KLA Corporation

Good afternoon. My name is Stephanie. I'll be your conference operator today. At this time, I'd like to welcome everyone to the KLA Corporation September quarter 2026 earnings conference call and broadcast. All participant lines have been placed in listen-only mode 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 one follow-up. Lastly, should you need operator assistance, please press star zero. 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 September 2026 quarterly earnings call. Joining me are our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results, as well as our outlook, which we released after the market closed, and it 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 always refer to calendar years. The next material contains a detailed reconciliation of GAAPs and non-GAAP results. Our comments today are subject to risks, and uncertainties reflect and our SEC filings. Any forward-looking statements, including those we make on the call today, are also subject to those risks, and KOA cannot guarantee those forward-looking statements will come through. Our actual results may differ significantly from those projected in our forward-looking statements. For any subsequent updates, please refer to KOA's IR website, which also contains investor events, presentations, corporate governance information, and links to our SEC filings. We will begin the call with Rick providing commentary on the quarter and our overall business environment, followed by Brent with financial highlights and our outlook. I'll pass the call now to Rick. Rick? Thanks, Kevin. Haley's September quarter beat the midpoint of our guidance ranges across all key metrics. Revenue was another record at $4.14 billion. This, coupled with our December quarter revenue guidance of approximately $4.7 million, demonstrates the growth acceleration we planned for the second half of 2026, rooted by continued strength in leading-edge foundry logic related to AI infrastructure investments and increasing process control intensity across leading-edge devices and advanced packaging. Other highlights of the quarter include KLA delivering operating margins above 46% for the first time ever, Gross margin was 62.7% and free cash flow was $1.34 billion. Over the course of calendar 2026, the AI demand environment has continued to strengthen as reflected in our performance. Additionally, our strong customer engagement has provided visibility into a more favorable outlook for waiver equipment investment for calendar 2026 and 2027. We see this reflected in our growing backlog and sales funnel forecast. We expect momentum across our business to continue into the December quarter, and we're positioned to deliver significant growth in calendar 2027. We have been proactively working with our strategic supply chain partners over the past year to increase their capacity in order to keep up with our demand. Advanced packaging remains increasingly critical to AI infrastructure expansion. and advanced packaging roadmaps continue to incorporate more sophisticated wafer front end processes, which drive additional process control requirements. KLA's leading process control portfolio enables the company to address these requirements across a growing range of applications. For calendar 2026, and many more. Thank you. supported by a growing installed base and continued customer focus on tool performance, productivity, and availability in this tight system utilization environment. Finally, KLA's process, PCB, and component inspection businesses are also benefiting from technology transitions and the rigorous performance requirements of high-performance computing. In summary, KLA is experiencing strengthening momentum driven by growth across the semiconductor ecosystem. The pace of our backlog growth is a key signal of accelerating momentum and provides confidence in our visibility into calendar 2027. Our September quarter results demonstrate the strength of KLA's market position and operating model execution. Semi-conductors continue to play an increasingly important role across global industries. The growth driven by investment in AI infrastructure and expanding demand across a broader range of applications and end markets. Together, these trends are supporting stronger, more durable, and more diversified long-term growth for the industry. Additionally, the growing complexity of AI-enabled semiconductors is increasing process control intensity throughout the manufacturing flow, reinforcing KLA's long-term growth opportunity. KLA's differentiated portfolio is uniquely positioned to address these requirements. while sustained AI data center investment and broader adoption of advanced packaging architectures continue to expand the company's addressable market. As we look ahead, we remain focused on supporting customer roadmaps, investing in innovation, and scaling our global capabilities to meet expected demand growth through calendar 2027. As we progress toward our 2030 target model, we remain committed to disciplined execution, technology leadership, and our Proven Capital Allocation Stretch which will allow us to create durable shareholder value. With that, I'll turn the call over to Bren to discuss the quarter's financial highlights.

Thank you, Rick. KLA delivered strong sequential and year-over-year growth in the September quarter. For the first time in our company history, KLA delivered operating margins over 46%. These results reflect our market leadership and disciplined execution supported by our global team's dedication and focus on customer success. Revenue of 4.14 billion was above the midpoint of guidance and rose 13% sequentially and 29% year over year. Non-GAAP diluted EPS was $1.22 and GAAP diluted EPS was $1.18, each above the midpoint of the respective guidance ranges. Gross margin was 62.7%, slightly above the midpoint of the guidance range. Operant expenses were $688 million including 395 million in R&D and 293 million in SG&A. Operating margin rose 240 basis points sequentially to 46.1%. Head income was 1.60 billion. Gap head income was 1.55 billion. Cash flow from operations was 1.53 billion. Free cash flow was 1.34 billion. The company had 1.311 billion diluted The breakdown of revenues by reportable segments and markets, major products and regions, can be found within the shareholder letter and slides. Moving through the balance sheet, ALA ended the quarter with $4.7 billion in total cash, cash equivalents and marketable securities, and $5.95 billion of debt. The company maintains a flexible and attractive bond maturity profile supported by investment grade ratings from all three major rating agencies. The industry outlook continues to strengthen with visibility improving as customers increase long-term investment plans. Despite these fast space limitations, customers have been very resourceful and are accelerating delivery expectations across all segments. We are therefore raising our expectation for the waiver equipment market, including advanced packaging, to approximately the mid $150 billion range in calendar 2026. Daily backlog continues to grow, and our sales funnel visibility is unprecedented, supported by new FAB investments by a broad base of customers. We continue to plan for significant growth in calendar 2027. While we'll have more to say about market and customer segment expectations for next year and our earnings call in late January, We currently expect the wafer equipment market to exceed $200 billion in calendar 2027. Customer engagement remains robust with numerous new fab projects and greenfield facilities scheduled to come online in the quarters ahead. The primary area of focus for our customers is on delivery urgency aligned with new project plans. Against this backdrop, KLA's business momentum and critical role in leading edge process control positions us to deliver accelerating growth for the remainder of calendar 26 and continuing into 2027. Our expectations of revenue growth acceleration in the second half of 26 are playing out as more capacity comes online in our long lead time supply chain areas. This is resulting in growth in the second half of calendar year 26 over the first half of approximately 25% and positioned the company for continued sequential growth into calendar 2027. DLA's December quarter guidance is for revenue of $4.7 billion, plus or minus $200 billion. Foundry logic revenue for semiconductor customers is forecasted to be approximately 60%, and memory is expected to be about 40% of semiconductor process control systems revenue to semiconductor customers. Within memory, DRAM is expected to account for approximately 84%, with NAN representing the remaining 16%. As a reminder, these business mix approximations pertain solely to our semiconductor customers and do not fully reflect our total semiconductor process control system's revenue. Gross margin for the December quarter is forecasted to be 62.5% plus or minus one percentage point. While the company is demonstrating expected operating leverage across the business as it grows, This is being offset by persistently high memory costs for our system image processing requirements, as we have discussed in prior quarters. We are actively engaged across the portfolio to optimize memory efficiency in our systems, along with other product cost reduction initiatives. These efforts, coupled with driving our useful returns-based value sharing with our customers, should offset this headwind over time. Operating expenses are forecasted to be approximately $710 million in the December quarter. We will continue to prioritize next-generation product development, scaling our business execution and company infrastructure investments to support expected revenue growth over the next several years. And we anticipate these expenses to grow sequentially through 2027, but at a much slower pace than revenue growth and consistent with our business model for operating margin leverage. As a reminder, 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 expense for December quarter, and we expect it to remain at approximately this quarterly level. Planning tax rate is 14.5%. Our tax rate will vary quarter to quarter due to the geographic distribution of profit and various discrete items. For the December quarter, non-GAAP diluted EPS is expected to be $1.44 plus or minus 11 cents, and GAAP diluted EPS is expected to be $1.41 plus or minus 11 cents. EPS guidance is based on a fully diluted share count of approximately 1.306 billion shares. In conclusion, process control, and KLA in particular, remain critical to the AI ecosystem build-out. and benefits from numerous ongoing relevance inflections, including increases in leading-edge designs across boundary and logic, device size and value, rising complexity and performance requirements, and the growing importance of advanced packaging. ALA is experiencing strengthening momentum and a broader set of growth drivers across the semiconductor ecosystem. The rate and pace of our backlog growth is a key signal of our accelerating momentum and increased confidence in our visibility leading into calendar 2027. Our September quarter results demonstrate the strength of KLA's market position and operating model execution and support continued confidence in our performance moving forward. These recent results also illustrate the strength of KLA's market-leading portfolio, disciplined operating model execution, and continued confidence in improving our performance moving forward. Looking ahead, we remain focused on supporting customer roadmaps, investing in innovation, and scaling our global capabilities to meet expected demand growth throughout calendar 27 and beyond. As we progress towards our 2030 target model, we remain committed to disciplined execution, technology leadership, approving capital allocation strategy, and creating durable shareholder value. That concludes my prepared remarks. Kevin, please begin the Q&A.