor process control segment, including its associated service business, was $1.27 billion. In terms of approximate customer, segment mix of process control systems revenue to semiconductor customers, Foundry was strong as expected at 59%, logic was 10% and memory was 31% in the September quarter. Within memory, the business was split roughly two thirds 3 DRAM and one third NAND. Revenue for the specialty semiconductor process segment was $89 million, down 11% sequentially, but up 29% year over year.

Demand in this segment is driven by growth in RF, MEMS and advanced packaging. PCB, Display and Component Inspection revenue was $181 million, down 10% sequentially, but up 1% year over year. In terms of balance sheet highlights, KLA ended the quarter with $2.04 billion in total cash, total debt of $3.45 billion after retiring $50 million outstanding on our revolving line of credit and a flexible and attractive bond maturity profile supported by investment-grade ratings from all three agencies. From a cash flow and capital returns perspective, free cash flow was $456 million in the September quarter.

Free cash flow conversion was 96.1% and free cash flow margin was 29.7%. For capital returns over the past 12 months, we have returned $1.3 billion to shareholders or 82% of free cash flow, including $542 million in dividends paid and $789 million in share repurchases. During the September quarter, we repurchased $188 million of common stock and paid $141 million in dividends. As it relates to guidance, our view of WFE growth this year is approximately 10%, growing of a baseline of 52 to $53 billion in 2019.

Given this and our outlook for revenue growth in the calendar fourth quarter, KLA is in position once again to outgrow our industry. Looking forward, no early, based on our current backlog and sales funnel visibility over the next couple of quarters, we are encouraged by the sustainability of our current demand profile for the first half of calendar '21. We will have more to say about our views of '21 WFE in our January earnings report. Before turning to our specific December quarter guidance, we'd like to comment on the current trade situation regarding the United States and China.

As you all know, in the September quarter, the U.S. Department of Commerce stated that SMIC, or SMIC, may pose an unacceptable risk of diversion to a military end-use in China. So we must obtain an export license prior to shipping certain systems and spare parts to SMIC and certain related parties that are subject to the U.S. export administration regulations.

This new license requirement did not have any effect on any shipments in the September quarter. We are complying with the new rules and have already applied for licenses for expected shipments in the December quarter. Given the expected level of business in the quarter subject to license requirements, the results of the license requirements will not have a material impact on revenue. And as a result, we have made no adjustments for this situation to our plans or guidance ranges.

The trade situation remains fluid, and we've done our best to give you our perspective on the impact to our business and will refrain from speculating on the situation further. Our December quarter guidance is as follows. Total revenue is expected to be in a range of $1.585 billion, plus or minus $75 million. Foundry is forecasted to be about 52% of semiconductor process control systems revenue to semiconductor customers, depicting the strength we continue to see among the foundry customer base.

Memory is expected to grow to be approximately 37%. Logic is expected to be about 11%. We forecast non-GAAP gross margin to be in a range of 61% to 63%, as we expect similar product mix and services leverage as in the September quarter. The market reception to product offerings in our semiconductor process control business has been strong.

And as outlined at our investor day last year, the company has made solid progress on our plans of driving cost and efficiencies on new product platforms and leveraging scale derived by our worldwide service infrastructure. In addition, better than modeled gross margin improvement in acquired businesses is a tailwind to our gross margins overall. Other model assumptions include operating expense of approximately $380 million, interest and other expense of approximately $42 million, and an effective tax rate of approximately 13%. Finally, GAAP diluted EPS is expected to be in a range of $2.59 to $3.23 and non-GAAP diluted EPS in a range of $2.82 to $3.46, or $3.14 at the midpoint.

The EPS guidance is based on a fully diluted share count of approximately 155 million shares. In closing, KLA is executing well with increasing confidence that we are on track to meet or exceed our 2023 target model, both in terms of top line growth and profitability. Growth in semiconductor revenue looks compelling over the long run, with solid demand across end markets and at multiple technology nodes. We are encouraged by the strength and resiliency of the KLA operating model, which guides our strategic objectives.

These objectives feel our growth, operational excellence, and differentiation across increasingly more diverse product and service offering. They also underpin our sustained technology leadership, deep competitive moat and strong track record of free cash flow generation and capital returns to shareholders. With that, I'll now turn the call back over to Kevin to begin the Q&A. Kevin?

Kevin Kessel -- Vice President of Investor Relations

Thanks, Bren. Now, Priscilla, I think we're ready for you to queue for questions, please provide instructions.

Questions & Answers:

Operator

[Operator instructions] We'll now take our first question from John Pitzer with Credit Suisse. Your line is open.

John Pitzer -- Credit Suisse -- Analyst

Yeah. Good afternoon Rick, Bren. Congratulations on the solid results. I just wanted to follow-up, Bren, on your commentary around China.

You said the results of licenses will not have a material impact on the December quarter revenue. Is that because you've already adjusted for it in your guidance, or you just don't think that shipment -- most of your shipments to SMIC require a license? And in that same vein, just given that China continues to be extremely strong, I think one of the key investor concerns out there is that the fear of bands are causing customers to pull forward. I'm wondering if you could just talk a little bit about the mix of your China business between domestic and multinational and kind of that concern of pull forward.

Bren Higgins -- Chief Financial Officer

Thanks, John. So on the SMIC situation, as we said in the prepared remarks, we've applied for licenses for the December quarter, where we think we need them. And if you look at just overall, I mean, SMIC, just for some background, it's an important customer, but not a particularly large one. And over the last six months or so, we've been discussing a broadening of investment.

And certainly, they participated in that. There's probably timing factors that are involved in terms of how others are seeing this business come in over the course of over the year. But as we look at what we revenued in the September quarter, and where there was no effect and then we look at the December quarter, we've applied for licenses, as I said, where we need them. And at the end of the day, when we look at the overall expectation of revenue on our business for the quarter, we just don't see it having a material impact.

So we didn't have to adjust anything, frankly. So our plans are consistent overall, so there's no change there. On your second question pull-ins are really difficult in our business. I mean, certainly, demand overall has been very strong.

And so, when you have a customer try to pull in a delivery, it means that they're taking a slot from another customer. And given the overall demand profile, most of the customers are sticking with their slots. So we haven't really seen a change. We've been, I think, fairly consistent in our view of shipments for the year, about $800 million, it's been second half loaded.

It's what we are seeing today. So I haven't seen much of a change overall in terms of the behavior for customers, at least in regards to our products.

John Pitzer -- Credit Suisse -- Analyst

Thank you guys.

Operator

And we will take our next question today from Harlan Sur with JP Morgan. Your line is open.

Harlan Sur -- J.P. Morgan -- Analyst

Good afternoon, guys. A great job on the quarterly execution and strong results. On the innovation and new product front, there's a good correlation in years where the team rolls out new tools and platforms and then the forward revenue momentum for the next few years. Last year, you guys, I think, launched about 10 new tools or platforms, second iteration of your Gen 5, your new X-ray metrology platform, e-beam inspection platform and also your multi-column e-beam inspective for mask inspection, just to kind of name a few.

Are these platforms contributing to the incremental upside in revenue performance this year? And how many new platforms do you guys have in development and or will be introducing over the next 12 months?

Rick Wallace -- Chief Executive Officer

Thanks, Harlan. As you might imagine, these programs are at different points in their life cycle. So yeah, we have seen contribution. For example, we talked about print check for EUV with the BBP platform, and that's been a continuation and a broadening of that demand.

In other cases, we've talked recently about where we are in terms of the x-ray metrology product or the multi-beam reticle tool. Those are not contributing in a material way to the revenue in the near term, but those are the products that we do expect to fuel our growth in '21 and beyond in support of the 2023 plan. In terms of how many programs we have under development, we have a number, as always, of significant investments going on. But as you might imagine, they are at various phases of introduction.

But when we laid out our 2023 plan, we're pretty confident that the programs that we've got in place and the ones that are under development are where they need to be in order to support the 2023 plan. The challenges of some of those, as you might imagine, there have been some COVID challenges, which maybe hit us harder early in COVID, and then in terms of program execution, but we feel like we've made great progress in terms of navigating that. And we feel good about where we are, which is why we say we're on track to meet or exceed the '23 plans that we laid on. Bren, do you want to add to that?

Bren Higgins -- Chief Financial Officer

Yeah, Harlan, I think one of the things that we're pretty excited about is that over the last year or so, we've introduced platforms in a lot of our core businesses. And those platforms have had really strong market perception. We think you mentioned Gen 5, but also new iterations of the Gen 4 product line and customers mix and matching across both tool sets and supporting a wide variety of designs and different process flows, which has been great for the business. But new laser scattering offerings, you mentioned e-beam, we have a new e-beam inspection product.

And the portfolio strategy of the company, as we connect those tools and we leverage common interfaces and common algos, common software, it's been able to, I think, provide a pretty competitive offering out there in the marketplace. And so, we've been able to maintain our share. We grew share in 2019. We think we're going to maintain that in '20, maybe improve it a little bit and been able to do it at very strong margins.

So certainly, growth in the overall business is a factor there, but also the product positioning is a factor. So we're pretty pleased with what's out in the marketplace. And to Rick's point, we've got some new things coming down the pipe that hopefully will drive our performance against our '23 targets.

Harlan Sur -- J.P. Morgan -- Analyst

Thanks for the insights.

Operator

We will go next to C.J. Muse with Evercore. Your line is open.

C.J. Muse -- Evercore ISI -- Analyst

Yeah. Good afternoon. Thank you for taking the question. I guess, I was hoping perhaps you could speak a little bit about the confidence that you have on sustainable spending in the first half of '21.

And in particular, would love to hear your thoughts around Foundry and logic contributions. And as part of that, if you could touch on what impact at all -- if at all, you might see if we see greater spend on five nanometer versus three nanometer at TSMC?

Bren Higgins -- Chief Financial Officer

C.J., I'll take the first part. It's been -- we've got -- as we said in the prepared remarks, we had very strong backlog coming into the quarter. We had a positive book-to-bill this quarter. And if we look at the funnel of expectations into the December quarter, just the overall order outlook, as we look into December and into March and then the backlog position, we believe will take into the year gives us some confidence of sustainability of these business levels.

And so, while it's early for us to spend a lot of time sizing '21, and we'll have more to say about '21 in the next earnings call in January, that overall position gives us confidence that we'll see some sustainability here. From a foundry/logic point of view, when you look at the overall market, and there are puts and takes there. But we are pretty confident in the fact that foundry/logic looks like that it has sustainability as we move into the first half of the year, I don't see it changing. Obviously, quarter to quarter, there's always fluctuation.

But in general, feel very good about the profile of that business as we move in the first half.

Rick Wallace -- Chief Executive Officer

Yeah. And just one thing to add, C.J. I think one of the beliefs and our investment thesis on some of our new capabilities, for example, EUV print check, was that we were going to be highly relevant in the advanced nodes. But of course, people really haven't hit much volume.

So we've really seen proof of that concept, and we're getting a lot of customer pull for capacity and capability to support those ramps. And it's not just at one customer. So we feel very good about the process control intensity expectations that we had going into these nodes. We're seeing them being realized.

So we view that as another positive indicator, not just on the overall foundry spend, but on the process control related spend.

Bren Higgins -- Chief Financial Officer

So there are multiple customers Gen 5, we would expect Gen 5 to have some growth next year in wafer starts, and we'd also expect to see some what we call mini line risk production type investment on the N3 more toward the middle of the year and then the second half.

Operator

Thank you. And we will move to Krish Sankar with Cowen and Company. Your line is open.

Krish Sankar -- Cowen and Company -- Analyst

Yeah, thanks for taking the question, and congrats on the great results. I had a question for Rick or Bren. You guys mentioned in your prepared comments, memory should see growth next year. I understand you're going to give more color in January.

But just within that context, how would you expect KLA revenues to trend? The reason I'm asking is there's a general view that within the memory vertical, KLA has more exposure to NAND than DRAM. So I'm kind of curious to hear your thoughts on '21 memory and KLA's performance.

Rick Wallace -- Chief Executive Officer

Really, since the middle of 2018 or so, we've seen very disciplined spending by our memory customers. And so, we've seen that continue through after a strong down year in 2019 to a flattish year here in 2020. We see some modest recovery here in the December quarter, as you see from the disclosures we gave for the quarter, and we see that continuing as we move into next year. I don't see -- just if you look at the overall pricing environment and certainly, the smartphone and the timing of data center recovery will have an impact on the overall memory environment.

You've got EUV introduction into DRAM, which could be a factor, as well as we move into the second half of the year that we would expect to see memory as an improving business for us as we move into '21. As I said, I think that the discipline has been there. And as we start to see pricing recover, I think you'll see more investment there. But I wouldn't say it's a huge expectation in terms of growth, but I think a lot of it will be dependent on some of the end market dynamics that I mentioned.

From a process control intensity point of view, it's a little bit higher today in 3D flash than DRAM, although the introduction of the EUV in DRAM is an opportunity for us to drive process control intensity. So I think we're optimistic about that when we start to see that play out. And then also as stacks layer counts increase in flash that we will see more opportunities for our metrology product lines. We've got some new product offerings.

We also have the e-beam inspection tools. We talked about where things that we believe will ultimately create some opportunities for us for either intensity improvement or share. So I think we're pretty optimistic about those opportunities.

Krish Sankar -- Cowen and Company -- Analyst

Thanks again.

Operator

Thank you. And we will move next to Joe Moore with Morgan Stanley. Your line is open.

Joe Moore -- Morgan Stanley -- Analyst

Great thank you. Sorry to go back to this, but I just want to make sure I understand the SMIC situation. Are you saying you didn't have exposure in the September quarter? And then, I guess, as you look at these rules, is there sort of an equal impact, whether you ship out of the U.S. or whether you ship out of Israel or, Singapore?

Bren Higgins -- Chief Financial Officer

In the September quarter, the change or the notification from the government came in at the very end of September. So there's no impact in the September quarter. And so, as we look at the December quarter, as I said earlier, when we have to apply for licenses, we've applied for those. And we don't think that the granting of those licenses within the time frame we're talking about or not, will have a material impact on the business for the fourth quarter.

Joe Moore -- Morgan Stanley -- Analyst

I see. And is there a difference as to where you ship out of it? Is it a different licensing process, whether you ship out of the U.S. or from a foreign location?

Bren Higgins -- Chief Financial Officer

Well, you have to -- the licensing requirement is -- there isn't a licensing requirement that comes from a form factor.

Joe Moore -- Morgan Stanley -- Analyst

All right. Thank you so much.

Operator

And we will go next to Patrick Ho with Stifel. Your line is open.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Thank you very much. Rick or Bren, in terms of your PCB business, it's actually had a few strong quarters, and you mentioned that 5G has been a big driver. You've given us the road map and a lot of the development on the process control area. Can you just talk about, I guess, the product road map on that business and because these type of tools typically have a long lifespan.

When do you feel the need to call refresh and upgrade it for this next wave of line that's being driven by 5G?

Rick Wallace -- Chief Executive Officer

All right. It's a great question. And the answer is, we're relatively new to this business. So about 1.5 years, very impressed with what the Orbotech team had been doing.

And I think in conjunction with them, we're really working hard to make sure we have the right amount of investment to continue new products meeting customer needs. And I would say that they had great engagement, and we've added that. And as a result, we're investing heavily in that business to make sure that we're meeting some of the emerging demand, the flex PCB and all the new substrates, all the things. This is the beginning, as you know, of the 5G.

And we think there's a continued opportunity for sustained growth over time. So we're very bullish on what that team has done. And in combination, we think it's been a tremendous success so far and a lot of upside as we go forward. But like KLA businesses, it requires continued investment in new capabilities, and we're doing that right now.

Operator

Thank you. And we will move next to Timothy Arcuri with UBS. Your line is open.

Timothy Arcuri -- UBS -- Analyst

Hi. Thanks. Bren, I had a question about your Semi Systems business. If I sort of take your prior comments about the PCB and the Display business for calendar half on half, you said it would be down half on half.

So that would imply that that segment is sort of at best flat for December. And that's the biggest piece other than Semi Systems. So it seems like Semi Systems have to be up about 5% to like 9.35 to 9.40% for December? So I guess, a, is that right? And b, assuming it is, then your systems for the year are up about 10%, which is about in line with where you think WFE is? Yet you said that you're outgrowing the market. So I just wanted to see if you can fit those comments because it doesn't seem like you're really gaining WFE share this year, and you didn't gain anything last year, either in a period where we've seen pretty big mix shifts toward the foundry/logic.

So I guess, can you sort of speak to that?

Bren Higgins -- Chief Financial Officer

A few questions in there, Tim, and I'll try to answer this for you. Yeah, your conclusion around December sequential Semi Systems is right, mid-single digits. Obviously, we run the business at a total company level. But in terms of our expectations, it looks like it's sequentially a bit single-digit growth here.

And so, when you take in aggregate, you add all that up, that with our Semi Systems, probably somewhere in the neighborhood of about 15% growth year over year against a market environment that's 10%. So that's an outperform. And if you look at last year, WFE was down about 7%, and our Semi business was up 1%. So that's an outperform too in 2019.

So we can spend some time with you on the math on all of this, but that's how to think about your questions.

Operator

We will go next to Atif Malik with Citi. Your line is open.

Atif Malik -- Citi -- Analyst

Thanks for taking my questions. Rick, if I look at inspection and measurement, industry sales attach rate to lithography sales historically, it makes a new high as industry introduces newer wave length. As you look at EUV now since introduction at seven nanometer growing to 26 steps at thre nanometer and some introduction at 1 Alpha DRAM, do you think the defect challenges associated with EUV remains a tailwind for your process control business or leveling off?

Rick Wallace -- Chief Executive Officer

Well, Atif, I think it's a good question. What we've seen so far, as you know, we're relatively conservative, but we have had indications, and we believe earlier in EUV that we would see increased penetration of our advanced optical tools, as well as in the mask shop. That's really playing out. So we do model process control intensity going up as a result of increased EUV adoption.

And part of why that's working for us is, I mentioned EUV print check. That's essentially kind of a new category where we're able to deploy additional BBP tools to support DRAM of EUV. And as you might imagine, those wafers are incredibly expensive. So there's a real focus by our customers to make sure that they're obviously optimizing their yield and catching excursions.

At the same time, the size of the defect is becoming more relevant and smaller defects. So our tools end up having to run in modes where they capture smaller defects with increased algorithms, which also means that the capacity needs increase as the design rules go down in order to cover and detect. So yeah, I would say that those are both tailwinds and our customers tell us that because they're very ambitious about ramping the advanced nodes and wanting to make sure we're in a position to support them. Does that answer your question?

Atif Malik -- Citi -- Analyst

Yes.

Operator

Thank you. We will go next to Quinn Bolton with Needham & Company. Your line is open.

Quinn Bolton -- Needham and Company -- Analyst

Thanks, guys, for taking my question. I wanted to first ask just the patterning business, up 21% sequentially. It looks like it had a pretty strong quarter. Wondering if you could highlight sort of what areas within patterning really drove that growth? And then I've got a follow-up.

Bren Higgins -- Chief Financial Officer

Patterning overall, we had a strong quarter in reticle inspection. So quarter to quarter, that was the biggest driver.

Quinn Bolton -- Needham and Company -- Analyst

Do you expect that to continue? Or is that a fairly lumpy business?

Bren Higgins -- Chief Financial Officer

Well, it's big ASPs and so it's low integers and big ASPs. And so, depending on timing, it does tend to be lumpy. Overall reticle inspection because of the number of design starts in advanced foundry has been a really strong business for us. So I think that when we look at it overall, it was a very strong year in '19 and '20.

It down a little bit from '19 in that business, but still pretty strong. So I think those drivers will continue. And as we move into next year and we start to move into some of our offerings to support additional EUV activities, we should see some contribution from there as well. But reticle inspection was the driver.

But to your point, it is lumpy quarter to quarter.

Quinn Bolton -- Needham and Company -- Analyst

Great. Follow-up question. Just ASML in its call talked about some modulation in its EUV system deliveries given no transition timing of some of its customers. Wondering if you look into next year, do you see continued growth in EUV print check? Or do you expect that to perhaps soften for some period of time?

Rick Wallace -- Chief Executive Officer

I wouldn't say soften. I mean the challenge that customers have with EUV print check is, it's a new application, and there are new algorithms. There's new defects that they've got to run down and do source. And so, there's a huge appetite to get that.

In fact, we're getting a lot of pressure to get systems that were forecast, delivered to support that. So I would -- and there are additional algorithms, as I said, we're developing. So all the indications we see are an expanding opportunity for EUV print check, and I think that will go for some time based on the early indications that we're getting.

Quinn Bolton -- Needham and Company -- Analyst

Great. Thank you.

Operator

We'll go next to Vivek Arya with Bank of America. Your line is open.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Thanks for taking my question. I wanted to dig into the gross margins and your operating margins, both were above your longer term planned for September. And I believe the midpoint of your guidance says that they can sustain at these levels. I'm curious, how should we think about the trajectory of these margins going into the next several quarters? Can they sustain at these levels? Or do you think that there was anything abnormal, whether it was COVID or mix related that helped you? And as kind of part b of that, it was good to see you restart the share buybacks, but the levels are still somewhat below.

I think what you have done in some prior quarter. So any color around just the sustainability of margins and how you can reaccelerate the share repurchase would be very helpful.

Bren Higgins -- Chief Financial Officer

Vivek, on gross margin, as I said earlier, we've been very pleased overall with the product positioning overall and the pricing related to that positioning. So that's been a good thing for our business. I mentioned operating leverage in service. And so, with the growth of the service business, the utilization rates in the installed base, that one thing with consolidation in the industry allows you to really drive good utilization across your resources.

And we've invested in a lot of infrastructure over the last few years, and we're starting to see the benefits of that now. We are getting the tailwind too in our EPC Group related to acquisitions that the acquired businesses are doing better from a margin point of view. So there's a number of factors that are driving it. If you look at our long-term plan, we talked about a 60 to 61% at these revenue level type gross margin performance.

And I would expect us now to be somewhere between 61 and 62%. You do have mix factors in any given quarter. But I do think there's probably a good point here of sustainability versus the model that we had. If you take it down to operating margins, I think we're underspending our normalized spend levels just because of some of the COVID constraints around travel, but also how quickly we can hire people and so on.

So I do think that the spend level is probably understated a bit when compare it to what normalized would look like. But I do think that there is a point here that drops through that has sustainability to it. Mix issues notwithstanding in any given quarter. On the buyback, as we back up and just look at it, we start with a principle in terms of how we look at the overall capital structure of the company and then how we allocate the capital.

And so, we start with a cash target of 1.5 to 2 billion. So we're operating within our target range today. And so, most of our buybacks or returns generally are funded through ongoing cash flow. So it was a little bit lower in this quarter compared to the March quarter, I guess.

I can't recall exactly where that number was, I think March and December. But I think as you look at that and we look at our go-forward expectations around cash flow, we would expect it will be roughly around these levels on an ongoing basis. So somewhere, it was what, $188 million, I'd say somewhere around $200 million plus or minus. And it's a systematic approach because, again, it starts with sort of a process that we run through.

So we have some opportunistic possibility around that that we can work around it. But at the same time, it tends to be much more principle based than anything else. So I think that's how you'll see it play out. At the end of the day, we're going to return at least 70%.

We returned 82% in the last 12 months. We're going to return only 70% of the cash flow we're going to generate through the share repurchases and dividends and it's pretty balanced across the two.

Operator

Thank you. [Operator instructions] We'll move next to Blayne Curtis with Barclays. Your line is open.

Blayne Curtis -- Barclays -- Analyst

Good afternoon. Thanks for that. Just wanted to revisit a prior question on memory. You mentioned in your letter, customers were looking for higher big growth to meet demand.

Just any more color where that demand is coming from? And any -- I know you don't want to guide for memory next year, but just any color on what type of magnitude outside you're seeing?

Rick Wallace -- Chief Executive Officer

Well, like I said, we're optimistic. We see some improvement in the December quarter, and I think that continues as we move into next year. So most of it coming from customers supporting 5G and handsets. We think that's probably the biggest driver but it's pretty modest growth at these levels.

Bren just given where the industry has been, but we're optimistic that we'll see growth as we move into next year.

Operator

And I'm showing that we have no further questions. At this time, I'll turn the call back to Kevin Kessel for any closing or additional remarks.

Kevin Kessel -- Vice President of Investor Relations

Thank you very much, Priscilla, and thank you, everybody, for your questions and your interest. We will be talking to you shortly during the quarter, during our virtual investor events. This concludes the call.

Operator

[Operator signoff]

Duration: 47 minutes

Call participants:

Kevin Kessel -- Vice President of Investor Relations

Rick Wallace -- Chief Executive Officer

Bren Higgins -- Chief Financial Officer

John Pitzer -- Credit Suisse -- Analyst

Harlan Sur -- J.P. Morgan -- Analyst

C.J. Muse -- Evercore ISI -- Analyst

Krish Sankar -- Cowen and Company -- Analyst

Joe Moore -- Morgan Stanley -- Analyst

Patrick Ho -- Stifel Financial Corp. -- Analyst

Timothy Arcuri -- UBS -- Analyst

Atif Malik -- Citi -- Analyst

Quinn Bolton -- Needham and Company -- Analyst

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Blayne Curtis -- Barclays -- Analyst

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