Q2 2026 Earnings Call Transcript

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Good afternoon. My name is Stephanie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation December Quarter 2025 Earnings Conference Call and Webcast. All participant lines have been placed in a listen-only mode to prevent any background noise.

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

Welcome to the December 2025 quarterly earnings call. I'm joined by our CEO, Richard Wallace, and our CFO, Bren Higgins. We will discuss today's results as well as our March and calendar 2026 outlook, which we released after the market close and is 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 we make 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 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 and our quarter, followed by Bren with financial highlights and our outlook. Before I turn the call over to Rick, I wanted to remind everyone that we are hosting our Investor Day on March 12, and invitations were recently emailed out.

Now over to Rick.

Thank you, Kevin. I will summarize KLA's overall performance for 2025 and the December quarter, as well as cover the current industry landscape. For 2025, KLA continued to deliver relative growth outperformance along with strong profitability, free cash flow generation, and return to shareholders. For 2025, revenue grew 17% to a record $12.745 billion, with our process control systems business outpacing the industry growth by several points.

Earnings per share grew 29% year over year, demonstrating the strong leverage in our model. And KLA maintained industry-leading gross margins and operating margins of 62% and 43.6%, respectively. The company also grew free cash flow 30% to $4.4 billion and returned $3 billion in a combination of dividends and share buybacks. KLA's process control system revenue grew 19%, and our service business grew 15% for the year.

And 2025 is expected to be another year of process control share growth for KLA. The demand for AI infrastructure, coupled with KLA's industry leadership and process control, positions the company well in supporting all major growth vectors in semiconductor manufacturing, including advanced logic, high bandwidth memory, and advanced packaging. In the December quarter, KLA delivered strong results across the board, with revenue of $3.3 billion, non-GAAP diluted EPS of $8.85, and GAAP diluted EPS of $8.68. Highlights contributing to this performance include 17% year-over-year revenue growth fueled by investment in leading-edge foundry logic, high bandwidth memory, and DRAM.

AI remains a core driver of KLA's performance and a key factor in our growing industry leadership. As KLA solutions enable our customers to deliver products needed for AI, our systems are also applying AI-driven analytics to deliver actual insights that streamline chip manufacturing and accelerate innovation and time to yield for next-generation AI applications. We believe that our experience reflects the compelling capabilities, cost, and power consumption available with GPU-based compute architectures and is fueling the ongoing HPC infrastructure build-out. Looking ahead, KLA's innovations with AI will produce data for our customers that accelerate system performance, reduce the cost of ownership, and improve their return on investment in KLA systems.

In the December quarter, KLA continued to grow in advanced packaging, the rising demand for more powerful systems of chips is driving advanced packaging and increasing the value of process control in the chip package, which has fueled significant growth in this expanding market for KLA. KLA continues to see strong momentum in advanced packaging revenue growth and market share, with calendar 2025 total systems revenue of $950 million representing over 70% year-over-year growth. And as we look forward to calendar 2026, we expect this momentum to continue with year-over-year percentage growth expectations in the mid to high teens driven by faster than market growth for our process control products.

The daily services business grew to $786 million in the December quarter, up 6% sequentially and 18% year over year. This was the sixteenth consecutive year of annual service revenue growth with a compounded annual growth rate greater than 12% over that timeframe. Finally, the December quarter remains strong for both free cash flow and capital returns. Quarterly free cash flow was a record $1.26 billion.

Total capital return in the December quarter was $797 million, comprised of $548 million in share repurchase and $250 million in dividends. Total capital returns over the past twelve months were $3 billion. The industry dynamics to support the demand for AI infrastructure reinforce KLA's growing relevance for our customers, and our broad product portfolio plays a critical role in enabling customer success. Additionally, the emerging and fast-growing advanced packaging market further strengthens KLA's relative position.

Finally, rising semiconductor content across diverse end markets, coupled with strategic investments in legacy nodes, remains a key driver of dependable long-term growth for KLA and the semiconductor equipment industry. With that, I will turn the call over to Bren, who will discuss the quarter's financial highlights.

Thanks, Rick. KLA's December results reflect strong year-over-year growth with an industry-leading margin profile. The results also exemplify our market leadership, consistent business execution, and the dedication of our global teams in meeting customer commitments. Revenue was $3.3 billion, above the guidance midpoint of $3.225 billion.

Non-GAAP diluted EPS was $8.85, and GAAP diluted EPS was $8.68, each above the midpoint of the respective guidance ranges. Gross margin was 62.6%, sixty basis points above the midpoint of guidance due to stronger than modeled service performance and manufacturing efficiencies. Operating expenses were $653 million and included $384 million in R&D and $269 million in SG&A. Operating margin was 42.8%.

Other income and expense net was $32 million. The quarterly effective tax rate was 15%. At the guided tax rate of 14%, non-GAAP earnings per share would have been $8.99. Non-GAAP net income was $1.17 billion. GAAP net income was $1.15 billion.

Cash flow from operations was $1.37 billion, and free cash flow was $1.26 billion. The company had 132 million diluted weighted average shares outstanding for the quarter. The breakdown of revenue by reportable 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 $5.2 billion in total cash, cash equivalents, and marketable securities, and debt of $5.9 billion.

The company has a flexible and attractive bond maturity profile supported by investment-grade ratings from all three major rating agencies. KLA generates consistent strong free cash flow driven by our high-performing operating model. Over the past five years, cash flow has grown at a 20% compound annual growth rate, above the 16% revenue compound annual growth rate over the same period. This growth, coupled with resiliency across business cycles, helps enable a comprehensive capital return strategy that features double-digit dividend growth and share repurchases to support long-term shareholder value creation.

Turning to the outlook, the industry outlook for 2026 has strengthened over the past few months. We expect the core WFE market to grow in the high single to low double digits, reaching the low $120 billion range, up from approximately $110 billion in 2025. In addition, we expect the advanced packaging component of the market to grow at a similar rate to approximately $12 billion, for a total market forecast in the mid-$130 billion range, an increase in the low double digits versus our forecast for 2025. The customer spending profile is expected to broaden across all major end markets. Given KLA's strong business momentum, expanding market share, and higher process control intensity at the leading edge across all segments, we begin 2026 well-positioned to outperform and increase our share of the overall market.

We are experiencing strong customer momentum that has accelerated over the past three months, as reflected in our system backlog and sales funnel. Our view today is that 2026 revenue will grow mid-single digits compared to 2025, with accelerating growth in the second half of the calendar year. Customer lead times for our products are increasing due to supply constraints, limiting first-half growth potential across many of our products. 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 manufacturing.

The market environment and the complexity of our customers' technology roadmaps are compelling, presenting both challenges and opportunities for KLA to maintain its relative outperformance. In this industry environment, we remain focused on supporting customers, investing for the future, executing product roadmaps, and driving productivity across the enterprise. KLA's March guidance is as follows: Revenue of $3.35 billion, plus or minus $150 million. Foundry logic revenue from semiconductor customers is forecasted to be consistent with the December quarter at approximately 60%.

Memory is expected to be approximately 40% of semi-process control systems revenue to semiconductor customers. Within memory, DRAM is expected to be roughly 85%, and NAND the remaining 15%. As always, these business mix approximations pertain solely to our semiconductor customers and do not reflect our total semiconductors process control systems revenue. Gross margin for the quarter is forecasted to be 61.75%, plus or minus one percentage point.

Although volume levels are relatively consistent quarter to quarter, product mix is modestly weaker versus the December quarter. This guidance also includes the incremental impact of the rapidly escalating cost of DRAM shifts used in the company's image processing computers that ship with our systems, creating a headwind to our gross margin expectations. This pricing environment has changed profoundly over the past two to three months and has been highlighted regularly in industry press and analyst reports. While we expect this pricing environment to be transitory, current modeling suggests that this situation will persist through 2026 and have a roughly 75 to 100 basis points negative impact on gross margins for the calendar year.

As DRAM capacity additions accelerate over the next several quarters, we expect this cost dynamic to improve as we exit the calendar year, and we are modeling a return to a normalized pricing environment for our memory requirements in our longer-term business forecasts. Considering this impact, coupled with product mix and volume expectations, we expect gross margins to be approximately 62%, plus or minus 50 basis points in calendar 2026. Operating expenses are forecast to be approximately $645 million in the March quarter. For 2026, we continue to prioritize next-generation product development and company infrastructure investments to support expected revenue growth over the next several years.

And we anticipate these expenses to grow by roughly $15 million sequentially throughout the year. Our business model is designed to deliver 40% to 50% incremental operating margin leverage on revenue growth over the long run. Other model assumptions include other income and expense net of approximately $25 million for the March quarter, and expected to remain at this quarterly level for the calendar year. For taxes, our established practice is to provide an effective tax rate assumption for the calendar year when providing guidance for the March quarter.

Given expectations of geographic distribution of revenue and profit, pillar two adoption, and recent tax changes in the United States, the planning tax rate for 2026 is 14.5%. We would expect some quarter-to-quarter tax rate variance due to discrete items. For the March quarter, non-GAAP diluted EPS is expected to be $9.8, plus or minus $0.78, and GAAP diluted EPS is expected to be $8.85, plus or minus $0.78. EPS guidance is based on a fully diluted share count of approximately 131.7 million shares. In conclusion, our near-term revenue guidance reflects consistent growth and relative strength.

We expect to outperform the market in 2026, driven by multiple tailwinds driving rising process control intensity and growth in advanced packaging. KLA continues to focus on delivering a differentiated product portfolio that addresses customers' technology roadmap requirements and production efficiency objectives, which are driving our longer-term relevance and growth expectations. The KLA operating model guides our best-in-class execution. Our focus on customer success, innovative solutions, and operational excellence drives industry-leading financial performance, enabling us to return capital consistently and predictably.

KLA's business is uniquely positioned to capitalize on today's technology inflections and growth drivers. We are encouraged by strengthening customer confidence and engagement, which informs our business forecast. The 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. KLA's business has gone from being primarily indexed to leading-edge R&D investment and fab capacity ramp to now addressing all growth phases in WFE and advanced packaging, enabling leading-edge process development, time to results in fab capacity ramps, and optimizing yield in a high-volume production environment.

In addition, the growing investment in custom silicon, particularly among hyperscalers developing their own custom chips, has led to a proliferation of new higher-value design starts and increased demand on our customers to deliver performance, volume, and time to market. As the design mix and complexity grow, so does the need for advanced process control. As a result, KLA is seeing consistent 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. Kevin, please begin the Q&A.

Thank you, Bren. Operator, can you please provide the instructions and begin the Q&A session?

Thank you. We'll now take our first question from Vivek Arya with Bank of America Securities.

Thanks for taking my question. For the first one, your forecast for WFE for this year. Yesterday, your peer reported and suggested that WFE could grow over 20%. I think they said 23%, and you're suggesting something in the high singles to low double.

I was hoping you could clarify what is kind of the apples-to-apples inclusion or exclusion? And then part of that, you're suggesting advanced packaging only grows, I think, at that same pace. High single to low double. But that's very surprising given how fast the AI market is growing and just the correlation of that advanced packaging market to AI.

So basically, if you could just give us apples-to-apples, you know, why such a big disconnect between your view of WFE growth versus what your peers suggested yesterday?

Vivek, it's Bren. So I did talk about this a little bit in the letter, but I think one of the issues that has become a little bit noisy over the last couple of years has been the rise of packaging as a market. And the inclusion of it in WFE forecast, and I think you and I talked about this in your conference, back in June, was that, you know, that, you know, who what do people exactly include in these numbers? And it varies a little bit across analysts and across companies.

If you look at our forecast, our view on consistent traditional core WFE in 2025 was approximately, and we'll see how people report, but approximately $110 billion. And that the advanced packaging market, we look at it, the total market, is roughly in that $11 billion range. So we'll call it the low one twenties. As we look at 2026, looking at it in the same way, we see advanced packaging growing somewhere in excess of $12 billion.

So, you know, it'll probably be in double digits, we'll see. It tends to be a quicker turn business, so we'll see how that plays out. And that core WFE is rising from one ten, as we said, to about one somewhere in the low one twenties. So I think when you add the two together, you end up in the mid one thirties.

Which is I think consistent with what Lam said yesterday. But that's how to think about the market. I don't know how they think about it and what they include and what they don't. We try to capture all elements of the market as it relates to process and process control and so that's how we look at it overall.

In terms of what happens on the wafer film frame, advanced component, and so on. So that's how we see it. Hopefully that helps. And one of that Rick just to add one part of that, the question on the growth of packaging.

We're talking to our customers they are frustrated with the shelves that they have available. So part of what's slowing down the growth this year is their ability to have their factories built to support packaging because of the growth. So that's why we see it more we'll see a lot more growth in '27 as a result that. There is demand, but I think it's a matter of getting the facilities ready, which is a theme generally right now with our customers.

So I think on the go forward, we're just gonna aggregate it. And I think maybe that helps. But what I tried to do is provide over the last several months or so some disaggregation disaggregated view of what's traditional core WFE, the same WFE we've looked at over the last multiple decades, and what the advanced packaging market looks like as you add the two together. And you get to the mid 30 one thirties as we look at 2026.

Okay. And for my follow-up, just kind of two clarifications. One is what's your assumption of China, WFE kind of absolute percentage growth? How much was China WFE as part of that $120 plus billion in your definition kind of all in WFE?

How much was China? And then what are your assumptions about what China would do this year? And then how much are your supply constraints limiting your growth? Is there a way to quantify right, how much growth you're kind of leaving on the table because of your where are those supply constraints?

And how much are they limiting your growth this year? Thank you.

All right. There's a lot in there. For China, our expectation is that China is flattish, maybe slightly positive. Modest growth in 2026. It was modestly negative in 2025. For the company, as a percent of as a percent of our revenue, we think it'll be somewhere in the mid 20% to high 20% range.

As we look at it. I think if you look at the total China WFE inclusive of the restricted fabs, We see China somewhere in the, we'll call it in the mid maybe mid $30 billion range mid to high $30 billion range in 2026.

Anything on supply constraints?

Look, think as it relates to the first half, we're virtually sold out across most of our products. Given the lead time of our products, our decisions that were we're driving in the first half or decisions made in the 2025 generally. As we move into the second half and as we talked about in the prepared remarks we see the second half accelerating versus the first half. We have a little bit more flexibility.

But there are constraints in terms of what our customers are asking for. We're seeing our lead times extend. There are facility readiness dynamics that will be play a role in terms of timing of shipments. The one good thing is that given the all the new facility or greenfield visibility we have is it give us pretty good confidence as we look out into 2027 and most of our conversations today about new orders are for deliveries late in '26 and into '27. So, it's it's pretty clear from a visibility point of view we feel pretty good about our ability to ramp the business.

I think if you look back to 2022, I think we did a pretty good job in terms of ramping to support a pretty robust environment. And so I think that those practices and our investments and how we manage our supply chain will play through in terms of our ability to satisfy demand as we look out over the next twelve to twenty four months.

Thank you.

Thank you. We'll take our next question from Harlan Sur with JPMorgan.

Hey, good afternoon. Thanks for taking my question. Your core process control systems business delivered yet another strong year of WFE outperformance. I think it grew 20% versus 2025 WFE of like, plus 10 to 12 within this inspection, outperformed yet again for, like, the third or can't remember fourth consecutive year growing 25% patterning growing 12%, How are you guys thinking about the growth in inspection and patterning relative to WFE view of sort of low teens growth this year?

Given the focus on yield and manufacturability, would you expect a similar level or more of outperformance in control for calendar 2026?

Yeah, Harlan. It's Rick. Thank you. I think recognizing the outperformance, I think we're feeling really good about the trends that we're seeing especially in inspection and especially as they relate to the BB BBP products.

And to Bren's point, I think we've been trying to add capacity in that product line. And probably we're going to need it based on our conversations with customers. I think there'll be continued growth and everything about what we're seeing in the build-out for AI, Bren talked about the increased designs, the larger die, And now what we're seeing in HBM, which has become a huge driver In many ways, a bigger story is the change intensity around memory. Has been pretty dramatic in terms of if we look back the last couple years, and they have a heavy usage of advanced inspection to support that.

So it's good. I mean, we're looking at a modeling as we go forward and our customers have told us '26 is expansion and setting the stage for even more expansion than '27. And so we think we'll continue to see strong growth associated with that. I think that the capacity I mean metrology is historically a little closer tied to some of the capacity. So we'll see some relative recovery and then reticle is going to be very strong because it's so tied to the number of design starts and the challenges associated with advanced mounts.

Bren, am I missing anything?

Yeah, I think to your question about relative performance, I think despite the more mix related to memory as Rick talked about our performance in HBM is changing the intensity profile. So, we feel pretty good about our ability to sustain multi-year outperformance that we've seen. So I think it's pretty exciting. The portfolio is in a really good place from an overall share point of view and we're seeing intensity rise in a number of a number of markets.

We feel pretty good about it.

Great. Thank you for that. And for my follow-up, it's pretty well understood that on all these new sort of advanced technology transitions, you do need a lot more inspection and metrology capabilities. Right?

But on top of that, given the industry's chip supply tightness, your customers are looking to even further squeeze more supply for a given sort of current installed base I'm wondering is this and so their focus you know, just as much on technology transition, but on the existing capacity footprint trying to drive more supply via yield improvements, better manufacturability, I'm wondering if this is also driving incremental demand for your process control solution?

Yes, certainly. I mean, we have seen in some cases back penetration of technologies once the recognition was that two things have happened in some cases. You know if you go back in time they'd move from one to the next and not really pay much attention to the prior. Now there's more demand at the prior and if they're getting advantages and the capabilities in the latest technology node, we see back penetration to squeeze out, to your point, more yield.

Right now because of the constraints and I think if you when we talk to all our customers we hear a common theme is they're constrained by the ability to build new fabs and new shelves. But to your point, they're for the most part, trying to do everything they can, to optimize. And then the pricing environment is such for them that that additional yield is worth And so that's the other factor that's that's driving them.

Thanks, Rick. Thanks, Bren.

Thank you. We'll take our next question from Joe Quatrochi with Wells Fargo.

Yes. Thanks for taking the question. Maybe just kind of understand the supply constraints that you're seeing in the first half. Any way that you can kind of help us understand just what could growth has potentially kind of been first half or second half if you didn't have those supply constraints? And then is it mostly just DRAM? Or is it also other components like optics and things?

Well, Joe, the biggest long lead time aspect of our build of materials and optical components. So to my earlier point about the lead time for that tends to be pretty long. So that does like I said, we were making decisions last summer that was affecting what we expect to ship in the first half of the year. So that's probably the biggest factor.

We don't really look at what we could have done. Certainly in the last few months, we've seen a strengthening from customers for more demand in the first half. And so mean, good thing about our differentiation in our market position is that we can balance pretty well across our customers to make sure that we're trying to meet their needs. At the same time, we're not missing business or losing business.

So our lead times are extending. Our customers know that. And so we're managing it accordingly. So I don't but I don't think, you know, I go, oh, I could have done this or could have done that.

It's, you know, what can you And so, you know, I think that that's the nature of our conversations with customers and then we look to improve as we can. As we move into 2026, we will see the business accelerate would expect second half to cap high single maybe low double digit type growth. As we move into the second half of the year.

I think as an industry you have to remember if we moved independently if we could supply everything everybody wanted right away it still would be a limit. There are other factors that limit their ability to ramp these fabs. So our customers when we talk to them are having the same conversation with our peers that they're having with us. Collectively they need all the equipment in order to be able to ramp And so the frustration for a lot of them now is they've got demand and in some cases they don't even have the ability to build the shells as fast as they want.

And then fill it out. So to Bren's point, collectively we're all being asked to accelerate equipment delivery, but it's not really because we don't have VBP that we're missing out. It's part of their overall solution. So when we talk to them they really want to prioritize when they get that equipment to be able to facilitate it.

But we're not going to lose share because

That's that's helpful. And then as follow-up, just trying to understand like the kind of trajectory of gross margin I mean, it seems like maybe based on the guidance, March is is kind of the bottom and we move higher from here. And anything you can share on just the ability to, like, pass through higher component costs or rep reprice your backlog?

Yes. So I think you're right. It looks like March is probably the low point for the year as that goes. And as we move across the year we'll see it increment up.

We're going to be our first priority as it relates to memory supply is securing supply to ensure that we can meet our delivery commitments and support our customers. That's our primary focus. We'd also would expect that the tariff burden as we progress through 2026 given some of the the process things we're doing within the company will will also diminish in terms of its impact. I talked about a 50 to a 100 basis point impact related to tariffs.

We're closer to the top end of that range today. And we'll see that come down I think over time. So as it relates, I thought it was important to give you some sense of it in terms of the expectations for the year. 62% plus or minus 50 basis points. We think the memory situation is transitory And and really as it relates to how we we price our products, it's much more of a a value oriented pricing model and less about cost movement particularly around commodities.

So, it's important that we continue to maintain the product cadence that we have in terms of launching new products and variants of new products. And that gives us an opportunity to to enhance our cost of ownership offering to our customers add new capability and also take into consideration some of these dynamics around cost that we've been dealing with for some time starting with some of the pretty significant inflation just a few years ago to this issue today. So that's how we're thinking about it right now.

Helpful. Thank you. Thanks, Joe.

Thank you. We'll take our next question from C. J. Muse with Cantor Fitzgerald.

Apologies. Thank you for taking the question. I guess first question on gross margins. How are you thinking about the progression through the year, given the overall guide of 62%?

And then more importantly, I guess, are your thoughts around 2027 and the ability to kind of pass along the higher DRAM cost, which I I don't assume will will go away anytime. Soon. And and I guess as you deliver kind of newer products, what impact would should that have on incremental gross margins into next year?

Yes. So, over the course of the rest this year, I think that margins look product mix is probably the biggest factor in quarter to quarter variability, but I would expect gross margin to trend north, part of it being our expectations around mix here, but also expected increases in overall volume. So I think that there's some scale benefits that we'll see that will flow through. Over the long run, I feel pretty comfortable with as we talked about our our model that we presented at our last Investor Day of 63% plus type gross margin profile I feel still very good about that.

And given the the mix of our business, the the the growth rates of service and so on. So I think as we look into 2027, I would expect to see gross margins continue on kind of an incremental cadence from where they are. And I feel pretty good about 63% plus as we go forward and we see some normalization in some of these cost areas.

Very helpful. And then I wanted to focus on DRAM. I think your share of wallet historically has been kind of 789%. Depending on the year. But curious now with HBM, particularly as we evolve to HPM4 and 4E, how do you see that share kind of progressing in 2026 and 2027? Thanks so much.

Sure. I think technologically, there's a lot of reasons to explain why we're seeing higher adoption. One, we talked about before is less redundancy, the value of these devices is higher, so there's a less willingness to give away real estate to redundancy. There's because you got to move so much data in and out, there's more metalization layers which require more inspection.

And then there is the increased use of the advanced lithography, which requires an EUV more inspection. So all those things are driving up the intensity of DRAM and it looks much more similar to what logic did not that long ago. So, think all those issues are driving that. And we feel really good about the that going forward as we're engaging with customers and they're seeing the benefits of for many of them, haven't they haven't been employing a lot of process control like this in in most of their working lifetime.

So we're seeing them getting used to that in coming to us for more capability.

I think the other thing is the process variability flexibility in the past depending on end market but something that customers could bend devices and it with high performance compute they don't have the ability to do that. So that's that's driving more rigor around ensuring that each of the devices in the stacks performs pretty tight specs. The demand environment is also driving opportunities in our service businesses customers look to keep these tools up to have maximum uptime to ensure good performance where in the past with redundancy you might see less contract penetration. We think it's a growth opportunity here moving forward given the nature of these devices.

Their requirements.

Thank you, CJ.

Thank you. We'll take our next question from Shane Brett with Morgan Stanley.

Thank you for letting me ask a question. My first question, I just wanted to follow-up on CJ's question earlier, but you've previously talked about DRAM process control intensity increasing 100 basis points with EUV. Another 100 basis points with HBM. But is there a world in which DRAM process control intensity just really gets close to advanced logic? Thank you.

Well, it's still a ways away from advanced logic given the high mix of designs. And so that's I think, the biggest issue that you see in advanced logic that's that's different than than memory. So we're pretty encouraged by what we're seeing. We'll see how this plays out with with more EUV layers, and so on in DRAM devices.

So we think that it's just the the the market requirements are driving more inspection, more metrology, and we think that will be a positive trend. Not sure I'm ready to commit to to something that that looks like advanced logic given the nature of those devices and and and the the differences in a logic fab versus memory.

Got it. And my follow-up is on foundry logic. So you've called out a broadening of foundry customers over the last year. And it's clearly materializing with your customers CapEx announcements. But you talk about the process control intensity at these customers? And just how good can leading edge logic for you be this year? Thank you.

I'll start and then let Vern fill in. We are seeing the broadening We're definitely seeing the intensity I think to Bren's point, there's a couple of factors that you have to look at. Maybe three really. One is the technology node, and big factor is die size.

And then another one is the mix. And and so if you have a a company that's doing advanced logic, but they're not on large die and they're not high mix, that intensity is just not going to be as high. If you have somebody that's doing all three. But it's higher than it's been, and in order to be competitive, they're increasing it.

So we kind of model that going forward, and that's and we'll lay this out in a lot more detail when we look at our 2030 conversation at the Analyst Day. But we are seeing it going up for this year. And there's when we talk to our customers, in advanced logic, even they are talking about it depends. It depends on if they get more customers, it depends on how much more capacity they need.

Their investments will follow based on that. So it's a little hard for us judge what that's going to end up being. Thank you.

You, Shane.

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

Good single digits half on half versus the back half of last year. I think you made a comment answering a question about high single digits of

Yep.

Tim, do you mind starting over? I think when you began your question, you were kind of, like, right in the middle, so we didn't pick up the start of the question. I didn't want you to finish and then have to do it again.

You don't mind. Perfect. Okay. Okay.

Perfect. So, Brent, we know you said the first half of this year, is gonna be at mid singles versus the back half of last year. So so we know what June is. June's, like, three six and change.

I think in answering a question, you said high singles to low doubles. And I think you meant the back half of the year. Is that a half on half comment? Because that would sort of imply that this calendar back half would be something like $7.5 billion.

And I like I asked because that's not up that much versus the 3.6 that you're saying for June.

Tim, yes. So there was a half to half statement I said. So we'll see how it plays out, right? I'm not going going to guide specifically with more detail.

I tried to give you a sense of this our expectations of growth in the second half of the year. And, you know, I think it's, you know, likely in that, you know, that sort of high single low double range. For now. So we'll see how things play out as we move forward.

Okay. And then advanced packaging, I think unless I I looked back through the transcripts, I saw last quarter on the October call, I thought the expectation was that the advanced packaging market this year would grow more than 20%. And now I think you're saying mid to high teens. Did the market downtick, or did stuff pull in?

Or, you know, maybe I'm just parsing numbers, but I'm just kinda wondering if, something changed. Thanks.

No. We're pretty encouraged by what we're seeing in the market. It It's not a large market, so the percentages can can move around a fair amount. We're very encouraged by what we're seeing from a a share point of view across the market.

So we'll see. I tried to provide some context. Think it's it's likely in that we'll call it 10% to 20% range. And so that's why we said what we said.

What's interesting about our process control position in that market, if you go back 2021 and process control, we were roughly 10% of that market. That overall market was what I call the rounding error in terms of how you thought about WFE. Now as you look at the size of the market, and the opportunity that's there, it is now becoming part of what's called what I think is the core overall equipment market. Our share was down in the 10% range think when you look at 2025, close to half the market and share.

And I think in 2026 we feel pretty good about our prospects moving forward. So it's a great opportunity There's a lot of advancements that's happening there. Sampling, rates are high. So we have a broader portfolio that we think customers will start to leverage more as we move forward.

So it's a pretty I think exciting market and we have great drivers within what I call traditional WFE, and we have this evolving SAM that we think will augment our growth here moving forward.

Okay. Thanks, Ben.

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

Yes. Thank you. I guess first question would be characterizing the relative growth of memory versus foundry logic for this year. And I recognize that a lot of that probably has to do with clean room space constraints as you said. But what do you how do you think it shapes up for this year and then particularly in the second half of the year as some of the revenue starts to improve?

Well, we think that certainly the DRAM part of the market will grow faster than foundry logic will grow. It's driven mostly by the demands for HBM but also as we talked about the challenges in conventional memory as well. So the way we're modeling is you know we think overall foundry logic is a 10% to 15% for the year from a WFE point of view. And that the DRAM part of the market is probably 15% to 20%.

Versus last year. Flash, a little harder to pin. I think it's slower than DRAM. It's off a lower it's it's a lower base, so, you know, lower number.

But I I think the biggest, at least from our point of view, I mean, certainly, biggest drivers for the for WFE this year and from a growth point of view overall is what's happening in advanced logic and what we're seeing in the DRAM market.

Thank you. As a follow-up, think you've talked about 12% to 14% kind of normalized service growth. Given the rising utilization rates, the fact that the folks are a bit tight now, how does that affect the service growth for both '26 and as you kind of start into '27?

Well, there's a number of factors that are driving gross certainly to your point, I mean higher utilizations. I mean our tools tend to to stay very well utilized no matter where customer overall utilizations are because it's the best way to manage capital even in downturns is to drive yield. So our customers in terms of how they buy our systems is they they buy them, they run them at very high uptime, And the value is in the performance of the systems and matching performance in terms of information on defectivity and metrology and so on. So, the growth expectations of the growing install base this install base living longer, Opportunities for work where things are tighter in the market opportunities around memory, as I talked about earlier, opportunities in packaging.

And then growing streams in our acquired businesses where we think we can leverage the infrastructure of KLA to drive drive revenue growth and service out of acquired businesses. Those are all our our vectors for growth here moving forward. So we feel very confident about the 12% to 14% go forward target model for service revenue and I think there are a lot of drivers that suggest we can operate at the higher end of the range versus the lower. Over time.

Thank you. Thank you, Chris.

Thank you. We'll take our next question from James Schneider with Goldman Sachs.

Thanks. Good afternoon and thanks for taking my question. I was wondering if you could maybe provide a little bit more precision following on the last question. Do you expect that I mean, you expect DRAM to be stronger in the short term, but do you expect the growth in foundry logic to actually expand substantially into the back half of the year such that growth those growth rates would be closer to matched or not?

I'm just trying to think about how that plays out in terms of process control intensity for you over the course of this year? Thank you.

Yes. So I can't comment exactly on where the overall industry levels will be. I mean, certainly as it relates to KLA's business, would expect the foundry logic part of our business to be kind of stronger in the second half. Than the first half right now. But it is I think it's pretty fluid and there's I think kind of consistent growth expectations half to half across both segments.

Well, and we know from public comments some of our customers have made they are definitely facility constrained. Right? So their ability to ramp I'm sure they're going to do everything they can to pull that in, but I think we're going see in the foundry logic space you know, setup for 27 is pretty remarkable. We'll see more I think late in '26 as they have the opportunity.

But they're 's a lot of discussions already about preparing us the equipment supply companies for '27.

That's helpful. And then maybe as a follow-up, relative to the China market, you outlined your expectations for WFE growth there. But I'm wondering in terms of your competitive landscape, you have a very, very strong portfolio sort of across the board in your your product space. Have you heard any kind of incremental interest from your customers in China or from the government in terms of promoting more onshore solutions there?

Thank you.

Well, I think that know, to the degree where we can compete, we continue to offer capabilities that our customers want. I think biggest constraint we have and the biggest challenge we have sometimes in China is when we're not permitted to sell but alternative non US companies are permitted to sell to the same And those are conversations we've had with the government We're not going to opine on those decisions overall, which companies are on that list. In terms of competition from China, I think the there's been more progress made quite a bit more in the process tools than there has been in either lithography or in process control, partly largely because of the technology required to do that.

So we feel pretty good about competing anywhere in the world including China and we push for in the cases where we've had some unfair disadvantages, we just want a level playing field as it pertains to actions taken by the government.

Thank you.

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

Hi. This is Robert Burns on the line for Krish. Thank you for taking my questions. I know you've talked a good amount on some of the previous questions.

But, just in terms of these capacity constraints, are there any areas of the market that are larger pain points in your ability to ship tools to? And, any areas where potentially you could be constrained, and would need more capacity once, foundry and logic takes off, more in in, calendar year '27.

I mean, if you think about this is Rick. If you think about our portfolio we by and large ship the same products same kind of products for advanced technologies whether it's memory or foundry logic. So not like we're constrained on a to support the memory guys or the logic guys. It it's it's more the thing Brent talked about where optics is an example where you only have so much capacity over time and you can you can add it, but you can't add it quickly because it takes a lot of work to to increase number of the output of very complex optics.

So it's more product specific to our products than it is customer specific. And I guess the only other thing I'd add to that is what's driving the mark today is really leading edge demand. And so it isn't like we when we went through 2023 and 2024 with more legacy products where you had a broader mix of products, what customers want today are leading edge solutions. And so that's that's where where most of the focus is.

Got it. Thank you. And then your DRAM shipments were particularly strong this quarter. I think you had mentioned in the last call, you expected them to be up. But were there any shifts in your view over the quarter? And what sort of demand visibility do you have into that market for this year?

Yeah. As as we said earlier, I mean, certainly over the last few months, we've seen fundamentals of overall equipment spending strengthen and certainly a desire by our customers to get tools sooner rather than later. So we've tried to manage our way around that and and the demand is is broad based. So I would say that overall demand has strengthened in last few months in that part of the market.

The whole part of all markets frankly.

Got it. Thank you.

Thank you. We'll take our next question from Stacy Rasgon with Bernstein Research.

Hi, guys. Thanks for taking my questions. My first one, I want to ask Tim's question a slightly different way. So you gave the guidance for the first half, which kind of gives me June.

And again, if I'm modeling, said high single to low double. The second half would be up you know, call it 10%. That would put us my math suggests that kinda total revenue is up I don't know, 12, 13%, which is about what you're suggesting the whole WP market is growing. So like, I you you said you're gaining share, so why wouldn't that number be be higher?

Like, where is the share gains? Given that half over half in the second half that you're talking about?

Well, so Stacy, I mean, part of this is is the blended numbers, right? So you're getting that when we talk about share gain overall, we're looking at our our semiconductor process control business in terms of its relative performance against total equipment market. So there is that. Again, I I I allow that allow you to do the work.

I'm not gonna I'm not gonna guide the full year to to that level of precision. I will say that we feel very good about our ability to grow, grow faster than than than the market. And, you know, you've got service element, you've got our non-semi elements that are you know, are also factors in our growth rate.

Okay. Because, I mean, services is growing about that much as well. You said 12 to 14%, and I just I just feel like that that half over half, and maybe there's just conservatism built into but it feels like like I said, call it 10% or whatever, feels light. Anyways, So my second question, just around China, The last time you reported it was after the affiliate rule been put in place and before it was taken off.

What are your thoughts on, I guess, recovery of that revenue? And, like, how does that bake in to your thoughts on China revenue next year? Because I to my mind, like, you're I don't know if your China guidance for next year now is higher than it was last quarter or not, but presumably some of that affiliate revenue should be coming back?

Yeah. I I would have Yeah. I think that three months ago, we thought China would be, you know, modestly down and now I think it's it's going to be up for us. This year. So that business has come back in and feathered through within our forecast. And some of the commentary we provided here.

And how much was that again? Was I can't remember. $3.3 billion or 350? I can't remember.

Yeah. In that ballpark, I mean, some service elements, but yeah. That ballpark.

Got it. Okay, that's helpful. Thank you, guys.

You. We do have time for one additional questioner. We'll take our final question from Tom O'Malley with Barclays.

Hey, guys. Thanks for taking my question. As I look out you talk about more share gains. Where should I be paying attention Is that more on the leading edge foundry logic side?

Is that more in the advanced packaging side? Just because to Stacy's question, right, you're talking about a core WP that you're growing in line with, maybe you're being a conservative to start the year and end up beating that as we go along. But I would imagine if you include advanced packaging as well, that's an area where you had a lot of strength. So imagine that would accelerate the growth rate.

Maybe explain where you're seeing those share gains? Is it more so on the AP side or on the leading edge foundry logic side?

Well, we're certainly seeing share gains in as I talked about earlier. I think there's a lot of positive momentum there. I think we've we've done extremely well with logic and I think there's a lot of momentum on the memory side. As it relates to the overall business, I wouldn't say our share is pretty consistent.

Across the different segments. I mean, so it really comes down to our products. Reticle inspections had a really strong year. We think that that's part of the markets inflecting.

We're doing pretty well there. We see some positive momentum in our electron beam businesses. And so we think that that's a positive here moving forward as well. So I think between happening in packaging, what's happening in e beam, what's happening in reticle, and our our largest, you know, businesses like our broadband plasma business or high end pattern inspection It's a market that's growing faster and we have a strong share.

So we'll influence the overall share numbers just because of the relative growth rate of that segment versus other parts of the market. So those are the areas we feel pretty good about our share position here in 2025. In terms of gaining share and we think that we'll continue to increment what is that it was a really strong share position we'll continue to increment here moving forward given the nature of the portfolio and our ability to compete meeting customers technical requirements and their cost requirements being able to leverage the network effect across the systems. So we think that that is enhances our competitive offerings and positions us well here moving forward from a share point of view.

Super helpful. And if I may, just a really quick follow-up. Your competitor talked about the different vectors of market growth into their guidance for WFE in 2026 and said, foundry logic, good growth DRAM, good growth, but NAND a bit below that. I was curious if you agree with that assessment when you look at the broader market.

And then obviously, you're hearing some NAND guys report tonight maybe talking a bit more aggressively about spend. Do you think that as this year goes along, maybe that view can change if you see an acceleration a bit more quickly on the NAND side from a technology transition perspective or some greenfield I know it's a smaller business for you, but interested in your thoughts.

I think the challenge given the constraints in the industry around how much can actually be supplied, any new demand that's showing up today, as I said earlier, in terms of our conversations with customers, is more about 27 deliveries. Also, they're not a competitor. They're a peer. We have enough competitors. Thank you.

Thanks, Tom.

Thank you, Tom. All right. I wanted just to thank everyone for time. I know it's a very busy earnings season and a very busy earnings day. We look forward to seeing hopefully many of you at our Investor Day in New York on March 12. And with that, I'll turn it back the operator for any final instructions.

Thank you. This concludes the KLA Corporation December Quarter 2025 Earnings Call and Webcast. Please disconnect your line at this time, and have a wonderful day.