Q3 2025 Earnings Call Transcript

Good afternoon. My name is Marco, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the KLA Corporation March Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] 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 March quarter and our June quarter outlook. Joining me is our CEO, Rick Wallace; and our CFO, Bren Higgins. We will discuss today's results released after the market closed and available on our website along with supplemental materials. We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified.

All full-year references made refer 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. 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 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. Rick will begin with some introductory comments on the business environment and the quarter, followed by Bren with financial highlights and our outlook. Now over to Rick.

Thanks, Kevin. I will start our March quarter results and talk about some comments about the current business environment, followed by some recent market share reports and finish up with some business highlights. KLA's March quarter results were above the midpoint -- all the guidance range with revenue of $3.06 billion, non-GAAP diluted EPS of $8.41 and GAAP diluted EPS of $8.16. KLA's results continue to be fueled by strong demand in leading-edge logic and high-bandwidth memory. KLA's growing advanced packaging business also made another strong contribution in the quarter.

These drivers demonstrate the critical investment required for building out the infrastructure, which is supporting AI. While there's notable macro uncertainty across many sectors globally, KLA has not seen any change in demand or indication from our customers of any adjustment to their announced investment plans. That said, the current unprecedented global trade uncertainty and potential second order effects on macro demand in the future are far from clear. Given this fluid business operating environment and potential implications for KLA, we've decided to postpone our Investor Day from June 18 to early to mid-calendar 2026. It's our hope that the macro environment will stabilize by then, and we look forward to expanding on the story of KLA's growth strategy and increasing market relevance.

Our capital return announcements today reflect not only our commitment to assertive and explicit capital allocation, but also our confidence in the business opportunities for KLA over the foreseeable future. Moving along to market share reports. This quarter marks the annual release of industry research reports showing KLA maintain a strong global share of WFE and Process Control market for calendar 2024. KLA continued share leadership was highlighted by persistently strong customer adoption of optical patterned wafer inspection and share gain in advanced wafer level packaging. Over the past five years, KLA's share of Process Control has grown by nearly 250 basis points.

Notably, KLA's Process Control share of advanced wafer-level packaging market has grown from being in the third position in 2019 to being on track assume the leading position in 2025. Turning to highlights for the quarter. KLA delivered a 30% year-over-year increase in revenue in the March quarter due to increased investment in leading-edge logic and HPM. Second, AI continues to be a key catalyst, driving KLA's consistently strong performance. As AI continues to advance the semiconductor industry is experiencing more complex design, accelerating product cycles, high-value wafer volumes and growing advanced packaging demand.

These trends underscore the increased value of process control and assisting our customers in managing a dynamic production environment as investments and complexity increase, which uniquely benefits KLA. The further demonstration of this, the March quarter captured another period of strong momentum for our advanced packaging portfolio. Customers' adoption of KLA's advanced packaging portfolio of products, demonstrate the success of our market diversification, product technology roadmap and growth strategies. KLA's advanced packaging revenue grew to over $500 million in calendar 2024 and is now expected to exceed $850 million in calendar 2025. Fourth, the KLA Services business grew to $669 million in the March quarter, up modestly sequentially and up 13% year-over-year.

Newly announced market access restrictions in early December 2024 from the U.S. government export controls impacted service revenue growth in the March quarter. Still, as a sign of its predictability and resiliency, our Service business marked its 52nd consecutive quarter of growth on a year-over-year basis. Finally, the March quarter was another solid quarter from a cash flow and capital returns perspective. Quarterly free cash flow was $990 million.

Over the past 12 months, free cash flow was $3.5 billion with a free cash flow margin of 30% over the same period. This free cash flow margin ranks amongst the top 10% of companies in the S&P 500. Total capital returns in the March quarter was $733 million, comprised of $507 million in share repurchases and $226 million in dividends. Total capital returns over the past 12 months was $3 billion. KLA's results once again demonstrated Process Control leadership and the success of our broad portfolio and competitive differentiation.

Our consistent performance further demonstrates the critical nature of KLA's products and services, which are uniquely positioned to enable growth at the leading edge including the ongoing build-out of AI infrastructure. With that, I'll pass the call over to Bren to cover financial highlights and our outlook.

Thanks, Rick. KLA's March quarter results demonstrate market leadership combined with the consistent execution and dedication of our global team to get customer commitments and driving strong results, which fueled double-digit year-over-year growth and profitability improvement. Revenue was $3.06 billion, above the guidance midpoint of $3 billion. Non-GAAP diluted EPS was $8.41 and GAAP diluted EPS was $8.16, each finishing at the upper end of the respective guidance ranges.

At the guided tax rate 13.5%, non-GAAP diluted earnings per share would have been $8.55. Gross margin was 63%, about 50 basis points higher than the midpoint of guidance, as product mix within our Process Control segment was stronger than modeled for the quarter. Operating expenses were $575 million, about $10 million below the guidance midpoint, as the timing of prototype material expenses were lower than expected. Operating expenses were comprised of $338 million in R&D and $237 million in SG&A. Operating margin was 44.2%.

Other income and expense net was a $36 million expense. The quarterly effective tax rate was 15%. Net income was $1.12 billion, GAAP net income was $1.09 billion. Cash flow from operations was $1.1 billion and free cash flow $990 million.

The breakdown of record of revenue by reportable segments and end markets and major products and regions can be found within the shareholder letter and slides. Moving to the balance sheet, KLA ended the quarter with $4 billion of 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. KLA's balance sheet provides the ability to fund our growth strategies, organic and inorganic and offer attractive capital returns to shareholders. The cornerstone of KLA's business is consistently generates strong free cash flow driven by one of the best operating models in the industry and a predictable and highly differentiated service business, which helps drive a capital return strategy that includes consistent dividend growth and increasing share repurchases over the long-term.

This strategy supports a strong track record of predictable and asserted capital deployment and remains an important differentiating element of the KLA investment thesis. To further underscore our commitment to capital returns and our confidence in the long-term value accretion of KLA, today, we announced the 16th consecutive annual dividend increase, which is up 12% to $1.90 a share per quarter or an annualized dividend of $7.60. Along with this action, we also announced a new $5 billion share repurchase authorization, raising our total repurchase authorization to $5.46 billion. Turning to the outlook.

The industry outlook continues to be driven by increasing investments in leading-edge logic, high bandwidth memory and advanced packaging. For WFE in 2025, our outlook remains the same as in late January. We forecast WFE to grow by a mid-single-digit percentage from approximately $99 million to $100 billion level in calendar 2024. Growth is expected to be driven principally by increasing investments in both leading-edge foundry and logic and memory to support growing AI and premium mobile demand, partially offset by lower overall demand from China. 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 unique product portfolio differentiation and value proposition are focused on enabling technology transitions, accelerating process node capacity ramps and ensuring yield entitlement and high-volume production.

We remain encouraged that our customer discussions have not changed and are working hard to align shipment slots with their requirements. In this industry environment, KLA will continue to focus on supporting our customers, executing our product roadmaps and driving productivity across the enterprise. KLA's June quarter guidance is as follows. Total revenue is expected to be $3.075 billion, plus or minus $150 million.

Foundry/Logic revenue from semiconductor customers is forecasted to be approximately 69%. The memory is expected to be approximately 31% of Semiconductor Process Control systems revenue to semiconductor customers. Within memory, DRAM is expected to be about 76% of the revenue mix and NAND, the remaining 24%. Gross margin is forecasted to be 63%, plus or minus one percentage point, inclusive of the impact of recently announced global tariffs.

This estimate is to the best of our ability, given the complexity and of the regulations and how they align with our global processes. Consistent with this assessment, we expect global tariffs to have a roughly 100 basis point headwind to gross margin per quarter, assuming relatively stable quarterly revenue expectations for the remainder of the calendar year. Of course, this environment is changing rapidly, and we will continue our assessment and evaluate mitigation opportunities within our operational processes and pricing strategies. For calendar 2025, based on results for the March quarter, guidance for the June quarter and our expectations for business mix across systems and services, systems product mix and factory utilization, we expect gross margins for the year to be approximately 62.5% plus or minus 50 basis points.

Other model assumptions include other income and expense net of approximately a $35 million expense for the June quarter and expect this to be roughly consistent throughout the calendar year. The effective tax rate assumption for June is 13.5%. Beginning in the September quarter, which is the first quarter of our fiscal year, our effective tax rate will reflect the adoption of global taxation Pillar 2, which is expected to increase the rate to approximately 14% in the second half of the calendar year. For the June quarter, GAAP diluted EPS is expected to be $8.28 plus or minus $0.78, and non-GAAP diluted EPS of $8.53 plus or minus $0.78. A quick update on our remaining performance obligations or RPO disclosure in our SEC filings.

As a reminder, RPO is primarily a systems only metric for KLA. In our report, RPO during earnings as it is disclosed on our subsequently filed SEC 10-Q and 10-K reports. There is significant divergence in practice and companies have different definitions and disclosure practices on RPO. This lack of consistency among companies reporting can be a source of confusion for investors and make the disclosure difficult to compare across industries and peer companies.

We will continue to provide our backlog balance annually in our 10-K report. We will update our quarterly disclosures for RPO starting in the first quarter of fiscal 2026, which is the quarter ending September 30, 2025, to be a transaction price for contracts that have not yet been recognized as revenue as of the end of the quarter. This disclosure of RPO would be consistent with the disclosure of our industry peers. In conclusion, our near-term revenue guidance continues to point relative to stability around current business levels despite the increased uncertainty from changes to global trade.

We are staying close to customers as they also navigate this challenging environment. We continue to see solid growth in calendar 2025 and expect to outperform the mid-single-digit WFE growth rate by several points. KLA's focus 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 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 and begin the queue.

Thank you. [Operator Instructions] We'll now take our first question from Harlan Sur with JPMorgan. Please go ahead.

Good afternoon Great job on another solid quarter of execution. Despite the view that team is still going to drive $3 billion plus per quarter throughout the year, you're holding your WFE view of up mid-single digits percentage year-over-year, you're not seeing any major changes to your customer spending plans. Yes, you did highlight the 100 basis points hit to gross margin due to tariffs, but at the same time, you did also take up your full year guidance on gross margins, but you're postponing your Analyst Day by nine months to a year on the potential trade and tariff uncertainty. I understand the direct impact concerns and risk on global demand for electronics.

But is there also a significant tariff-related risk on your equipment and systems post, let's say, the 90-day reciprocal tariff I mean, the team, I thought was fairly geographically diversified across your manufacturing base. I wouldn't think so. Maybe just take us through some of the puts and takes around tariffs and trade and your ability to modulate your global manufacturing operations under different tariff-related scenarios to minimize the impact on your system shipping to different geographies.

Hi, Harlan, it's Bren. Thanks for the comments, and there's a lot in there. The first thing I'll say is our decision to push the Investor Day was really just related to the current uncertainty, obviously, global trade structure and construct that's being discussed today is really unprecedented, and we'll have to see how that settles out. I did talk a little bit about our view on tariff impact to KLA, and of course, that's very fluid and could change, but we do see a little bit of a headwind in our gross margin as it relates to mostly our service business and having such a strong contract stream, particularly in places like China, where you have some reciprocal impact of parts going in that can have an effect on our business.

So you have that exposure, you also have whatever we bring into the U.S. factory. So some of that is being mitigated through different exemptions. And so I think there's some fluidity on that. So we'll see how that plays out over time.

But -- and there's also some mitigation steps we can take from a process point of view in terms of how we manage our network, move parts around the world and so on. Obviously, when you do things like that, you're going to focus on what's the right thing for the business operationally. And certainly, in a higher structural tariff environment, you might consider doing things where return on investment might be higher. So we have to go and evaluate those things.

We're looking at that. We're also looking at longer-term pricing strategy as well in terms of mitigation effects. So when we thought about the Investor Day, we said, look, there's this tariff concern, what it does to in terms of second order impact to the macro, some unknowns associated with that. So we thought it was prudent for us to just move it into early '26, where we feel like we hopefully have a more stable environment.

So we're looking forward to it. We're pretty excited about what's happening in the business. You put out a lot of our strength in our results and what we've seen over the last few years in terms of our relative growth and share of WFE. So we think we're pretty well positioned both in core WFE, but also opportunities in advanced packaging.

And our service business performed extremely well despite some of the challenges with export control. So we think the business is in a pretty good place, and we are just reacting to global macro environment that's changed a lot in the last three months. As it relates to the footprint, we have a pretty diverse footprint around the world. We've established it over the past two decades.

We've moved products to different locations. I'd say again that you start with where it makes sense to do things operationally, whether it's cost or execution talent and so on, and then you optimize as it relates to taxes or incentives or other potential regulations. So those things can change. And so you have to make sure that the operational considerations are first and foremost.

So we have a global footprint. We'll assess the situation, and we'll do what we think is right for the business over time, and that's pretty much all I have to say about it.

I appreciate that. And then maybe on a bright note, Rick, as you mentioned in your shareholder letter, calendar '24, share rankings are out for Process Control. The team and the Process Control segment outgrew overall WFE last year. And despite your dominant number one position, you're 6.5 times larger than your number two competitor in the space, you still gained 50 basis points of share and strong number one position, I think by my count, in five out of the six major subsegments within Process Control, I think the one area where it was a bit of a surprise where you made significant progress was in e-beam pattern wafer inspection and despite optical continuing to dominate at a 7x larger market versus e-beam, the KLA team did double their e-beam inspection revenues last year.

You gained about 700 basis points of share there. So the team's strategy has always been to introduce new solutions when the market is ready to adopt. So what's driving the incremental opportunity in e-beam? And how is the KLA's e-beam platform sort of differentiated?

Thanks, Harlan. Yes, I think that the progress we made in e-beam has been long coming. I mean, we've been investing in our platforms for many years in terms of getting the e-beam products to where we thought they could really be supplemental to the optical and work in concert. And I think a lot of the success that we're now seeing is we got those platforms to start performing at a high level, and customers have now had a chance to evaluate them.

And I think what we're finding, especially on the very high end of the most challenging layers of the most challenging nodes is that people are actually doing both. They're doing optical EV mod, some of those layers. And the synergy between the two tools -- I mean one of the things we always look for the interoperability between the two, so that you can leverage the strength of e-beam with optical. So we're seeing those results.

I think, more importantly, our customers are seeing them, and we felt good about it because, as you know, often this takes months or quarters for customers to really test out the capability. So we're confident that we're on a trajectory where we're going to keep growing that business. And -- at this point, we're really glad we invested for so many years. I think there was a time where we're spending a lot of money on e-beam and it took a long time to get these results, but we're really thrilled with where we are now and our customers are telling us we need more.

And so from that standpoint, we're excited about forecast. We ran into a problem last year where as we started getting demand, we didn't even have capacity. So Bren and the ops team had to ramp it up to be able support it. So we're in good shape with that.

We got a great customer feedback and very excited about the progress we've made in e-beam.

Yes. Thanks, Rick. Thanks, Bren.

Thanks.

And we'll go next to Atif Malik with Citi. Please go ahead.

Thank you for taking my questions. I have a question on the services growth. I understand that it's a bit pressured this year because of the loss of fabs in China. Can you talk about your full year outlook on the services for this year?

Sure, Atif. So yes, the biggest impact we felt was in Q1, where growth quarter-to-quarter was fairly limited. It was despite losing access to the fabs to put up our 52nd quarter of year-over-year growth. Consecutive quarter year-over-year growth was, I think, pretty impressive and the team did very well with that.

Last year, when I think about just the semi PC part of the business, now there's also our EPC part of service, but semi PC grew -- in 2024, grew above trend line about mid-teens, about 16%. This year, I think it will be low double digits. So if you look at the total service growth, our expectations for the year are trending right around 10% or so. So a little bit below the long-term target.

But given the impact of those controls where you lose access to those tools. Now as those tools are providing limited in what kind of supply they can provide to the broader market to meet demand, you would expect some capacity to potentially get added in other places that offsets that. So we would think over the long-term that you get that business back as we model our service growth over the long run, really based on long-term growth expectations for internal in terms of useful life, rising ASP, but also growth in semi revenue. So long term, we feel very good about the long-term target.

In 2025, we're going to be slightly below at around 10%.

Great. And as a follow-up, on advanced packaging momentum, good to see you guys raising the bar to $850 million and number one market share this year. Rick, if you can just pull a curtain a bit on your kind of competitive positioning in advanced packaging? Are you stronger on the logic or the side or the HPM side? And what are your thoughts about hybrid bonding adoption?

So I think I mentioned this before, Atif, that what we've really seen is the market in many ways has come to us. And this really kicked off a couple of years ago, mainly around packaging that we've seen pushed for AI applications and just the very -- the high cost of that entire package. And therefore, it can support the kind of cost per inspection that you couldn't support on, frankly, lower-cost solutions in terms of the packages. So these packages, as you know, if you have a large chip combined with a number of memory chips that are stacked, the value of that is very high.

So it's both inspection and measurement, but also some of the process capability that we have in SPTS. That's really differentiation in the solutions. In many ways, what we've done is we've taken the products that we have for the front end and adapted them for the back end, and that's what's getting traction now. And mainly, it's with and we've seen a lot of applications driving, and we see big growth.

So we talked about going to $500 million to $850 million, and frankly, that growth trend continues, that's the message we're getting from our customers. So one of things that we're still sorting through is what the available market is for KLA because we think about how much of WFE do we talk about, but there's also all this investment that's not necessarily included that in packaging. And so we're still sorting through what that looks like, and that's going to help us outperform the overall industry.

So I think one other point on this is, to Rick's point about being able to adapt our front-end solutions to the back-end is there are some incremental engineering requirements as it relates to handling of substrates and so on in different environmental conditions is that that's a lot of engineering at least from a sensitivity and performance point of view in the systems that has already been done. So the ability to take that also brings a nice incremental profit stream to the company as we leverage some of the -- some of that to capability. And as that market starts to move to needing more capability, then you move up the value stack in terms of KLA solutions to address those challenges for our customers.

So it's a great opportunity from a growth point of view, but it's also an opportunity from a margin point of view of something that was a bit a headwind given the nature of what was required that turns into a tailwind as customers demand more capability from us. So we're really excited about that opportunity moving forward, particularly given the growth rates of advanced wafer-level packaging is likely faster than overall WFE growth over the next several years.

Thank you. Next, we will go to Vivek Arya with Bank of America Securities. Please go ahead.

Thank you. I had near and longer term question. On the near-term, I saw that China, I think, came in at about 26% in March. I think you had estimated closer to 29%. So does it go up in a kind of flattish top line year? And related to that, the $500 million impact that you had mentioned for the year, how much did you see in calendar Q1? How much more is left to go?

Yes, Vivek, on the map for China. And you're right, we spent some time on it last quarter. And we thought that for 2025, the business would be somewhere overall, our percent of business in China would be somewhere in high 20s, maybe 30%. And our view is still consistent with that.

Now I think it will be lumpy over the course of the year in terms of what shows up in any given quarter. So it was 26% in Q1. We'll see. I'm not going to guide Q2. We'll see what ends up coming in from a revenue recognition point of view. But over the course of the year, right around 30%.

And I think when you look at that relative to our expectations for the year, with some of soft guidance we've given about second half revenue, then that translates into China being down about 15% to 20% or so for the year the overall company. As far as the export control impact, we really size that based on the impact that we had through the month of December and some of the juggling of shipments as it related to certain other customers that might have taken tools through 2025. And I didn't really focus on what happened in the given quarter as our business is pretty fluid. So things move around.

Our view of the impact is still consistent with what I said last quarter at $500 million of revenue, plus or minus $100 million, with roughly 70% of that being -- or 65% to 70% of that being systems, still the same. But I'm not going to bridge back to what happened in Q1 versus other quarters. We've looked at the total impact over the next -- at the time, roughly four-plus quarters and that's how we size the impact.

All right. And from a follow-up, I know a little early, but I'm curious, like, what's on your dashboard to gauge whether 2026 WFE could be up, down flat? How does China figure into it in terms of opportunity and risk because a lot of long-term investors in KLA, they're always looking out. So how would you want them to think about what your opportunity set is in 2026? Thank you.

Right. So 2026 for us right now, that was obviously a big question earlier this year as we thought about some of the macro uncertainty. The feedback we're getting for the AI build-out, I think it's really important for everybody to understand what our customers are telling us is that they're still building for capacity that is less than the stated demand out there for the capability. So if you think about how many wafer starts are being started and what the implications on some of the hyperscaler CapEx would be it's still understated.

And so we think that, that will continue to grow, and that's the feedback we're giving. And part of the thing that's so hard to handicap is, how does this get impacted by some of the macro stuff. So the driver for us, we said at the beginning of the year clearly was leading edge. And it's the three things we talked about is advanced logic in support of all the design starts, the bigger die, everything in support of AI, whether it's the training or the inference chips and -- custom silicon.

And then it's the HBM and there are multiple players in that, and that's a more inspection intense technology than we've had in memory for a long time. And then this [technical difficulty] I think we're still early days in all of those areas in terms of the amount of silicon that's being brought online. So I think in support of that, you're going to see continued growth at the leading edge, primarily driving those other sectors. The thing that's been slow has been, we just haven't seen much come back in terms of handsets or PCs.

And those are the markets that, as you know, consume a lot of the silicon. So I think we'll know a lot more about 2026 as this build-out for 2025 continues. But the conversations we're having right now, absent any other macro goals, I think, looks pretty encouraging in terms of what the overall forecast looks like as we go out and really as we go out towards 2030. And so that's the -- we think we're early on. And today, as you know, aftermarket, there are some hyperscalers that announced continued and sometimes even increased investment in the AI infrastructure.

So we think we're in a great position right now.

Thank you.

We'll go next to Joe Quatrochi with Wells Fargo. Please go ahead.

Yes. Thanks for taking the question. Maybe just a follow-up on that, Rick. I mean, is cleaner in space of potential kind of gating factors as you look into '26? Or how do you think about that aspect of it?

No, I don't think so. I mean I the question is going to be I think they can build, depending on where they're building, they can get the shelves up and get them positioned to invest. So no, I don't think for the plans that we see -- I mean, I think -- I've always felt that the connection one would draw from all hyperscalers and the concern that people had about his AI overheated, I would look to the silicon at the leading edge being the governing factor. And the good news on that is I don't think they're going to overbuild.

And then the good news is there's going to be steady growth in the next several years to support it. So that's why we're a little more sanguine about what are people saying about the overbuild. But I don't think there's overbuild and I think there is going to be additional capacity when needed. We're in a lot of conversations with our leading-edge customers about that and we have pretty good insight into what their needs are going to be down to specific products.

And in some areas, just I mentioned the e-beam one earlier, we're getting heads up that we've got to add capacity. And for us, it takes a while to be able to support that. So I think we're in good shape for -- as we look out in -- the rest of the year and I think as we look into '26, we're feeling pretty excited about the opportunity.

That's very helpful. And maybe one for Bren. Just I wanted to kind of better understand just the uptick in the full year gross margin, just given the fact that the dynamics around tariffs that you talked about. Maybe can you just help us like understand kind of what's giving you the confidence there to increase it?

Yes. No, it's -- I appreciate the question, Joe. And I think what we're seeing is from a mix point of view, we've had a bit of headwind over the last few years as it relates to some of the cost dynamics as with the inflation that we experienced and what that meant to product cost. And as we're shipping new platforms, it's the opportunity for KLA generally to reset that as we deliver more favorable cost of ownership to our customers, but then reset that and the capability that exists in the next generation of product that comes to market.

So that's certainly been a factor. I mentioned earlier that we're starting to see some scale benefits as it relates to advanced packaging, which we're encouraged by as well. So there's a number of factors. I'd say most of it is in product mix, but there's been certainly some opportunities for us to deal with some of the cost pressures we felt over the last few years.

So yes, we've got the tariff impact. But despite that, I feel that we are trending more or less in line with this expectation of margins somewhere around 62.5% as we finish the year, plus or minus 50 basis points, so 63% in March and then the guidance, 63% plus or minus 1% for June. And then as you look forward, we're going to be somewhere, even with the full quarter of potential tariff impact is roughly 100 basis points. We're still somewhere in and around that 62% range given expectations for revenue levels that are relatively stable.

We'll take our next question from Timm Schulze-Melander with Redburn Atlantic. Please go ahead.

Timm Schulze-Melander: Hi. Thank you so much for taking my question. Maybe the first one, just on the sequential Q-on-Q. Could you just help us maybe with a bit of the gross profit bridge, pretty flat revenues but a really decent impact on gross margin? Maybe if you could just peel back some of the moving parts, that would be really helpful. Thank you.

Well, I think gross margin is roughly flat -- as you look at the -- because we were 63% and then we're guiding in March, and we're guiding 63% at a roughly flat revenue number. So there's some puts and takes -- some puts and takes in there as it relates to the different products that are revenue in the quarter. But in general, our expectation is pretty consistent for the company overall.

Timm Schulze-Melander: Yes. I was thinking more about the March quarter compared to the December quarter.

March compared to December. Okay. No, that's a great question. So if you look at March overall, it was mostly related to -- typically for KLA, our biggest issues tend to be really around the product mix of our business. And so we had some higher value systems. Not every product and KLA portfolio carries the same margin. So the margin was more weighted to some of our higher value products.

Timm Schulze-Melander: Okay. And maybe just as a quick follow-up. I think if I caught it correctly, you talked about the service business basically being the sort of source potential tariff impact to margins. Maybe if you could just give us a bit of color about that and also maybe just kind of how you're thinking about how you might respond to that pressure kind of on a medium- to longer-term basis?

Well, one thing that's unique about KLA's service business is it's a high percentage of our revenue is contract revenue. And so we deliver and customers pay by a service contract, and we support the system and make commitments for service and support, uptime and performance, availability and so on as it relates to those systems. So as part of that, then we have to then also ensure that we've got the parts whenever there are failures. So typically, in a particular region, we are importing those parts to support the tools.

And given it's a contract stream, we're the importer. So potentially carry some exposure depending on where those parts might to be coming from - and so there have been some exemptions that have come through as it relates to that, particularly as it relates to parts going into China, but that's been where we do have some exposure. So we'll see how that plays out. So that's the aspect that's tied to service.

Obviously, you have tariffs potentially on parts that are coming from outside the country into the U.S. for tools that we're building in in our factory the U.S. that then ultimately, those tools stay in the U.S. If they round trip out of the U.S., then you can then draw back some of that. But as it relates to the service piece, the issue is, as I talked about. Now you're in a billable situation, you could potentially adjust the customer because comes an ex-works type transaction, the customer would potentially then have to be the importer and then have the tariff liability.

But because of the contract structure, it's a little bit different for us. Now ultimately, over time, if you're ending up with a structural cost increase, you have to come up with ways to pass that cost along. And so there are different pricing strategies that we need to consider in our business based on what the long-term implications are.

Timm Schulze-Melander: Thank you, Bren.

We'll go next to C. J. Muse with Cantor Fitzgerald. Please go ahead.

Yes, good afternoon. Thank you for taking the question. I guess, Bren, I'm just trying to dig into your kind of relatively stable half-on-half revenue outlook better than some of your peers. So curious, is that a function of perhaps less memory exposure, sustainable foundry or greater seasonality from PCB in the second half or SPTS kind of taken off?

I guess, what are the key drivers of driving that sustainability?

Yes, I'm taking a quick look here, C.J. As I look at it, it looks on a half-to-half point of view, looks fairly stable. I would say memory potentially could tick up a bit and foundry logic looks like it is probably make it tick down a little bit. But I don't see a lot of moving parts here as I look at it moving forward, I'd say the percent of businesses, at least as it relates to our semiconductor customers, it's pretty consistent.

Great. And then I guess as my follow-up, you highlighted great growth in advanced packaging. The lion's share of that is CoWoS. Can you speak to kind of the work you're doing on HBM, how you're thinking about insertions? Is it 8PM 4E, and is there a way to kind of size the opportunity sitting here today? Or is it too early? Thank you.

Yes. So I would say that we have -- we're certainly seeing increasing momentum. Most of our exposure and the share that we've seen -- the share gain we've seen has been on the logic side, but in high bandwidth memory, as customers are going to increase stacks of chips, it's creating incremental opportunity. So we feel like we're getting more traction, it's driving the need for more capability and we're getting more traction with certain customers.

So we think, over time, as you see a selection process as a customer transitions, it creates an opportunity for us to compete for some business. As you know, those customers are running at pretty aggressive capacity levels in terms of delivering for their customers. So when you're in that environment, you don't necessarily want to change anything. So I think we have to wait for a selection as you move into higher stacks.

And then obviously, ultimately, as you think about technology changes with hybrid bonding down the road creates another incremental opportunity. So we're seeing increasing momentum on the memory side, and would expect that to continue as we go through really as we continue to this year and into next year.

Next, we'll go to Krish Sankar with TD Cowen. Please go ahead.

Yes, hi. Thanks for taking my question. First on branding. When I look at the U.S. revenue, it's up Q-o-Q, but the dollar figures are still pretty low.

And I'm just trying to reconcile that with what TSM said about investing in Arizona. Do you think the Process Control being an early cyclical, some of the early purchases for Arizona are done? Or do you think there's still potential for the rest of the year? And then I have a follow-up.

Most of our business when our biggest customers that were in centric. So that isn't -- most of that is going to Taiwan and not into Arizona. Arizona has been a slow investment cycle over the last few years. So there's been a level of business that we've had that's been a kind of low levels -- lower levels consistently over the course of a longer period of time.

But given the focus and the drive on into, that's driving most of our business into Taiwan.

Got it. And then a quick follow-up on tariffs. Thanks for the color on the service impact from tariffs. I understand a lot of moving parts, but I'm just wondering, if it ever comes to it, can you meet non-U.S. demand from your non-U.S. manufacturing facilities and U.S. demand from the U.S.? Or is it not as simple as that?

As it relates to service?

No, as it relates to systems.

Well, look, as I said in the first question, I think it was Harlan's question at the beginning. We have a global footprint, and we've established it over the last couple of decades. We've moved products around the world depending on what makes sense operationally for us. You can't do anything in a short period of time.

In a longer period of time, you'd have to consider, I think it would be very hard for us to have complete capability across factories. We certainly aren't in a position necessarily to do that today. But could you, over time, increase your flexibility, you'd have to make some investments to be able to do that, you potentially could do those things. But you be comfortable that that you're facing an environment is not going to change because those are significant investments you have to make.

Got it. Thank you very much. That's very helpful.

Next, we'll go to Tom O'Malley with Barclays. Please go ahead.

Hi, guys. Thanks for taking my question. My first was just in regards to C.J.'s question earlier just on the second half and whether it's weighted memory or Foundry/Logic. And it sounded like memory is up a little a little bit, Foundry/Logic maybe down little bit.

If you look at the mix of memory, some of your peers have already talked about like a sharper falloff in the second half when it comes to NAND. And I fully appreciate that your business is very small there. But the correct interpretation of that, that the DRAM side gets a little bit stronger and you see a little weakness on that? Are you seeing anything different just given or the timing of your NAND business?

I say that DRAM is the biggest driver. What you're seeing in NAND is more technology investments and some upgrades. So there's some activity there, but it's fairly limited. Most of what's driving our business is investment supporting our bandwidth memory.

Helpful. And then I think that it's obviously brave of you guys to go out there and kind of talk about tariff impacts already when many of your peers have kind of said, hey, don't look at the second half and you guys are being pretty prescriptive when it comes to the gross margin. So maybe it's helpful. Can you guys talk about what you guys did in order to get to that 100 basis points per quarter?

Like did you look at different facilities? Did you take everything as a whole? Like any kind of description or color as to how you got to that number would be super helpful. Thank you.

Well, so Tom, what I didn't do was -- what we had to do was really just drill through all of our business, right? And there's a fair amount of unknowns. What I didn't say early on was the various caveats, right, that things could change. And certainly, we're in a pretty fluid dynamic and who knows something could change in a short period of time.

We'll see what happens in 90 days and so on. But we know what we're what we're shipping and bringing in with our bill plans and given our lead times, what's coming into our factories around the world, obviously, we have visibility into the contract streams from a service point of view, given how unique that business is in the industry and how our customers -- our percent of business is -- that's a contract base is much higher than what other companies might have. And look, we'll see. I said roughly around 100 basis points.

We'll see if things change. But at the end of day, I can I can look at what's in service, look at what's in the factories. There are some potential unknowns as you think about what might come from suppliers, but we think we handicap that as best we could. And then there's obviously mitigation steps that we'll take over time to offset whatever pressures we might feel.

So -- and we can do...

Let me add. Because it reports to brand, but have a really strong logistics team and the same team that got us through COVID without missing deliveries and without lifting guidance was the team that drilled through all this. So I would say that Bren's team was all over this. And that's why we were able to like assess the impact and then change even during the week, we were doing it or a few days, as the rules change.

So I don't think it was luck, and we're not guessing. We did a lot of detailed work. The assumptions could change over time. And that's part of the concern we have about having everybody together for an Investor Day is something that changed the morning of that day.

And so we're kind of waiting for things to settle out. But it was a lot of hard work. We know where our parts come. We understand the rules and we applied them.

That's how we got there.

Next, we'll go to Srini Pajjuri with Raymond James. Please go ahead.

Thank you. I have a follow-up about the second half comments that you made in particular about the Foundry/Logic. I think the comment was that it's going to tick down a little bit. It was down a bit, and then you're guiding kind of flattish for this quarter.

I'm guessing most of that is China. I'm just curious as to how you're expecting, and two, demand to kind of fare? And if you can talk about where we are in the N2 cycle? And then, I guess, as we go to next year, when do we expect 1.4 to kind of kick in?

Well, so I think around N2, the investment cycle we're seeing this year looks pretty strong as we've said, and we feel pretty good about its continuation of next year. Our customers are going to add in this first year, somewhere around to 40,000 to 50,000 wafer starts. And we think that that you'll see at least a doubling of that into next year, maybe more. So we feel pretty good about some of the moving parts, it's not our only customer that's investing here.

And so like I said earlier, I think half to half, it's things tick up a little bit, things ticked down a little bit, but more or less our mix of business expectations from where we started the year is more or less about the same.

Got it. And then more of a longer-term question. I'm just curious to understand a little better what the implications from high NA. I know it's early days, but as we go to high NA, I'm reading that the reticle sizes will come down.

I'm guessing the complexity will increase quite a bit. And of course, packaging complexity will go up. But if reticle come down. So just curious to understand what the implications for semi PC intensities with?

I think those are exactly some of the issues that our customers are considering as they think about when to insert and how much to insert. I think that the one thing that is definitely true is the reason you want high NA is because you want to print smaller features. And that's always been a driver for our business because the same thing that allows you to print smaller features means that smaller defects matter more. So our customers, when they go -- when they increase the resolution on their lithography, have to increase their sensitivity on their inspection.

That's a good thing. And also, at the same time, it means that we've got to drive our capability to have more detection on those advanced devices. The reticle quality and the verification of reticles has been a huge driver in EUV in general, and that created a whole separate category of what we call print check, which is where people take the wafers that are being printed by EUV and they inspect the wafer to verify the design. Even though there are tools for reticle, there's also that additional.

We would expect, especially in the early days of high NA that there would be more radical check required. So from our standpoint, it drives increased percent of inspection and measurement because of the continued scaling, but it also -- we're working very closely with our customers who are considering that because one of the decision points they have is do they have the metrology and inspection to make those nodes work. So that's a big part of the conversation. So I would say that the most likely scenario for High-NA is when it gets introduced, it will be at a limited number of layers on whatever device or node that it's introduced and our customers because they have to be thoughtful, we'll have a backup plan in terms of whether it's multi-patterning or other ways to achieve their objectives.

So it's in the end, good for us as EUV has been good for driving relevance and of inspection. But I think it remains to be seen when that timing actually happens and what devices. And I'm quite sure because our customers keep telling us it's going to be based on their economics, not just on the performance, but on the total cost of implementation.

Got it. Thank you, Bren.

We'll next go to Timothy Arcuri with UBS. Please go ahead.

Thanks a lot. Bren, I wanted to ask about semi systems half-on-half. You quantified in the presentation, you actually quantified the outgrowth relative to this mid-single-digit WFE this year. You said you're going to outgrow by several points.

So if WFE is up 5, I take several to So that means systems will grow like 8, and you did 7.5% in last year. So that puts you at 8% for the year. So if we know what you're doing in the first half, it implies back half systems is down like 15% half-on-half. That's a lot.

So do you take issue with that math? Because I thought systems were going to be more like flattish half on half, did like something change?

Yes. Hi, Tim, I'm looking at the numbers here and based on revenue expectations, I think semi PC systems are going to be roughly spot in the second half of year.

Okay. Then outgrow by a lot more than 7...

Yes, several points relative to the WFE is up mid-single digits, I said we'd do several points better than that.

Yes. Well, if the numbers are going to be up like 12%. So that's like a lot more than several. But anyway, okay, so then on RPO.

So why stop reporting RPO midyear? Was it like causing the problem? And then I guess, you said that you're going to include it to be the transaction price for contracts that have not yet been recognized as the end of the quarter. So how is the new practice different from current practice?

So we're not going to stop at mid fiscal year, we're just giving you a heads up that we're going to make a change going into our new fiscal year, which begins on July 1. So it's the September 30 ending quarter. If you look at the quarter we just completed, and you'll see the actual numbers based on the historical practice in the 10-Q that we'll file at the end of this week is the RPO came down to about 8.9%, changed a couple of hundred million, so not really much change in it. Our view moving forward was one of the things that was -- and it's something that we spent a significant amount of time on over the last several months is that companies -- the disclosure practices across companies very widely hear about what RPO really is.

And so what we're really trying to do here is converge towards where we think the majority of our companies are. I mean, the whole point of disclosures is to be able to make adequate comparisons across companies, across industries. You certainly can't do that with this metric given the wide divergence and practices that people have related to it. So we think our view is a good balance view moving forward.

What's actually an obligation is something that has shipped to customers and has an FPA, whether it's that or whether it's a service contract that's been signed. And so our RPO guidance will converge to that, which is more of a deferred revenue -- the deferred revenue disclosure across our systems and service. And we'll provide a backlog assessment, which is more or less what we were doing before in our case going forward. So we're going to continue to tune as we complete this year, and then we're going to make some changes moving next year.

So we can be consistent -- a little bit more consistent with what the rest of industry and equipment. And so I think if you even look across large caps, you'll see that the three large caps do it have been doing it all differently. So it's a source of confusion. I get it lot.

So what we're trying to do is align more closely with what some of our peers are doing.

Okay, Bren. Awesome, thanks.

Thank you, Tim.

We have time for one more question. We'll go next to Melissa Weathers with Deutsche Bank. Please go ahead.

Thank you for letting me ask a question and squeezing me in. I wanted to ask on the high-volume manufacturing side. This is a big theme that you guys talked about at your last Analyst Day as you shift from more of like R&D-type spending to HVM spending and being a bigger part of the mix there. So how are you seeing this play out in the current leading edge nodes and maybe future nodes?

Like is there any way you can help us contextualize how much the HVM opportunity is for KLA?

Historically, KLA was more levered towards R&D and fab ramp and as a fab move to entitlement yield levels. There was a reduction in Process Control intensity and shift in our customers strategy to focusing and driving productivity in the fab. As the design start environment has picked up over the last several nodes, it has driven more challenges into high-volume production as customers are trying to manage yield across different process flows in a very different or robust design mix. And so as a result of that, you end up with different designs that test design rules in different ways.

Our customers don't want to start any more wafers than they have if they deliver the tight market windows. And so you're seeing adoption of more process control in a high mix foundry in high-volume production. So it is changing, and we're also seeing even back boarding, where they're seeing a change in mix, where a fab at N5, for example, had certain tool set expectation based on an expected type of mix. But as you've seen more and more HPC products move through those fabs.

It's driven the need for different and more capability. So you're seeing a lot more adoption in production than what you used to see if you go back 10 to 20 years in the industry. And so I think it's just really reflective of the dynamic environment our customers are trying to manage to with process windows that are extremely tight with these leading-edge nodes.

Thank you

Thank you. And I'd like to turn the call back over to Kevin Kessel for any additional and closing remarks.

Great. Thank you, everyone, for your time and your attention, your interest in KLA. We appreciate it. I know it's a busy earnings day. We will be catching up with all of you at the upcoming conferences and meetings. With that, I’ll turn it back now to the operator for any final closing instructions.

Thank you. This concludes the KLA Corporation March quarter 2025 earnings call and webcast. Please disconnect your line at this time and have a wonderful day.