Q1 2026 Earnings Call Transcript

Good afternoon. My name is Stephanie, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the KLA Corporation September Quarter 2025 Post-Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics for KLA. Please go ahead.

Welcome to the September 2025 quarterly earnings call. I'm joined by our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results as well as our December quarter outlook, which was released after the market close and is available on our website along with the 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 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. We will begin the call with Rick providing commentary on the business environment in our quarter, followed by Bren with financial highlights and our outlook. Before I turn the call over to Rick, I wanted to provide a save the date for our Investor Day.

It has been rescheduled for Thursday, March 12, 2026, in New York. Now over to Rick.

Thank you, Kevin. To kick off our call today, I'll cover a few highlights from our quarter that showcase how the company is benefiting from the growing relevance of process control and AI infrastructure investment and our momentum in advanced packaging. KLA delivered strong results across the board in the September quarter with revenue of $3.21 billion and non-GAAP diluted EPS of $8.81. GAAP diluted EPS was $8.47. This performance demonstrates how KLA's process control leadership has expanded beyond leading-edge R&D investment to address all growth markets in WFE, including high-bandwidth memory and advanced packaging.

Accelerating investment in scaling AI infrastructure is fueling technology development investment across the leading edge, driving more designs, increased complexity, shorter product cycles and higher-value wafers. Alongside this growth, the industry is also seeing rising demand for advanced packaging. In this complex environment of rapid AI technology development, process control accelerates time to results by resolving process integration challenges during the fab ramp-up phase to optimize time to market for a diverse mix of semiconductor designs. KLA's leading-edge customers are also challenged to optimize yield and limit process variability in high-volume production environment, resulting in increasing process control intensity.

In this increasingly complex semiconductor device technology landscape, we're seeing rapid growth in demand for KLA's advanced packaging portfolio, which has emerged as a meaningful market for the company as heterogeneous device integration has become more complex. KLA's advanced packaging systems revenue continues to gain momentum through a combination of intensity gains and market share improvements across our portfolio. For calendar year 2025, we expect advanced packaging related revenue to exceed $925 million, up approximately 70% year-over-year. KLA's service business also continues to deliver strong growth.

Services grew to $745 million in the September quarter, up 6% sequentially and 16% year-over-year. Consistency and resiliency are hallmarks of the KLA's service business. Finally, the September quarter was strong on both cash flow and capital returns front. Strong cash flow in the quarter was at a record of $1.066 billion.

Over the past 12 months, free cash flow was $3.9 billion, with a free cash flow margin of 31%. Total capital return in the September quarter was $799 million, comprised of $545 million in share repurchases and $254 million in dividends. Total capital return over the past 12 months was $3.09 billion. In summary, KLA's business is both enabled and benefits from today's technology inflections and the growth drivers related to AI as well as from growth in advanced packaging.

KLA's business has gone from being primarily indexed to leading-edge R&D investments in foundry/logic customers to now addressing all growth markets in WFE, including memory, advanced packaging and leading edge and legacy node logic. As we look ahead over the next several years, the long-term secular trends driving semiconductor industry demand and investments in WFE and advanced packaging are compelling and represent a relevant performance opportunity for KLA. In this dynamic growth environment, our consistent execution reflects the resilience of the KLA operating model, the strength of our global team and our disciplined approach to capital allocation focused on long-term investment and maximizing total shareholder value.

With that, I'll turn the call over to Bren to discuss the quarter's financial highlights.

Thanks, Rick. KLA's September quarter results reflect double-digit year-over-year growth and improved profitability. Revenue was $3.21 billion, above the guidance midpoint of $3.15 billion. Non-GAAP diluted EPS was $8.81 and GAAP diluted EPS was $8.47, each above the midpoint of the respective guidance ranges.

Gross margin was 62.5%, 50 basis points above the midpoint of guidance, driven by a stronger product mix and manufacturing efficiencies. Non-GAAP operating expenses were $618 million. Operating expenses included $360 million in R&D and $258 million in SG&A. Non-GAAP operating margin was 43.2%.

Other income and expense net was a $28 million expense with upside to guidance principally driven by a favorable mark-to-market adjustment on a strategic supplier investment. The quarterly effective tax rate was 14.1%. Net income was $1.17 billion. GAAP net income was $1.12 billion.

Cash flow from operations was $1.16 billion, and free cash flow was $1.07 billion. The breakdown of revenue by reportable and end markets and major products and regions can be found within the shareholder letter and slides. Moving on to the balance sheet. We ended the quarter with $4.7 billion in total cash, cash equivalents and marketable securities and $5.9 billion in debt.

The company has a flexible and attractive bond maturity profile supported by investment-grade ratings from all 3 major rating agencies. A cornerstone of KLA's business is consistent strong free cash flow generation, driven by one of the best operating models in the industry and a predictable, highly differentiated service business. This helps drive a comprehensive capital return strategy that includes consistent dividend growth and increase in share repurchases over the long term. Our actions this year emphasize our commitment to capital returns and our confidence in KLA's long-term shareholder value accretion.

On April 30, 2025, we announced the 16th consecutive annual dividend increase, up 12% to $1.90 per share per quarter or an annualized dividend of $7.60 per share. Along with this action, we also announced a $5 billion share repurchase authorization. Turning to the outlook. It continues to be driven by increasing investment in leading-edge logic, HBM and advanced packaging.

Growth of advanced packaging supporting heterogeneous chip integration has led to a new meaningful served market for KLA. What was once a rounding error in wafer fab equipment is now, according to KLA internal estimates, an approximately $11 billion market, growing faster than core WFE. This is particularly true as chip density shrink and the processing required for package increase risk for our customers. For KLA, this creates a new served available market that will augment the company's revenue growth over the next several years.

The market and technology road map for leading-edge WFE supporting high-performance compute is driving relative inflections for process control. This opportunity, coupled with the evolving complexity of advanced packaging, supports an even broader market opportunity for KLA. As we approach the close of calendar 2025, we continue to expect mid- to high single-digit growth in WFE, modestly improved from our previous outlook discussed last quarter. Growth in 2025 is being driven principally by increasing investment in both leading-edge foundry/logic and memory to support growing AI and premium mobile demand, partially offset by lower demand from domestic China.

Given KLA's business momentum, expanding market share opportunities and higher process control intensity at the leading edge across all segments, we remain on track to outperform the WFE market in 2025. The advanced packaging market is also expected to grow more than 20% compared to last year. Finally, customer discussions have become more constructive on expectations for calendar year 2026 to be a growth year for the industry with a broader spending profile than 2025 for both WFE and advanced packaging. While it is still too early to provide precise calendar 2026 revenue guidance, our view today is that first half revenue levels will be roughly flat to modestly up compared to the second half of calendar 2025, with accelerating growth in the second half of the calendar year.

This outlook is inclusive of the revenue impact related to additional market access loss related to certain customers in China resulting from extended export controls from the U.S. government. We estimate the revenue impact on the December quarter and calendar 2026 to be approximately $300 million to $350 million for KLA. For calendar 2026, this impact is spread roughly evenly across the first and second half of the calendar year. 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.

The market environment and the complexity of our customers' technology road maps are compelling and bring challenges and opportunities for KLA to continue its relative performance. In this industry environment, KLA remains focused on supporting customers, investing for the future, executing product road maps and driving productivity across the enterprise. KLA's December quarter guidance is as follows: Total revenue is expected to be $3.225 billion, plus or minus $150 million. Foundry/logic revenue from semiconductor customers is forecasted to be approximately 59% and memory is expected to be approximately 41% of Semi Process Control systems revenue to semiconductor customers.

Within DRAM -- excuse me, within memory, DRAM is expected to be about 78% and NAND, the remaining 22%. As always, these business mix approximations pertain solely to our semiconductor customers and do not fully reflect our total Semiconductor Process Control systems revenue. Gross margin is forecasted to be 62%, plus or minus 1 percentage point, based on relatively consistent factory output versus the September quarter and product mix revenue expectations. Operating expenses are forecasted to be approximately $635 million in the December quarter as we continue to make product development and infrastructure investments to support expected revenue growth.

Given our expectations for company growth and product development road map requirements, we will maintain our operating expense trajectory. Our business model is designed to deliver 40% to 50% incremental non-GAAP operating margin leverage on revenue growth over the long run. Other model assumptions include other income and expense net of approximately $32 million expense for the December quarter. The effective tax rate assumption has risen slightly to 14%, reflecting the impact of recent global tax changes.

For the December quarter, GAAP diluted EPS is expected to be $8.46, plus or minus $0.78, and non-GAAP diluted EPS of $8.70, plus or minus $0.78. EPS guidance is based on a fully diluted share count of approximately 132 million shares. In conclusion, our near-term revenue guidance shows modest growth and is consistent with our views from the start of the year of relative top line stability. We expect to meaningfully outperform the mid- to high single-digit WFE growth rate in 2025, driven by rising process control intensity, inclusive of the significant growth of the advanced packaging market. KLA focuses on delivering a differentiated product portfolio that addresses customers' technology road map requirements, which are driving our longer-term relevance and growth expectations.

KLA's business is well positioned for today's technology inflections and growth drivers. We are encouraged by the customer engagement that informs our business forecast. Long-term secular trends driving semiconductor industry demand and investments in WFE and advanced packaging are compelling and represent a relative performance opportunity for KLA over the next several years. In addition, the growing investment in custom silicon, particularly among hyperscalers developing their own custom chips, has led to a proliferation of unique device designs and increased demand on our customers to deliver performance, volume and time to market.

As design complexity and diversity grow, so does the need for advanced process control. As a result, KLA has seen growth in process control intensity as each new chip design requires rigorous inspection, metrology and yield optimization solutions. KLA is uniquely positioned to benefit from these trends as we expand our market leadership and deliver differentiated value to our customers. That concludes our prepared remarks.

Let's begin Q&A.

Thanks, Bren. Operator can you...

Sorry, I was just going to pass it over to you to start the process. Thank you.

[Operator Instructions] And we'll take our first question from Harlan Sur with JPMorgan.

Congratulations on the strong quarterly execution. Last quarter, you had this early view given your lead times, customer discussions on calendar '26 being a growth year. You reiterated that today, but talked about being more constructive on that growth rate. So it was another day -- with another 90 days of visibility given that leading-edge design starts are continuing to expand at a rapid pace, the recent and significant AI data center infrastructure announcements, has the magnitude on the WFE growth outlook improved?

Or is it more just confidence level on the growth that you were thinking about 90 days ago? And you mentioned the broader spending profile on WFE and advanced packaging. Can you guys just elaborate on that a little bit?

Sure, Harlan. I'll start. Thank you for the comments. I don't know if it's really a strengthening outlook as much as it's just we're getting closer to it.

Customers, particularly our long-standing customers and their lead time expectations, we're starting to get more constructive about exact timing. We're encouraged by what we're seeing certainly for KLA at the leading-edge with a broadening level of investment. We think that's going to be positive on leading-edge foundry/logic. DRAM is also constructive.

And with the investments in HBM, that's been very process control intensive. And so that's been a really good sign as well. Flash market is, I think, continues to grow. The rest of the legacy market, I'm not so sure there's much growth there, and I think we'll have a little bit of a correction in China.

Obviously, we're feeling the effects of some new control that's impacting our view into next year. But we were expecting China to normalize anyway. So I think as we look at it all, we're pretty constructive on WFE growth, rising and capital intense or process control intensity. And packaging has a lot of momentum, both in terms of intensity.

So we feel pretty good about what's in front of us, and we'll have a lot more to say specifically about growth in the industry and our expectations for KLA beyond what we said in the comments. We'll have a lot more to say when we report for December and January.

One thing, Harlan, just to add to Bren's comment. What we do see and kind of feel is body language from customers are pretty strong in terms of wanting to make sure they're securing slots. So we're having kind of conversations with people not wanting us to get away from them because they're worried that they may not be able to achieve their objectives if they don't line us up. And I suspect that's across the other equipment guys, too.

Got it. And I appreciate that. And then specifically on advanced foundry and logic, in addition to the increased process control intensity, as the industry moves from 2-nanometer to less than 2-nanometer, right? There's an added dynamic, I feel like where your foundry customers are standing up fabs in totally new geographies, right?

So more uncertainty on yield ramps, systematic defects, like different type of workforce, right? And then on the advanced logic side, the large guy here is more focused on building out a world-class foundry business, which means way more focus on yield and manufacturability versus their historical trend. Wondering if these additional dynamics are driving the potential for incremental process control spend as you look into next year?

Well, sorry, I do think that there -- as the customers are dealing with the new design rules and some of them, especially that are maybe back in it, if you will, trying to do leading edge, they're benchmarking what do they need for process control, and we're seeing kind of very constructive conversations around that. So I think that's true. I think it's kind of filling out the rest of the players, if you will, in terms of how they're thinking about investment and process control. So yes, I'd say that, that strengthens, if there are more players doing more leading edge in more locations, that's going to be accretive to overall intensity.

Yes. One of the themes over the last couple of years has obviously been significant investment augmented by China and legacy design rules. But when you think about leading edge, leading edge was tremendously efficient, right, with most of the investment being really driven by one of our customers. I think as you start to see a broadening out there, it creates more opportunities for leading-edge engagement, process control intensity as a lot of the strategic investment happens to support what is an accelerating growth opportunity for our customers.

So I think we're encouraged by that profile as we move forward.

We'll take our next question from Vivek Arya with Bank of America.

On the foundry/logic side, you are, I think, guiding it to decline to 59% from 74% of sales, I believe, so a decline of over $300 million sequentially. I'm curious what's causing this drop? How much of this is the China restriction? How much of this is the China impact? And is this kind of just a 1 quarter lumpiness? Or is there more to read into it as we look into the first half of next year?

Yes. So Vivek, for our semiconductor customers on the mix side, on the leading edge, it's upticking in the December quarter, but it's being offset by a reduction in China. China was elevated in September at 39%. And just for a reference point, our expectations for the total year for China, and I have been pretty consistent with this for the last 9 months or so as we thought it would be somewhere in 30% plus or minus range.

So it was a little bit elevated versus the annual trend. So as China comes down, part of that is you have leading edge going up. And then you also have memory as -- and particularly in DRAM, we see that upticking in the December quarter. So there's some moving parts there but that's what's happening.

As it relates to the recent export controls, I would say the impact on the December quarter is fairly immaterial to the company overall and that we were able to move slots around. We've got certain products where customers get in the queue, and so we can pull business forward. It's a lot of different customers. But obviously, over the long term, that's lost business.

And so as we said in the prepared remarks, we think that's about $300 million to $350 million between now and the end of '26. So hopefully, that gives you a little color on the moving parts.

Our next question will come from C.J Muse with Cantor Fitzgerald.

I guess I was hoping to focus on gross margins. You guided down 50 bps. I'm assuming that's just product mix. I would love to hear your thoughts there.

And then, Bren, you're highlighting, again, the 40% to 50% incremental operating margins. If we are in a world where WFE continues to grow kind of in a double-digit world over the next couple of years, should we be thinking that you're at the higher end of that range given kind of greater contribution from the higher-margin silicon?

Yes, C.J., on the guide down, you're right, it's about 50 bps, and it's mostly related to just mix adjustments in the quarter. As I've said over the last couple of quarters, there is a tariff impact that we're dealing with, which is more or less consistent quarter-to-quarter. That's roughly 50 to 100 basis points of the impact. So yes, we're guiding 62% and output is relatively consistent.

So it's really a mix issue. In terms of how we were thinking about running the company and over the long run, certainly our 40% to 50% long-standing incremental operating margin target does drive how we size the company. Gross margin obviously is a factor in that. And so we have to think about where gross margins are trending as we consider that.

We outperformed that target pretty significantly as revenue has grown in the mid-teens. I'd call it above trend line growth in 2025. So as we move forward, I think the easiest way to think about that is if you're more or less a trend line, we're more or less in the middle of the target range. And if growth levels are above that high single-digit trend line, we should outperform it. If growth level is below, we'll probably underperform the target a bit.

But that's how we're going to size the company over time, and our performance over longer periods of time is obviously very consistent with that.

We'll move next to Joe Quatrochi with Wells Fargo.

I appreciate the qualification or quantification on the advanced packaging WFE. I was curious just to think about just the advanced packaging process control intensity. I think just based on some of the things you put out there or talked about in the past, it's like high teens. Is that the right way to think about it? And then how do you think about where that goes over time?

No, I wouldn't say it's that high. I think if you look at KLA's share of WFE, I mean, one of the interesting things, as I said in the prepared remarks, is it wasn't much of a factor for us in our business. And you don't have to go back more than just a few years, and the percent per KLA was in the 1% range. And now if you take our views on 2025 at $11 billion or so, we're approaching 6%.

So we've seen an escalation here in terms of intensity as the requirements have changed fundamentally related to the high-performance computing on the logic side and the memory side. So we think that, that continues over time. I don't think you're going to see that kind of -- that slope of growth. But we do expect that as density shrink and processes become more complex, that it does play to the need for more advanced systems.

And of course, we have our front-end portfolio that we can use to address this interesting market. So I think it's a new SAM for KLA. We have a lot of great drivers within WFE that we think are driving process control and KLA share of the market, and we're augmenting that growth with this growth that we expect to see in advanced packaging that likely over time grows modestly faster than WFE. So it's a really encouraging opportunity.

And I think as we start to move up the value chain in terms of new capability required, and I think it creates an opportunity for us to drive something in the neighborhood or better than general corporate averages on margins.

We'll take our next question from Tom O'Malley with Barclays.

Nice results. I wanted to ask a bigger one that people have been trying to the earnings period here. I understand that it wasn't in the preamble. But Lam went out and talked about $100 billion of AI spend is roughly equivalent to $8 billion in WFE or additional spend.

And they talked about most of that being related to memory. Do you agree with that statement? Or do you have any qualification for how you would look at that ratio?

I think in general, this is Rick. I think in general, if you think about what goes into a data center, the percent that is memory, the percent that is GPUs or logic and then the rest, you're probably at about -- if you take $100 billion, then you could say that half of that would be semiconductor related and the intensity on that kind of gets you to that run rate. But I don't think it's necessarily 50-50 in terms of memory and in terms of the logic side. So our view is you're pretty close.

And then we would -- as we were just talking out in packaging, so we get closer to $10 billion on the $100 billion because of the investment that's not just semiconductor but packaging. And we think our opportunity in that is pretty good because, again, those are all the high challenging process control elements, kind of everything that we've been talking about larger die, more valuable die, more HBM is really challenging from a process control, getting more so and then packaging. So we're in general agreement, we would add back in the packaging part, and we think our participation in there is above our average intensity for the rest of the industry.

We'll take our next question from Timothy Arcuri with UBS.

Bren, Rick was talking about customers starting to want to get in line for. So I would imagine bookings were pretty good. So can you give us RPO? I know it was $7.9 billion last quarter. Where did it end this quarter?

Tim, we don't -- we changed our disclosures, so we're not disclosing that anymore. But what I will tell you is that if you look at our lead times, our expectations for our lead times, as I said last quarter and they've been converging after a couple of years of elevated backlog related to a number of greenfield projects that have now shipped through. And if you look at the composition of our business going forward, really tied to our -- some of our long-standing customers that tend to operate in 6-month kind of lead time windows. Our lead times have converged and I think, normalized between 7 and 9 months.

Now if you go back and look at 2020, 2021, even go back historically for KLA, it used to be about 6 months. Now our customer base is broader today. And I think there's a combination of a little bit more new fab activity that will push those up. But the context that we provided in terms of our expectations for growth next year and how that plays through in terms of KLA's first half and second half is supported by an order flow that is consistent with those lead times.

So I think that, that is how you should think about it in the 10-K each year, we will provide our -- as we have historically, we'll provide our backlog. And so that will give you an anchor point in terms of backlog on an ongoing basis. But 7 to 9 months, and it looks pretty consistent in that range as we go forward.

I guess you did give it there last quarter, Bren, is that like new this quarter?

Yes. We changed our disclosure, Tim, and we highlighted that we were going to make that change back in the March quarter earnings results. We said when we started the new fiscal year beginning July 1 that, that disclosure would change. There were a number of reasons for that.

The primary reason being the inconsistency in how that disclosure was being interpreted and reported across our industry. So we have aligned more closely with the disclosure that our peers have, and that's what we're going to do here going forward.

Okay. Then I guess as my second question. So you said last quarter, Bren, that China was going to be for you, down 10% to 15% this year. But even to get down 10%, I have to have China down like $250 million Q-on-Q in December. Is that the right number that China is going to be back to like 30%, 31% in December?

Yes. In the December quarter, I think China will be high 20s. So yes, you're in the range. We'll see how the quarter finishes up.

But I think in the high 20s is how I'm modeling and then it translates into maybe 30%, maybe 31%, very consistent with the way I've talked about it all year long. And the other thing I'd say is, as you look at 2026, we think it's probably it comes down into the mid-20s. And obviously, some of that is driven by the export restriction, but also some general normalization that we've been talking about that would be coming. So we think it's likely to settle somewhere in the mid-20s as we look at 2026, at least how we see it today.

We'll take our next question from Krish Sankar with TD Cowen.

Bren, I have a 2-part question. One is in the past, you've spoken about 2-nanometer gate-all-around is 100 basis points improvement in share for you versus 3-nanometer gate-all-around. A, is that true, still the case? And number 2 is, I think if I remember right, the advanced packaging share is about 50%.

If I do the math on that $11 billion and $925 million, it seems like advanced packaging, WFE intensity is around mid-teens. Do you think advanced back-end inspect -- process control intensity is getting higher than front end? Or do you think it's still below?

I think it's still below. I mean just the first part of your question, we haven't -- look N2 has been a more intensive process control intensive node. Obviously, you have an architecture change that's quite significant. The other issue is that as you think about larger die that creates opportunities for more process control intensity.

So -- and I think the litho scaling and litho layers with larger die designs or HPC designs tends to drive more litho layers in the process as well. So when we look at N2 overall versus N3, we do see an improvement in overall intensity. There is a share element to it, too. We're encouraged by some of the share movement we're seeing.

But overall, that's how we see it. As it relates to advanced packaging, I think our logic share is higher than our memory share. We'll have more to say in terms of articulating how this market breaks up. But as I look at KLA share of the advanced packaging market, we're about 6%.

And if you look at KLA's share of the PC market, it's closer to 8%. So the process control intensity is not as high and sampling rates are pretty elevated these days. And we'll see over time if that changes. Certainly, the need for more capability will be a requirement here moving forward.

But we'll see how those things trade off over time as our customers move forward.

Then I think you also mentioned that some of your front-end tools are being used for back end. I'm just kind of curious, especially on the macro inspection or inspection side, is that an overkill? Like even ASML spoke about introducing new i-line tool for advanced packaging. Would you consider introducing new tools for back-end packaging? Or are you going to use the front-end tool?

No, I mean -- it's funny you say that because that was our initial reaction when the customers want us to put our front-end portfolio in the back end, we said, are you sure? Because the cost of that are you sure you need it? And they were quite certain that they needed it because of the -- just think about the cost of yield failure in packaging and how much it's worth to ensure that that's not happening. So that's what we've really seen in terms of that.

They're not -- it's obviously not our most advanced tools, but it is. They are systems that we use in the front end and that would have been considered the most advanced tools if you go back a few years. So absolutely, they're the ones that pulled us in. I mean we did not come to them.

It was almost the other way. They said, we want you to provide this capability. So when we think about the road map for packaging, and remember what we're talking about advanced packaging, we're, in many ways, early innings because there's still other technology inflections that are going to go into HBM over the next several years as the rest of the market catches up with these advanced packages. So we're really talking about a pretty small percentage of available packages being inspected at this high level.

Now over time, people will learn more about it, and they won't inspect at the frequency. So that's why we see the growth will continue, but it won't continue at the rate we've had for the last couple of years, but it should outpace overall WFE growth. And our share position is great for 2 reasons. One is that we've got this capability.

But beyond that, unlike our competitors that are coming from the back end, we have road maps and a lot of customers have tremendous value in that road map ability.

And we'll take our next question from Charles Shi with Needham.

I noticed that based on your Q4 guidance, the KLA process control revenue in DRAM is probably going to grow 50%-ish year-on-year. I don't think the overall DRAM WFE is growing that much. And I think historically, people don't really think the KLA as a DRAM house, more of a leading-edge logic house. So wonder what's happening this year?

Why is it growing this much faster than DRAM WFE? Specifically, is it kind of tied to the EUV insertion DRAM? And how do we think about 2026 DRAM side of the process control growth?

Yes. It's an interesting observation. For those of us who have been around for a long time, we remember when DRAM was actually leading technologically and was the biggest market for inspection for KLA. And what happened was, for many years, there was a bit of a holiday in terms of design rules in DRAM and the need for process control and what the use case was.

But when you get into what's going on with -- especially around the high-bandwidth memory and the challenges that people have relative to the new design rules, we're actually seeing, in some cases, higher sensitivity requirements, in some cases, for DRAM on some layers than we're even seeing in logic. So we've had a bit of a reversal of some -- in some areas, and we've seen big adoption of early on as people are debugging these processes and then realizing they don't have a lot of process margin. So that's the other thing is there -- and when they start EUV, then they're using our systems for print check.

So you see a lot of applications happening, and that's really what's been driving this increase. We thought it would happen. Years ago, we were hoping it would happen sooner, but it's definitely we're seeing leadership in some areas in terms of the need for process control as they retool these DRAM facilities to deal with some of the new market requirements.

Look, the introduction of EUV was certainly a factor in terms of process control intensity. We think overall, probably changed it about 1 point. But then if you look at the requirements for HBM, we think it's increased it another point or so. Rick talked about a lot of the issues.

The other thing you have to keep in mind is that the reliability requirements in a stack of DRAM chips in an HBM device, the device is only as good as the weakest DRAM. And so the performance requirements, the process variability that the customer can accept, you can't bin these devices that go into an HBM integration. So there are a number of things that are happening there that are positive for process control intensity.

Got it. Maybe a quick follow-up. I think going back a couple of years ago, you guys talked about the delayed pellicleization, what that means to the KLA mask inspection portfolio. I thought the thesis was that without pellicle, your existing mask inspection plus print check probably works the best.

But with the pellicle, maybe actinic works better. I know this has been an ongoing discussion for many years, but we are hearing recent -- some recent reporting out of Taiwan, talking about your leading foundry customers potentially converting a fab into a pellicle fab and wonder what that means to your overall strategy on mask inspection. Mind if you shed some light on that?

Yes. So rather than going to specific strategies, specific customers have, I can tell you we're in conversations with all the leading mask manufacturers in the fabs in terms of what is their strategy relative to reticle qualification and requalification because it's a critical area. And although we don't have all the pieces in that, we have many of the pieces because there's many points along the way, whether you're calling the reticles in the fab, you're doing recall or you're doing verification and print check. So we're heavily involved in those conversations.

As you know, the challenges with pellicleization and the trade-off is throughput. And so that's always the issue of using pellicles as you give up some of the light performance. There have been advancements and we're well positioned to support those. But when we talk about a record year in our reticle business, obviously, people are buying with the future in mind as they do that, and we continue to see growth going forward.

We feel pretty good about our ability to participate as we go forward in terms of any scenario that plays out. But I can tell you, we're very heavily involved in customers with those conversations.

We'll take our next question from Chris Caso with Wolfe Research.

I guess the first question is regarding the commentary on '26. Could you give a little more detail about what you're seeing first half versus second half? I assume that it's a combination of advanced logic and DRAM driving that second half? And is that just simply a function of where your lead times are that some of the improvements we've seen over the past couple of months are just now flowing through in orders given where the lead times are right now?

Yes. As we said in the prepared remarks, I think the first half is maybe flat to slightly up. We'll see as we move forward where that ends up. But at least that's how it looks today.

And I think you'll see growth accelerate more into the second half. Lead time discussions, we're talking about slots, but I think there's some facility dynamics also that are influencing some of the timing. But would expect advanced logic and the broadening of the investment that I mentioned to be a driver into the first half. But there's continued momentum on the DRAM front, too.

So we're pretty encouraged by what we're seeing there. Obviously, it'll be offset by some weaker numbers out of China, but the leading-edge dynamics are encouraging.

Just a question on gross margins as we go into '26 also. And with some of the mix changes, particularly with China probably coming down as a percentage of the mix, anything we should think about with respect to gross margins as we start modeling through '26?

Yes, Chris, I'll give a little bit more specific guidance on margins and operating expense expectations based on our revenue picture next quarter. Gross margins for KLA are generally impacted, I'd say, almost exclusively impacted by what we sell, not so much who we sell to and where we sell it. So it really is a factor of how it's impacting certain product types that we have a pretty extensive portfolio of products, the broadest in our segment of the industry. And depending on what you're buying, it can carry different margin profiles.

Certain parts of the market, like packaging tend to carry a more dilutive stream. As I mentioned earlier, I think, over time, that goes from being a headwind to a tailwind. Service tends to grow and has a dilutive gross margin, but we believe an accretive operating margin. So you do have some of the moving parts.

The tariff impact, when you compare year-to-year, we really -- that's more second half dynamic this year. And my hope is given some of the things that we have going on in the company in terms of assessing how we can try to mitigate that exposure that, that becomes less of a headwind over time. I think structurally, we're in a world where we'll be dealing with higher tariffs, but I do think there are things we do in terms of how we operate the company, where there's some ROI in terms of just how we move parts around the world and how we reduce the leakage and drawback scenarios as we understand and track different parts attributes that help reduce some of that.

So I think there are a number of dynamics at play that will become less of a headwind over time. And depending on the growth of the business, obviously, that will have -- volume will have an impact, too. So I'll have more to say about it. I think those are some of the context behind the different moving parts.

We'll take our next question from Shane Brett, Morgan Stanley.

I wanted to follow up on Charles' earlier question, but your memory customers have been talking of CapEx growth into 2026. But just given how strong this December quarter DRAM guide is, how should we think about your memory growth expectations into next year relative to this really strong December quarter?

Yes, I apologize. I know that Charles asked that and we didn't answer that question. There are definitely some timing factors that are influencing process control, timing relative to other products. As I look at where we're at, I mean, this year has been a very strong year in DRAM for the company.

I would expect next year to be a growth year as well. And I think a lot of these announcements, I think, as we start to see that play out, we'll see whether that is more of a second half dynamic into next year and how much that sort of carries forward. But what is clear is, across all of our customers, I expect them to spend more and to see growth in our DRAM investment from our customers into next year.

[Operator Instructions] We'll take our next question from Edward Yang with Oppenheimer.

Rick, Bren, most of my questions have been already answered, but maybe you could talk about your outlook for foundry-related revenue opportunities outside the dominant Taiwanese customer. I think at least one major foundry has historically underinvested in yield improvement tools. Maybe that tune is changing. So are you seeing any change in engagement there?

Yes. I would say that we're encouraged by -- as we said earlier, we're encouraged by the broadening of investment that we're seeing at the leading edge as we go into next year.

Yes. The conversation qualitatively, the conversations we have with customers that are looking to, as you mentioned, not the leader that are looking to do advanced logic, we do have a lot of conversations around what they're asking our advice, what do they need to be successful, especially since they maybe haven't been pressing the latest nodes. And so there's a lot of conversation we have about the specific things they're trying to accomplish. It depends on the dynamics.

It depends on their mix. It depends on their die size. It depends on what their expectations are for how fast they want to ramp. But it is, for sure, a lot of conversations we're having.

And as Bren says, we feel pretty good about those discussions. I think for a lot of people, the process control part, they haven't really fully understood how the world has changed in the last few nodes. And so those conversations are ongoing.

And just as a quick follow-up. Yesterday, the leading AI accelerator company talked about a $0.5 trillion backlog. We're seeing these flurry of deals involving the major AI lab players. From your vantage point, can you level set for us, is the semi-cap industry position to serve that scale of demand? Or is the ecosystem discounting some of these projections as aspirational?

Yes. I don't -- I guess I would maybe pass it a little bit differently in the sense that I think the semiconductor industry has been prudent in terms of adding capacity. And right now, when we talk to -- when we try to reconcile the external discussions about CapEx and what that translate into in terms of wafers, not enough wafers will be available to achieve those objectives in the time frame. And our view is that it's not necessarily a bad thing.

It means it's not going to -- it's unlikely to overheat if those forecasts remain intact because there's more gating factors than there are people making announcements. It's easier to make an announcement about investment in the data center than it is to build a new fab. So I think it's going to take some time for the industry to absorb and support the capacity demands implied by all the public announcements.

We'll take our next question from Blayne Curtis with Jefferies.

I just want to go back to the DRAM comments. You talked about the increasing capital intensity. I'm just kind of curious about kind of the conversations. Obviously, massive numbers have been thrown out there.

Just kind of curious, I think someone asked this prior about what -- was that always the plan to have DRAM up this much? Or have things been pulled in? And then I guess, just if you could elaborate a little bit more color on those conversations you said where they're looking for capacity, like what's holding it up? Is it just they need fab space?

Or are they unsure about the demand? Just any color there would be great.

Yes, I would say that you definitely feel there's more urgency on the DRAM front in terms of timing. We'll have to see how that plays out in terms of slots as we move into next year. Given our lead times, what we can accommodate, obviously, we try to work closely with our customers on that front. But there's certainly -- I think from a pricing point of view, I think the dynamics that are driving HBM pricing overall, there's definitely a sense of urgency from our customer base.

And as I said earlier, across the top 3, I do expect higher investment levels next year than we're seeing here in '25.

I think the other way to think about it, if you think that there's 3 components, primary components that go into supporting these AI infrastructure build-outs, you have obviously the GPUs and the accelerators around those, you have the packaging and then you have the memory. I think you're going to see over time that you go in phases of which one seems to be short supply. And we kind of went through a phase of that with packaging being behind. And now I think the realization by a lot of our customers is they might -- there might be more opportunity in memory than they thought, and those are accelerated from what they even told us a few months ago.

So I think that, that's part of what you're seeing. I think everybody is a bit amazed by the number of applications that are being realized using AI. Even inside of KLA, we keep coming up with new ways to leverage the technology. And I don't think we're the only ones doing that.

So I think the memory guys are right now feeling, wow, there's more opportunity if they could add capacity. And those are kind of the conversations because they realize that it takes longer, as I said, to ramp the supply chain than it does to make these announcements about CapEx.

We'll take our next question from Jim Schneider with Goldman Sachs.

Maybe just one follow-up relative to the earlier question about the diversification in your leading-edge logic and foundry customer base. Is that something that's more on the inquiry level at this point? Or are you actually seeing that either in your order book or in the form of forecast from those customers at this stage?

I would say we are seeing it and certainly as it informs our views of next year, we're seeing it in the order forecast. And the -- as Rick talked about earlier, I think there's a lot of collaborative discussion about how we can help navigate and ramp and drive time to results in this capacity.

And then maybe just as a quick follow-up. Maybe you can help us just refresh your expectations about kind of confirming mid-teens is the right level for service growth in 2025 and maybe give us a sense about whether that could accelerate next year?

Yes. We've seen service actually pick up a little bit here. It's been a little stronger than we expected. Obviously, we've had some FX benefits, but we've also had some strengthening as utilization rates have gone up.

We've seen some strengthening in some of our billable business. So I think our service growth will be in our target range of 12% to 14% this year. And I would expect right now, as I look at next year, that we'll be in the same range as well. So I think we feel pretty good about where that is, both based on the growth expected in the installed base, the lifetime increase in the tools, the incremental value that's coming from the complexity in the systems and how that's affecting the pricing as it relates to contracts, the opportunities in the acquired businesses that we've acquired over the last few years to drive their service business and new requirements that we're seeing, this is a factor in '25 as well.

But as you think about packaging, a different service model for packaging, but also for DRAM, where the utilization rates to some of the earlier questions have been higher and higher expectations of performance of our system. So I think there's some new opportunities for growth there that, frankly, if you go back a couple of years, I don't think we fully anticipated, both on the packaging front but also on the high bandwidth memory front supporting HPC.

We'll take our next question from Timm Schulze-Melander with Rothschild & Co.

Timm Schulze-Melander: Actually, I just had one with respect to your outlook for next year. You talked about this broadening in demand for 2026. Could I just ask, could you just paint some color around to what extent that already bakes in high NA engagements or whether that would be an upside to your outlook for '26?

One thing, look, on the R&D front, there's a lot of collaboration with customers. How that translates into revenue is not part of the outlook. Most of what the engagement is, is on ramping the continuation of the N2 ramp, our 2-nanometer ramp across our customer base. And so it isn't influenced by the adoption of high NA in that time frame, certainly not in a material way.

We do have time for one additional question. We'll take our final question from Brian Chin with Stifel.

I appreciate that. Maybe a question here. I think there was a reference earlier about the potential for some acceleration in second half of next calendar year. I'm sure it's not one single thing, but how much of that second half outlook is tied to new cleanroom space availability, knowing that some of your tools, probably some of the first that go into a greenfield fab.

Look, there are some issues, I think, with space constraints potentially. It's not, of course, on every customer, but I do think that it could affect some timing as we move into the second half of next year and into '27 as you start to think about the next node ramping and some of the new fabs coming online in memory. So right now, I don't think space is going to be an issue. Obviously, that would depend on the strength of demand, yes, that could change.

But for now, it's certainly a factor, but I don't think it's a big factor as it stands today. We'll see how things go.

Maybe if I have time for a quick follow-up. Just on advanced packaging, I think to date, a lot of your inspection business strength has been strongly tied to logic. How much of your continued optimism on market and KLA growth in packaging next year involves expansion opportunities in HBM packaging?

I feel good about market share, both in logic and in memory on the packaging front. We've seen positive trends in both segments over the last couple of years, and I think that, that continues into next year.

Thank you, Brian, and thank you, everybody, for your interest in KLA. We appreciate your time today, and we'll be in touch. I'll turn it back over to the operator for any closing instructions.

Thank you. And this does conclude today's KLA Corporation September Quarter 2025 Post-Earnings Call. Please disconnect your line at this time, and have a wonderful day.