KLA Corporation Q1 FY2026 earnings call

• KLA delivered strong results in the September quarter with revenue of $3.21 billion and non-GAAP diluted EPS of $8.81. - The company's process control leadership has expanded to address all growth markets in WFE, including high-bandwidth memory and advanced packaging. - Services grew to $745 million in the September quarter, up 6% sequentially and 16% year-over-year. - Strong cash flow in the quarter was a record $1.066 billion, with free cash flow over the past 12 months at $3.9 billion and a free cash flow margin of 31%. - Total capital return in the September quarter was $799 million, including $545 million in share repurchases and $254 million in dividends. - The long-term secular trends driving semiconductor industry demand and investments in WFE and advanced packaging are compelling for KLA.

In the September quarter, KLA achieved revenue of $3.21 billion. The service business grew to $745 million in the quarter, up 16% year-over-year. For calendar year 2025, advanced packaging related revenue is expected to exceed $925 million, representing an approximate 70% year-over-year increase. The service business contributes a significant portion to the overall revenue, with its 16% year-over-year growth being a notable segment performance.

• 2025: Expect mid- to high single-digit growth in WFE, modestly improved from previous outlook; advanced packaging market expected to grow more than 20% year-over-year. - 2026: First half revenue levels roughly flat to modestly up compared to second half of 2025, with accelerating growth in the second half; December quarter total revenue expected to be $3.225 billion plus or minus $150 million; gross margin forecasted to be 62% plus or minus 1 percentage point; operating expenses forecasted to be approximately $635 million; GAAP diluted EPS expected to be $8.46 plus or minus $0.78, non-GAAP diluted EPS of $8.70 plus or minus $0.78.

• Revenue impact related to additional market access loss related to certain customers in China resulting from extended export controls from the U.S. government, estimated to be approximately $300 million to $350 million for KLA from December quarter to 2026.

Q: 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?

A: 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.

Q: 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?

A: 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.