KLA Corporation Q2 FY2026 earnings call

• Rick Wallace summarized 2025 performance: revenue grew 17% to $12.745 billion, EPS grew 29%, gross margin 62%, operating margin 43.6%, free cash flow grew 30% to $4.4 billion, and $3 billion returned to shareholders. - December quarter highlights: $3.3 billion revenue, non-GAAP diluted EPS $8.85, GAAP diluted EPS $8.68; driven by investment in leading-edge foundry logic, HBM, and DRAM; AI as a core driver, with AI-driven analytics streamlining chip manufacturing; strong growth in advanced packaging. - Bren Higgins discussed financial highlights: revenue $3.3 billion above guidance midpoint, non-GAAP diluted EPS $8.85 above midpoint, gross margin 62.6%, cash flow from operations $1.37 billion, free cash flow $1.26 billion; outlook for 2026 with WFE market expected to grow in high single to low double digits, advanced packaging component to grow similarly, and March guidance provided.

In 2025, KLA's process control systems revenue grew 19%, and the service business grew 15%. In the December quarter, revenue was $3.3 billion. The daily services business reached $786 million in the December quarter, up 6% sequentially and 18% year over year. Process control systems contributed significantly to revenue growth, with advanced packaging also showing strong momentum, having calendar 2025 total systems revenue of $950 million representing over 70% year-over-year growth.

• March guidance: Revenue of $3.35 billion, plus or minus $150 million; gross margin for the quarter forecasted to be 61.75%, plus or minus one percentage point; 2026 gross margin expected to be approximately 62%, plus or minus 50 basis points; operating expenses forecasted to be approximately $645 million in the March quarter and expected to grow by roughly $15 million sequentially throughout 2026; non-GAAP diluted EPS expected to be $9.8, plus or minus $0.78, and GAAP diluted EPS expected to be $8.85, plus or minus $0.78; tax rate for 2026 planning at 14.5%.

• Supply constraints limiting first-half growth potential across many products. - Rapidly escalating cost of DRAM shifts used in image processing computers creating a headwind to gross margin expectations, with modeling suggesting a roughly 75 to 100 basis points negative impact on gross margins for 2026. - China market constraints and competition issues in the semiconductor industry.

Q: Vivek Arya asked about WFE growth vs peers and China WFE growth.

A: Bren Higgins responded that WFE market definition varies, core WFE expected to grow from ~$110 billion in 2025 to low $120 billion in 2026, advanced packaging to grow to ~$12 billion, China WFE expected to be modestly positive in 2026 and in mid to high $30 billion range.

Q: Harlan Sur asked about process control growth and incremental demand.

A: Richard Wallace and Bren Higgins responded that there will be continued growth in process control, especially in inspection and metrology, driven by AI, advanced packaging, and yield improvements.

Q: Joe Quatrochi asked about gross margin trajectory and passing through component costs.

A: Bren Higgins responded that March is likely the low point for gross margin in 2026, with margin expected to increment up, focusing on securing memory supply and tariff burden diminishing over time.

Q: C. J. Muse asked about DRAM share and HBM progression.

A: Richard Wallace and Bren Higgins responded that DRAM process control intensity is increasing due to factors like less redundancy, more metalization layers, and advanced lithography, and HBM is driving growth in DRAM.

Q: Shane Brett asked about foundry logic process control intensity.

A: Richard Wallace responded that foundry logic process control intensity is increasing due to technology node, die size, and mix factors, and they are seeing broadening of foundry customers.

Q: Timothy Arcuri asked about growth guidance and advanced packaging.

A: Bren Higgins responded that growth in the second half of 2026 is expected to be in high single to low double digits, and advanced packaging is a growing market with strong momentum.

Q: Chris Caso asked about memory vs foundry logic growth and service growth.

A: Bren Higgins responded that DRAM market is growing faster than foundry logic, and service growth is driven by higher utilizations, growing install base, and opportunities in acquired businesses.

Q: James Schneider asked about foundry logic growth and China market competition.

A: Bren Higgins and Richard Wallace responded that foundry logic growth is expected to be stronger in the second half of 2026, and KLA competes globally and pushes for a level playing field in China.

Q: Robert Burns asked about capacity constraints and DRAM visibility.

A: Richard Wallace and Bren Higgins responded that optics is a product-specific constraint, demand in DRAM market has strengthened, and there is broad-based demand.

Q: Stacy Rasgon asked about WFE growth share gains and China revenue recovery.

A: Bren Higgins responded that KLA feels good about gaining share across segments, and China revenue is expected to recover and be included in the forecast.

Q: Tom O'Malley asked about share gain areas and NAND market.

A: Bren Higgins responded that share gains are seen in advanced packaging, logic, memory, and various product segments, and thoughts on NAND market depend on supply constraints and customer demands.