KLA Corporation

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-earning conference call all participant lines have been placed on the list and on remote to prevent any background noise after the speaker's remarks there will be a question and answer session if you'd like to ask a question at that time please press star 1 on your telephone keypad if you wish to remove yourself from the queue please press star 2. Please limit yourself to one question and then feel free to read Q for any follow-up questions. Lastly, should you need assistance during the conference today, please press star zero. Thank you. I will now turn the call over to Kevin Kessler, Vice President of Investor Relations and Market Analytics for KLO. Please go ahead.

Welcome to the September 2025 quarterly earnings call. I'm joined by our CEO, Rick Wallace, and our CFO, Brent Higgins. We will discuss today's results as well as our December quarter outlook, which was released after the market closed 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 and our quarter, followed by Brian 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 the 12th, 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. Haley delivered strong results across the board in the September quarter with revenue of $3.21 billion and non-gap diluted EPS of $8.81. Gap 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 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 state's technology inflections and the growth drivers related to AI, as well as from growth and 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 ADAPT's packaging are compelling and represent a relative 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 Brent to discuss the quarter's financial highlights. Brent Weaver- Thanks, Rick. CLA 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 affected tax rate was 14.1%. Net income was $1.17 billion. Gap 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 three 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 increasing 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 30th, 2025, we announced the 16th consecutive annual dividend increase of 12% to $1.90 per share per quarter for 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 densities shrink and the processing required for packaging creates 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 roadmap 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 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 roadmaps 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 roadmaps, 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, or 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 percent plus or minus one 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 roadmap 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 a $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 78 cents, and non-GAAP diluted EPS of $8.70, plus or minus 78 cents. 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 WSE growth rate in 2025, driven by rising process control intensity, inclusive of the significant growth of the advanced packaging market. ALA focuses on delivering a differentiated product portfolio that addresses customers' technology roadmap requirements, which are driving our longer-term relevance and growth expectations. ALA'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 is seeing 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 the Q&A.