Q4 2025 KLA Corp Earnings Call

Operator: Recorded webcast. All participant lines have been placed in a listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star one on your telephone keypad. If you do wish to remove yourself from the queue, please press star two. Please limit yourself to one question and one follow-up. Lastly, if you should need operator assistance during the call today, please press star zero. I would now like to turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead, sir.

Webcast.

All participant lines have been placed in a listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star 1 on your telephone keypad, if you do wish to remove yourself from the queue, please press star 2.

Kevin Kessel: Welcome to the June 2025 Quarterly Earnings Call. I am joined by our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results as well as our September quarter outlook, released after the market closed and 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 may 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.

Please let me yourself to 1 question and 1 follow-up. Lastly, if you should need operator assistance during the call today, please press star zero. I would now like to turn the call over to Kevin kessle vice president of investor relations and Market analytics, please go ahead sir.

Welcome to the June 2025 quarterly earnings call. I am joined by our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results as well as our September quarter outlook released after the market closed and 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 for your references, made refer to calendar years. The earnings materials contain, a detailed reconciliation of gaap to non-gaap results.

Hey, is 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.

Kevin Kessel: Our actual results may differ significantly from those projected in our forward-looking statements. Rick will start with introductory comments on the business environment and our quarter, followed by Bren with financial highlights and our outlook. Now over to Rick.

Any forward-looking statements including those. We make on the call today are also subject to those risks and Ka cannot guarantee those 4 looking statements will come true.

our actual results May differ significantly from those projected, in our forward-looking statements,

Rick Wallace: Thanks, Kevin. I'm going to cover KLA's business highlights for the June 2025 quarter, including commentary on KLA's relevance in the AI infrastructure buildout. For the June quarter, KLA's results were strong across the board. We were at or above the high end of our guidance ranges. Specifically, revenue was $3.175 billion. Non-GAAP diluted EPS was $9.38, and GAAP diluted EPS was $9.06. We also had record free cash flow of over a billion dollars for the quarter. KLA's leadership and process control has put the company in a unique position at the center of enabling success for our customers to build out infrastructure to support artificial intelligence. Prioritized investment to ramp AI capabilities has fueled growth at the leading edge across the semiconductor industry through more complex designs, faster product cycles, higher value wafers, and increased demand for advanced packaging.

Rick will start with introductory comments on the business environment and our quarter, followed by Bren with financial highlights, and our Outlook. Now, over to Rick

Thanks. Kevin.

I'm going to cover Koz business highlights for the June 2020 life quarter including commentary on Koz. Relevance to the AI infrastructure build out for the June quarter. Kayla's results were strong across the board and we were at or above the high end of our guidance. Ranges, specifically Revenue was 3.175 billion. Non-gaap doesn't do DPS was $9.38 and gaps diluted EPS was $96. We also had record free cash flow of over a billion dollars for the quarter.

Haley's leadership, and process control has put the company in a unique position at the center of enabling success for our customers to build out, infrastructure to support artificial intelligence

Rick Wallace: In DRAM, investments in AI have been focused on high bandwidth memory, which demands higher performance, enhanced reliability, reduced redundancy, and more sophisticated logic circuitry at base die chips that control the HBM stack. Demand for leading-edge logic, HBM, and advanced packaging capabilities are the key contributors to KLA's performance in the June quarter. The importance of process control continues to increase due to semiconductor scaling, new architectures and materials, and increasing designs. In particular, process control can improve time to result by debugging process integration challenges in the SAP ramp phase and optimizing yield across a high-volume manufacturing environment with high semiconductor device design mix. Additionally, the evolution and complexity of requirements for advanced packaging is creating new opportunities for the value of KLA's process control and process solution.

Prioritize Investments ramp AI capabilities has fueled growth at the Leading Edge, across the semiconductor industry through more complex design faster, product Cycles, higher value Wafers. And increased demand for advanced packaging in dram investments. In AI have been focused on high bandwidth memory which demands higher performance, enhanced reliability, reduced redundancy and more sophisticated logic circuitry at base, die chips. That control the HPM stack.

Demand for leading edge, logic, HPM, and advanced packaging capabilities were key contributors to KLA's performance in the June quarter.

Rick Wallace: Finally, this leads to increased relevance for KLA's service business as KLA systems become more technically complex, are utilized for longer periods in the fab with customers where they're expecting optimal tool performance and availability. To deliver solutions to meet this demand, the company leverages the KLA operating model to focus on prioritizing and productizing new innovation in our product roadmaps and ensuring that our business operations can scale and execute to capitalize on strong growth and expanded market share in the most critical markets for our customers. To date, we've seen no material changes in customer demands or unannounced investment plans. As a result, our WFE assessment for 2025 is consistent with our expectations that were stated last quarter.

The importance of process control continues to increase due to semiconductor scaling, new architectures and materials, and increasing designs. In particular, process control can improve time to results by debugging process. Integration challenges, and Fab ramp phase, and optimizing yields across the high volume, manufacturing environment with high semiconductor device design, mix. Additionally, the evolution and complexity of requirements for advanced packaging is creating new opportunities for the value of khaz. Process control and process Solutions. Finally this leads to increased relevance for KA service business. As Ka systems become more technically complex our utilized for longer periods in the path with customers where they're expecting optimal tool, performance and availability.

Rick Wallace: There are more details about this quarter's highlights in our shareholder letter, but in short, KLA grew revenue 24% year over year in the June quarter with sustained strong investment in leading-edge foundry and logic and HBM. This quarter also marked another period of strong momentum for our advanced packaging portfolio. We now expect advanced packaging systems related revenue to exceed $925 million in calendar 2025, up from our previous estimate of $850 million last quarter and over $500 million last year. In services, our business grew to $703 million in the June quarter, up 5% sequentially and 14% year over year. Finally, the June quarter was strong from a cash flow and capital returns perspective. Quarterly free cash flow topped $1 billion for the first time, ending at $1.065 billion.

To deliver a solutions to meet this demand. The company leverages the kala operating model to focus on prioritizing, productizing new Innovations in our product roadmaps and ensuring that our business operations can scale and execute to capitalize on strong growth and expanded market share in the most critical markets for our customers today. We've seen no material changes in customer demands or on announced investment plans as a result. Our wfps assessment for 2025 is consistent with our expectations that were stated last quarter.

Rick Wallace: For the last 12 months, free cash flow was $3.75 billion with a free cash flow margin of 31% over the same period. Total capital return in the June quarter was $680 million, comprised of $426 million in share repurchases and $254 million in dividends. Total capital return over the past 12 months was $3.05 billion. KLA's June quarter results reaffirm our leadership in process control and the strength of our broad and differentiated portfolio. They also demonstrate the essential role KLA's products and services played in supporting semiconductor industry growth. Our consistent execution reflects the resilience of the KLA operating model, the dedication of our global teams, and our disciplined capital allocation to invest in our business over the long run and maximize long-term shareholder value. And with that, I'll turn the call over to Brent.

Up from our previous estimate of $850 million last quarter, and over $500 million last year, services and business grew to $703 million in the June quarter, representing a 5% sequential increase and a 14% year-over-year growth. Finally, the June quarter was strong from a cash flow and capital returns perspective. Quarterly free cash flow topped $1 billion for the first time, reaching $1.065 billion.

For the last 12 months, free cash flow is 3.75 billion in the free cash flow margin of 31% over the same period total Capital return. In the June quarter was 680 million comprised of 426 million in share repurchases and 254 million dividends total Capital return over the past 12 months was 3.05 billion.

Bren Higgins: Thanks, Rick. KLA's June quarter results were strong. Revenue was $3.175 billion, above the guidance midpoint of $3.075 billion. Non-GAAP diluted EPS was $9.38, above its guidance range. GAAP diluted EPS was $9.06 cents, which was at the upper end of the guidance range. At the guidance tax rate of 13.5%, non-GAAP diluted earnings per share would have been $9. Gross margin was 63.2%, slightly above the midpoint of guidance as the quarter played out mostly as expected. Operating expenses were $603 million, about $8 million above the guidance midpoint. Operating expenses were comprised of $353 million in R&D and $250 million in SG&A. Operating margin was 44.2%. Other income and expense net was a $23 million expense with upside from guidance provided by a favorable mark-to-market adjustment of the strategic supplier investment.

Kelly is June quarter results. Reaffirm our leadership and process control, and the strength of our Broad and differentiated portfolio. We also demonstrate the essential role of kali's products and services, play and supporting semiconductor industry growth. Our consistent execution, reflects the resilience of the collie, operating model the dedication of our Global teams and our disciplined Capital allocation to invest in our business, over the long run and maximize long-term shareholder value. And with that, I'll turn the call over to Brett.

Thanks, Rick Daley's, June, quarter results for straw. Revenue was 3.175 billion above the guidance, midpoint of 3.075 million,

John Gap. Deleted. DPS was $9.38 above its guidance range. Gap deleted. DPS was $96 cents, which was at the upper end of the guidance range.

If the guided tax rate is 13.5%, non-gaap diluted earnings per share would have been $9.

Gross margin was 63.2%, slightly above the midpoint of guidance, as the quarter played out mostly as expected.

operating expenses for 63 million about 8 million above the guidance midpoint

Operating expenses were comprised of 353 million in R&D and 250 million in sgna.

Operating margin was 44.2%.

Bren Higgins: The quarterly effective tax rate was 9.9%, well below guidance as various discrete items impacted the quarter for sold. Net income was $1.24 billion. GAAP net income was $1.2 billion. Cash flow from operations was $1.16 billion, and free cash flow was $1.06 billion. The breakdown of revenue by reportable segments and end markets in major products and regions can be found within the shareholder letter and slides. Moving to the balance sheet, we ended with $4.5 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 strong investment grade ratings from all three major rating agencies. The 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 and highly differentiated service business.

Other income and expense net was the 23 million expense with upside from guidance provided by a favorable mark-to-market adjustment of the Strategic supplier investment.

The quarterly affected tax rate was 9.9%, well below guidance, as various discrete items impacted the quarter's result. Net income was $1.24 billion. GAAP net income was $1.2 billion. Cash flow from operations was $1.16 billion, and free cash flow is $1.06 billion.

the breakdown of Revenue by reportable segments, and then markets and made your products and regions can be found within the shareholder letter and slides,

Moving to the balance sheet, we ended with 4.5 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 strong investment grade ratings, from all 3, major rating agencies.

Bren Higgins: This helps drive a comprehensive capital return strategy that includes consistent dividend growth and increasing share repurchases over the long term. Our recent actions emphasize our commitment to capital returns and our confidence in the long-term shareholder value creation of KLA. On April 30th, 2025, we announced the 16th consecutive annual dividend increase, which was up 12% to $1.90 per share per quarter, or an annualized dividend of $7.60 per share. Along with this action, we also announced a new $5 billion share repurchase authorization. I'll now turn to the outlook. It remains driven by increasing investment in leading-edge logic, high bandwidth memory, and advanced packaging. For WFE in 2025, as stated earlier, we are maintaining our original outlook for mid-single-digit growth in WFE from approximately $100 billion in 2024.

The Cornerstone of khaz business is consistent strong free, cash flow generation driven by 1 of the best operating models in the industry and a predictable and 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 recent actions emphasize our commitment to capital returns and our confidence in the long-term shareholder value appreciation of KLA.

On April 30, 2025, we announced the 16th consecutive annual dividend increase.

Which was up 12% to $1.90 per share per quarter, or an annualized dividend of $7.60 per share.

Along with this action, we also announced the new 5 billion dollar share repurchase authorization.

I'll now turn to the Outlook. It remains driven by increasing investment and Leading Edge logic. High bandwidth, memory and advanced package.

Bren Higgins: This growth is expected to be 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 overall demand from China. Given KLA's strong business momentum, expanding market share opportunities, and higher process control intensity for leading edge across all segments, we remain confident in our ability to outperform the overall WFE market in 2025. Finally, early customer discussions are constructive on expectations for calendar year 2026 to be a growth year for the industry. 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. We continue to be encouraged that our customer discussions on product roadmaps and capacity planning have remained consistent.

For wfb in 2025, as stated earlier, we are maintaining our original outlook for Mid single-digit growth. In WSB from approximately 100 billion dollars in 2024.

This growth is expected to be driven principally by increasing investment. In both Leading Edge, boundary logic and memory to support, growing Ai and premium mobile demand.

Partially offset by lower. Overall demand from China.

Giving Ka strong business momentum expanding market, share opportunities.

Process control intensity to leading edge across all segments.

We remain confident in our ability to outperform the overall WF Market in 2025.

Finally, early customer discussions are constructive on expectations for calendar year 2026 to be a growth year for the industry.

Technology transitions.

Accelerating process node capacity ramps and ensuring yield entitlement and high volume production.

We continue to be encouraged that our customer discussions on product roadmaps and capacity, planning have remained consistent.

Bren Higgins: In this industry environment, KLA will stay focused on supporting customers, executing product roadmaps, and driving productivity across the enterprise. KLA's September quarter guidance is as follows. Total revenue is expected to be $3.15 billion, plus or minus $150 million. Our quarterly revenue expectation and general stability for the remainder of the calendar year remains consistent with that articulated over the past two quarters. Foundry logic revenue from semiconductor customers is forecasted to be approximately 75%, and memory is expected to be approximately 25% of semi-process control systems revenue to semiconductor customers. Within memory, DRAM is expected to be about 79% and NAND the remaining 21%. As always, these business mix approximations are for our semiconductor customers only and do not completely represent our aggregate process control systems revenue.

In this industry environment, Ka will stay focused on supporting customers, executing product, roadmaps, and driving productivity across the Enterprise.

Ka September quarter guidance is as follows.

Total revenue is expected to be 3.15 billion plus or minus 150 million.

Our quarterly Revenue expectation of General stability. For the remainder of the calendar year remains consistent with that articulated over the past 2 quarters.

Boundary logic revenue from semiconductor. Customers is forecasted to be approximately 75%.

and memories expected to be approximately 25% of semi-processed control systems, Revenue to semiconductor customers

Within memory RAM is expected to be about 79% and nand. The remaining 21%.

As always these business mixed approximate approximations are for our semiconductor customers only and do not completely represent our aggregate process control systems Revenue.

Bren Higgins: Gross margin is forecasted to be 62%, plus or minus one percentage point, reflecting a slightly weaker systems revenue mix expectation and a 50 to 100 basis point impact from announced global tariffs. This tariff impact estimate is below our original estimate of roughly 100 basis point headwind to gross margin that we discussed last quarter. This environment is new to our industry, and the long-term tariff situation remains unclear. We continue to assess the impact across our business and identify potential mitigation actions to reduce our exposure to this headwind over time. We will provide periodic updates on our assessment when appropriate. For calendar 2025, based on the results for the June quarter, guidance for the September quarter, and our expectations for the business mix across systems and services, including the systems product mix, tariffs, and factory utilization, we expect gross margins for calendar '25 to remain approximately 62.5%.

Gross margins forecasted to be 62% plus or minus 1 percentage point.

Reflecting the slightly weaker systems Revenue, mix expectation and a 50 to 100 basis point impact from announced Global tariffs.

This tariff impact estimate is below our original estimate of roughly 100 basis. Point headwind to gross margin that we discussed last quarter.

This environment is due to our industry, and the long-term tariff situation remains unclear.

We continue to assess the impact across our business and identify potential mitigation actions to reduce our exposure to this headwind over time.

We will provide periodic updates on our assessment when appropriate.

For calendar 2025 based on the results for the June quarter guidance for the September quarter and our expectations for the business mix across systems and services.

Including the systems product. Mix tariffs and Factory utilization.

We expect gross margins for calendar, 25 to remain approximately 62.5%.

Bren Higgins: Operating expenses are forecasted to be approximately $615 million in the September 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 $33 million expense. The non-GAAP effective tax rate assumption for the September quarter and the remainder of the calendar year is 13.5%, lower than the 14% we had previously estimated based on our expectations for the geographic distribution of income. For the September quarter, GAAP diluted EPS is expected to be $8.28, plus or minus $0.77 cents, and non-GAAP diluted EPS of $8.53, plus or minus $0.77 cents.

Operating expenses are forecasted to be approximately 615 million in the September 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 at 33 million expense.

The non-gaap affected tax rate, assumption.

The September quarter and the remainder of the calendar year is 13.5%.

Lower than the 14% we have previously estimated based on our, our expectations, for the geographic distribution of income.

For the September quarter, Gap alluded that EPS is expected to be $8.28.

Plus, or minus 77 cents.

And non-gaap validity, EPS of $8.53 cents.

Bren Higgins: EPS guidance is based on a fully diluted share count of approximately 132.4 million shares. In conclusion, our near-term revenue guidance remains stable, indicating the continuation of current business levels, and our customer discussions support this outlook. Based on conversations with customers, we anticipate continued solid growth in calendar 2025. Given the revenue commentary for the remainder of the calendar year, we expect to meaningfully outperform the mid-single-digit WFE growth rate. KLA focuses on delivering a differentiated product portfolio that addresses customer and technology roadmap requirements, which are driving our longer-term relevance and growth expectations. KLA's business is well positioned for the current technology inflection. While we cannot ignore the near-term geopolitical trends, we are encouraged by the customer engagement that informs our business forecast.

Based on a fully diluted share count of approximately 132.4 million shares.

In conclusion, our near-term Revenue guidance remains stable, indicating the continuation of current business levels, and our customer discussion support this Outlook.

Based on conversations with customers, we anticipate continued solid growth in calendar 2025.

Given the revenue commentary for the remainder of the calendar year. We expect a meaningfully outperform, the mid single-digit. WFC growth rate,

Daily focuses on delivering a differentiated product portfolio. That addresses customer technology roadmap requirements which are driving our longer term relevance and growth expectations.

Bren Higgins: 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. That concludes our prepared remarks. Let's begin the Q&A.

Haley's business is well, positioned for the current technology inflections while we cannot ignore the near-term. Geopolitical trends, we are encouraged by the customer engagement. That informs our business forecast,

The long-term secular Trends driving semiconductor industry, demand and investments in wfe and advanced packaging our compelling and represent a relative performance opportunity for KLA over the next several years.

That concludes our prepared remarks.

Let's begin the Q&A.

Kevin Kessel: Thanks, Brent. Bo, if you could please cue folks for questions.

Operator: Certainly, sir. Ladies and gentlemen, at this time, if you would like to ask a question, please press star one on your telephone keypad. If you do wish to remove yourself from the queue, you may do so by pressing star two. We remind you to please unmute your line when introduced and, if possible, pick up your handset for optimal sound quality. And in the interest of time, we ask that you please limit yourself to one question and one follow-up. We'll go first this afternoon to CJ Muse of Cantor Fitzgerald.

Thanks Brent. Uh, both. If you could please keep folks for questions.

Certainly sir, ladies and gentlemen, at this time, if you would like to ask a question, please press star 1 on your telephone keypad, if you do wish to remove yourself from the queue, you may do so, by pressing star 2, we remind you to please unmute your line when introduced and if possible pick up your handset for optimal sound quality and in the interest of time, we ask that you please limit yourself to 1 question and 1 follow-up. We'll go. First this afternoon to CJ Muse of Cantor Fitzgerald.

Analyst (Multiple: CJ Muse, Tom O'Malley, Timothy Arcuri): Good afternoon. Thank you for taking the question. so I I just would love to hit on your comment around early customer discussions constructed for growth in 2026. you know, you work typically from eight plus month lead times. Obviously, you've got some visibility into '26. So we'd love to hear kind of how those conversations are going and and what you know, what what needs to happen to have firm conviction on growth in '26.

Good afternoon. Thank you for taking the question. Um, so I I just would love to hit on, um, your comment around early customer discussions, constructed for growth in 2026. Uh, you know, you work typically from 8, plus, uh, month lead times. Obviously, you've got some visibility into 26. So we'd love to hear kind of how those conversations are going. And what uh, you know what what needs to happen to have firm conviction on growth in 26.

Rick Wallace: Yeah, CJ. Hey, thanks for the question. And you know, I think it's a little bit early for us to quantify it, but certainly we're encouraged by the discussions we're seeing. We think that as you look just across the industry, based on those discussions, that we'll see customers investing more. Obviously, what's driving the space today is high-performance compute, and so that part of the market is strong. And we'll have to see how other end markets play out in terms of of what that growth looks like. But certainly, it's a leading edge. we're encouraged by the activity we're seeing supported by that market. we're optimistic that we might see some broadening of investment there. DRAM continues to be strong, fueled by HBM. Flash is coming off at low levels, but I think the flash market continues to to be constructive moving forward.

Yes, DJ. Hey, thanks for the question. And, you know, I think it's a little bit early for us to quantify it, but certainly, we're encouraged by the discussions, we're seeing. We think that

Rick Wallace: Overall, legacy seems like it's bottom, so I think we feel pretty good about about where that is. We'll see what growth looks like, but at least in terms of where it's at now, I don't think it's any worse. And then our our modeling as it relates to native China activity is that it's it's likely down you know, somewhere in that you know, we'll see how far down, but I think it's down after you know a couple of years of of pretty elevated investment in '23 and '24. So we think that '25 is down and we think '26 is probably you know has some some headwinds as well as that normalizes given most of the focus there is on legacy.

As you look just across the industry. Um, based on those discussions that we'll see customers invest in more. Obviously, what's driving the space today is high performance compute and so that part of the market is strong and we'll have to see how other end markets play out in terms of of what that growth looks like. But certainly at the Leading Edge, uh, we're encouraged by the activity. We're seeing supported by that market, uh, we're optimistic, that we might see some broadening of Investments there. Um, dramm continues to be strong fueled by HPM flash, is coming off a low levels, but I think the flash Market uh continues to to be constructive moving forward. Overall Legacy seems like it's bottom so I think we feel pretty good about about where that is. We we'll see what growth looks like but at least in terms of where it's at now I don't think it's any worse and then our, our modeling as it relates to

The native China activity is that, it's, it's likely down, um, you know, somewhere in that, uh, you know, we'll see how far down but I think it's down after, you know, a couple of years of of pretty elevated investment in 23 and 24. So if you think that, you know, 25 is down and we think 26 is probably, you know, has some some headwinds, as well as as that normalizes given. Most of the focus there is on Legacy.

Kevin Kessel: Yeah, and just to add to it, CJ, just to add, as we see the continued investment in the advanced logic, as Brent mentioned, we see momentum as more and more players are bringing their design. So you think about the sustained investment in advanced logic and then even some investment going back a note. So we're also seeing some additional, so we feel really good about logic foundry in terms of that overall momentum plus the packaging momentum we've talked about.

Yeah, just to add to it.

Just add as we see the continued investment in the advanced logic. As Bren mentioned, we see momentum as more and more players are bringing their design. So you think about the sustained investment in advanced logic and then even some investment, uh, going back a note. So we're also seeing some additional, so we feel really good about logic Foundry in terms of that overall momentum plus the packaging momentum. We've talked about

Analyst (Multiple: CJ Muse, Tom O'Malley, Timothy Arcuri): Very helpful. I guess on the domestic China front, you know, you talked earlier indication of lower again in '26. Curious, you know, as three regions, Wuhan, Shanghai, Beijing are competing for supremacy and we've now gone from four to six large kind of players, how does that kind of inform your view? Does it give you a sense that things would only decline a little or, or, or you know, a lot or, or just too early to tell? Thanks so much.

Very helpful um I guess on on the domestic China front. Uh you know you you talked earlier indication of of lower again in 26 curious you know as 3 regions Wuhan Shanghai. Beijing are are competing for Supremacy and we've now gone from 4 to 6, large kind of players, how does that kind of inform your view? Does, does it give you a sense that things would only decline a little or or or you know a lot or, or just do early to tell? Thanks so much.

Rick Wallace: Yeah, I think it's too early to tell at this point. As I said, yeah, we had two years of of of a lot of backlog we had to shift through and work off, which we have done. And you know, I think now, you know, that we're seeing investment from our other customers, we're seeing that drive drive our business outlook more strongly here moving forward. So we'll have to see as we move forward here. But my sense, just in terms of looking at it bottoms up and trying to reconcile with some of the some of the top-down kind of market outlook information, I feel like it's probably got some headwinds to it in terms of the investment levels relative to '25.

Yeah, I think it's too early to tell at this point. As I said, yeah, we had 2 years of, of, of a lot of backlog. We had to shift through and work off which we have done. And, you know, I think now, you know, that we're seeing investment from our other customers, uh, we're seeing that drive drive our business Outlook. Uh, more strongly here moving forward. So so we'll have to see is as we move forward here, but um, my sense just in terms of looking at it, uh, bottoms up and trying to reconcile with some of the

Some of the top down kind of Market, Outlook information. I I, I feel like it's probably, uh, um, got some headwinds to it. In terms of the investment levels relative to 25

Operator: Thank you. We'll go next now to Harlan Sir of JP Morgan.

Thank you. Well, the next now to Harland sir of JP Morgan,

Harlan Sur: Hello, good afternoon and great job on the quarterly execution, guys. Year to date, so March and June, your process control systems business, right? That's inspection and patterning. That's up 35% year over year. So it looks like you guys are setting up for another strong year of growth and maybe even more share gains, right? But within that, inspection is up 50% year to date, while patterning is kind of flattish. Kind of similar to the profile of the calendar '24 where inspection drove most of the growth. So maybe you can just help us understand, A, the drivers of the massive strength in inspection. Is it broad-based? Is it across optical, dark teal, bare wafer, e-beam? And then maybe help us understand the relatively flattish growth in patterning. And do you guys anticipate another year of total share gains in process control?

Hello, good afternoon and great job on the quarterly execution guys, um, year to date. So March and June your post office controls systems business, right? That's inspection and patterning.

35% year-over-year. So it looks like you guys are setting up for another strong year growth and maybe even more share games, right? But within that inspection is up 50% year to date while having is kind of flattish, but kind of similar to the profile of the calendar 24, where inspections are most of the girls, so maybe you can just help us understand

Hey, the drivers of the massive strengthen inspection. Is a broad-based cross optical dark shield, fairway for e-beam and then maybe help us understand the relatively flattish growth in patterning. And do you guys anticipate another year of total share gains in process control?

Rick Wallace: Yeah, yeah, Harlan, thanks for the comments. A lot there. I'll try to unpack it a bit. I mean, certainly we've seen strong inflection in our optical pattern inspection business. We were supply constrained in that business for some time. Now we have more supply and so we're shipping through a lot of backlog for that product and that product is well positioned and really critical for for gate all around. So that's been a nice driver. Obviously, what's happened in packaging has also been a nice driver for this part of the business. Sampling rates and inspection, given the challenges, are very, very high. And so that's been a nice tailwind for that part of the business as well. So inspection has definitely been inflecting. As it relates to patterning, you have really three businesses there in patterning.

Yeah, yeah, Harland. Thanks for the comments. Um, a lot there.

certainly, we've seen

Rick Wallace: You have optical metrology, which is around overlay, and then you also have film measurement, radical inspection. And with overlay, as we've seen, you know, some slowdown in advanced litho, from a customer point of view, there's an attach rate of that business to lithos. And so that's reduced, you know, I'd call it more really non-consumption in that business. So that's been a little bit weaker. Really, the only business we have that has an attach to litho generally. Film measurement, I think it's a little bit lumpy. We'd expect better than market growth out of that business as we go through the year for 2025. And for radical inspection, it's a lumpy business. We have some large integers in there, but would expect to see that business grow meaningfully and at a record level for calendar '25 versus '24.

Product and that product as well position and and really critical for uh for gate all around. So that's been a nice driver. Obviously, what's happened in packaging is also been, uh, been a nice driver for this part of the business, sampling rates and inspection given. The challenges are very, very high and so that's been a nice, uh, a nice Tailwind for that part of the business as well. So inspection has has definitely been inflecting as it relates to patterning. You have really 3 businesses that are in pattern and you have Optical metric which is you know, around overlay and then you also have cell measurement

Rick Wallace: So a little bit of just what happens in the quarter, but I think from a directional point of view, I think we'll see a stronger patterning as we move to the second half of the year.

Kevin Kessel: Yeah, and Harlan, to your point, I think overall we are seeing process control intensity continue to rise for all the reasons we've talked about: advanced designs, large diet. And so initially, at least a lot of that favors inspection. And Brent talked about some of the fashion patterning. And then the radical comes around. I mean, for KLA, radical in 2025, it's going to be a record year. So we feel good about where we are positioned there, and we have more products coming along. So we feel process control intensity continues to strengthen, and our market position is very strong.

Radical radical inspection and with overlay as we've seen, you know, some slowdown in advanced. Litho, uh, with from a customer point of view there, there's an attached rate of that business to lithos and so that's um, that's reduced, you know, I'd call it more, you know, really non-consumption uh, at in that business. So that's been a little bit weaker, really. The only business we have that has has an attached to to Litho generally. Um, they'll measurement, I think it's a little bit. Lumpy would expect, uh, better than market growth out of that business as we go through the year for 2025 and for radical inspection. Uh, it's a lumpy business, we have some large integers in there, um, but would expect to see that business, grow meaningfully, uh, and at a record level, uh, for calendar, 25 versus 24. So, a little bit of you, just what happens in the quarter, but I think from a, a directional point of view, I think we'll see, you know, stronger patterning as we move through the second half of the year.

Yeah, and Harland to your point, I think overall we are seeing process control intensity, continue to rise. For all the reasons we've talked about the advanced designs

Large die. And so initially at least a lot of that favors inspection and Brent talked about some of this, the, the facts and patterning and then the radical comes around. I mean, for KA reticle and 20205 is going to be a record year. So we feel good about where we are positioned there, and we have more products coming along. So, um, we feel process control, intensity, condensing is to strengthen and our Market position is very strong.

Harlan Sur: Very insightful. Thank you for that. And yet again, you guys upped your target for advanced packaging revenues from $850 to now $925 million for calendar '25. That's up like 80% year over year. I assume it's a combination of HBM and 2.5D and 3.5D advanced packaging. We know that many of next-generation 2-nanometer AI GPU XPU designs are targeted for this kind of 3.5D packaging architecture, stacked chips, more HBM stacks. Just overall significantly more complex versus 2.5D. But maybe you guys can just help us understand where where are you guys seeing the incremental upside? I think this is like the third or fourth time that we revised your full-year outlook for advanced packaging. So where are you guys seeing the incremental upside?

Very insightful. Thank you for that. And yet, again you guys left your target for advanced packaging, revenues from 8:50. And now, 925 million for calendar 2525. That's up, like 80% year-over-year. I assume it's a combination of HDM and 2, and a half D and 2 and a half D Adventure. We know that many of of next generation, 2, nanometer AI, GPU, XTU, designs are targeted for this kind of 3 and a husky packaging architecture. Stack chips. More HPM stocks just overall significantly more complex versus 2 and a half feet but maybe you guys can just help us understand where, where are you guys seeing the incremental upset? I think this is like the third or fourth time that we revised your full year. I'll look for advanced packaging. So what are you guys seeing? The incremental upside?

Rick Wallace: So Harlan, you touched on a lot of it. And I think it's a combination of it took us a little while to have the products that were requested. And so a little bit of that is adoption and then some momentum once we started getting going. And then just the ramp, it all comes back to the build-out associated with the AI infrastructure. And you know, for us, that's the third leg. We talked about logic foundry, advanced designs, bigger die, talked about HBM, and talked about packaging. And really, it's that part of packaging. And I think as our customers see success with our portfolio, we're gaining share. So the exciting part for us is apart from WFE dynamics, which I think we do spend an awful lot of time about, this is really outside of WFE.

Rick Wallace: So we're seeing growth in packaging as a sector for inspection metrology. Also, our process position there is good. And then we're gaining share. So you have a really nice combination. And when we talk to customers, we think we're closer to the beginning of this trend than at the end of it. We think there's a lot of growth to come. Yeah. Harlan, the other thing I'd say is that just if you just go back just a short period of time, let's go back a few years, in 2022, as a percent of advanced packaging in our semi-process control business, given the nature of the requirements was pretty low. You're probably about a 1% intensity. Today, we're sitting somewhere around in that 5% to 6% range. So just in a few years, we've seen our position change quite dramatically as the requirements, to Rick's point, have increased.

So so Harley you touched on a lot of the. And and I think it's a combination of um it took us a little while to have the products that were requested and so a little bit of that is adoption and then some momentum once we started getting going and then just the ramp is it's all comes back to the buildout associated with the AI infrastructure and you know, for us, that's the third leg. We talked about logic Foundry, Advanced designs bigger die, talked about hbm and talk about packaging, and really, it's that part of packaging. And I think as as our customers, see success with our portfolio. Uh, we're gaining share. So the exciting part for us is apart from WFC Dynamics, which I think we do spend an awful lot of time about. This is really uh outside of wfb. So we're seeing growth in packaging as a sector for inspection. Mology also are

Processed position there is good and then we're gaining share. So, you have a, a really nice combination

And when we talk to customers, uh we think we're closer to the at the beginning of this trend than at the end of it. We think this is, there's a lot of growth to come.

Rick Wallace: So we're pretty excited about the growth rate and opportunity there. And we think that this continues to be a growth area as we move into next year.

Harlan Sur: Thanks, Rick. Thanks, Brent.

Thanks Rick. Thanks Brent.

Operator: Thank you. We'll go next now to Vivek Arya of Bank of America.

Thank you. We'll go next now to the back area of Bank of America.

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): Thank you for taking my question. On the first one, the process control intensity in memory, I wanted to get your views on this. Historically, you know, it used to be low, closer to, I think, mature nodes. How is that process control intensity evolving as the industry is moving from traditional DDR DRAM to more high bandwidth memory? Is there a way to quantify what the benefits are to KLA because HBM is expected to be one of the fastest growth drivers in AI accelerators? I'm just curious to understand how your opportunity is evolving as the industry migrates to HBM and then advanced versions of HBM.

Kevin Kessel: Yeah, so I'll give you a qualitative, and Brent can do the harder thing of giving you more quantitative. Qualitatively, you have more advanced, bigger, more valuable die with more challenging circuitry in the periphery and less redundancy. So AI, do you have a tremendous pressure coming because these are in high use, and therefore these die don't rest. These are, you know, unlike the duty cycle is high. So you've got to, and they're part of an expensive system. So what our customers have said is they increased, and as you know, there's multiple players, they've increased the inspection both in the development but also in the build-out. And they're finding that they need everything they can get as to insight. And because these are more valuable die with less redundancy, the defectivity levels in the past that might have been acceptable are not, and so not acceptable now.

Uh, thank you for taking my question. Um, on the first 1, um, the process control intensity in memory, um, I wanted to get your views on on this. Historically, you know, it used to be low closer to, I think mature nodes. Uh, how is that process control? Uh, intensity evolving. As the industry is moving from traditional, um, ddrd, Ram, to more high bandwidth memory. Is there a way to quantify what the benefits are, uh, 2 Ka? Because the hmm is expected to be 1 of the, you know, fastest growth uh drivers in AI accelerators. So I'm just curious to understand how your opportunity is evolving as the industry migrates, uh, to ATM and then um, you know, Advanced versions of HPM

Yeah, so I'll give you a qualitative, and then Bern can do the harder thing of giving you more quantitative. Qualitatively, you have more advanced, bigger, more valuable by with more challenging circuitry in the periphery and less redundancy. So AI, do you have a tremendous pressure coming? Because these are in high use, and therefore these die. Don't rest. These are, you know, unlike the duty cycle is high. So you've got a—and they're part of an expensive system. So what our customers have said is they increase.

Kevin Kessel: So they need more coverage. They need higher tools, plus they're introducing new technology. So everything is driving toward higher process control intensity. We've been, I don't know that we've been surprised, but we've been pleased by the adoption, and we think there's more demand coming as people understand the challenges. And then there are roadmap cadence that's different than the consumer cadence was. So I think from their standpoint, they're under a lot of pressure to deliver at yield. So that's what's happening and why this adoption is very different than memory has been in years for us.

And as, you know, there's multiple players, they've increased the inspection both in the development but also in the build out and they're finding that they need everything, they can get as to Insight. And because these are more valuable die with less redundancy. Uh the Deep activity levels in the past that might have been acceptable or not and so not acceptable now. So they need more coverage. They need higher Tools Plus. They're introducing new technology. So everything is driving toward higher process, control intensity. Um, we've been, I don't know that we've been surprised but we've been pleased by the adoption and we think there's more demand uh, coming as people understand the challenges and then their roadmap Cadence, that's different than the Consumer Cadence was so I think from their standpoint, there are a lot of pressure to deliver at yield. So that's what's happening. And why this adoption is very different than than memory has been in years for us?

Rick Wallace: So when DRAM went to EUB, we started to pattern a couple of layers or a few layers in with EUB, we saw a step up in intensity. So process control intensity was somewhere around 9% to 10% of WFE back before. And then with the introduction of EUB, we saw that improve. We saw that improve about 100 basis points. When we moved to HBM, we think that there's another 100 basis points or so of opportunity there. We'll see how that plays out over time. But as Rick said, as the requirements have changed, it's increased the value of our products and changed how customers sample and their expectations around reliability. You also have bigger die, which benefits everyone, but I think some of these challenges that they have around the market requirements for HBM are benefiting process control uniquely.

So when dramm went to uh, with the eub, we started this pattern um a couple layers or few layers in with the with the UV. We saw a step up in intensity. So a process control intensity was somewhere around 9 to 10% of of wfv uh back before and uh then with the introduction of EU, we saw that improved, we saw that improve about a 100 basis points. When you moved to hbm, we think that there's another 100 basis points or

Rick Wallace: And so we're seeing that on the logic side, but we're also seeing that on the memory side as well. So right now, when we look at it, we think there's probably another incremental 100 bits on top of that. So if you go back pre-EUB to where we are today, it's probably somewhere in the neighborhood of 200 basis points of higher process control intensity. And our share position and momentum is in a pretty good place. So we're encouraged by what we're seeing.

Show of opportunity there. We'll see how that plays out over time. But as, as Rick said, as the requirements have changed, its increased. The value of our products and changed how customers sample and their expectations around reliability. You also have bigger die, which benefits everyone. But I think these some of these challenges that they have around the market requirements, for hbm are benefiting process, control uniquely. And so we're seeing that on the logic side but we're also seeing that on the memory side as well. So right now we look at it, we think there's probably another incremental 100 bibs on top of that. So if you go back for UV to where we are today, it's probably somewhere in the neighborhood of of 200 basis points of higher process control intensity and our share position and momentum is is is in a pretty good place. So we're encouraged by what we're seeing.

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): Very helpful. And then for my follow-up on growth margins, kind of near and a little more medium term. So if, let's say, December quarter sales are flattish, should we assume growth margins stay flattish, or are there any other mix effects, et cetera, that we should keep in mind? And then kind of more medium term, what are you doing to mitigate that tariff cost pressure? Can it be mitigated? Like when should we assume that you have some alternatives in place to get the gross margins back to the trend line? Thank you.

Very helpful. And then for my follow up, on on Gross margins, uh, kind of near and a little more medium down. Um, so let's say December uh, quarter sales are flat. They should be assumed gross, margins, they flatters, or are there any other, uh, mix effects Etc. That we should keep in mind and then kind of more medium-term. Um, what are you doing to mitigate, uh, that status, uh, cost pressure. Can it be mitigated like when, when should we assume that? Uh, you have, uh, you know, some Alternatives in in place to get the gross margins? Back to the, uh, trend line. Thank you.

Rick Wallace: Yeah, so the first part of your question, we talked about our views of calendar '25 gross margin at 62.5%. So if you take Q1 and Q2 and our guidance for Q3, that will lead you to an uptick in gross margin in the fourth quarter based on our expectations now around revenue mix as of this next quarter. So that should get you there. You can do the math and figure out how to get there. But as it relates to tariffs, you know, there's a lot. I mean, first of all, as I said in the prepared remarks, it's a new thing for our industry. It hasn't been a factor in our business operations historically.

Rick Wallace: So now, as we face the likelihood of higher structural tariffs moving forward, there are some business processes as it relates to how we move parts around, how do we leverage free trade zones, things like that to reduce leakage of tariffs as it where you pay a tariff, but then you have an opportunity when you turn around to export where you can reclaim or claw back the tariff that you pay related to the export. So there are a lot of those dynamics that are mitigating factors. Obviously, if it drives structural cost increase, then that's something that we'll have to deal with both in our service and system businesses over time, just like we would with any other cost increase. But we think that there's some opportunities to go do some things on the process side where, look, we got a lot to do.

First of all, as I said in the prepared remarks it it's it's a new thing for our industry. It hasn't been a factor in our business operations, uh, historically. So now as we Face, uh, the likelihood of higher, structural tariffs, moving forward, um, there are some business processes as it relates to how we move parts around. Um, how do we leverage free? Trade zones and things like that to reduce leakage of of of tariffs as it uh where you pay a tariff. But then you have an opportunity when you turn around to export where, uh, you can reclaim or claw back the, the Tariff that you pay related to the export. So there are a lot of those dynamics that are mitigating factors. Obviously, if it drives structural cost increase, then that's something that we'll have to deal with both in our service uh and system businesses over time. Just like we would with any other cost increase but we think that there's some opportunities to go do some things on the process side where

Rick Wallace: The ROI wasn't all that compelling, even though it might have been a better process. Well, if you add in the economic cost of incremental tariffs, all of a sudden, some of those issues rise up or opportunities rise up to priority scale. So that's really how we're thinking about it. I think for the street in terms of how you're modeling KLA, I think that the 50 to 100 basis point guidance headwind is probably the way to think about it. And then as I start to see either some stability or some changes in terms of how we're doing things that reduce that, I'll provide that update when appropriate.

Like we got a lot to do, the ROI wasn't all that compelling even though it might have been a, you know, a better process. Well, if you add in, uh, the economic cost of of incremental tariffs, all of the sudden some of those issues, rise up for opportunities, rise up to the priority scale. So, that's really how we're thinking about it. Uh, I think for, for the street in terms of how you're modeling KLA, I think that the 50 to 100 basis point guidance, uh, headwind is, is probably the way to think about it. And then, as I start to see either some stability or or some changes in terms of of how we're doing things that that uh, that reduce that, I'll

provide that update, when appropriate,

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): Thank you.

Thank you.

Operator: Thank you. We'll go next now to Shane Brett of Morgan Stanley.

Thank you, we go next now, to Shane Brett of Morgan Stanley.

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): Thank you for letting me ask a question. Apologies for asking a bit of a near-term question, but if I'm understanding this correctly, your September quarter foundry logic revenue is likely to strengthen sequentially, but your memory revenue across both DRAM and NAND will decline. I thought that the memory mix, specifically DRAM, may uptick a bit more in the second half. So we should talk about the big business mix here and if we could see a memory uptick in the December quarter. Thank you.

Thank you for letting me ask a question. Apologies for asking a bit of a near-term question, but if I'm understanding this correctly, your September quarter Foundry, logic revenue is likely to strengthen sequentially, but your memory Revenue Prospect, DM and Nando decline. I thought that the memory mix specifically dram. May update a bit more in the second half. So we should talk about the big business mix here. And if we could see a memory uptick in the December quarter, thank you.

Rick Wallace: Yeah, well, the way it's lining up, I think that we'll see DRAM stronger in the December quarter than the September quarter.

Yeah, well the way it's lining up. Uh, I

See.

D stronger in the December quarter than than the September quarter.

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): Got it.

Rick Wallace: It's just really about timing of revenue, revenue recognition, those dynamics. You know, there's shipments, but there's final product acceptance processes that we run through that drive revenue into a particular quarter. But as I look at it and you think about some of the project timing that's out there, I would expect to see an uptick into the December quarter.

Got it. It's just really.

Recognition those Dynamics you know their shipments but the final product acceptance processes that we run through uh the drive Revenue into a you know into a particular quarter. But as I look at it and you think about some of the the project timing that's out there uh I would expect to see it uptick and visit December quarter.

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): Got it. Thank you very much. And for my follow-up, so at your 2022 analyst day, you set out a $14 billion revenue target for '26, which I think was based on $125 billion WFE assumption. I think your market share gains have clearly checked above what you're probably thinking in 2022. Just could you talk about those market share gains and sort of where your kind of current assumptions are towards, as we think towards 2026? Not really asking for a revenue guide, but if you can kind of give us a few crumbs on how to think about '26. Thank you.

Right. Thank you very much and for my follow-up. So thank you, 2022, analyst day. You set out for 14 billion Revenue Target for 26, which I think was based on 125 billion wfp assumption. I think your market share gains with clear checks above what? You're probably thinking in 2022. Just could you talk about those market, share gains and sort of where your kind of current assumptions are

Towards as we think towards 2026, not really asking for a revenue guide. But if you can kind of, give us a few crumbs on how to think about 26. Thank you.

Rick Wallace: Well, you're right. The 2026 plan assumed WFE level in the mid-120 range. And so, you know, we'll see whether we get there or not. But I would say that for KLA, we don't need $125 to make that plan given the strength that we've seen in our share of WFE, the growth rates we've seen in packaging. Obviously, we've had some headwinds as it relates to export control in terms of lost opportunity, but also how that's affected our service business. But in general, we feel like we're pretty well positioned from a share of WFE point of view. We assumed a 7.25% share of WFE. If you take out packaging, I think our share of WFE is approaching 8%. Then you add in the packaging opportunity. So, you know, we'll see. If I got WFE levels in the mid-teens, I think we got a shot at it.

Rick Wallace: But I think when you consider puts and takes, we don't need as much given the growth rates we've seen in our overall share of market. Now that's been intensity-driven. I mentioned packaging. We're also, I think, pretty confident around some of the share opportunities we also have. That's all that's part of that number. The financial model underneath is operating very consistent. Absent the tariff effect, we'd probably be in line or maybe even slightly better on the gross margin side at that revenue level. So the rest of it is driven by our incremental operating margin model and our expectation of drop through to EPS based on business performance, but also capital structure action of EPS growth of one and a half times our revenue growth rate.

Well, you're right. The 2026 plan assumed wfb level in the in the mid 120 range. And uh, so you know, we'll see whether we get there or not. Um, but but I would say that that particular we don't need 125. To make that plan, um, given this the strength that we've seen in our, our share of WSB the growth rates we've seen in packaging. Obviously we've had some headwinds as it relates to export control in terms of lost opportunity, but also how that's affected our service business. But in general, we feel like we're pretty well positioned from a share of wfp. Point of view, we assume to 7 and a quarter percent share of WF. Um, if you take out packaging, I think our shared WFC, uh, is a is approaching 8%, then you add in the packaging opportunity. So um, you know, we'll see if I got wfb levels in the the, the mid teens. I think we got a shot at it. Um, but I think it when you, when you consider puts and takes

Um, we don't need as much given the growth rates we've seen in our overall share of market. Now, that's been intensity driven. I mentioned packaging. We're also, I think, pretty confident around some of the share opportunities we have. That's all part of that number. The financial model underneath is operating very consistent, absent the tariff effect.

Rick Wallace: So it really is going to be predicated on where WFE ends up in terms of how we perform against that target. But the financial framework is executing as we expected.

on where wfb ends up, uh, in terms of, you know how we perform against a Target but the financial framework uh, is executing as we expected

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): Got it. Thank you very much.

Got it. Thank you very much.

Operator: Thank you. We'll go next now to Charles Shee of Needham.

Thank you, we go next. Now to Charles shei of needam.

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): Thanks for taking my question. Maybe my first question, a little bit more about China. China's percentage of sales, 26% in March, 30% in Q2. So is the 30% still the right number kind of going into the second half of the year or shall we kind of expect some upside? Because the data points so far have suggested that there has been some upside in China WFE so far. But kind of wonder since you still view China WFE coming down this year, kind of kind of want to get some thoughts there. Thanks.

6 for taking my question. I I maybe uh my first question a little bit more about the China. Um China is the percentage of sales 26% in March 30% Q2. So it's a 30% um uh still the right number kind of going into the second half of the year or showing kind of expect some upside because

The data point. So far has suggested that there, there has been some upside in China that we have so far but but kind of 1 there, since you, you you still view. China is coming down this year, kind of kind of want to get some thoughts out there. Thanks.

Rick Wallace: Yeah, Charles, and I'll try to unpack this a little bit. If you go back to earnings in January, we talked about our China business dropping to the 30% level, assuming a $3-ish billion run rate. And that's down from about 41% in 2024. So obviously, Q1 was lower, which means that you're likely to see higher percentages as you move forward. So we fast forward to April, and the guidance in April was very consistent with that. If you look at where we sit today, I still see it at roughly 30% plus or minus. Now, the second half will be higher than the first half because you were at 26% and 30% in Q2. So I think the second half is higher than the first half. But for the company overall, we're still in line with that 30% expectation plus or minus a couple of points.

Yeah, Charles and I'll try to unpack this a little bit. If if you go back to earnings in January, we talked about

China business dropping to the 30% level uh, assuming a a 3 inch billion dollar run rate and that's down from about 41% in 2024. So, obviously q1 was lower, which means that, you know, the, the the you're likely to see higher percentages As you move forward. So our our, we we, we fast forward to April and the the, uh, the

Rick Wallace: Now, our business has strengthened. We were at a $3 billion run rate. Now we just got at 315. So some of that strength has been reflected in China at a consistent percentage. So at the beginning of the year, we thought our China business would be down somewhere between 15% and 20% overall. As I sit today, I think we're probably down somewhere between 10% and 15% on just the general strengthening overall. So China behaving pretty much as expected and expect the year to end up somewhere around 30%.

Guidance in April was very consistent with that. If you look at where we sit today, I still see it at roughly 30% plus or minus. Now, the second half will be higher than the first half because you were 26% 30% in in Q2. So, I think the second half is higher than the first half, but for the company overall, we're still in line with that 30% expectation, uh, plus or minus a couple of points. Now, our business is strengthened we were at 3 billion dollar run rate. Now, we just got it. 315. So, some of that strength has been reflected in in China at a, at a consistent percentage. So at the beginning of the year, we thought our China business would be down somewhere between 15 and 20%. Overall, as I said today, I think we're probably down somewhere between 10 and 15%.

On on just the general strengthening overall. So the China behaving pretty much as expected. Uh, and expected here to end up somewhere around 30%.

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): Thanks, Brent. I appreciate the comment. Maybe another relatively higher-level question. I answered your answers to the questions from other analysts on this call regarding process control intensity. I think historically, people kind of associate or positively correlate process control intensity with lithography intensity. I think lots of discussion on lithography intensity this year feels like the consensus is probably coming down. But I think that historical correlation kind of broken down over the past couple of years. Process control intensity actually was on the way up. Lithography probably kind of coming down if we remove any of the stockpiling in China, those kind of factors. So kind of want to get the sense from you guys, what do you see that the process control intensity, why is that correlation breaking down and what's the outlook going forward once a year?

Like from I appreciate the call. There may be another, uh, relatively higher level of person. I I, I said, well, I, I listen to your answers to the questions from other analysts, uh, on this call regarding, uh, process country intensity. I think if he's going to lead, people kind of associate or positively correlate process, controlling intensity with lithography intensity. I think lots of discussion on the phone intensity, this year, feels like, uh, the

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): Do you expect that the bifurcation is kind of going to be sustaining structure or maybe we'll get that mean reversion event at some point in the down the road? Thank you.

Process. It's probably coming down but I think uh that historical um correlation kind of broken down over the past couple years process control intensity. Actually was on the way up Lisa. Probably kind of coming down if we remove any of the stop piloting in China, those kind of factors. Um, so kind of want to get the sense from you guys. What do you see, uh, that the process control intensity? Uh, why why is, why is that correlation breaking down and what's the Outlook going forward on here? Do you expect, uh, that that bifocal going to be sustaining structure? Or maybe we'll get that mean reversion uh event at some point in the January. Thank you.

Rick Wallace: Yeah, that's an insightful question. If you go back in time, and I won't go too far back, but often the process control for lithography was associated with wavelength shifts in lithography, usually driven by one large manufacturer of a microprocessor. And so that was the cadence that kind of set everything. And so in those cases, you'd be going to a new design rule and you'd need new lithography, maybe the mix was different with the advance. And so you'd see intensity go up and those same drivers would be driving process control intensity. To your point, what's changed quite a bit is the dynamics associated, and it started happening a few nodes ago where we saw a proliferation in advanced designs at leading edge. Because historically, what you also saw was fewer people designing at the leading edge. So therefore, it was pretty correlated.

Yeah that's an insightful question the uh if you go back in time and I won't go too far back, but often the process control for lithography was associated with wavelength shifts in lithography, usually driven by 1 large manufacturer of a microprocessor. And so that was the Cadence that kind of set everything. And so in those cases, you'd be going to a new design Rule and you'd need new lithography. Maybe the mix was different with the advanced and so you see intensity go up and those same drivers would be driving process. Control, intensity to your point. What's changed quite a bit? Is the Dynamics Associated and it started happening, uh, a few days ago.

Rick Wallace: But around seven nanometers, we started seeing more designs happening, and the design intensity around the number of designs chasing leading edge doesn't really do anything for lithography intensity. In fact, it doesn't do anything for much capital intensity except for process control intensity. Because you have a higher degree of variability because you have more designs going through at the leading edge. You drive radical consumption up higher, and that has been a very stable market. But more importantly, you have a very high mix fab where the variability is more and more challenged. And then you have to manage that in terms of how do you make sure you're yielding enough and not putting too many wafers in. That's all about process control. That's not about other things, not about litho.

Rick Wallace: And then add to that, the latest thing that's accelerated even further is the number of large die associated with AI. So you have yet another driver that's doing it. On top of all that, you have what's going on in advanced packaging, which is allowing people to integrate a lot and in many ways reduces the need for other equipment but increases the need for process control. Lastly, you have what's going on in HBM. So it's kind of a perfect transition from a, if your business is process control, this is a really good time because every one of these drivers is driving the intensity. And the way that customers can afford to have more processes control is they don't need as much intensity in their other parts of semiconductor manufacturing. So you're exactly right, but it's really the proliferation of designs and the drivers around AI.

Doesn't do anything for much capital intensity except for process control intensity because you have a higher degree of variability due to having more designs going through at the leading edge. You drive radical consumption up higher, and that has been a very stable market. But more importantly, you have a very high-mix fab where the variability is becoming more and more challenging. Then you have to manage that in terms of how to ensure you're yielding enough and not putting too many wafers in. That's all about process control. That's not about other things, not about litho.

On to that, the latest thing, that's accelerated even further is the the number of large dye in associated with AI. Uh, so you you have a yet another driver that's doing it on top of all that you have what's going on in advanced packaging, which is allowing people to integrate a lot. And and in many ways reduces the need for other equipment, but increases the need for process control. Lastly, you have what's going on in hbm. So it's kind of a perfect transition from a if if if you're a business is processed control, this is a really good time because every 1 of these drivers is driving the intensity and the way that customers can afford to have more processes control is they don't need as much intensity in their other parts of semiconductor manufacturer. So uh, you're exactly right but it's really the proliferation of designs and the drivers around AI.

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): Appreciate the insights, Rick. Thank you.

Appreciate the insights. Um uh Rick. Thank you.

Operator: Thank you. We'll go next now to Tom O'Malley with Barclays.

Thank you. We go next now to Tom Ali with Barclays.

Analyst (Multiple: CJ Muse, Tom O'Malley, Timothy Arcuri): Hey, guys. Thanks for taking my question. When you answered the question earlier in the call on 2026, and I appreciate it's early and you don't want to give more color, you talked about the broadening of leading edge trends, and I think you were very intentional around using that word. Are you talking about additional customers coming in on the leading edge side? Are you just talking about the broadening of opportunities in the existing pillars of customers that you already have?

Hey guys, thanks for taking my question. When when you answered the question earlier in the call on 2026 and I appreciate its early and you don't want to give more color, you talked about the broadening of Leading Edge men. So I think you were very intentional around uh using that word. Are you talking about additional customers coming in on the Leading Edge side? Are you just talking about the broadening of opportunities in the existing pillars, uh, of customers that you already have?

Rick Wallace: Both. Talking about both. We're seeing more people at the leading edge, as we talked about higher mixed foundries. And for the first time, I think in quite a while, we're seeing more players doing leading edge or very close in proximity to leading edge across. So we're seeing some momentum there. Some of that's been in the news. And as a result, what we're seeing is a broadening of customers as well as a proliferation of designs. And I think it is the proliferation of designs that is driving the broadening of customers.

Both talking about both uh we're seeing more people at the Leading Edge um as we talked about higher mixed foundries, and for the first time, I think in quite a while, we're seeing more players.

Doing Leading Edge or very close in proximity to Leading Edge across. So we're seeing some momentum there. Some of that has been in the news, and as a result, what we're seeing is a broadening of customers, as well as a proliferation of design. I think it is the proliferation of designs that is driving the broadening of customers.

Analyst (Multiple: CJ Muse, Tom O'Malley, Timothy Arcuri): And when you guys look out into '26, you obviously are also thinking, you know, look at this, look at the environment you just described. You talked about a lot of different areas in which process control is going to do a lot better than other areas of equipment. How are you comfortable in talking about the strength of the broader market where you're kind of, you're kind of describing a dynamic where maybe you're taking more of the pie and obviously having more of the pie, the market may look a lot bigger. So maybe can you walk us through like what you're doing to understand what your intensity is of total WFE next year? Do you see share gains and maybe the market isn't as big, but you maybe have a piece of that market that's a little bit larger?

Analyst (Multiple: CJ Muse, Tom O'Malley, Timothy Arcuri): How do you kind of figure that out as you look at your forecast into next year?

And and when you guys look out into 26, you obviously are also thinking, you know, look at this, look at the environment, you just described you talked about a lot of different areas in which process control is going to do a lot better than other areas of equipment. How are you comfortable in talking about the strength of the broader Market? Where you're kind of, you're kind of describing a dynamic, where maybe you're taking more of the pie and obviously, having more of the pie, the market may look a lot bigger. Um, so maybe can you walk us through? Like, what you're doing to to understand what your intent to be? Is of, of total WFC next year? Do you see share gains? And, and maybe the market is this big, but you maybe have a piece of that market. That's a little bit larger. How do you kind of figure that out as you look at your forecast into next year.

Rick Wallace: Well, I'll take the qualitative. Brent wanted to do the quantitative part. We don't actually know exactly. What we know is what the trends are happening. And there's always been this thing about process control that kind of cuts both ways. One is, can you solve these problems? And if you could, you people would buy systems to do it. But for a long time, there were a lot of unmet needs. And so people would find other ways to solve those problems because eventually they're going to figure it out. And what I mean by that, let's say you need to find a specific defect in a specific part of the process. You need to segment that process to find it. Well, if you don't have the tools that are actually capable of doing that, customers will figure out another way around it, maybe not nearly as efficient.

Rick Wallace: But so part of what's changed is we have more of those tools. And part of what the reason we have that is our portfolio has been strengthened through a lot of investment over the years. And we talked about quite a while ago, the repeated application of advanced processing of our own systems using AI has given us more ability to solve those problems in conjunction with some new product offerings such as our e-beam portfolio. It means that we can give customers a better way to manage those. So from the standpoint of that, but I don't actually think in some customers, they are figuring out dynamically how much process control they need. And it still incumbents on us to prove the value when they introduce it.

Well, I'll I'll take the the qualitative like brand once it didn't do the quantitative part. I I we we don't actually know exactly what we know or what the trends are happening and and there's always been this thing about process control uh that kind of cuts. Both ways 1 is, can you solve these problems and if you could you people would advise systems to do it but for a long time, there were a lot of unmet needs and so people would find other ways to solve those problems because eventually they're going to figure it out. And what I mean by that, let's say you need to find a specific defect in a specific part of the process. You need to segment that process to find it. Well if you don't have the tools that are actually capable of doing that customers will figure out another way around it. Maybe not nearly as efficient.

Rick Wallace: But when we say we're pretty confident going into '26, it's because we have more and more places where customers are telling us, in some regards, they're playing back to us what we may have said to them a while ago. We know we need more process control intensity. We need you to help us get that portfolio. And they're making sure that we have the ability to do that. Those are encouraging conversations that we're having now. And we understand why because we're involved in a lot of the debugging of these processes to understand. You also have architectural changes that are just making it harder.

Rick Wallace: And so the dynamics of supporting these advanced nodes, and as I mentioned before, we're in kind of the perfect storm for all the process flows, whether it's HBM, and those are more challenging, whether it's advanced logic with bigger die, and also the packaging. So that's why we feel pretty good about '26. And Brent can maybe add more color. Yeah, look, we all know our own business is probably best. So when we try to provide some color on where the industry is, obviously that's informed by what you know and are closest to. So we thought that it was prudent at this point, given the nature of customer conversations, to provide our perspective on next year the way we did. To Rick's point, we do see opportunities for our business to continue to inflect.

You when they introduced it but when we say we're pretty confident going into 26. It's because we have more and more places where customers are telling us in some regards. They're playing back to us what we may have said to them a while ago, we know we need more process control. Intensity, we need you to help us get that portfolio and they're making sure that we have the ability to do that. Those are encouraging conversations that we're having, you know. And and we we we understand why, because we're involved in a lot of the debugging of these processes to understand. You also have architectural changes that are just making it harder and so the Dynamics of supporting these Advanced nodes. Um and as I mentioned before, we're in kind of The Perfect Storm for all the process flows. Whether it's hbm and those are more challenging when it's Advanced logic with bigger dye and also the packaging. So that that's why we feel pretty good about 26 and Bren can maybe add more color. Yeah, I look, we all know our own businesses.

Is probably best. So when we try to

Rick Wallace: One thing about larger die is it faces defect density challenge where everybody benefits from bigger wafers. But the defect density challenges when you have large die create new opportunities for process control. When you look at high-performance compute, you also look at the value of those die. And so that, given the nature of that, customers are investing more to ensure that those chips function as designed, and the performance specs are quite rigorous. So all that gives us a certain amount of confidence around our own business. And I try to do my best to give you at least the perspective that I have today at the end of July, what next year, what we think next year will look like.

Provide some color on on where the industry is. Obviously that's informed by by what, you know, and are closest to. So, uh, we thought that, you know, it was prudent at this point given the nature of customer conversations to provide our perspective on next year. Um, the way we did to Rick's point, we, we do see opportunities for, for our business to continue to inflect 1 thing about larger diet. Is it creates this defect density challenge where everybody benefits from?

Bigger wafers, but the defect density challenge is when you have large die.

Creates, you know, new opportunities for for process.

When you look at high performance compute, you also look at the value of, of those dye. And so that given given the nature of that customers are investing more to ensure that that those chips function as designed and the performance specs are quite rigorous. So, all that gives us, you know, certain amount of confidence around our own business. Uh, and I, you know, I tried to do my best, to, to give you at least a the perspective that I have today in, uh, at the end of July, uh, or what next year. Uh, what we think next year looks like.

Analyst (Multiple: CJ Muse, Tom O'Malley, Timothy Arcuri): Thank you. Appreciate that.

Thank you, appreciate that.

Operator: Thank you. We'll go next now to Joe Quatroci of Wells Fargo.

Thank you, we go next now to Joe quatrochi of Wells Fargo.

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): Yeah, thanks for taking the question. Maybe just a follow-up to that kind of line of questioning. If we think about just you talked about the writing and diversity designs of starts in HPC, increasing KLA's relevancy. I guess, how do you think about just the sample rates or what that does to sample rates for process control? Do we just think about that as being maybe the peak to trough is less steep on a new node ramping, or is this kind of a step function higher in terms of sample rates?

Yeah, thanks for taking the question. Maybe just a follow-up to, to that kind of line of questioning. If we think about just, you talked about, you know, the writing and diversity of designs that starts in HBC, increasing Koz re re relevancy. Um, I guess how do you think about just the the sample rates or what that does to sample rates for process control? Do we just think about that as being maybe the peak to trough is less steep on a new node ramping? Or is this kind of a step function higher in terms of sample rates?

Rick Wallace: Yeah, this is another interesting development, Joe. And because we had that same question, you know, if you go back historically, you'd have a new node, you would ramp at the beginning of time, you'd ramp it up, and then you'd run it in volume. And so you'd see process control intensity most highest at the front end, right? That's what you're referring to.

Yeah, this is another, uh, interesting development, and Joe and...

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): Yeah, exactly.

Rick Wallace: What's happened now, yeah, what's happened now, though, is because there are multiple designs, what we're seeing is they'll debug, the customer will debug a new process on a specific device type, a specific wafer, and they'll ramp that. But not long after, you'll get other designs that are coming in that have their own version of those ramps, and they're not the same. And in many cases, the process flows for different customers are different. The die size might be different. So you're really having a compounding of ramps inside what looks like HBM. And a lot of these HBM fabs are actually doing process ramps of the new nodes, plus there are continued improvements inside of that node in terms of what that capability.

I'll because we had that same question, you know? If you go back historically, you'd have a new node you would ramp at the beginning of time, you'd ramp it up and then you'd run it in volume. Um, and so you'd see process control intensity most, you know, highest at the front end, right? That's what you're referring to. Um, yeah, what happened now?

Rick Wallace: And even to one degree, we saw somebody go back to a prior node and introduce more process control because what was introduced into that prior node was a larger die. And so it's not the traditional model people think of when you go back in time of you ramp it and then you run it. That's not what's happening. There's multiple ramps because every one of these die, you know, these devices come in. There's some benefit to some customers to not be first with their advanced designs. In fact, there's an economic benefit to coming in six months later, but it doesn't make it easier to ramp it in the production. So that's why when we look out and we look at the distribution and we were looking for, are we seeing that effect of seeing it front-end loaded?

Yeah, what's happened now though is because there are multiple designs. What we're seeing is, they'll debug the customer will debug a new process on a specific device type of specific wafer and they'll ramp that, but not long. After you'll get other designs that are coming in that have their own version of those ramps. And they're not the thing and, and in many cases, the process flows for different customers are different. The dice size might be different. So you're really having a compounding of ramps inside, what looks like hbm. And a lot of these hbm, Fabs are actually doing process ramps of the new nodes. Plus, they're are continued improvements inside of that node in terms of what that capability and even to 1 degree. We saw somebody go back to a prior node and introduce more introduce more process control because what was introduced into that prior node was a larger die. And so, it's not the traditional model people think of

Rick Wallace: And the answer is no, that's not what we're seeing. In fact, in some cases, we're seeing it going back because the yield, these wafers are so valuable that if there's an entitlement of yield and they can get more, they're actually putting in more process control to squeeze those lines, get more capability. So very different than the traditional view of how process control ramps with a new technology node.

Kevin Kessel: Joe, the other thing is that when these nodes are well adopted, say the design levels are high, then that limits what our customers are able to do in terms of trying to reuse their equipment, at least as it relates to our products. And so as we've had a a litho roadmap, we've had new architectures, the Moore's Law attributes have been good that drive the design environment high, then it limits the reuse of capacity. There's a number of technical challenges that also limit it, but certainly the adoption levels of the leading edge by multiple designs is a factor as well.

They are so valuable that if there's an entitlement of yield and they can get more, they're actually putting in more process control to squeeze those lines to get more capability. So, it's very different from the traditional view of how process control ramps with the new technology node.

So the other thing is, is that when these nodes are well, adopted say the design levels are high then that limits what our customers are able to do in terms of trying to reuse their equipment, at least as it relates to our products. And so as we've had a, a, a litho road map, we've had new architectures, the Moors law attributes, have been good that drive the design environment High, then it limits the ReUse of of capacity because the number of technical challenges that also limit it but certainly the the adoption levels of of of the Leading Edge. Um, but by multiple design,

Rick Wallace: And let me add two more things. Because you have multiple retical designs, reticals have always been 100%. Right, you're inspecting all the reticals to make sure, and then you have a requal, but you're inspecting them, make sure they're good. And why? Because they're so expensive and the cost of a failure is so high. We're actually seeing that dynamic in packaging too, because the cost of these advanced packages are so high that they're running at 100%. So that doesn't even fall off. That's just because of the cost structure of those. So multiple situations, it's not as easy to model as it used to be, but it's good for process control intensity.

And let me ask 2 more things, um, because you have multiple radical design radicals radicals have always been 100% right here, inspecting. All the radicals to make sure and then you have a recall but you're inspecting them. Make sure they're good and why? Because they're so expensive and the cost of a failure is so high, we're actually seeing that Dynamic and packaging too because the cost of these Advanced packages are so high that they're running at 100% so that doesn't even fall off. That's just because of the the cost structure of those so multiple situations. It's not as easy to model as it used to be um but it's good for process control intensity.

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): Yeah, that's super helpful. And maybe just as a follow-up, I think earlier to a question you said, and correct me if I'm wrong, but you said retical revenue, retical inspection revenue this year would be a record or pretty strong growth. Can you help us just understand what's driving that? I know that like China had been a source of demand for that, but I think there's also quite a bit of demand on leading edge or N-1 nodes.

Yeah, that's super helpful. Um, and maybe this is a follow-up. I think earlier to a question, you said incorrectly, if I'm wrong, but you said radical revenue—radical inspection revenue this year would be a record, or pretty strong growth. Can you help us just understand, like, what's driving that? I know that, like, China had been a source of demand for that, but I think there's also quite a bit of demand on leading edge or in minus 1 notes.

Rick Wallace: Yeah, Joe, so China is a factor there, right? Because the very limited number of captive mashups, so investments to develop a emergent mask ecosystem. So there is, you know, legacy node retical tools that are continuing to be a factor for us. Requalification opportunities in the fab, given the nature of the number of designs, the value to Rick talked about, and the limited use of helicals is also a factor. The other thing that you have that's also driving it is it's more single die. Since most of the reticals, let's say, you know, 60% plus of reticals are single die reticals, you need to inspect those reticals against a reference. And so whether that is a database reference of the design, whether that's a different golden reference, then that's also a factor.

Rick Wallace: We're also seeing benefit in terms of print check on the broadband plasma Gen 4 platform, or Gen 5, that one's a Gen 5 platform that is doing retical qual as well. Now that business shows up in our optical inspection results and not in patterning. But there's a number of drivers and a ton of investment happening by customers to ensure that these reticals are the fidelity of the pattern is good and that they're not introducing any defectivity because you need 100% defect detection and retical inspection or you print that defect onto every die. So a number of good drivers across multiple products.

Yeah, yeah, Joe. So China is a factor there, right? Because uh, the very limited number of captive Mash shops. So, Investments to develop, a, a merchant mask ecosystem. So, uh, so there is, you know, Legacy node reticle tools that are that are continuing to be a factor for us. Uh, we qualification, uh, opportunities in the Fab, given the nature of, of the number of designs, the value to talked about and The Limited use of pellicles is also a factor. The other thing is you have, that's also driving. It is more single die. Since most of the, the radicals that say, you know, 60% plus of of reticles are single diuretics. You need to inspect those reticles against a reference and so whether that is a, a, a database reference of the design, or whether that's a a different, a golden reference, then that's also a factor.

Kevin Kessel: But just to point out, what Brent talked about using optical for print check, that is not included when we say we're having a retrograde retical. It's without that.

We're also seeing benefits in terms of print check on on, on the, uh, Broadband plasma Gen 4 platform, um, or Gen 5, that 1's in Gen 5, platform. That is is doing reticle qual as well. Now, that business shows up in our, in our Optical inspection results and not in patterning, but there's a number of drivers and and, and, and a ton of investment Happening by customers. Uh, to ensure that these reticles are are, uh, the Fidelity of the pattern is good and that they're not introducing any defectiveness you need 100% defect detection and reticle inspection, or you print that defect on on onto every die. So a number of good drivers across multiple products, but just to point out what Brent talked about using optical for for, uh, print check that is not included when we say we're having a record here in radical. But

Without that.

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): Got it. Thank you.

Got it. Thank you.

Operator: We'll go next now to Timothy R. Curry of UBS.

We'll go next now, to Timothy our Curry of UBS.

Analyst (Multiple: CJ Muse, Tom O'Malley, Timothy Arcuri): Thanks a lot. Brent, can you, I know you're going to shift how you report backlog and RPO, but I think that's maybe with the new fiscal year. So can you give us RPO?

Thanks a lot. Uh, Ben can you? I know you're going to shift how you report backlogs and RPO, but I think that's maybe with the new fiscal year. So can you give us, um, RPO

Rick Wallace: Yeah, so we'll report in the 10K. I think we're going to file it here in another week or so. RPO will be somewhere around in the neighborhood of $7.9 billion.

Yeah. So we'll report in the 10-K. I think we're going to file it here in another week or so. RPO will be somewhere around in the neighborhood of $7.9 billion.

Analyst (Multiple: CJ Muse, Tom O'Malley, Timothy Arcuri): So it came down by like a billion dollars?

So, it came down by like $1 billion.

Rick Wallace: Came down by about that much. Yeah, we're starting to see, you know, as we said earlier, as we've shipped through a lot of the long backlog customers now and some of the supply-constrained products, we're now seeing our business being driven by our longstanding customers that operate with shorter lead times. So now we're normalizing lead time. We've been talking about it for a number of quarters that we were moving towards it. I think now we're getting into that range where, look, our longstanding customers have, you know, historically, you know, six to eight-month lead times. The packaging business has two to three-month lead times. So we're seeing a normalization of lead time that's happening here, and that's affecting the backlog level. It took a while to get here. We were up at, what, 18 months of backlog. Now we're down, you know, around eight months of backlog.

Rick Wallace: You have to remember the RPO number is significantly a systems number. So when you do the math on it, you have to compare it against the systems revenue. And so when you do that math, you end up in that seven to nine-month range that I talked about.

The packaging business has 2 to 3 month lead times. So, um, we're seeing a normalization of lead time that's happening here, uh, and that's affecting uh, the backlog levels. It took a while to get here. We were up at what 18 months of backlog. Now, we're down, you know, around 8 months of backlog, you have to remember the RPO number, is the the significantly a systems number. So, when you do the math on it, you have to compare it against the systems Revenue.

Analyst (Multiple: CJ Muse, Tom O'Malley, Timothy Arcuri): Yeah, I mean, we've been talking about it for a while that it's going to come down. But it was a billion dollars. That was stripped out by you. So basically, that's canceled by you?

And so when you do that math, you end up in that, uh, in that 7 to 9 month range that I talked about.

Yeah, well, I mean we've been talking about this for a while, but it's going to come down. But so was the $1 billion that was stripped out by you. So basically just canceled by you.

Rick Wallace: No, no, no. That was part of our shipments. I mean, we don't really see our backlog cancel all that much. I mean, we had to strip out backlog as it relates to export controls when that happened. But whenever we make adjustments, better debooking adjustments, those are typically related to an event like that. Our backlog tends to go to the customer who gives us an order. And you have to remember, we had a number of new customers that were doing greenfield projects that to get a slot when you want it, what do we require? We require an order. We require a deposit. We require letters of credit. So that was a big part of the backlog. Now you fast forward to where we are today and you look at our longstanding customers that you know well. Well, those customers we build the forecast with.

No. No, no. That was, that was, uh, part of our shipments. I mean, we don't really see our backlog canceled, uh, all that much. I mean, we, we had to strip out backlog, as it relates to export controls when that happened, but whenever we make adjustments that are Deb booking adjustments. Uh, those are typically uh related to an event like that our backlog tends to tends to all together with customer gives us an order. And you have to remember, we had a number of new customers that were doing Greenfield projects.

Rick Wallace: And so the order to shipment timing tends to be in that six to eight-month timeframe. So we're seeing more of that business going forward, and that's reflected in the lower backlog level. I would expect now that we've normalized it to stay more or less in this range here going forward.

That to get a a slot when you want it. What do we require? We require an order, we require a deposit, we require letters of credit. So that's with a big part of the backlog. Now, you fast forward to where we are today and you look at our long-standing customers that, you know, well, well those customers, we build the forecast with and so the, the order to shipment timing tends to be in that,

6 to 8 months, time frame.

Analyst (Multiple: CJ Muse, Tom O'Malley, Timothy Arcuri): Thanks, Brent. And then just on service, you were thinking about 10% for the year, but you seem to be running into that. Is that like your theme this year? Can you talk about that service?

So, we're seeing more of that business going forward, and that's reflected in the lower backlog levels. I would expect now that we've normalized it to say more or less in this range here going forward.

Thanks, B. This on service, um, you were setting up 10% for the year, but you should be running out of that. It's like, what's the use this year? Can you talk about that service?

Rick Wallace: For the, I'm sorry, Tim, you're breaking up a little bit. Oh, service. Yeah, overall service, I think we're in that ballpark. Yeah, yeah, 10, you know, 10% plus range for the year.

I'm sorry, Tim, you're breaking up a little bit. Oh, oh, service. Yeah, overall service, I think we're in that ballpark.

Yeah, yeah, 10 to 10. You know, 10% plus range for the year.

Analyst (Multiple: CJ Muse, Tom O'Malley, Timothy Arcuri): Okay, so it's still going to go up sequentially in September or December, right?

Okay, so it's still going to go up sequentially in September or December.

Right.

Rick Wallace: Yep.

Analyst (Multiple: CJ Muse, Tom O'Malley, Timothy Arcuri): Okay. Got it. Thanks.

Yep.

Rick Wallace: It generally does, right? I think because as you add tools and tools come off of warranty, unless you have some situation where all of a sudden, like, you know, you lose access to a fab, we thought that might put some pressure on sequential growth. But we've also seen the dynamics in our service business start to inflect in terms of, you know, performance requirements, availability requirements, and in the, you know, our general attach rate. So it's the 52nd quarter of year-over-year growth for service than we'd expect to see sequential growth in services we continue through the year.

Okay, perfect. And generally, does, right? I think because as you add tools and tools come off of warranty, unless you have some situation where all of a sudden, you know, you lose access to a Fab, and we thought that might put some pressure on sequential growth. But we've also seen the dynamics in our service business.

Start to collect in terms of of of, you know, performance requirements, availability requirements and and the, you know, our general attach rate. So it's the 52nd quarter of of year-over-year growth for service and would expect to see sequential growth and services. We continue through the year.

Operator: Thank you. And ladies and gentlemen, I do have time for one more question this evening. We'll take that now from Brian Chin of Stifel.

Thank you, and ladies and gentlemen, I do have time for one more question this evening. We'll take that now from Brian Chin of Stifel.

Analyst (Multiple: Vivek Arya, Shane Brett, Charles Shi, Joe Quatrochi, Brian Chin): I know, thanks for sneaking me in here at the end. I think one of my questions has kind of been asked here, which you remarked on pretty well, which is basically that these data center ships are kind of breathing life into, you know, minus one nodes, it sounds like. I think that's something that's a pretty important thing. Maybe one last, my question will be, I could be mistaken, but I think when you discussed in the past, it felt like your near-term opportunity set in advanced packaging was particularly in 2.5T or co-op packaging rather than an HBM. Is that the case? And where is more, is that the case, I guess? And also, are you addressing more inspection applications still, or is metrology part of that as well?

Hi there. Thank you for a, a sneaking me in here at the end. Um, but I don't 1 of my questions is the kind of masks here which uh, you you you remarked on pretty well which is basically that these data center chips are kind of breathing life into, you know, minus 1 nodes. It sounds like I think that's something that's a pretty important thing. Maybe, 1 Los my question will be.

Um, I could be mistaken, but I think when you discussed in the past,

It's not like your near-term opportunity. Set in advanced packaging was particularly in 2 and a half feet, or or co-ops packaging rather than an hbm is, is that the case and where, where is more of the? Is that the case I guess? And also, uh, are you addressing more inspections applications still or, or as Metrology part of that as well.

Rick Wallace: Yeah, yeah, most of our share gains that we've seen so far have been in the logic area with co-ops, although we are seeing increased momentum in HBM. So we're pretty, pretty excited about directionally where that's going. So it certainly is informing our view of share opportunities. It is more defect-loaded than metrology because sampling rates for metrology tend to be a little bit lower. The design rules that are typically used in packaging are larger, and so that limits some of the metrology opportunities in the short run. But from an inspection point of view, to Rick's earlier point, you know, the sampling rates are incredibly high because you don't want to, you don't want to miss defects. You don't want to overkill devices either. So you don't want to underkill and miss something. You don't want to overkill either.

Rick Wallace: And I think so that's driving, you know, higher sensitivity requirements from KLA.

The the the that's driving, you know, higher um, you know, higher sensitivity requirements from from Ka.

Operator: Great, great. Thank you. Thank you. And at this time, Mr. Kessel, I'd like to turn things back to you, sir, for any closing comments.

Great, great. Thank you.

Thank you, and at this time, Mr. Kessel, I'd like to turn things back to you, sir, for any closing comments.

Analyst (Multiple: CJ Muse, Tom O'Malley, Timothy Arcuri): Oh, just thank you, everybody, for your time, for your interest in KLA. We appreciate it. We know it's a busy week to run and it's a busy day. We'll be in touch as we go forward. Thank you. Bye-bye.

Thank you, everybody, for your time and for your interest in KLA. We appreciate it. We know it's a busy week, and earnings are a busy day. We'll be in touch as we go forward. Thank you. Bye-bye.

Goodbye.

Speaker 8: Goodbye.