Q1 2026 KLA Corp Earnings Call

Mhm.

Good afternoon. My name is Stephanie and I'll be your conference operator. Today at this time, I'd like to welcome everyone to the KLA Corporation September quarter 2025 post earning conference call.

All participant lines have been placed in the living room mode to put in any background noise.

After the speakers remarks, there will be a question and answer session. If you'd like to ask a question at that time, please press star 1 on your telephone keypad,

if you wish to remove yourself from the queue, please press star 2.

Limit yourself to 1 question and then feel free to reach you for any follow-up questions.

Lastly, should you need assistance during the conference today? Please press star zero. Thank you.

I will now turn the call over to Kevin Kessler.

Vice president of investor relations and Market analytics for Klo. Please go ahead.

Welcome to the September 2025 quarterly earnings call. I'm joined by our CEO. Rick Wallace and our CFO, Brian Higgins.

We'll discuss today's results as well as our December quarter Outlook, which was released after the market closed and is available on our website along with the supplemental materials.

We are presenting today's discussion in metrics on a non-gaap financial basis, unless otherwise specified, all fully your references. Made refer to calendar years. The ending materials contain, the detailed reconciliation of gaap to non-gaap results.

Kayla'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 FCC filings, any forward-looking statements, including those. We make on the call today are also subject to those risks and Ka cannot guarantee those forward-looking statements will come true. Our actual results May differ significantly from those projected, in our forward-looking statements we will begin the call with a brick providing commentary on the business environment and our quarter followed by brand with financial highlights and our outlook before I turn the call over to Rick, I wanted to provide a Save the Day.

For our investor day, it has been rescheduled for Thursday, March, the 12th 2026 in New York. Now, over to Rick,

Thank you. Kevin to kick off our call. Today, I'll cover a few highlights from our quarter, that showcase how the company is benefiting from the growing relevance of process control and AI infrastructure investment, and our momentum in advanced Packaging.

Ka delivered strong results across the board in the September quarter with revenue of 3.21 billion. Non-gaap diluted DPS of 8.81 Gap diluted EPS was 8.47.

This performance demonstrates how Kayla's process control leadership has expanded Beyond Leading Edge, R&D investment to address all growth markets in wfb including high bandwidth memory and advanced Packaging.

Increased complexity shorter product cycles and higher value Wafers. Alongside this growth, the industry is also seeing Rising demand for advanced Packaging.

This complex environment of Rapid AI technology development.

This control accelerates time to resolve by resolving process integration challenges during the Fab ramp up phase.

Optimized time to market for a diverse mix of semiconductor designs.

Kala Leading Edge, customers are also challenged to optimize yield and limit process, variability and high volume production, environment, resulting in increasing process control intensity.

In this increasingly complex semiconductor device technology landscape, we're seeing rapid growth in demand for KLA's advanced packaging portfolio, which has emerged as a meaningful market for the company as heterogeneous device integration has become more complex.

Operator: To all sites on hold. We appreciate your patience and please continue to stand by. Good afternoon, my name is Stephanie and I'll be your conference operator today. At this time I'd like to welcome everyone to the KLA Corporation September Quarter 2025 Post Earnings Conference Call. All participant lines have been placed in the listen-only mode to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question at that time, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, please press star 2. Please limit yourself to one question and then feel free to requeue for any follow up questions. Lastly, should you need assistance during the conference today, please press star zero. Thank you.

To gain momentum through a combination of intensity gains and market share improvements across our portfolio.

We're targeting year 2025. We expect advanced packaging-related revenue to succeed $925 million, up approximately 70% year-over-year.

Sales a service business, also continues to do the Builder. Strong growth Services grew to 745 million in the September quarter up 6%, sequentially and 16% year-over-year.

Consistency and resiliency are Hallmarks of the KA service business.

Finally, the September quarter was strong on both cash flow and capital returns.

Strong cash flow in the quarter was at a record of 1.066 billion.

Over the past 12 months, free cash flow was 3.9 billion with a free cash flow margin of 31%.

Total Capital return in the September quarter. With 799 million comprised of 545 million, in share repurchases, and 254 million. In dividends total Capital Return of the past, 12 months was 3.09 billion.

I'm sorry, Taylor's business is both enabled and benefits from today's technology inflections and the growth drivers related to AI as well as from growth and advanced Packaging.

Daily Business has gone from being primarily indexed to Leading Edge R&D investments in Foundry, logic customers to now addressing all growth markets in wfe, including memory, Advanced, packaging, and Leading Edge and Legacy node logic.

As we look ahead over the next several years, the long-term secular Trends driving semiconductor industry, demand and investments in wfe and a deaths. Packaging are compelling and represent a relative performance opportunity for KLA.

This Dynamic growth environment are consistent execution, reflects the resilience of the KLA, operating model, the strength of our Global team and our disciplined approach to Capital, allocation focused on long-term investment and maximizing total shareholder value.

With that, I'll turn the call over to Brent to discuss the quarter's Financial Pilots.

Thanks, Rick. Hey, the September quarter results reflect double-digit year-over-year growth and improved profitability.

Revenue was 3.21 billion above the guidance midpoint of 3.15 billion.

Non-gaap alluded DPS with 8.81 and GAP. Delivery DPS was 8.47.

Each above the midpoint of the, its ranges.

Operator: I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics for KLA Corporation. Please go ahead.

gross margin was 62.5% 50 basis points above the midpoint of guidance driven by a stronger product mix and Manufacturing efficiencies

Non-gaap operating expenses were 618 million.

Kevin Kessel: Welcome to the September 2025 quarterly earnings call. I'm joined by our CEO Richard Wallace and our CFO Bren Higgins. We will discuss today's results as well as our December quarter outlook, which was released after the market close and is available on our website along with the supplemental materials. We are presenting today's discussion and metrics on a non-GAAP financial basis. Unless otherwise specified, all full year references made refer to calendar years. The earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future events, presentations, corporate governance information, and links to our SEC filings. Our comments today are subject to risks and uncertainties reflected in the disclosure of risk factors in our SEC filings. Any forward-looking statements, including those we make on the call today, are also subject to those risks, and KLA cannot guarantee those forward-looking statements will come true.

Operating expenses included 360 million in R&D and 258 million in sgna.

Non-gaap operating margin was 43.2%.

Other income and expense. Net was a 28 million expense with upside to guidance principally driven by a favorable Mark to Market adjustment on a strategic supplier investment.

The quarterly effective tax rate is 14.1%.

Net income was $1.17 billion. GAAP net income was $1.12 billion.

Cash flow from operations was 1.16 billion and pre-cast flow was 1.07 billion.

The breakdown of Revenue by reportable and end markets and major products. And regions can be found within the shareholder letter and slides

Moving on, to the balance sheet.

Kevin Kessel: Our actual results may differ significantly from those projected in our forward-looking statements. We will begin the call with Richard providing commentary on the business environment and our quarter, followed by Bren with financial highlights and our outlook. Before I turn the call over to Richard, I wanted to provide a save the date for our Investor Day. It has been rescheduled for Thursday, March 12, 2026, in New York. Now over to Richard. Thank you, Kevin. To kick off our call today, I'll cover a few highlights from our quarter that showcase how the company is benefiting from the growing relevance of process control and AI infrastructure investment and our momentum in advanced packaging. KLA delivered strong results across the board in the September quarter with revenue of $3.21 billion. Non-GAAP diluted EPS of $8.81. GAAP diluted EPS was $8.47.

We ended the quarter with 4.7 billion dollars in total Cash. Cash equivalents and marketable, securities and 5.9 billion in debt.

The company has a flexible and attractive bond maturity profile supported by investment-grade ratings from all three major rating agencies.

A cornerstone of KLA's business is consistent, strong free cash flow generation, driven by one of the best operating models in the industry and a predictable, highly differentiated service business.

This helps drive a comprehensive Capital return strategy that includes consistent dividend growth and increasing share repurchases over the long term.

our actions this year, emphasize our commitment to Capital returns, and our confidence in Koz long-term shareholder value accretion

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

a 12% to $1.90 per share per quarter or an annualized dividend of $7.60 per share.

Kevin Kessel: This performance demonstrates how KLA process control leadership has expanded beyond leading-edge R&D investment to address all growth markets in WFE, including high bandwidth memory and advanced packaging. Accelerating investment in scaling AI infrastructure is fueling technology development investment across the leading edge, driving more designs, increased complexity, shorter product cycles, and higher value wafers. Alongside this growth, the industry is also seeing rising demand for advanced packaging. In this complex environment of rapid AI technology development, process control accelerates time to results by resolving process integration challenges during the fab ramp up phase to optimize time to market for a diverse mix of semiconductor designs. KLA's leading edge customers are also challenged to optimize yield and limit process variability in high volume production environment, resulting in increasing process control intensity.

along with this action, we also announced the 5 billion share repurchase authorization

Turning to the Outlook to continue to be driven by an increasing investment in Leading Edge, logic hbm, and advanced Packaging.

Growth of advanced packaging supporting heterogeneous. Chip integration is led to a new meaningful serve market for KLA.

Accounting error and wafer fab equipment is now, according to KLA internal estimates, approximately $11 billion, with the market growing faster than core WFC.

This is particularly true as ship density, shrink, and the processing required for packaging create risk for our customers.

For KLA, this creates a new served available Market that will augment the company's Revenue growth over the next several years.

Kevin Kessel: In this increasingly complex semiconductor device technology landscape, we're seeing rapid growth in demand for KLA's advanced packaging portfolio, which has emerged as a meaningful market for the company as heterogeneous device integration has become more complex. KLA's advanced packaging systems revenue continues to gain momentum through a combination of intensity gains and market share improvements across our portfolio. For calendar year 2025, we expect advanced packaging related revenue to exceed $925 million, up approximately 70% year over year. KLA Services business also continues to deliver strong growth. Services grew to $745 million in the September quarter, up 6% sequentially and 16% year over year. Consistency and resiliency are hallmarks of the KLA Services business. Finally, the September quarter was strong on both cash flow and capital returns front. Strong cash flow in the quarter was at a record of $1.066 billion over the past 12 months.

This opportunity, coupled with the evolving complexity of advanced packaging, supports an even broader market opportunity for KLA.

As we approach the close of calendar 2025, we continue to expect mid to high single-digit growth in wfe modestly improved from our previous Outlook discussed last quarter.

Growth in 2025 is being driven principally by increasing investment in both Leading Edge Foundry, logic and memory to support, growing Ai and premium mobile demand.

Partially offset by lower demand from domestic China.

Giving Koz business. Momentum expanding market? Share opportunities.

And higher process control. Intensity is a Leading Edge across all segments. We remain on track to outperform the WSC Market in 2025.

The advanced packaging market is also expected to grow more than 20% compared to last year.

Finally customer discussions have become more constructive on expectations, for calendar year 2026 to be a growth year for the industry with a broader spending profile than 20125.

For both wfe and advanced Packaging.

while it is still too early to provide precise, calendar 2026, Revenue guidance,

Kevin Kessel: Free cash flow was $3.9 billion with a free cash flow margin of 31%. Total capital return in the September quarter was $799 million, comprised of $545 million in share repurchases and $254 million in dividends. Total capital return over the past 12 months was $3.09 billion. In summary, KLA's business has both enabled and benefits from today's technology inflections and the growth drivers related to AI as well as from growth in advanced packaging. KLA's business has gone from being primarily indexed to leading edge R&D investments in foundry logic customers to now addressing all growth markets in WFE including memory, advanced packaging, and leading edge and legacy node logic.

Our view today is that first half Revenue levels will be roughly flat to modestly up compared to the second half of calendar 2025.

With accelerating growth in the second half of the calendar year.

This outlook is inclusive of the revenue impact related to additional market access laws concerning certain customers in China, resulting from extended export controls from the U.S. government.

We estimate the revenue impact on the December quarter and calendar 2026 to be approximately 300 to 350 million for KOA

Our calendar 2026. This impact is spread roughly evenly across the first and second half of the calendar year.

Haley's unique product, portfolio, differentiation and value, proposition are focused on enabling technology transitions.

Kevin Kessel: As we look ahead over the next several years, 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 in this dynamic growth environment. Our consistent execution reflects the resilience of the KLA operating model, the strength of our global team, and our disciplined approach to capital allocation focused on long-term investment and maximizing total shareholder value. With that, I'll turn the call over to Bren to discuss the quarter's financial highlights. Thanks, Rick. KLA September quarter results reflect double-digit year-over-year growth and improved profitability. Revenue was $3.21 billion, above the guidance midpoint of $3.15 billion. Non-GAAP diluted EPS was $8.81, and GAAP diluted EPS was $8.47, each above the midpoint of the guidance ranges.

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

The market environment and the complexity of our customers, technology roadmaps are compelling and bring challenges and opportunities. For KA to continue its relative performance.

in this industry, environment Ka remains focused on supporting customers investing for the future, executing product road maps and driving productivity across the Enterprise

Al's December quarter guidance is as follows.

Total revenue is expected to be 3.225 billion, plus, or minus 150 million.

Boundary logic revenue from semiconductor. Customers is forecasted to be 59%.

And memories expected to be approximately 41% semi-processed Control Systems Revenue to semiconductor customers.

Kevin Kessel: Gross margin was 62.5%, 50 basis points above the midpoint of guidance, driven by a stronger product mix and manufacturing efficiencies. Non-GAAP operating expenses were $618 million. Operating expenses included $360 million in R&D and $258 million in SG&A. Non-GAAP operating margin was 43.2%. Other income and expense, net, was a $28 million expense with upside to guidance principally driven by a favorable mark-to-market adjustment on a strategic supplier investment. The quarterly effective tax rate was 14.1%. Net income was $1.17 billion, GAAP net income was $1.12 billion, cash flow from operations was $1.16 billion, and free cash flow was $1.07 billion. The breakdown of revenue by reportable and end markets and major products and regions can be found within the shareholder letter and slides.

Given our expectations for company growth and product development roadmap requirements. We will maintain our operating expense trajectory above business models, designed to deliver 40 to 50% incremental non-gaap operating margin leverage on Revenue growth over the long run.

Other models and assumptions include other income and expense net of approximately $32 million in expenses for the December quarter.

Kevin Kessel: Moving on to the balance sheet, we ended the quarter with $4.7 billion in total cash, cash equivalents, and marketable securities, and $5.9 billion in debt. The company has a flexible and attractive bond maturity profile supported by investment-grade ratings from all three major rating agencies. A cornerstone of KLA's business is consistent, strong free cash flow generation driven by one of the best operating models in the industry and a predictable, highly differentiated service business. This helps drive a comprehensive capital return strategy that includes consistent dividend growth and increasing share repurchases over the long term. Our actions this year emphasize our commitment to capital returns and our confidence in KLA's long-term shareholder value accretion. On April 30, 2025, we announced the 16th consecutive annual dividend increase of 12% to $1.90 per share per quarter, or an annualized dividend of $7.60 per share.

Tax rate. Assumption has risen slightly to 14% reflecting the impact of recent Global Tax changes.

For the December quarter Gap. Diluted EPS is expected to be 8.46 plus or minus 78 cents.

And non-gaap deleted, DPS of 8.70 plus or minus 78 cents.

EPS guidance is based on a fully diluted share count of approximately 132 million shares.

In conclusion, our near-term, Revenue guidance shows modest growth and is consistent with our views from the start of the year of relative Topline stability.

We expect to meaningfully outperform the mid to high single-digit WFC growth rate in 2025, driven by rising process control intensity, inclusive of the significant growth of the advanced packaging market.

Ala focuses on delivering a differentiated product portfolio that addresses customer's technology. Roadmap requirements which are driving our longer term relevance and growth expectations.

Kevin Kessel: Along with this action, we also announced a $5 billion share repurchase authorization. Turning to the outlook, it continues to be driven by an increase in investment in leading edge logic, HBM, and advanced packaging. Growth of advanced packaging supporting heterogeneous chip integration has led to a new meaningful served market for KLA. What was once a rounding error in wafer fab equipment is now, according to KLA internal estimates, an approximately $11 billion market growing faster than core WFE. This is particularly true as chip densities shrink and the processing required for packaging creates risk for our customers. For KLA, this creates a new served available market that will augment the company's revenue growth over the next several years. The market and technology roadmap for leading edge WFE supporting high performance compute is driving relative inflections for process control.

Daily Business is well, positioned for today's technology inflections and growth drivers.

We are encouraged by the customer engagement. That informs our business forecast,

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

In addition, the growing investment in custom silicon, particularly among hyperscalers developing their own custom chips, that led to a proliferation of unique device designs and increased Demand on our customers to deliver performance volume and time to Market.

As design complexity and diversity grow. So, it is a need for advanced process control.

As a result kasing growth and process control intensity as each new chip. Design requires rigorous inspection Metrology, yield optimization Solutions

Kevin Kessel: This opportunity, coupled with the evolving complexity of advanced packaging, supports an even broader market opportunity for KLA. As we approach the close of calendar 2025, we continue to expect mid to high single digit growth in WFE, modestly improved from our previous outlook discussed last quarter. Growth in 2025 is being driven principally by increasing investment in both leading edge foundry logic and memory to support growing AI and premium mobile demand, partially offset by lower demand from domestic China. Given KLA's business momentum, expanding market share opportunities, and higher process control intensity at the leading edge across all segments, we remain on track to outperform the WFE market in 2025. The advanced packaging market is also expected to grow more than 20% compared to last year.

Daily and equally positioned to benefit from these Trends as we expand our Market leadership and deliver differentiated value to our customers.

That concludes our prepared remarks.

Let's begin the Q&A.

Thank you, operator.

Sorry, I was just gonna pass it over to you to, to start the process. Thank you. Apologies for that, thank you. And at this time, if you'd like to ask a question, please press star 1 on your telephone keypad, if you wish to remove yourself from the queue, you may do so, by pressing star 2,

We remind you to please unmute your line, we introduced and if possible please pick up your handset for optimal sound quality. In the interest of time, we ask you, please limit yourself to 1 question. If you have additional questions, you may reach you

And we'll take our first question from harlander with JP Morgan.

Kevin Kessel: Finally, customer discussions have become more constructive on expectations for calendar year 2026 to be a growth year for the industry with a broader spending profile than 2025 for both WFE and advanced packaging. While it is still too early to provide precise calendar 2026 revenue guidance, our view today is that first half revenue levels will be roughly flat to modestly up compared to the second half of calendar 2025 with accelerating growth in the second half of the calendar year. This outlook is inclusive of the revenue impact related to additional market access loss related to certain customers in China resulting from extended export controls from the U.S. Government. We estimate the revenue impact on the December quarter in calendar 2026 to be approximately $300 million to $350 million for KLA.

Hey, good afternoon, guys, and congratulations on the strong quarterly execution. You know, last quarter, you had this early view, giving your lead times, customer discussions on calendar 2026, being a growth year. You reiterated that today but talked about being more constructive on that growth rate. So, with another day, with another 90 days of visibility, given that Leading Edge design starts are continuing to expand at a rapid pace.

Could you please pace the recent and significant AI data center infrastructure announcements as the magnitude on the WFC growth? All looks improved, or is it more just a confidence level on the growth that you were thinking about 90 days ago? You mentioned a broader spending profile on WFC in advanced packaging. Can you guys elaborate on that a little bit?

Sure Harlen. I'll, I'll start, um, thank you for the comments.

Kevin Kessel: For calendar 2026, this impact is spread roughly evenly across the first and second half of the calendar year. KLA's unique product portfolio differentiation and value proposition are focused on enabling technology transitions, accelerating process node capacity ramps, and ensuring yield entitlement and high volume production. The market environment and the complexity of our customers' technology roadmaps are compelling and bring challenges and opportunities for KLA to continue its relative performance in this industry environment. KLA remains focused on supporting customers, investing for the future, executing product roadmaps, and driving productivity across the enterprise. KLA's December quarter guidance is as follows. Total revenue is expected to be $3.225 billion plus or minus $150 million. Foundry logic revenue from semiconductor customers is forecasted to be approximately 59% and memory is expected to be approximately 41%.

Um, I, you know, I don't know if it is really a, a, a strengthening Outlook as much as it's just you, we're getting closer to it customers. Um, particularly our long-standing customers and their lead time expectations. We're starting to get more constructive about exact timing. Um, we're encouraged by what we're seeing. Certainly for KLA at the Leading Edge, with a broadening level of investment, we think that's going to be positive on, we can Edge Foundry, logic. Um, dram is also constructive and and with the investments in HPM, that's been very process control intensive. And so that's been uh, really good sign as well.

Flash Market is, I think continues to grow. Um, rest of the Legacy Market. I'm not. So sure there's much growth there and I think we'll have a little bit of a correction in China.

Kevin Kessel: Semiconductor process control systems revenue to semiconductor customers within memory, DRAM is expected to be about 78% and NAND the remaining 22%. As always, these business mix approximations pertain solely to our semiconductor customers and do not fully reflect our total semiconductor process control systems revenue. Gross margin is forecasted to be 62% plus or minus 1 percentage point based on relatively consistent factory output versus the September quarter and product mix revenue expectations. Operating expenses are forecasted to be approximately $635 million in the December quarter as we continue to make product development and infrastructure investments to support expected revenue growth. Given our expectations for company growth and product development roadmap requirements, we will maintain our operating expense trajectory. Our business model is designed to deliver 40% to 50% incremental non-GAAP operating margin leverage on revenue growth over the long run.

Obviously, we're feeling the effects of of some new controls, that's impacting our view into next year, but we were expecting China to, to normalize anyway. So I think, as we as we look at it all, we're pretty constructive on on wfb growth, uh, rising and, uh, Capital items are are process control, intensity, and packaging has a lot of momentum, both in terms of intensity. Um, but also share. So we feel pretty, pretty good about what's in front of

a lot more to say specifically about about growth in the industry and our expectations for KOA beyond what we said.

In the comments, we'll have a lot more to say when we report for December and January, 1 Thing Arland, just to add to Brens. Comment. Um, we what we do see, and kind of feel is body language from customers, uh, pretty strong in terms of wanting to make sure they're secure and Slots. So we're having kind of conversations with people not wanting this to get away from them because they're worried that they may not.

I suspect that's across.

Across the other equipment guys, too.

Kevin Kessel: Other model assumptions include other income and expense net of approximately a $32 million expense. For the December quarter, the effective tax rate assumption has risen slightly to 14% reflecting the impact of recent global tax changes. For the December quarter, GAAP diluted EPS is expected to be $8.46 plus or minus $0.78 and non-GAAP diluted EPS of $8.70 plus or minus $0.78. EPS guidance is based on a fully diluted share count of approximately 132 million shares. In conclusion, our near term revenue guidance shows modest growth and is consistent with our views from the start of the year of relative top line stability. We expect to meaningfully outperform the mid to high single digit WFE growth rate in 2025, driven by rising process control intensity inclusive of the significant growth of the advanced packaging market.

Oh, there's no appreciate that, and then specifically on Advanced laundry and logic, you know, in addition to the increased process control, intensity of the industry moves from 2, nanometer to less than 2 nanometer. Right there. There's an added Dynamic. I feel like where your fee customers are standing up, Fabs in totally new geographies, right? So more uncertainty on yield ramps. Systematic defects like different type of Workforce, right? And then on the advanced logic side, you know, the large guy here is more focused on building out. A world-class fungi business, which means, way more focused on yield and manufacturability versus their historical Trend. 1 name of these additional Dynamics are driving the potential for incremental process control stand. As you look into next year,

Well, sorry.

I do think that there are

Kevin Kessel: ALA focuses on delivering a differentiated product portfolio that addresses customers' technology roadmap requirements, which are driving our longer term relevance and growth expectations. ALA's business is well positioned for today's technology inflections and growth drivers. We are encouraged by the customer engagement that informs our business forecast. Long term secular trends driving semiconductor industry demand and investments in WFE and advanced packaging are compelling and represent a relative performance opportunity for KLA over the next several years. In addition, the growing investment in custom silicon, particularly among hyperscalers developing their own custom chips, has led to a proliferation of unique device designs and increased demand on our customers to deliver performance, volume, and time to market. As design complexity and diversity grow, so does the need for advanced process control.

As the customers are dealing with the new design roles, and some of them, especially those that might be back in it, if you will, are trying to delete an edge, their benchmarking, what do they need for process control? And we're seeing kind of very constructive conversations around that. So, I think that's true. I think it's kind of filling out, um, the rest of the players, if you will, in terms of how they're thinking about investment and process control. So, yeah.

I'd say that that strengthens if there are more players doing more Leading Edge and more locations that's that's going to be a creative to overall intensity. Yeah, 1 of the themes over the last couple of years is obviously been significant investment augmented by by China and Legacy design rules.

But but when you think about Leading Edge Leading Edge was tremendously efficient right with with mostly investment being really driven by by 1 of our customers. I think as you start to see a broadening out there, uh it creates more opportunities for for Leading Edge engagement.

Process control, uh, intensity as as a lot of the Strategic investment happens to support. What is an accelerating growth opportunity, uh, for for our customers. So, I think we're encouraged by by that profile, as we move forward.

Kevin Kessel: As a result, KLA is seeing growth in process control intensity as each new chip design requires rigorous inspection, metrology, and yield optimization solutions. KLA is uniquely positioned to benefit from these trends as we expand our market leadership and deliver differentiated value to our customers. That concludes our prepared remarks. Let's begin Q&A.

Thanks Rick. Thanks Brent.

Thank you. We'll take our next question from VEC. Arya with Bank of America.

Operator: Thank you.

Kevin Kessel: Head to Snyder, Operator. Sorry, I was just going to pass it over to you to start the process. Thank you.

Operator: Apologies for that. Thank you. At this time, if you'd like to ask a question, please press Star one on your telephone keypad. If you 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, please pick up your handset for optimal sound quality. In the interest of time, we ask you please limit yourself to one question. If you have additional questions, you may requeue, and we'll take our first question from Harlan Sur with JPMorgan.

Uh, thanks for taking my question. Um, on The Foundry logic side you are I think guiding you through decline to 59% from 74% of sales, I believe. So a decline of over 300 million sequentially and curious, what's causing this drop? How much of this is the China restriction? How much of this is the China impact? And is this kind of just a 1 quarter lumpiness or or is there more to read into it as we look into the first half of next year?

Yeah, so the VAC for Semiconductor customers on the mixed side on the Leading Edge. It's up ticking in the December quarter, but it's being offset by a reduction.

In China.

China was elevated in September at 39%. Just for a reference point, our expectations for the total year for China.

[Analyst]: Good afternoon guys and congratulations on the strong quarterly execution. You know last quarter you had this early view given your lead times, customer discussions on calendar 2016, a growth year. You reiterated that today but talked about being more constructive on that growth rate. With another 90 days of visibility, given that Leading Edge design starts are continuing to expand at a rapid pace, the recent and significant data center infrastructure announcements, has the magnitude on the WFE growth outlook improved or was it more just confidence level on the growth that you were thinking about 90 days ago? You mentioned a broader spending profile on WFE and advanced packaging, can you guys just elaborate on that a little bit?

Uh, and I have been, uh,

pretty consistent with this, for the last

Months or so. As we thought it would be somewhere in that 30% plus or minus range. So it was a little bit elevated versus the the annual Trend. So as China comes down, part of that, is that you have leading things going up. And then you, you also have you know, memory, uh, as um,

Particularly in DRAM, we see that uptick in December.

Kevin Kessel: Sure Harlan, I'll start. Thank you for the comments. I don't know if it's really a strengthening outlook as much as it's just we're getting closer to IT customers, particularly our long standing customers and their lead time expectations. We're starting to get more constructive about exact timing. We're encouraged by what we're seeing certainly for KLA at the Leading Edge, with a broadening level of investment, we think that's going to be positive. On Leading Edge Foundry Logic, DRAM is also constructive and with the investments in HBM that's been very process control intensive. That's been a really good sign as well. Flash market is I think continues to grow. Rest of the legacy market, I'm not so sure there's much growth there and I think we'll have a little bit of a correction in China.

There's some moving Parts there but that uh that's what's happening. As it relates to the recent export controls, I would say the impact on the December quarter is fairly immaterial to the company overall and that we were able to move slots around. We've got certain products where customers get in the queue and so we can pull business forward, it's a lot, different customers. Um,

Obviously, over the long term, that's lost business. And so, as we said, the prepared remarks, we think that's about 300 to 350 million between now and, and the end of, uh, the end of 26,

So hopefully that gives you a little color on the moving parts.

Thank you. Our next question will come from CJ news with can

Kevin Kessel: Obviously we're feeling the effects of some new controls that's impacting our view into next year, but we were expecting China to normalize anyway. I think as we look at it all, we're pretty constructive on WFE growth rising in capital intensive or process control intensity and packaging has a lot of momentum both in terms of intensity but also share. We feel pretty good about what's in front of us and we'll have a lot more to say specifically about growth in the industry and our expectations for KLA beyond what we said in the comments. We'll have a lot more to say when we report for December and January. One thing Harlan, just to add to Bren's comment, what we do see and kind of feel is body language from customers pretty strong in terms of wanting to make sure they're securing slots.

Yushen from the higher margin of silicon. Thanks so much.

Yeah, CJ on the guy down. Uh, it you're right, it's about 50 bits and it's mostly related to just mix adjustments in the quarter. Uh, as I've said, uh, over the last couple of quarters, you know, there there is a, a tariff, uh, impact that we're dealing with, which is more or less consistent quarter to quarter that's roughly, you know.

Kevin Kessel: We're having kind of conversations with people not wanting us to get away from them because they're worried that they may not be able to achieve their objectives if they don't line us up. I suspect that's across the other equipment guys too.

[Analyst]: I appreciate that. Specifically on advanced foundry and logic, in addition to the increased process control intensity as the industry moves from 2 nanometer to less than 2 nanometer, there's an added dynamic where your customers are standing up fabs in totally new geographies. This creates more uncertainty on yield ramps, systematic defects, and different types of workforce rates. On the advanced logic side, the large guy here is more focused on building out a world-class foundry business, which means way more focus on yield and manufacturability versus their historical trend. Wondering if these additional dynamics are driving the potential for incremental process control spend as you look into next year.

50 to 100 basis points of impact. Uh, so yeah we're guiding 62 and and, you know, outputs relatively consistent. So it's really a mixed issue in terms of how we were thinking about running the company and, you know, over the over the long run, certainly our 40 to 50% long-standing incremental, operating margin Target does Drive how we size the company. Gross margin, obviously is a factor in that and and so, you know, we have to think about where where gross margins are trending, as we consider that. Um, we outperformed, that Target pretty significantly. Uh, as Revenue has has grown in the mid teens, I call it above trend-line growth in 2025. So as we move forward, I think the easiest way to think about that is if you're more or less a trend line we're more or less in the middle of the target range. And if growth levels are above that, you know, High single digit trend line. We should outperform it growth levels below. Uh, you know, we'll probably underperform the target a bit but but that's how we're going to size the company over time and

Our performance over, you know, longer periods of time is is obviously very consistent with that.

Thanks so much.

Thank you. We'll move next to a joke with Toshi at Wells Fargo.

Kevin Kessel: I do think that as the customers are dealing with the new design rules and some of them, especially that are maybe back in it, if you will, trying to do leading edge, they're benchmarking what do they need for process control and we're seeing kind of very constructive conversations around that. I think that's true. I think it's kind of filling out the rest of the players, if you will, in terms of how they're thinking about investment and process control. Yes, I'd say that that strengthens if there are more players doing more leading edge in more locations, that's going to be accretive to overall intensity. One of the themes over the last couple of years has obviously been significant investment augmented by China and legacy design rules.

Yeah, thanks for taking the question. I appreciate uh the qualification or quantification on the advanced packaging wfz uh was curious just to think about just the the advanced packaging process control intensity. I think just based on some of the things you put out there or talked about in the past, it's like high teams. Is that the right way to think about it. Um, and then how do you think about where that goes over time?

No, I wouldn't say it's it's that high. I think if if you look at Koz share of WFA, I mean 1 of the interesting things. As I said, in the prepared remarks is, you know, it wasn't much of a factor for us in our business and you don't have to go back more than just a few years. And, you know, the the percent uh, of for KLA was in the, you know, the 1% range and now you know, if you take, you know, our views on on 2025 at 11 billion or so, you know, we're approaching 6%. So uh we've seen a a a escalation here in terms of intensity, as the requirements have changed fundamentally related to to uh

Kevin Kessel: When you think about leading edge, leading edge was tremendously efficient with most of the investment being really driven by one of our customers. I think as you start to see a broadening out there, it creates more opportunities for leading edge engagement, process control intensity, as a lot of the strategic investment happens to support what is an accelerating growth opportunity for our customers. I think we're encouraged by that profile as we move forward.

Performance Computing on the logic side and the memory side. So we think that that continues over time, I don't think you're going to see that kind of uh that slope of growth. But we do expect that as as density shrink and processes become more complex that it does play to the need for more.

[Analyst]: No, thanks, Rick. Thanks, Bren.

Operator: Thank you. We'll take our next question from Vivek Arya with Bank of America Securities.

[Analyst]: Thanks for taking that question. On the foundry logic side, you are, I think, guiding it to decline to 59% from 74% of sales. I believe so a decline of over $300 million sequentially. I'm curious what's causing this drop? How much of this is the China restriction? How much of this is the China impact? Is this kind of just a 1/4 lumpiness, or is there more to read into it as we look into the first half of next year?

More more advanced systems and of course we have our front-end portfolio that we can use to address this this interesting market. So I think it's a a new Sam for KLA. We have a lot of great drivers within W Fe that we think are driving process control and Kaylee share of the market. And we're augmenting that growth with this growth that we expect to see in advanced packaging that likely over time grows uh modestly faster than than wfe. So, um, it's it's a really encouraging opportunity and I think as we start to move up the the value chain in terms of of of new capability required and I think it creates an opportunity for us to to drive, you know, something, you know, in the neighborhood or, or better than than General Corporate averages on on margins.

Thanks.

Kevin Kessel: Yes. Vivek, for our semiconductor customers on the mix side, on the leading edge, it's upticking in the December quarter, but it's being offset by a reduction in China. China was elevated in September at 39%. Just for a reference point, our expectations for the total year for China, and I have been pretty consistent with this for the last nine months or so, as we thought it would be somewhere in that 30% plus or minus range. It was a little bit elevated versus the annual trend. As China comes down, part of that is you have leading rates going up and then you also have memory, particularly in DRAM, we see that upticking in the December quarter. There are some moving parts there, but that's what's happening as it relates to the recent export controls.

Thank you, we'll take our next question from Tom Molly with Barkley.

Hey guys, thanks for taking my question. Nice results. Uh, I wanted to ask a bigger 1 that people have been trying to the earnings period here. I understand it, it wasn't in the Preamble, but uh, lamb went out and talked about 100 billion of AI spend is roughly equivalent to 8 billion in wfe or additional spend. And they talked about most of that being related to memory. Do you agree with that statement or do you have any qualification for how you would? Look at that ratio.

Uh, I think in general, this is Rick. I think in general, um, if you think about what goes into a data center, the percent that is memory. The percent that is

Kevin Kessel: I would say the impact on the December quarter is fairly immaterial to the company overall in that we were able to move slots around. We've got certain products where customers get in the queue and we can pull business forward and slot different customers. Obviously, over the long term that's lost business. As we said in the prepared remarks, we think that's about $300 million to $350 million between now and the end of 2026. Hopefully that gives you a little color on the moving parts.

[Analyst]: Thank you, Bren.

Operator: Thank you. Our next question will come from C. J. Muse with Cantor Fitzgerald.

[Analyst]: Yeah, good afternoon. Thank you for taking the question. I guess was hoping to focus on gross margins. You guided down 50 bps. I'm assuming that's just product mix. Would love to hear your thoughts there. Then Bren, you're highlighting again the 40 to 50% incremental operating margins. You know, if we are in a world where WFE continues to grow kind of in a double digit world over.

Added packaging. So we get closer to 10 billion on the 100% of the investment. That's not just semiconductor of a packaging and we think our opportunity in that is pretty good. Because again, those are all the high challenging process control elements, kind of everything that we've been talking about larger dye, more valuable dye. More hbm, is is really challenging from a process control, getting more so and then packaging. Uh, so we're in general agreement, we would add back in the packaging part and we think our participation in there is above our average intensity for the rest of the industry.

Super helpful. Thank you.

Thank you. We'll take our next question from Timothy with UBS.

Thanks. Um.

Kevin Kessel: The next couple of years, should we be thinking that you're at the higher end of that range given kind of greater contributions from a higher margin of silicon?

[Analyst]: Thanks so much.

Uh, Bren Rick was talking about, uh, customers, um, starting to want to get in line for. So I would imagine bookings were pretty good. So, can you give us, can you give us RPO? I know it was 7.9 billion last quarter. Where did it end this quarter?

Kevin Kessel: Yes, C. J., on the guide down, you're right. It's about 50 bps and it's mostly related to just mix adjustments in the quarter as I've said over the last couple of quarters. There is a tariff impact that we're dealing with which is more or less consistent. Quarter to quarter, that's roughly 50 to 100 bps of impact. We're guiding 62 and output's relatively consistent. It's really a mix issue in terms of how we were thinking about running the company. Over the long run, certainly our 40 to 50% long-standing incremental operating margin target does drive how we size the company. Gross margin obviously is a factor in that, and we have to think about where gross margins are trending as we consider that we outperformed that target pretty significantly as revenue has grown in the mid-teens, I call it above trend line growth in 2025.

Hey, Tim. We don't uh, we changed our disclosure, so we're not disclosing that anymore, but what I will tell you is, is that if you look at our lead times,

Expectations for our lead times. As I said, last quarter, and we've been converging after.

A couple of years of elevated. Backlog related to a number of Greenfield projects that have now shipped through. And if you look at the composition of our business going forward, really tied to our some of our long-standing customers that tend to operate in, you know, 6-month kind of lead time windows.

Um, our lead times have converged and I think normalized between 7 and 9 months. Now, if you go back and look at 2020, 2021, and even go back historically for KLA, it used to be about 6 months. Now, our customer base is broader today.

Kevin Kessel: As we move forward, I think the easiest way to think about that is if you're more or less at trend line, we're more or less in the middle of the target range, and if growth levels are above that high single-digit trend line, we should outperform it. Growth levels below, we'll probably underperform the target a bit, but that's how we're going to size the company over time. Our performance over longer periods of time is obviously very consistent with that.

I think there's a combination of a little bit more uh new Fab activity that will push those up. But the context that we provided in terms of our expectations for growth uh next year and and how that plays through in terms of of khaz, first half and second half is supported by an order flow that is consistent with uh, those lead times. So um, I think that that is how you should think about it in the 10K. Each year. We will provide uh

[Analyst]: Thanks so much.

Operator: Thank you. We'll move next to Joe Quatrochi with Wells Fargo.

That historically will provide our backlog, and so that'll give me an anchor point in terms of backlog on an ongoing basis. But 7 to 9 months, and it looks pretty consistent in that range as we go forward.

[Analyst]: Yeah, thanks for taking the question. I appreciate the qualification or quantification on the advanced packaging. I was curious just to think about just the advanced packaging process control intensity. I think just based on some of the things you put out there or talked about in the past, it's like high teens. Is that the right way to think about it, and then how do you think about where that goes over time?

I guess you did give it their last quarter Brown, is that like, is that like new this quarter?

Kevin Kessel: No, I wouldn't say it's that high. I think if you look at KLA's share of WFE, one of the interesting things, as I said in the prepared remarks, is it wasn't much of a factor for us in our business and you don't have to go back more than just a few years. The percent for KLA was in the 1% range. Now, if you take our views on 2025 at $11 billion, we're approaching 6%. We've seen an escalation here in terms of intensity as the requirements have changed fundamentally related to the high performance computing on the logic side and the memory side. We think that continues over time. I don't think you're going to see that kind of slope of growth. We do expect that as densities shrink and processes become more complex, it does play to the need for more advanced systems.

Yeah, we we changed our disclosure Tim and we we highlighted that we were going to make that change back in in the March quarter earnings results. We said, when we started the new fiscal year beginning uh July 1st, that that disclosure would change. There were a number of reasons for that. The primary reason being the, the inconsistency and how that disclosure was being interpreted and reported across our industry. So we have a lot more closely with the disclosure that our peers have. And and that's what we're going to do here going forward.

Okay, then I guess this is my second question. So you said last quarter from the China was going to be for you down 10, to 15% this year. But even to get down 10, I have to have China down, like, 250 million dollars q1q in December. Is that is that the right number that China's going to be back to like 30 31%, uh, in December?

Yeah, in the December quarter, I think China will be, you know, high high high 20s. Uh, so yeah, you're you're in the range. You know, we'll see how the quarter finishes up, but

I think in the high 20s is, is how modeling and then it translates into, you know, maybe 30, maybe, it's 31, very consistent with the way. I've talked about it all year long.

Okay, Brent. Thank you.

Kevin Kessel: Of course, we have our front end portfolio that we can use to address this interesting market. I think it's a new SAM for KLA. We have a lot of great drivers within WFE that we think are driving process control and KLA's share of the market. We're augmenting that growth with this growth that we expect to see in advanced packaging that likely over time grows modestly faster than WFE. It's a really encouraging opportunity and I think as we start to move up the value chain in terms of new capability required, it creates an opportunity for us to drive something in the neighborhood or better than general corporate averages on margins.

Yeah, and the other thing I'd say is, you know, you look at 2026? We we we think it's probably comes down into the mid 20s.

And so some of that is is driven by the export restrictions but also some general normalization that we've been talking about that would be coming. Uh, so we we think it likely uh settles somewhere in the mid 20s. As we look at 2026 at least how we see it today.

Thank you. We'll take our next question. From Chris Stark with TDK.

[Analyst]: Thanks.

Operator: Thank you. We'll take our next question from Tom O'Malley, Barclays.

[Analyst]: Hey guys, thanks for taking my question. Nice results. I wanted to ask a bigger one that people have been trying through the earnings period here. I understand it wasn't in the preamble, but Lam went out and talked about $100 billion of AI spend is roughly equivalent to $8 billion in WFE or additional spend. They talked about most of that being related to memory. Do you agree with that statement or do you have any qualification for how you would look at that ratio?

Um, do you think advanced back-end inspection is gaining more prominence than front-end?

Or do you think it's still below?

Kevin Kessel: I think in general this is Rick. I think in general if you think about what goes into a data center, the % that is memory, the % that is GPUs or logic, and then the rest, you're probably at about, if you take $100 billion, then you could say that half of that would be semiconductor related and the intensity on that kind of gets you to that run rate. I don't think it's necessarily 50/50 in terms of memory and in terms of the logic side. Our view is you're pretty close. As we were just talking, added packaging so we get closer to $10 billion on the $100 billion because of the investment. It's not just semiconductor but packaging. We think our opportunity in that is pretty good because again those are all the high challenging process control elements, kind of everything that we've been talking about.

Yeah, I think it's, I think it's still below. I mean, it says, the first part of your question, uh, we haven't looked into has been a, a more intensive process control intensive node. Uh, obviously you have an architecture change, that's, that's quite significant. Uh, the other issue is, is that as you think about, uh, larger die, that creates opportunities, uh, for more process control intensity. Uh, so and and and I think the lithos scaling, and litho layers with with, with larger dye designs, or or HPC designs, uh, tends to drive more more lethal layers in in the process as well. So when we look at 102 overall, uh, versus N3. We do see a an improvement in overall intensity, there's a share element to it too. You know, we're, we're encouraged by some of the share movement. We're seeing, uh, but overall that that's how we see it as it relates to Advanced packaging. Um, you know, I think, you know, our logic share is higher than our memory share. Uh, we'll have more to to say in terms of articulating. How this this

Kevin Kessel: Larger die, more valuable die, more HBM is really challenging from a process control, getting more so, and then packaging. We're in general agreement. We would add back in the packaging part and we think our participation in there is above our average intensity for the rest of the industry.

[Analyst]: Super helpful, thank you.

Operator: Thank you. We'll take our next question from Timothy Arcuri with UBS.

Uh, this market breaks up, but you know, as I look at KLA's share of the advanced packaging market, we're about, you know, 6%. If you look at Koz's share of the PC market, you know, it's closer to 8%. So the process control intensity is not as high, and you know, sampling rates are pretty elevated these days. And you know, we'll see over time if that changes. Certainly, the need for more capability will be a requirement here moving forward, but we'll see how those things trade off over time as our customers move forward.

[Analyst]: Thanks, Bren. Rick was talking about customers starting to want to get in line for. I would imagine bookings were pretty good. Can you give us RPO? I know it was $7.9 billion last quarter. Where did it end this quarter?

that's, I've been, uh, I think you also mentioned that, uh,

Kevin Kessel: Hey Tim, we don't, we changed our disclosures so we're not disclosing that anymore. What I will tell you is that if you look at our lead times, our expectations for our lead times, as I said last quarter, they've been converging after a couple of years of elevated backlog related to a number of greenfield projects that have now shipped through. If you look at the composition of our business going forward, really tied to some of our long standing customers that tend to operate in six month kind of lead time windows, our lead times have converged and I think normalized between seven and nine months. If you go back and look at 2020 and 2021, even go back historically for KLA Corporation, it used to be about six months.

you know, uh, some of your frontend tools are being used for back pain. I'm just kind of curious, uh, especially on the macro inspection or inspection try because is that an Overkill like given the AF? And I'll talk about is using a new eyeliner, eyeliner tool for advanced packaging, would you consider introducing new tools for back-end packaging? Or are you going to use the front-end team? Thank you.

Kevin Kessel: Our customer base is broader today and I think there's a combination of a little bit more new fab activity that will push those up. The context that we provided is in terms of our expectations for growth.

No, I mean it's it's funny. You say that because that was our initial reaction when when the customers wanted us to put our front end portfolio. In the back end, we said are you sure because the the cost of that are you sure you need it? And they were quite certain that they needed it um because of the just think about the cost of of yield failure and packaging and how much it's worth to ensure that that's not happening. So that's what we've really seen in terms of of that they're not it's obviously not our most advanced tools but it is they are systems that we use uh, in the front

[Analyst]: Next.

Kevin Kessel: Year and how that plays through in terms of KLA's first half and second half is supported by an order flow that is consistent with those lead times. I think that that is how you should think about it. In the 10-K each year we will provide our, as we have historically, will provide our backlog and that will give you an anchor point in terms of backlog on an ongoing basis, but seven to nine months and it looks pretty consistent in that range as we go forward.

[Analyst]: I guess you did give it there last quarter, Bren. Is that like new this quarter?

And then that would have been considered the most advanced tools. You know, you go back a few years so absolutely, they're the ones that pulled us in. I mean we did not come to them, it was almost the other way. They said we want you to to provide this capability. So you know, when we think about the roadmap for packaging and remember what we're talking about Advanced packaging, we're in in many ways, early Innings because there's still other technology infections that are going to go into hvm over the next several years as the rest of the market catches up with these uh Advanced packages. So we're really talking about a pretty small percentage of available packages being inspected at this high level. Now, over time people will learn more about it and they they won't inspect it the frequency. So that's why we see the growth will continue, but it won't continue at the rate we've had for the last couple of years, but it should outpace.

Overall WFC growth.

Kevin Kessel: Yeah, we changed our disclosure, Tim, and we highlighted that we were going to make that change back in the March quarter earnings results. We said when we started the new fiscal year beginning July 1 that that disclosure would change. There are a number of reasons for that. The primary reason being the inconsistency in how that disclosure was being interpreted and reported across our industry. We have aligned more closely with the disclosure that our peers have, and that's what we're going to do here going forward.

And our and our share position is great. For 2 Reasons 1, is that we've got this capability but beyond that unlike our competitors that are coming from the the back end, we have road maps and a lot of customers have tremendous value in that roadmap ability.

Thank you very much, very helpful. Thank you. I appreciate it.

Thank you, and we'll take our next question, from Charles Sheen. We need them.

[Analyst]: Okay, this is my second question. You said last quarter, Bren, that China was going to be for you down 10 to 15% this year. Even to get down 10%, I have to have China down like $250 million quarter-over-quarter in December. Is that the right number, that China is going to be back to like 30, 31% in December?

Kevin Kessel: Yeah, in the December quarter I think China will be high, high 20s. You're in the range. We'll see how the quarter finishes up. I think in the high 20s is how modeling, and then it translates into, you know, maybe 30, maybe 31. Very consistent with the way I've talked about it all year long.

Um, thanks for taking my question. Um, I noticed that that based on your Q4 guidance, uh, the KLA process control Revenue. DM is probably going to grow 50% each year on year. I don't think the overall DM WC is growing that much and I think historically people don't really think the KA as a deer and house, more more of a Leading Edge logic house. Um, so wonder what's happening this year. Uh, why is it the growing this much faster than, uh, the year and wfv specifically? Is it kind of tied to the euv, uh, insertion, DM? And how do we think about, uh, 2026, um, year side of the process of control? Uh growth. Thank you.

[Analyst]: Okay, Bren, thank you. Yeah.

Kevin Kessel: If you look at 2026, we think it probably comes down into the mid-20s, and obviously some of that is driven by the export restriction, but also some general normalization that we've been talking about that would be coming. We think it likely settles somewhere in the mid-20s as we look at 2026, at least how we see it today.

Operator: Thank you. We'll take our next question from Krish Sankar with TD Cowen.

[Analyst]: Hi, thanks for taking my question, Erica. Bren, I had a two part question. One is in the past you've spoken about 2 nanometer gate all around is 100 basis point improvement in share for you versus 3A. Is that still the case? Number two is I think if I remember right, their advanced packaging share is about 50%. If I do the math on that, it's $11 billion and $9.7 million. It seems like advanced packaging WP intensity is around mid teens. Do you think advanced back end inspection process intensity is getting higher than front end or do you think it's still below?

Long time, we remember when dram was actually leading technologically and was the biggest market for inspection for KLA. Um and what happened was for many years, there was a bit of a holiday in terms of design rules and dram and the need for process control and what the use case was, but when you get into what's going on with especially around the high bandwidth memory, and the challenges that people have relative to the new design rules, we're actually seeing in some cases higher sensitivity, requirements in some cases for dran on some layers than we're even seeing in logic. So we've had a bit of a, of a reversal of, of some in some areas and we've seen big adoption, uh, of early on as people are debugging these processes and then realizing they don't have a lot of processed margins. So that's the other thing is, is there. And when they start e euv, then they're using our systems for print check. So you see a lot of uh applications happening. And that's really what's been driving this?

Kevin Kessel: I think it's still below. Since the first part of your question, we haven't. Look, N2 has been a more process control intensive node. Obviously, you have an architecture change that's quite significant. The other issue is that as you think about larger die, that creates opportunities for more process control intensity. I think the litho scaling and litho layers with larger die designs or HPC designs tends to drive more litho layers in the process as well. When we look at N2 overall versus N3, we do see an improvement in overall intensity. There's a share element to it too. We're encouraged by some of the share movement we're seeing, but overall that's how we see it as it relates to advanced packaging. I think our logic share is higher than our memory share. We'll have more to say in terms of articulating how this market breaks up.

Increase, we thought it would happen. Uh, years ago, we were hoping it would happen sooner, but but it's definitely. We're seeing, uh, leadership in, in some areas, in terms of the need for process control, uh, as as they retool these dramm facilities to deal with some of the new market requirements.

On the introduction of eev was certainly a factor in terms of process control. Intensity we think overall probably changed it about a point, um, but then if you look at the requirements for hbm, we think it's increased at, you know, another point or so. Uh, Rick talked about a lot of the issues. The the other thing is you have to keep in mind, is that the reliability requirements in a stack of dram chips, in an hbm device. The, the device is only as good as the weakest vram, and so the, the the performance requirements, the process variability that the customer can accept. You can't spin these these devices that go into into an hbm uh integration. So there are a number of things that are happening. There that are uh are positive for process control intensity.

Kevin Kessel: As I look at KLA share, the advanced packaging market, we're about 6% and if you look at KLA's share of the PC market, it's closer to 8%. The process control intensity is not as high and sampling rates are pretty elevated these days. We'll see over time if that changes. Certainly, the need for more capability will be a requirement here moving forward, but we'll see how those things trade off over time as our customers move forward.

[Analyst]: I think you also mentioned that some of your front end tools are being used for back end. I'm just kind of curious, especially on the macro inspection or inspection track, is there an overkill, like even ASML talked about introducing a new I line tool for advanced packaging. Would you consider introducing new tools for back end packaging, or are you going to use the front end tool? Thank you.

Got it. May maybe a quick follow-up. Um, um, I I think uh, uh uh going back a couple of years ago, you guys talk about the delay, the technical ization, uh, what that means to the KOA mask inspection portfolio. Um, I stopped by ceases was that with our pellico, uh your existing mask inspection plus spring check, probably works the best, but with the pellico maybe at 10:00 I know this is a has been an ongoing discussion for many years but uh we are hearing a recent some recent reporting out of Taiwan, talking about your leading Foundry, customer potentially converting a Fab into a pellicle table and the wonder what that means, uh, to your overall strategy of

Um, a massive inspection um, could you share some light on that? Thank you.

Kevin Kessel: No. I mean it's funny you say that because that was our initial reaction when the customers wanted us to put our front end portfolio in the back end. We said are you sure? Because the cost of that, are you sure you need it? They were quite certain that they needed it because of the—just think about the cost of yield failure in packaging and how much it's worth to ensure that that's not happening. That's what we've really seen in terms of that. It's obviously not our most advanced tools, but they are systems that we use in the front end and that would have been considered the most advanced tools if you go back a few years. Absolutely they're the ones that pulled us in. I mean, we did not come to them, it was almost the other way.

Yeah. So, rather than going to specific strategies specific customers have, I can tell you we're in conversations with all the leading task manufacturers in the fabs in terms of what is their strategy relative to radical qualification and re-qualification.

Because it's a critical area and and although we don't have all the pieces in that, we have many of the pieces because there's many points along the way whether you're calling the radicals in the Fab you're doing recall or you're doing verification and print check. So we're heavily involved in those conversations as you know the challenges with politicalization and the trade-off is throughput. And so that's always the issue of of using pellicles, as you give up some of the light performance there have been advancements and and we're well positioned to support those but

Kevin Kessel: They said, we want you to provide this capability. When we think about the roadmap for packaging, and remember what we're talking about, advanced packaging, in many ways early innings, because there's still other technology inflections that are going to go into HVM over the next several years as the rest of the market catches up with these advanced packages. We're really talking about a pretty small percentage of available packages being inspected at this high level. Over time people will learn more about it and they won't inspect at the frequency. That's why we see the growth will continue, but it won't continue at the rate we've had for the last couple years. It should outpace overall WFE growth. Our share position is great for two reasons.

You know, when we talk about a record year and our radical business, obviously people are buying with the future in mind as they do that and we can send you to see growth going forward. We feel pretty good about our ability to participate, uh, as we go forward in terms of

You know, any scenario that plays out, but I can tell you we're very heavily involved in customers with those conversations.

Thanks.

Thank you. We'll take our next question from Chris cassa with Wolfe research.

Kevin Kessel: One is that we've got this capability, but beyond that, unlike our competitors that are coming from the back end, we have roadmaps and a lot of customers have tremendous value in that roadmap ability.

Yeah, thank you. Good evening. I guess the first question is, uh, regarding the, the commentary on on 26. Um, because you have a little more detail about, uh, you know, what you're seeing, you know, first half versus second half, um, you know, assume that it's a combination of advanced logic and and dram, uh, you know, driving that second half. And, you know, is that just simply a function of, you know, where you lead times are that, uh, you know, some of the improvements we've seen over the past couple months, uh, are are just now, uh, you know, flowing through an orders given where the lead times are right now.

[Analyst]: Thank you very much. Very helpful. Thank you. Appreciate it.

Operator: Thank you. We'll take our next question from Charles Shi with Needham.

Kevin Kessel: Thanks for taking my question. I noticed that based on your Q4 guidance, the KLA process control revenue in DRAM is probably going to grow 50% ish year on year. I don't think the overall DRAM WFE is growing that much. I think historically people don't really think of KLA as a DRAM house, more of a leading edge logic house. I wonder what's happening this year. Why is it growing this much faster than DRAM WFE specifically? Is it kind of tied to the EUV insertion in DRAM and how do we think about 2026 DRAM side of the process control growth? Thank you. Yeah, it's an interesting observation. For those of us that have been around for a long time, we remember when DRAM was actually leading technologically and was the biggest market for inspection for KLA.

At least that's how it looks today, and I think you'll see growth accelerate more into the second half.

Lead time discussions we're talking about slots but I think, you know there there's some facility Dynamics also that are influencing some of the timing but would expect uh Advanced logic and and the broadening of the investment that I mentioned to.

To be a driver into the first half.

Um, but there's continued momentum on the DRAM Pro too, so we're pretty encouraged by what we're seeing there. Obviously, it'll be offset by some weaker numbers out of China.

But, but the, uh, the leading edge dynamics are encouraging.

Thank you. Um, just a question on Gross margins as we go into 26 also and uh, you know, with some of the, uh, the mixed changes, you know, particularly with, with China, probably coming down as a as a percentage of the mix anything we should think about with respect to gross margins, uh, as we start modeling through 26,

Yeah, Yeah. Chris

Kevin Kessel: What happened was for many years there was a bit of a holiday in terms of design rules in DRAM and the need for process control and what the use case was. When you get into what's going on, especially around the high bandwidth memory and the challenges that people have relative to the new design rules, we're actually seeing in some cases higher sensitivity requirements for DRAM on some layers than we're even seeing in logic. We've had a bit of a reversal in some areas and we've seen big adoption early on as people are debugging these processes and then realizing they don't have a lot of process margin. That's the other thing that is happening. When they start EUV, they're using our systems for print check. You see a lot of applications happening and that's really what's been driving this increase.

Specific guidance on on, on margins and, and, and operating expense expectations. Um, based on, you know, our our Revenue picture at at next quarter. Um, gross margins, for KLA are generally impacted. I would say, almost exclusively impacted by what we sell, not so much that we sell to, uh, and, and where we sell it. So, it really is, is a factor of, of, of How It's impacting, um, you know, certain product types that that, you know,

We have a pretty extensive portfolio of products, the broadest in our segment of the industry. And depending on what you're buying, it can carry different.

Different margin.

Profiles, uh, certain parts of the market like packaging. Tend to carry a more diluted stream. As I mentioned earlier, I think over time, that that that goes from being a headwind to a Tailwind, um, service tends to grow and has a, a more, a diluted gross margin, but

Kevin Kessel: We thought it would happen years ago, we were hoping it would happen sooner, but it's definitely happening now. We're seeing leadership in some areas in terms of the need for process control as they retool these DRAM facilities to deal with some of the new market requirements. The introduction of EUV was certainly a factor in terms of process control intensity. We think overall it probably changed it about a point. If you look at the requirements for HBM, we think it's increased it another point or so. Rick talked about a lot of the issues. The other thing you have to keep in mind is that the reliability requirements in a stack of DRAM chips and an HBM device, the device is only as good as the weakest DRAM.

Uh, we believe in a creative operating margin. So you do have have some of the moving Parts. Um, the Tariff impact, you know, when you compare year to year, uh, we we really that's more second half Dynamic this year. And uh, my My Hope Is is given some of the things that we have going on in the company, in terms of assessing, how we can try to mitigate that exposure, that, that becomes less of a headwind over time. I think structurally, we're in a world where we'll be dealing with higher low, higher tariffs, but

Kevin Kessel: The performance requirements, the process variability that the customer can accept, you can't bin these devices that go into an HBM integration. There are a number of things that are happening there that are positive for process control intensity. Got it. Maybe a quick follow-up. I think going back a couple years ago, you guys talk about delayed pellicoization, what that means to the KLA mask inspection portfolio. I thought the thesis was that without pellicle your existing mask inspection plus print check probably works the best, but with the pellicle maybe actinic works better. I know this has been an ongoing discussion for many years, but we are hearing some recent reporting out of Taiwan talking about your leading foundry customer potentially converting a fab into a pellicle fab. I wonder what that means to your overall strategy on mask inspection. If you could shed some light on that.

There are things we do in terms of how we operate the company, where there's some Roi in terms of just how we move parts around, uh, the world and how we reduce the leakage and and, and, uh, and draw back scenarios as we understand. And, and track different parts attributes, that that help reduce some of that. So, uh, I think there are a number of Dynamics at play, that will become less.

All the headwinds went over time. Um, and, you know, depending on the growth of the business, you know, obviously that will have a volume, will have an impact too. So I'll have more to say about it. I think those are some of the, you know, some of the context behind the different moving parts.

Oh well, thank you.

Thank you. We'll take our next question from Shane. Brit Morgan Stanley?

Thank you for letting me ask a question. I wanted to follow up on Charles's earlier question, but your memory customer has been talking about capex growth into 2026 but just given how strong this December quarter gear? I'm guy is how should I think about your memory growth expectations into next year? Relative to this really strong December quarter. Thank you.

Operator: Thank you.

Kevin Kessel: Yeah, so rather than go into specific strategies specific customers have, I can tell you we're in conversations with all the leading manufacturers and the fabs in terms of what is their strategy relative to reticle qualification and requalification. It's a critical area and although we don't have all the pieces in that, we have many of the pieces because there's many points along the way, whether you're calling the reticles in the fab you're doing require or you're doing verification and print check. We're heavily involved in those conversations. As you know, the challenges with pelliclization and the trade off is throughput. That's always the issue of using pellicles as you give up some of the light performance. There have been advancements and we're well positioned to support those.

Yeah, he I I apologize. I know that Charles asked, I don't we didn't answer that question. Uh, there, there are definitely some timing factors that are influencing, you know, process control timing relative to other other products. Um, you know, as, as I look at where we're at, I mean, this year's been, you know, a very strong year in dram for the company. I would expect next year to be a growth year as well. Uh, and you know, I think a lot of of the you know, these announcements I think as we start to see that play out and you know we'll see, you know whether that is more of a second half Dynamic into next year or, you know, and how much that sort of carries forward. But but what is clear is is across

All of our customers. I expect them to spend more and to see growth in our DRAM investment from our customers into next year.

Thank you.

Thank you. And as a quick reminder if you'd like to ask a question you may press star 1. Now we'll take our next question from Edward Yang with Oppenheimer.

Kevin Kessel: When we talk about a record year in our reticle business, obviously people are buying with the future in mind as they do that. We continue to see growth going forward. We feel pretty good about our ability to participate as we go forward in terms of, you know, any scenario that plays out. I can tell you we're very heavily involved in customers with those conversations. Thanks.

Hi, Rick Bren. Uh, thanks for the time. Uh, most of my questions have already been answered, but maybe you could talk about your outlook for, uh,

Operator: Thank you. We'll take our next question from Chris Caso with Wolfe Research.

Yeah, I would say that, you know, we're encouraged by, as we said earlier, we're encouraged by the broadening of investment that we're seeing at the Leading Edge uh as we go into next year.

[Analyst]: Thank you.

Kevin Kessel: Good evening. I guess the first question is regarding the commentary on 26. Could you give a little more detail about what you're seeing first half versus second half? I assume that it's a combination of advanced logic and DRAM driving that second half.

Yeah, the conversations—qualitatively, the conversations we have with customers that are looking to, uh, as you mentioned, not the leader—that are looking to do advanced logic. We do have a lot of conversations around.

[Analyst]: Is that just simply a function of?

Kevin Kessel: You know where your lead times are, that some of the improvements we've seen over the past couple of months are just now flowing.

[Analyst]: Through in orders given where the lead times are right now?

Kevin Kessel: Yeah, as we said in the prepared remarks, I think the first half is maybe flat to slightly up, and we'll see as we move forward where that ends up. At least that's how it looks today. I think you'll see growth accelerate more into the second half. Lead time discussions, we're talking about slots, but I think there's some facility dynamics also that are influencing some of the timing. I would expect advanced logic and the broadening of the investment that I mentioned to be a driver into the first half. There's continued momentum on the DRAM front too. We're pretty encouraged by what we're seeing there, obviously offset by some weaker numbers out of China, but the leading edge dynamics are encouraging.

what they're asking, Our advice. What do they need to be successful? Especially since they maybe haven't been pressing, the latest nodes. And so there's a lot of conversation. We have about the specific things, they're trying to accomplish. It depends on, you know, the Dynamics that depends on their mix. It depends on their device size and it depends on what their expectations are for how fast they want to ramp. But it is for sure, uh, a lot of conversations we're having and as friends, as we feel pretty good about those discussions, I think, for a lot of people, the process control part. They haven't really fully understood how the world has changed in the last few nodes. And so those conversations are ongoing

And just as a quick follow-up. But, you know, yesterday the leading AI accelerator company. Uh, talked about a half trillion dollar backlog. You know, we're seeing these flurry of deals. Uh, involving the major AI lab players, you know, from your Vantage Point can you level set for us, you know, is the semi industry position to serve that scale of demand or

You know, the ecosystem, discounting some of these projections as aspirational. Thank you.

[Analyst]: Thank you.

Kevin Kessel: Just a question on gross margins.

[Analyst]: We go into 2026 also, and with some of the mix changes, particularly with China probably coming down as a % of the mix.

Kevin Kessel: Anything we should think about with respect?

[Analyst]: To gross margins as we start modeling through 2026?

Kevin Kessel: Yes, Chris, I'll give a little bit more specific guidance on margins and operating expense expectations based on our revenue picture next quarter. Gross margins for KLA are generally impacted, almost exclusively impacted by what we sell, not so much who we sell to and where we sell it. It really is a factor of how it's impacting certain product types. We have a pretty extensive portfolio of products, the broadest in our segment of the industry, and depending on what you're buying, it can carry different margin profiles. Certain parts of the market, like packaging, tend to carry a more dilutive stream. As I mentioned earlier, I think over time that goes from being a headwind to a tailwind. Service tends to grow and has a more dilutive gross margin, but we believe in accretive operating margin. You do have some of the moving parts.

Yeah I I I don't I guess I would maybe cast it a little bit differently in the sense that I think the semiconductor industry is being prudent in terms of adding capacity. And right now, when we talk to when we try to reconcile, the external discussions about capex and what that translated into in terms of Wafers not enough, Wafers will be available to achieve those objectives in the time frame. And our view is that not not necessarily A Bad Thing, it means it's not going to it's unlikely to overheat if uh, if those forecasts remain intact because you know there's more gating factors than there are people making announcements. It's easier to make an announcement about investment in the data center that it is to build a new Fab.

So I think it's going to take some time for the industry to absorb and support the capacity demands implied by all the public announcements.

Thank you. We'll take our next question from playing Curtis with Jeffrey.

Kevin Kessel: The tariff impact, when you compare year to year, that's more second half dynamic this year. My hope is, given some of the things that we have going on in the company in terms of assessing how we can try to mitigate that exposure, that that becomes less of a headwind over time. I think structurally we're in a world where we'll be dealing with higher tariffs. I do think there are things we do in terms of how we operate the company where there's some ROI in terms of just how we move parts around the world and how we reduce the leakage and drawback scenarios as we understand and track different parts attributes that help reduce some of that.

Hey, good afternoon, thanks for squeezing. Me and I, I just want to go back to the the dram comments. You, you know, you talked about the, the increase in capital intensity. I'm just kind of curious about, uh, kind of the conversations, obviously massive numbers have been thrown out there, uh, just kind of curious. I think someone asked this prior about, what was that? Always the plan to have the up this month, or if things

Pulled in, and then I guess just if you could elaborate a little bit more color on those conversations. You said they’re looking for capacity, like what’s holding it up? Is it just they need fab space, or are they unsure about the demand? Some color on that would be great.

Yeah, I would say that that you, you know, you definitely feel, there's more urgency on on the DM front in terms of timing. We'll have to see how that plays out in, in terms of slots as we move into next year.

But our, you know, our lead times, what we can accommodate, obviously we try to work closely with our customers.

Kevin Kessel: I think there are a number of dynamics at play that will become less of a headwind over time and, depending on the growth of the business, obviously volume will have an impact too. I'll have more to say about it. I think those are some of the context behind the different moving parts. Helpful. Thank you.

And, you know, I think from a pricing point of view, the dynamics that are driving HBM pricing overall...

You know, there is definitely a sense of urgency from our customer base, and as I said earlier, it costs the top three. I do expect higher investment levels next year than what we're seeing here in Q1 2026.

Operator: Thank you. We'll take our next question from Shane Britt, Morgan Stanley.

Kevin Kessel: Thank you for letting me ask a question.

[Analyst]: I wanted to follow up on Charles' earlier question about you, your memory customers.

Kevin Kessel: Have been talking up CapEx growth into 2026. Just given how strong this December quarter DRAM guide is, how should I think about your memory growth expectations into next year relative to this really strong December quarter? Thank you. Yeah, I apologize. I know that Charles asked that and we didn't answer that question. There are definitely some timing factors that are influencing process control timing relative to other products as I look at where we're at. This year has been a very strong year in DRAM for the company. I would expect next year to be a growth year as well. I think a lot of the announcements, as we start to see that play out, we'll see whether that is more of a second half dynamic into next year and how much that sort of carries forward.

I think the other way to think about it if you think that there's 3 components you know primary components that go into supporting these AI infrastructure buildout. You know you have obviously the the gpus and the accelerators around those you have the packaging and then you have the memory I think you're going to see over time that you go in in phases of which 1 seems to be short supply. And we kind of went through a phase of that with with packaging being behind. And now, I think the realization by a lot of our, our customers is they might they might be more opportunities.

Kevin Kessel: What is clear is across all of our customers, I expect them to spend more and to see growth in our DRAM investment from our customers into next year. Thank you.

Feeling. Wow, there's more opportunity if they could add capacity, and those are kind of the conversations because they realize that, you know, it takes longer, as I said, to ramp the supply chain than it does to make these announcements about CapEx.

Thank you.

Thank you. We'll take our next question from Jim Schneider with Goldman Sachs.

Operator: Thank you. As a quick reminder, if you'd like to ask a question, you may press Star One. Now we'll take our next question from Edward Yang with Oppenheimer.

Kevin Kessel: Hi Rick, Bren, thanks for the time. Most of my questions have been already answered, but maybe you could talk about your outlook for foundry related revenue opportunities outside the dominant Taiwanese customer. I think at least one major foundry has historically under invested in yield improvement tools. I think that tune is changing. Are you seeing any change in engagement there? I would say that we're encouraged by, as we said earlier, we're encouraged by the broadening of investment that we're seeing at the leading edge as we go into next year. The conversations, qualitatively, the conversations we have with customers that are looking to, as you mentioned, not the leader that are looking to do advanced logic. We do have a lot of conversations around what they're asking our advice, what do they need to be successful, especially since they maybe haven't been pressing the latest nodes.

Good afternoon. Thanks for taking my question. Maybe just one follow-up relative to the earlier question about the diversification in your Leading Edge Logic and Foundry customer base. Is that something that's more on the inquiry level at this point, or are you actually seeing that either in your order book or in formal forecasts from those customers at this stage?

Uh, I would say we are seeing it and and certainly, as it as it informs, our views of of next year, we're seeing it in the uh, in the order forecast. And um, the cam the as Rick talked about earlier, I think there's a lot of collaborative discussion about, uh, how we uh, can help uh, navigate and and ramp and drive if you have time to results. And and, and this capacity yet,

Thank you. And then maybe just as a quick follow-up. Uh, maybe you can help us to just refresh our expectations about, you know, kind of confirming mid-teens is the right level for service growth in 2025 and maybe give us a sense about whether that could accelerate next year. Thank you.

Kevin Kessel: There's a lot of conversation we have about the specific things they're trying to accomplish. It depends on the dynamics, it depends on their mix, it depends on their die size, it depends on what their expectations are for how fast they want to ramp. It is for sure a lot of conversations we're having. As Bren says, we feel pretty good about those discussions. I think for a lot of people, the process control part, they haven't really fully understood how the world has changed in the last few nodes. Those conversations are ongoing.

Yeah, you know, we've seen, you know service actually, you know, pick up a little bit here. Uh, it's been a little stronger than we expected. Um, obviously, you know, we've had some FX benefits, but we've also had some strengthening as utilization rates have gone up. We've seen some strengthening in some of our, uh, some of our billable business. So I I think our our service, uh, growth will be, you know, in our target range of 12 to 14% this year and I'm going to expect right now to look at next year, uh, that that will be in the same range as well. So I think we feel pretty good about where that is.

[Analyst]: Just as a quick follow up.

Kevin Kessel: You know, yesterday the leading accelerator company talked about a half trillion dollar backlog. We're seeing these flurry of deals involving the major AI lab players. From your vantage point, can you level set for us, is the semiconductor industry positioned to serve that scale of demand or is the ecosystem discounting some of these projections as aspirational? Thank you. I guess I would maybe cast it a little bit differently in the sense that I think the semiconductor industry is being prudent in terms of adding capacity. Right now when we talk to, when we try to reconcile the external discussions about CapEx and what that translates into in terms of wafers, not enough wafers will be available to achieve those objectives in the time frame. Our view is that not necessarily a bad thing.

Both based on the growth expected in the install base, the lifetime increase in the tools, and the incremental value that's coming from the complexity in the systems and how that's affecting the pricing as it relates to contracts.

Um the opportunities in the acquired businesses that we uh that we've acquired over the last few years, to drive their service business and new requirements that we're seeing. This is a factor in 25 as well but as you think about packaging a different service model for packaging. But also for dramm, where where the utilization rates to to some of the earlier questions uh have been higher and higher expectations uh of performance of our system. So I think there's some new new opportunities for growth there. That frankly, if you go back a couple years, I don't think we fully anticipated both on the packaging front, but also on the high bandwidth memory front supporting HBC

Thanks.

Thank you. We'll take our next question from Tim Schultz, Milaner with Ross, Child, and Go.

Kevin Kessel: It means it's not going to, it's unlikely to overheat if those forecasts remain intact because there's more gating factors than there are people making announcements. It's easier to make an announcement about investment in the data center than it is to build a new fab. I think it's going to take some time for the industry to absorb and support the capacity demands implied by all the public announcements.

Yeah. Hi, thanks for taking my questions. Um, actually, I just had one with respect to your outlook for next year. You talked about this broadening in demand for 2026. Could I just ask, could you paint some color around to what extent that already bakes in high NA engagements, or whether that would be an upside to your outlook for '26? Thank you.

Operator: Thank you. We'll take our next question from Blaine Curtis, Jeffries.

Kevin Kessel: Hey, good afternoon. Thanks for squeezing me in. I just want to go back to the DRAM comments. You know, you talked about the increasing capital intensity. I'm just kind of curious about the conversations. Obviously, massive numbers have been thrown out there. Just kind of curious. I think someone asked this prior about was that always the plan to have DRAM up this much or have things been pulled in? If you could elaborate a little bit more color on those conversations. You said where they're looking for capacity, like what's holding it up? Is it just they need fab space or are they unsure about the demand? Same color there would be great. I would say that you definitely feel there's more urgency on the DRAM front in terms of timing.

1 thing look on on the Rd front, there's a lot of collaboration with customers how that translates into revenue is not part of the, uh, the Outlook. I, you know, is most of what the engagement is is on ramping. The uh, you know, the continuation of the N2 ramp or 2 nanometer ramp across our our customer base. Uh, and so here's an influenced by the adoption of Ina and that time frame

That's great. Thank you.

Certainly not a material way.

Thank you. We do have time for one additional question. We'll take our final question from Brian. Ginn with People.

Thanks appreciate that. Um,

Kevin Kessel: We'll have to see how that plays out in terms of slots as we move into next year. Given our lead times, what we can accommodate. Obviously, we try to work closely with our customers on that front, but there's certainly, I think from a pricing point of view, the dynamics that are driving HBM pricing overall, there's definitely a sense of urgency from our customer base and as I said earlier, costs, the top three. I do expect higher investment levels next year than we're seeing here in 2025. The other way to think about it, if you think that there's three components, primary components that go into supporting these infrastructure buildouts. You have the GPUs and the accelerators around those. You have the packaging and then you have the memory.

Maybe a question here. I think there was a reference earlier about the potential for some acceleration in the second half of next calendar year.

I'm sure it's not one single thing, but how much of that second half of Outlook is tied to new clean room space availability? Knowing that some of your tools would probably be some of the first that go into a green field.

Kevin Kessel: I think you're going to see over time that you go in phases of which one seems to be short supply. We went through a phase of that with packaging being behind. Now I think the realization by a lot of our customers is there might be more opportunity in memory than they thought. Those are accelerated from what they even told us a few months ago. I think that's part of what you're seeing. I think everybody is a bit amazed by the number of applications that are being realized using AI. Even inside of KLA, we keep coming up with new ways to leverage the technology and I don't think we're the only ones doing that. I think the memory guys are right now feeling, wow, there's more opportunity if they could add capacity.

Um, yeah. As you start to think about the, you know, the next node ramping in some of the, you know, new fabs coming online in memory. So right now, I don't think space is going to be an issue. Obviously, that would depend on the strength of demand; you know, that could change. But for now, um, it's certainly a factor, but I don't think it's a big factor as it stands today. We'll see how things go.

Thanks. Maybe about time for a quick follow-up. Um, just on Advanced packaging, I think to date a lot of your inspection business strength has been strongly tied to logic,

How much of your continued optimism on marketing and KA growth, and packaging next year, involves expansion opportunities and H HBM, packaging?

I feel good about market share both in logic and in memory. On the packaging front, we've seen positive trends in both segments over the last couple of years, and I think that continues into next year.

Kevin Kessel: Those are the conversations because they realize that it takes longer, as I said, to ramp the supply chain than it does to make these announcements about CapEx. Thank you.

Great. Thank you.

Thank you, Brian. And, uh, thank you, everybody, for your interest in KLA. We appreciate your time today, and we'll be in touch.

Back over to the operator for any closing instructions.

Operator: Thank you. We'll take our next question from Jim Schneider with Goldman Sachs.

Thank you. And this does conclude today's KLA Corporation Q1 2026 earnings call.

Kevin Kessel: Good afternoon. Thanks for taking my question. Maybe just one follow up relative to the earlier question about the diversification in your leading edge logic and foundry customer base. Is that something that's more on the inquiry level at this point or are you actually seeing that either in your order book or in formal forecast from those customers at this stage? I would say we are seeing it and certainly as it informs our views of next year, we're seeing it in the order forecast. As Rick talked about earlier, I think there's a lot of collaborative discussion about how we can help navigate and ramp and drive time to results in this capacity.

Quarter 2025, post-earnings call. Please disconnect your line at this time, and have a wonderful day.

Kevin Kessel: Maybe just as a quick follow up, maybe you can help us just refresh your expectations about kind of confirming mid teens is the right level for service growth in 2025 and maybe give us a sense about whether that could accelerate next year. Yeah, we've seen service actually pick up a little bit here. It's been a little stronger than we expected. Obviously we've had some FX benefits, but we've also had some strengthening as utilization rates have gone up. We've seen some strengthening in some of our billable business. I think our service growth will be in our target range of 12% to 14% this year. I would expect right now as I look at next year, that we'll be in the same range as well.

Kevin Kessel: I think we feel pretty good about where that is, both based on the growth expected in the install base, the lifetime increase in tools, the incremental value that's coming from the complexity in the systems and how that's affecting the pricing as it relates to contracts, the opportunities in the acquired businesses that we've acquired over the last few years to drive their service business and new requirements that we're seeing. This is a factor in 2025 as well. As you think about packaging, a different service model for packaging but also for DRAM, where the utilization rates to some of the earlier questions have been higher and higher expectations of performance of our system.

Kevin Kessel: I think there's some new opportunities for growth there that frankly if you go back a couple years, I don't think we fully anticipated both on the packaging front but also on the high bandwidth memory front supporting HPC. Thanks.

Operator: Thank you. We'll take our next question from Timm Schulze-Melander with Rothschild and Co.

[Analyst]: Yeah, hi, thanks for taking my questions. Actually, I just had one. With respect to your outlook for next year, you talk about this broadening in demand for 2026. Could I just ask, could you just paint some color around to what extent that already bakes in high NA engagements or whether that would be an upside to your outlook for 2026? Thank you.

Kevin Kessel: One thing, look, on the R&D front there's a lot of collaboration with customers. How that translates into revenue is not part of the outlook. Most of what the engagement is is on ramping, the continuation of the N2 ramp or 2 nanometer ramp across our customer base, and so isn't influenced by the adoption of INA in that time frame.

[Analyst]: That's great. Thank you.

Kevin Kessel: Certainly not in a material way.

Operator: Thank you. We do have time for one additional question. We'll take our final question from Brian Chin with Citi.

Kevin Kessel: Thanks, I appreciate that. Maybe a question here. I think there was a reference earlier about the potential for some acceleration second half of next calendar year. I'm sure it's not one single thing, but how much of that second half outlook is tied to new clean room space availability, knowing that some of your tools will probably be some of the first that go into a greenfield fab. Look, there are some issues I think with space constraints potentially. It's not of course on every customer, but I do think that it could affect some timing as we move into the second half of next year and into 2027 as you start to think about the next node ramping and some of the new fabs coming online in memory. Right now I don't think space is going to be an issue.

Kevin Kessel: Obviously that would depend on the strength of demand that could change. For now it's certainly a factor, but I don't think it's a big factor as it stands today. We'll see how things go.

[Analyst]: Thanks.

Kevin Kessel: Maybe about time for a quick follow-up just on advanced packaging. I think to date a lot of your inspection business strength has been strongly tied to logic. How much of your continued optimism on market and KLA growth and packaging next year involves expansion opportunities in HBM packaging? I feel good about market share both in logic and in memory. On the packaging front, we've seen positive trends in both segments over the last couple years. I think that continues into next year. Great. Thank you. Thank you, Bren. Thank you, everybody, for your interest in KLA. We appreciate your time today, and we'll be in touch. Turn it back over to the operator for any closing instructions.

Operator: Thank you. This does conclude today's KLA Corporation quarter 2025 post earnings call. Please disconnect your line at this time and have a wonderful day. Sam.