Q2 2025 Earnings Call Transcript

Good afternoon. My name is Todd, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation December Quarter 2024 Earnings Conference Call and Webcast. All participant lines have been placed in a listen-only mode to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead.

Welcome to our earnings call to discuss the December quarter and calendar year 2024 results and outlook. I'm joined by our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results released after the market close and available on ir.kla.com along with supplemental materials. Today's discussion and metrics are presented on a non-GAAP basis, unless otherwise specified, all full year references we make are to calendar years.

The earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future investor events presentations, corporate governance information and links to our 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 disclosure of risk factors in our SEC filings. Any forward-looking statements, including those we make on our 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. Rick will start with some introductory comments, followed by Bren with financial highlights and our outlook. Before I turn the call over to our CEO, Rick Wallace, I wanted to remind everyone that our 2025 Investor Day will be held on the morning of June 18, in New York City. Now over to Rick.

Thank you, Kevin. I will summarize KLA's overall performance for calendar '24 and the December quarter and cover company highlights and updates on the industry landscape. For calendar 2024, KLA again delivered relative growth outperformance, strong profitability, and healthy return to shareholders. Specifically, 2024 revenue grew 12% to a record $10.85 billion.

And the process control revenue grew by over 12%, which indicates increased market share, while the services business grew 15% to $2.5 billion a year. Also for the calendar year, KLA maintained industry leading gross and operating margins at 61% and 41%, respectively. The company grew free cash flow to $3.4 billion and returned $2.9 billion in a combination of dividends and share buybacks. KLA's outperformance for the year was driven by a return to growth at the leading edge, which includes increased investment in AI, high-performance computing and continued momentum in advanced packaging, as well as sustainable performance for KLA's services business.

Turning to the December quarter results for KLA came in above the midpoint of non-GAAP guidance range, despite navigating through the business impact of the new U.S. government export controls, which were released late in the quarter. Specifically, the quarter revenue topped $3 billion for the first time. Diluted GAAP was $8.20, finishing at the upper end of the guidance range for the quarter. GAAP diluted EPS was $6.16. The business landscape is performing as expected, and we're encouraged by the strong demand we're experiencing in leading-edge logic with specific memory customers supporting high bandwidth memory and advanced packaging.

KLA's differentiated portfolio of solutions aligns exceptionally well with enabling our customers to navigate increasing complexity, growing design starts, and larger semiconductor devices in an environment of rising semiconductor demand. Specific highlights in the quarter include a combination of strong sequential and year-over-year revenue growth, demonstrate an improving industry environment. KLA is specifically positioned to benefit from accelerating growth at the leading edge. Across all sectors, there are technology development investments supporting AI and HBM, as well as strengthening supply-demand environment, which positions the wafer fab equipment industry for growth in calendar 2025. AI continues to be a crucial catalyst for KLA.

We are well aware of the recent revelations of DeepSeek and the implications that it portends a diminished demand for advanced semiconductors in support of the AI infrastructure build-out. As a company that has been developing AI models for use in our own inspection systems for many years, our own experience supports the theory that increased compute efficiency enables more adoption of AI in our platforms. The demand is clearly elastic. As it pertains to the demand environment for advanced semiconductors, we see no reason to believe that increased compute efficiency in AI will have an impact on the advanced demand environment in the foreseeable future.

AI is both an important driver and enabler of KLA's business. Specific drivers connected to AI that are a positive for KLA's growth are higher volume and higher value wafer demand, more complex designs, accelerating product cycles, larger die size, and growing advanced packaging demand. These trends demonstrate the increasing value of process control and assisting our customers through managing a dynamic production environment as investments and complexity increase. Exemplifying this momentum for our advanced packaging portfolio continued in the quarter.

The growing demand for more powerful systems of chips is driving more complex heterogeneous chip integration enabled by advanced packaging, which increases the value of process control in the chip package. This is fueling growth for KLA and our broad portfolio systems. KLA advanced packaging revenue grew to approximately $500 million in calendar 2024 and is expected to exceed $800 million in calendar 2025, up from our last estimate of $750 million. KLA service business grew to $667 million in the December quarter, up 4% sequentially and 18% year-over-year.

This makes 50 consecutive quarters of growth for our services business on a year-over-year basis. Finally, quarterly free cash flow was $757 million in calendar 2024, and the free cash flow margin was 31% over the same period, putting KLA amongst the top companies in the S&P 500. Total capital return in the December quarter was $877 million, comprised of $650 million in share repurchase and $227 million in dividends. Total capital return over the past 12 months was $2.9 billion. KLA views consistent and healthy capital returns as fundamental to delivering value for shareholders.

KLA's December quarter results delivered strong sequential and year-over-year growth, which validates KLA's process control leadership and portfolio strength. KLA operating model and the dedication of our global teams continues to be the foundation of our sustained success. We'll now pass the call over to Bren to cover financial highlights and our outlook.

Thanks, Rick. KLA's December quarter results demonstrate market leadership, combined with the consistent execution and dedication of our global team to meet customer commitments and drive sequential and year-over-year growth and profitability improvements. Revenue was $3.08 billion, above the guidance midpoint of $2.95 billion. Non-GAAP diluted EPS was $8.20 above the guidance midpoint.

GAAP diluted EPS was $6.16. Gross margin was 61.7%. Operating expenses were $596 million. Operating expenses were comprised of $342 million in R&D and $254 million in SG&A. Operating margin was 42.3%.

Other income and expense met with a $31 million expense. The quarterly effective tax rate was 13.7%. Net income was $1.1 billion, cash flow from operations was $850 million, and free cash flow was $757 million. The breakdown of revenue by reportable segments and markets, major products and regions can be found within the shareholder letter and slides.

Moving to the balance sheet, KLA ended the quarter with $3.8 billion in total cash, cash equivalents and marketable securities, debt of $5.9 billion and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three major rating agencies. During the December quarter, we retired our $750 million November 2024 bonds at maturity with cash on hand. KLA's balance sheet provides the ability to fund our growth strategies, organic and inorganic and offer attractive capital returns to shareholders. Turning to our outlook, the industry outlook continues to gain momentum in the near-term, driven by increasing investment in leading edge logic, high bandwidth memory, and advanced packaging.

We expect the WFE market to grow by a mid-single-digit percentage in 2025 from the high $90 billion level for calendar 2024. Growth in calendar 2025 is expected to be fueled principally by increasing investment in both leading-edge boundary logic and memory to support growing AI and premium mobile demand offset by lower overall demand from China due to the digestion of elevated levels of investment over the past couple of years. In an encouraging development, our top customer recently said in an earnings call that they expect the number of new takeouts for N2, or the 2 nanometer node, in the first 2 years to be higher than both N3 and N5 in their first 2 years, fueled by both smartphone and HPC applications.

As communicated in early December, we continue to estimate the impact on KLA's revenue in calendar 2025 from recent export controls in China to be approximately $500 million, plus or minus $100 million with roughly 70% of the impact affecting our systems business. While we are hopeful, based on our interpretation of the regulations, that there should be licensing opportunities that will mitigate some of this impact, we are taking a cautious view given the significant delays in processing licensing requests by the U.S. government over the past few years. However, given KLA's business momentum, market share opportunities, and higher expected process control intensity at the leading edge across all segments, we are confident we will continue to deliver growth outperformance compared with the WFE market in 2025. KLA's March quarter guidance is as follows.

Total revenue is expected to be $3 billion plus or minus $150 million. Our revenue guidance is up 27% year-over-year at the midpoint, further illustrating the improvement we expect to see in calendar 2025. Foundry/Logic revenue from semiconductor customers is forecasted to be approximately 73% and Memory is expected to be approximately 27% of Semi Process Control systems revenue to semiconductor customers. Within Memory, DRAM is expected to be about 75% of the revenue mix and NAND the remaining 25%. Non-GAAP gross margin is forecasted to be 62% plus or minus 1 percentage point or up approximately 30 basis points sequentially at the midpoint despite slightly lower revenue primarily due to more favorable product mix expectations.

For calendar 2025, based on expectations for business mix across systems and service, systems product mix and factory utilization, we expect gross margins for the year to be approximately 62% plus or minus 50 basis points. Non-GAAP operating expenses are forecasted in the March quarter to be approximately $585 million as we continue to make significant product development and scaling investments to support expected revenue growth. Given our expectations for company growth over the next couple of years, we will maintain our operating expense trajectory. For the remainder of calendar 2025, we expect sequential increases of approximately $15 million in incremental operating expenses per quarter.

This is driven by our priority around our product development roadmap requirements as well as revenue growth expectations. Our business model is predicated on ensuring 40% to 50% incremental non-GAAP operating margin leverage on revenue growth over the long run. Other model assumptions include: non-GAAP other income and expense, net, of approximately a $36 million expense for the March quarter and expect this to be roughly consistent throughout the calendar year. The tax rate assumption for March remains at 13.5% and we expect this to remain through the June quarter.

Beginning in the September quarter, which is the first quarter of our fiscal year, our tax rate will reflect the adoption of global taxation pillar 2. Based on our current modeling, we think pillar 2 implementation will drive the tax rate slightly higher to approximately 14% in the second half of the calendar year. We will provide an update on this planning rate mid-year if necessary. For the March quarter, GAAP diluted EPS is expected to be $7.77 plus or minus $0.60, and non-GAAP diluted EPS of $8.05 plus or minus $0.60. EPS guidance is based on a fully diluted share count of approximately 133.3 million shares.

In conclusion, our near-term revenue guidance points to relative stability around current business levels. Based on the strength of our backlog and market position, we see growth in calendar 2025 and expect to outperform the mid-single-digit growth rate we expect from the WFE market. KLA is focused on delivering a differentiated product portfolio that addresses customers' technology roadmap requirements and drives our longer term relevancy and growth expectations. With the KLA operating model guiding our best-in-class execution, KLA is focused on implementing our strategic objectives designed to drive outperformance.

KLA's focus on customer success, innovative solutions and operational excellence drives industry-leading financial and free cash flow performance and allows us to return capital consistently. That concludes the prepared remarks. Let's begin the Q&A.

Thank you, Bren. Operator, can you please provide the instructions for Q&A?

[Operator Instructions] We will take our first question from Vivek Arya with the Bank of America. Please go ahead. Your line is open.

Hi, this is Michael Mani on for Vivek Arya. Thank you for taking our questions. To start, we heard from two of your peers yesterday. The peer that is action deposition focused issued a pretty similar WFE view to you guys for [indiscernible] digits, while the other reiterated their annual guide suggesting that the spending remains healthy.

So the question is if total WFE is increasing something like $5 billion or so this year, but within that, WFE is also increasing. [Indiscernible] is also growing pretty strong, so consuming a good part of that incremental growth. What exactly is happening to the process control part of the market this year? And if process control WFE is growing solidly, which it seems like it is, does that suggest that mid-cycle digits for WFE could be conservative, or are there other parts of the market that are shrinking by that much? Thank you.

And pardon me, do you -- speakers, do you have us muted?

My apologies.

Yes, this is Bren. I'll take that one. And the guidance was clear that we think it's somewhere in that range of about $5 billion, to use your number into 2025 versus 2024. We feel pretty good about KLA's share of overall WFE opportunity into next year. Obviously, as we move into 2025, we've got more investment in leading edge and that's certainly a nice driver for our business and we're already seeing KLA's share of WFE at the N2 node being meaningfully greater than what we saw at N3. What's happening in DRAM, first advanced DRAM is good for us with scaling and EUV but also as you look at high bandwidth memory, high bandwidth memory is also dragging process control intensity due to the lack of redundancy, more complex logic circuitry in the base die, the need for more reliability, bigger chips and so on.

So, we feel pretty good about all of that. And then I think finally, the growth that we referenced in the letter in advanced packaging is accelerating for the company. It seems like every quarter I keep raising the numbers, so I'm pretty excited about the opportunities that are there and it seems to be accelerating as we move into this year. So for all those reasons, it looks like process control intensity, KLA share of market looks to increase in 2025 based on our assessment.

And in an environment where memory is probably a higher percent given expected growth in DRAM, I think the dynamics I talk about more than offset a slightly changing mix that's still Foundry/Logic heavy but a little bit more DRAM in terms of our views on '25.

Got it. That's helpful. Thank you. And for my next question, could you help us with the linearity for revenue this year to the best extent you can, just because we're kind of at a high watermark for revenue this quarter.

So should we expect maybe to be more first half weighted versus second half, especially given China's normalizing into the year and there's this impact of the export restrictions that we should consider? Thank you very much.

Yes, the second half, I'm not going to comment on it. As we said in the letter, we feel pretty good about relative stability as we look at the funnel here moving forward. We'll see, as we start to move through the year what happens. But in terms of how we're modeling the company, it seems that we're bouncing around this $3 billion level, plus or minus, at least as we look at the first half of the year.

Next question, please.

Thank you. [Operator Instructions] Our next question will come from Harlan Sur with JPMorgan. Please go ahead.

Good afternoon. Thanks for taking my question. In process control, strong outperformance for the team in calendar '24. I think your process control systems business was up 15% year-over-year, right? That's versus WFE at up in the mid single-digit.

But if I look back over the past 5 years, the team's process control business has outgrown WFE on average by about 500 to 700 basis points per year. So given this year is going to be more leading edge technology inflection driven, which is where obviously you guys have a strong leadership position, is it fair to assume that if WFE is up mid-single-digit percentage points this year, that your process control business should grow kind of low to mid-teens percent in calendar '25?

Harlan, that's a -- thank you for those comments. Obviously, we're not going to guide for the year, but clearly, we're feeling great about the position we have. And a couple of things have changed, as you well know, in terms of the dynamics. One, because we've resumed scaling, there's more opportunity for more inspection.

So I've always viewed the opportunities as being twofold. One, there needed to be an opportunity and then we had to have a solution. And sometimes we've had the case where, for example, if you go back years to 3D NAND, where of course, if we could have looked through and found defects, there would have been an opportunity, it was tough to do. But now we're really at an interesting point where the leading edge, every dynamic is going kind of in our favor.

In terms of higher value wafers, you've got larger die size, we talked about this in the prepared remarks, and you've got accelerated technology nodes and more layers that need to be figured out. The other dynamic, of course, that you know is HBM is looking more like logic than it used to. Less redundancy, more valuable die, and of course the dynamic around packaging. So we feel great, as Bren said, about process controls position and overall the spend for our customers.

And that's the conversation we're having with our leading customers is very focused on getting that availability and being supportive of their technology ramps as they make these big investments going forward.

That's great. Thank you for that. And then on the 60% growth outlook for your advanced packaging businesses here, can you just kind of help us unpack that a bit? How much of that mixes 2.5D packaging technology like [indiscernible] versus HBM versus other packaging types?

And what is the rough mix of process control versus semi-manufacturing systems? And then we're already starting to see some future AI designs moving to 3D SoIC technology starting next year. Is this a further tailwind for the team given the higher complexity of these next generation 3D architectures?

Yes, great questions. I mean, I think two things have happened and we got this early indication from our leading customers 1.5, 2 years ago, that the challenges in packaging were going to look a lot more like what was going on in the front end, and they asked us to make some of the platforms that we use for the front end available for packaging. So back to the question, what is this? A lot of it's inspection and metrology, derivatives of the projects and programs that we have and have many years of experience with.

There's clearly some plasma dicing, so SPTS [ph] is part of that overall solution. But there's no question that our customers are driving, as you know, it's a very expensive, when you have these high-end chips along with this complex packaging and this HBM, the risks are very high if there's yield loss. So there's more inspection opportunity there, and we feel great about the continued growth as we go forward. Right now it's mostly 2.5 HB, but we see it's going to go forward, and our customers are, this is an area that's moving very quickly, and because they need solutions, they're very focused on making sure we understand them as we go forward.

Hey, Harlan, it's Bren here. It's about 65%, 70% semi-PC versus process.

Great insights. Thank you.

Thank you. Our next question will come from C.J. Muse with Cantor Fitzgerald. Please go ahead.

Yes, good afternoon. Thank you for taking the question. I just wanted to dig a little bit deeper in your outperformance relative to WFE. Within that, you're including that 500 million China hit. And so, we'd love to hear, I guess, beyond the rising process control intensity at 2 nanometer and HBM, are there other drivers? Are those the two principal ones we should be thinking about?

Yes, those are -- C.J. those are the two principal ones.

[Indiscernible].

Yes, you've got higher intensity at the node. And to Rick's point, we feel very good about some product momentum in a number of our markets. So that's -- and then I think finally, as you look at that and you look at what's driving growth within process control, you've got an acceleration in certain products where we have a strong market position. So they're influencing the growth rate, obviously more relative to the overall.

So that also drives an improvement in share. Optical pattern inspection being one of those areas.

Well, and reticle. I mean, we saw some improvement in some of the work in reticle, and including the Gen 5 CTA [ph] for print check, which obviously shows up in the optical, but it's part of that solution. So, look, we're feeling pretty good, and there was some investment made by our customers to support prior nodes once they realized that there was still a yield opportunity there.

Just to follow-up on that, Rick, you talked about share gain. Can you elaborate on that? And then my second question would be on service. You talked about hitting kind of a long-term growth rate over time, but would be curious, given kind of the China impact, how you're thinking about growth for overall service in calendar '25. Thanks so much.

Sure. So on the share side, I think there's a couple areas that might be more obvious than others. One is optical, simply because optical grew disproportionately perhaps in the rest of the market and we have a large share there, so that creates a greater overall position there. We had some really strong momentum in e-beam, but then the other area where we really saw some strong performance was in packaging.

And so that's the one where the teams have really done a great job focusing the last couple of years, and we've been able to see continued momentum there. So we feel pretty good about it. Obviously the numbers for the year aren't going to come out, but we have gained a lot of share in the last couple of years, and the question was, would there be any retransfer, and we feel pretty good about where we are. For service, anytime you lose access to a fab, you have the immediate headwind that you can't get access to that equipment.

So as I look at growth this year, I think growth is probably in the high single digits for service, which is below the long-term model. We outperformed the long-term model by a little bit in 2024. Over time though, it's generally our view, at least in terms of how we run the company, as we think about the efficiency of the market, that, that if you have fabs that are inhibited from being able to supply that that capacity has to get added somewhere else. And so that would create an opportunity for us to make some of that up over the very long-term. So -- and obviously that would mean that you would end up with whatever was spent before would have to be replaced somewhere else.

So I think over the long run, we feel pretty good about the growth trajectory in our long-term model, but in the short run, it does affect, obviously, your ability to get at that capacity, which puts pressure on the growth rate and also puts some pressure on our ability to move resources around. And so we'll have to deal with some inefficiencies. We've staffed up to support those fabs, and now we have to move those folks to support other customers. So there's a few moving parts, but in the long run, we feel pretty good about the trajectory, given the higher value offerings, what we're seeing in terms of pricing as it relates to new products, the opportunities in packaging for incremental service.

So I think that the drivers for service are all pretty compelling. Obviously, the install base is growing, lifetimes are increasing. So in the long run, we feel pretty good about the long-term target.

Thanks so much.

Thank you. Our next question will come from Joe Quatrochi with Wells Fargo. Please go ahead.

Yes, thank you for taking the question. Just to follow-up on the services impact from China, just given the fact that most of your services is highly recurring, do we just take that, I guess, quarterly kind of run rate impact all in the March quarter and then grow from there? Or is there further kind of headwinds to think about in the out quarters?

Yes, I think that's the way to think about it. Because you lose what you would have gotten at those fabs, and then it grows from there. So I think that's a reasonable way to think about it.

Okay, perfect. And then just thinking about capital intensity for process control on the DRAM side, can you talk about just the difference in HBM process control intensity, relative to conventional DRAM, just how to think about that adoption? I know, obviously, EUV being adopted across the board is helpful for you guys, too.

Yes, so as I said earlier, right, with an HBM device, you've got a few things that are happening, you've got big or die, because you have to drill the DSPs. They're bigger, so you have less redundancy, which historically has been pretty significant in DRAM, and so that's been a headwind to process control intensity. The logic circuitry is more complex. The reliability on all the guy in the stack is higher.

So for all those reasons, it's very good for process control intensity. I think overall for DRAM, it's moving the needle probably somewhere from, we'll call it the 9 to 10 range where we've been historically as a percent of WFE, that it probably moves up a good 100 to 150 basis points from there. Now, obviously, mix will affect that. Most of the focus is on HBM in terms of new requirements.

So mix dynamics could affect that. But we feel pretty good about these dynamics as they affect and drive the DRAM market. And it's most pronounced in the latest technology nodes and that's where we're seeing it more. And so it's going to take a little bit of a time for us to really figure out what that overall looks like.

I think by Investor Day, we should be in a pretty good position to talk about it on a longer-term basis.

Helpful. Thank you.

Thank you. Our next question will come from Timothy Arcuri with UBS. Please go ahead. Your line is open.

Thanks. Bren, can you give us RPO? It was supposed to be up. Can you give us the number?

Yes, so RPO was down about $900 million. About half of that was related to deep bookings we took due to the December 2nd regulations. So about half of it related to that and then the other half shipment levels were higher. So that's how it played out in the quarter.

Got it. Okay, thanks. And then process control systems, you said pretty stable from here, but what about EPC? It was up a lot this quarter. It grew a lot in, well, it didn't grow that much, but it grew a lot in Q4. So how to think about it for this year? Can it grow 10, perhaps low double digits this year?

Yes, I think overall EPC is probably going to be about mid single digits. You have to remember that what shows up in EPC is flat panel business. And so at the end of this quarter, we will be done shipping systems for flat panel after we announced end of manufacturing 12 months ago. So you have the flat panel revenue coming out and so obviously that in this year affects the overall growth rate of the EPC businesses as we report those segments.

So overall we feel pretty good if you look at SPTS growth especially semiconductor, mostly driven by advanced packaging growth year-to-year. ICOS, component inspection, again a packaging-centric business, is also growing. PCB businesses are more tied to mobility and capacity, so less growth in those areas. And then of course you got the offset from losing the [indiscernible].

Now, losing the [indiscernible] does enhance the margin ratios, gross margins probably 20 bps higher. I think operating margins are probably 30 bps higher because the revenue mix is a little bit richer and certainly that's factored into how we guided gross margins as we look at next year -- look at this year, 2025.

Thank you, Bren.

Thank you. Our next question will come from Krish Sankar with TD Cowen. Please go ahead.

Yes, thanks for taking my question. And Rick and Bren, thanks for quantifying the $500 million plus or minus impact from export control. You also spoke about China WFE digestion. I'm just kind of curious, if you lean in the digestion from China, how to think about your decline in China sales year-over-year on top of export controls in '25 versus '24?

Yes, I'll try to help with that. I mean, obviously, we'll have to see how the year plays out. But if you look at how we finished the year, right, this last quarter was 36%. We finished the year at 41% of our business in China.

As we look at 2025, I think that percentage drops to about 29% plus or minus, a point or two as we go forward here. And so when you do the math on that, assuming the stability that we articulated about our top line, as we think about where we are right now, that translates into the overall China business down somewhere around 20% or so.

Got it. Got it. That's very helpful. And then another question is can I know -- to know China, I apologize for this.

But when you look at your numbers compared to some of your peers over the last two quarters your China sales have been more resilient compared to your peers? Is it due to the wafer business or is it because China's building domestic critical capacity? Like what's happening there that kind of makes you relatively more resilient to your peers?

Yes, I think the easiest way to think about it, you have to remember that KLA is really about helping customers qualify process and speed time to results, yield learning and so on. So as a result, you end up with, particularly with Greenfield fabs, a higher level of adoption is that fabs opening and more continuous investment at lower levels. So when a customer goes to add a significant amount of capacity, obviously more capacity centric peers are going to participate, but then they'll get it in that quarter and then it'll fall off. Where ours tends to be a little bit more consistent in terms of the investment profile.

And so it also, I think, tends to hold up because I think the value of process control, given the maturity of those operations, is pretty high.

Got it. Very helpful. Thank you, Bren. Thank you.

Thank you. Our next question will come from Tom O'Malley with Barclays. Please go ahead.

Hey, guys. Thanks for taking my questions. Mine is a little short-term oriented, so forgive me here. But the last two evenings, we've seen you and a competitor kind of talk about better NAND pretty significantly into the March quarter.

I was just hoping you could give us a little more detail. It didn't sound like from a sequential basis you would really call that out. I don't think you gave a ton of details, that would make sense. And we didn't see it coming there, but just maybe describe what's happening there.

Is that coming from a single customer? Is that coming across multiple customers? I totally understand it's a much lower base from you guys, but we'd love to try to figure out where the strength is coming from just on a sequential basis into March.

It's strength at pretty low levels. It's pretty broad based. We have seen the NAND business tick up right over the course of the '24 and into '25. We expect a little bit more improvement there. I think overall for the industry off of a very low level there's likely to be some WFE growth there, but it's not significant and as a percentage it's bigger obviously given the level of WFE at that presently but would expect to see that improve a little bit moving forward, but not a lot in 2025.

Got you. And then on the DRAM side, clearly there's debate in the broader market. You guys called out AI in some of your prepared remarks, but it seems like there's some share jockeying that's currently taking place. It sounded more positive for the year, your kind of view on the DRAM side.

Any commentary, just when -- you think about 6 months ago is when you talked to your customers, obviously people were putting in capacity for kind of all 2025. Have you seen incremental spend there in the short-term or rush orders to try to catch up by customers? Anything on that would be helpful. Thank you.

Well, I think our customers -- this is Rick, our customers certainly set out their plans looking out for the year, so there's been no real short-term change. I do think the strength in terms of what they're seeing in demand in support of the AI infrastructure continues to grow, and we see momentum there. So we are definitely in conversations, a lot of them about slot availability. Remember, we still have many products or a few critical products that are supply constrained so we're in conversations about that.

So we feel pretty good about the demand especially at the leading edge and the dynamics around the advanced DRAM are playing to our strength because of the challenges both the value of those devices, but also the yield challenges and as we mentioned before the die size are smaller less redundancy and it's looking more like higher process control intensity as we talked about. Next question, please.

Thank you. Our next question will come from Chris Caso with Wolfe Research. Please go ahead.

Yes, hi. Thanks. A follow-up question with regard to the China impact. And you've given some color on what you expect that for the year.

From a quarterly basis, is there any sort of incremental headwind or benefit as we go into the second half? I know that you talked about some of the mitigations and licenses, which are taking some time, but I guess how do we think about this as we go sequentially through the year?

Yes, we've been pretty cautious with it overall. We'll see how it plays out as I said in the prepared remarks in terms of licensing that could mitigate the impact, but when we look at it over the course of the year or what we expected, it was pretty consistent across the year. So, it wasn't, maybe again, that could be the nature to have customers buy process controlled versus other types of products. But it was pretty -- half to half was more or less pretty consistent.

Okay. Got it. And just to follow-up on gross margins, again, you're kind of starting out with 62. You're guiding to 62 for the full year. So, sort of assuming that remains stable as you go through the year.

And I guess at what point with regard to some of the operating leverage that you typically get with the fall through, what's kind of the starting point from that, that we can start to see, some of the leverage kicked in as revenue starts to grow.

We have mixed issues that that generally are the biggest impacting item to our overall gross margins, more so than customers or segments. But I would expect as we start to see overall revenue accelerate, we'll start to see the kind of leverage that we've seen historically. So I said 62% plus or minus about 50 basis points for a reason. I think some of that is predicated on what happens moving forward.

We do have, depending on the mix, right, we do have markets like the packaging market which carries a lower gross margin given the complexity of the tools than some of our higher end systems, but obviously the gross margin dollars are quite significant and the relevancy growth at KLA is significant. So we're pleased with that. But I think as we move forward, I think you're likely to see us continue in that 60% to 65% range as we accelerate revenue over time. And as we talked about in our 2022 plan, we saw gross margins were around 63% or so, obviously predicated on a volume level of about $3.5 billion.

So that gives you a sense of kind of where we're at from here to there moving forward. And I feel pretty good about our ability to achieve that given the investments we've made that are still -- I think we're in a good position to deliver against that. I don't think we have to go and make incremental investments in terms of the capacity, the hard asset capacity we have to execute to those business levels.

Got it. Helpful. Thank you.

Thank you. Our next question will come from Srini Pajjuri with Raymond James. Please go ahead.

Thank you. One short-term question on your March quarter guidance. Just the Foundry/Logic, I think you are guiding for 73% of the mix to be Foundry/Logic. That is -- I think, implies at least in a mid-single-digit type decline.

We haven't seen a decline in that business in a while. And I'm just trying to understand how that reconciles with your comment about end-to-demand being strong in the short-term.

Yes, I'm taking a look at it. I don't think it -- it doesn't look like it changes all that much. So I think it's -- given the overall revenue guidance is what it was, I think for semi-PC systems, I mean, we'll see how the quarter ends up. And we do have business that isn't, that's infrastructure business, for example, that doesn't show up in those percentages.

So when I look at the businesses that the semiconductor customers, it's pretty consistent, so I don't think it'll change a little bit. But as we talked about, I think Memory overall is a higher percentage of the mix in 2025 than it was in 2024.

Okay, got it.

If there were some other customers non-N2, N3 that showed up in December that aren't showing up.

Okay. Okay. That makes sense. Then I guess as we go through the year, obviously N2 is going to be relatively strong. Do you still have, I guess, material contribution or are you still expecting material contribution from N3 or is it at a minimal level? And then I guess, just to follow-up to that, how does the, I guess, PC intensity change as you go from N3 to N2? Thank you.

Yes, so most of the focus in terms of new investment is on 2 nanometer. There's still some incremental investment that's happening, Srini, but the vast majority of it is 2 nanometer centric. Obviously, there's packaging investment that's also happening. And I mentioned it earlier, yes [indiscernible] been over the last couple quarters or so, I've said that at N3 versus N2, at N2, we thought we were about 75 basis points higher in terms of KLA's share of WFE.

I think that we're likely higher than that's probably 90-ish to -- 90-ish basis points, maybe 100 basis points so trending in the right direction for sure.

Got it. Thank you.

Thank you. Our next question will come from Brian Chin with Stifel. Please go ahead.

Good afternoon. Thanks for letting us ask a few questions. Yes, I was just curious, in terms of Logic/Foundry chipmakers that are at the leading edge, but they've been expanding capacity aggressively, can you comment on the magnitude of residual spending you still see with them besides R&D and technology development? Obviously, you're able to offset that for any driving there, [indiscernible] outgrowing WFE this year, but just curious if you had any sort of commentary around that.

Are you saying -- I'm sorry, you said one that aren't at the leading edge?

At the leading edge, but not expanding capacity aggressively. That's kind of one guy doing that. But in terms of the other ones, you're sort of on the pace, or maybe -- on the pace, but not just not doing out aggressively. Maybe some sense of the signal spending engagement you still have with them.

So let's say we derisked that in our '25 plan.

Okay. Fair enough. And then maybe just caring for that last question, how about the process control intensity going from 2 nanometer [indiscernible] around to 16A? Because I think they're kind of meant to be somewhat closely coupled to some degree.

Yes, we're a little early on that one. So I'd like to, before we start making comments, actually shifting the support to that activity in a way to actually model it. One of the things, obviously, we've seen over the course of the last several nodes for intensity reasons, but also for share, is that because of the design start environment, limiting reuse, customers are managing a much more dynamic design environment. You now have more designs that are driving leading edge RAMS.

All these things have been positive factors, and then there's a share element as well. This fundamental, I think, shift moving forward in the composition of semiconductor revenue to larger, higher value die [indiscernible] density is very problematic. I think plays to growing opportunities for process control. We have to execute on our programs to be able to deliver the right solutions for customers to solve their problems and solve the right problems at scale to production.

But I think if we execute in our own business, it does create an opportunity for us to see continued tailwinds in this area.

Yes, and let me give a little more perspective too, because we've actually -- usually, if the spending is done in a node, that process control intensity is kind of set. But what we've seen happen is when we have new solutions that find new [indiscernible] problems that are yield impacting, we've seen some back porting of that. So in other words, you might see some systems going into prior nodes, which actually drives those intensities up the prior node, which is the new baseline to go forward. So we feel -- we think part of the outperform is the fact that we're actually have more solutions that solve the problems.

We've always had more opportunities than we've had answers for in terms of customers trying to figure out how to learn quicker and adopt new technologies, but our technologies are really coming together in a way that we think there's both share but also it drives adoption simply because we're solving more problems. So when we look at what we're seeing for N2, we feel pretty good about the potential to help our customers ramp those nodes and that'll be a basis on which to build going forward. For example, a lot of people didn't model early on the reticle verification on wafer, the print check that we're using for Gen 5. That's essentially a new application.

Once people valued that, then they might even go back and back port some of that capability when there's yield opportunity. So we felt pretty good about where we are in terms of driving overall intensity, and that'll be part of the message we share at our Investor Day is how we see that going forward, which will include the node you talked about.

Okay, great. Thank you.

Thank you. Our next question will come from Charles Shi with Needham and Company. Please go ahead.

Yes, good afternoon. Thanks for taking my question. So I think that you guys don't want to exclusively call out the direction for the second half in terms of the growth relative to the first half of the year. But it sounds like the base case assumption from you guys is that you're probably going to be around that $3 billion per quarter level, maybe throughout the year.

Maybe some of that is contingent upon whether you can get some export licenses for that $500 billion impact from the latest export control. But is there any other swing factors that you probably don't have a conclusion yet, but that could support some of the second half growth? Is there anything that you haven't mentioned?

Well, with licenses, as we said earlier, we haven't built that into the plan. And so we'll see how that plays out. And I think, the stabilizing around current levels as we look forward, it seems like we're operating around this level. And as we go beyond the middle of the year, we'll see what happens.

We mentioned earlier about derisking some opportunities. And so we'll see how those potentially play out around certain customers, but that could be a swing factor as well. And I think that back to what we said about certain parts of the market we've been a little bit more cautious on. We'll see if there's more upside in China.

I think we've tried to derisk that relative to the levels of investment we've seen over the last couple of years, but we'll see how that plays out as we move forward. But I think we’re -- for now it feels like around the current levels is the best that I can do from a guidance point of view.

Thanks, Bren. Maybe a quick follow-up. What's the expectation for China revenue contribution into March quarter?

It will come down as a percent, to be in high 20s. We'll see. We'll see what ends up revenuing, right, because you've got different rev-rec policy issues from whether it's a new customer and a new fab versus an established customer. So that could either accelerate revenue to revenue shipment or extend it to an acceptance process.

So we'll see how things play out. But in general, I would expect it to drop from the 35% level, probably into the high 20s, maybe 30 at the highest.

That's very helpful. Thank you.

Sure.

Thank you. [Operator Instructions] We'll take our next question from Atif Malik with Citi. Please go ahead.

Hi. Thank you for taking my question. Rick, the question on foundry concentration comes a lot with investors. Obviously, you guys are doing very well with your top foundry customer on N2 and gate all around, and there is [indiscernible] in Japan that's kind of ramping this year. How are you guys leaning into the two struggling foundries this year if that poses a risk to your business?

I'm sorry, say it again, how are we dealing with …?

How are you guys leaning into the two struggling foundries and what impact that could have both this year and [indiscernible] years in terms of your exposure?

Well, we're -- we obviously work with all our customers and so if there's a way for us to add value, we're doing that. I think the bulk of the stated CapEx number pretty clearly head towards the direction of biggest player in the market in terms of investment, but the others, we engage. I mean, certainly everyone that we work with wants to improve their ramp up time of new technology and improve their yield. And so, of course, we're doing that, but that's not where the bulk of the business is these days.

So I don't see a huge difference in terms of how we think we're engaging now relative to how we were in the past. It's just the dynamics have shifted much more toward the leader who's further ahead now than they've been in quite a while.

Fair enough. And Bren, on the $500 million restrictions impact, can you give some color? Were those like trailing edge logic projects or was it a DRAM contribution in those sales?

Yes, most of it was logic. Yes, very little --in fact all of that was logic. I mean, very little that was memory.

Thank you.

Thank you. And it appears we have no further questions at this time. I would like to turn the call over to Kevin Kessel for any additional or closing remarks.

Thank you very much and thank you everybody for your time and your attention. We know how busy today is and this week is, so we appreciate it. We'll be speaking with you all very soon. I'll turn it back now to the operator for any closing instructions.

Thank you. This concludes the KLA Corporation December quarter 2024 earnings call and webcast. Please disconnect your line at this time and have a wonderful day.