Shane Brett

Shane Brett followed up on DRAM comments, asking about KLA's memory growth expectations for next year relative to the strong December quarter guide, given memory customers' CapEx growth projections for 2026.

Answer

CFO Bren Higgins acknowledged that DRAM process control timing can differ from other products. He stated that 2025 has been a strong year for DRAM, and he expects 2026 to also be a growth year, with all top three customers increasing investment levels, driven by urgency around HBM pricing and the realization of more opportunity in memory.

Shane Brett followed up on DRAM, asking how KLA's memory growth expectations for next year compare to the strong December quarter DRAM guide, given memory customers' CapEx growth projections for 2026.

Answer

CFO Bren Higgins acknowledged that process control timing can influence product timing. He stated that 2025 has been a very strong year for DRAM, and he expects 2026 to also be a growth year, with all top three customers projected to increase DRAM investment. CEO Rick Wallace added that there is increased urgency on the DRAM front, driven by HBM pricing dynamics and the realization of more opportunity in memory due to the accelerating number of AI applications.

Shane Brett from Morgan Stanley asked for clarification on the September quarter's business mix, specifically the sequential decline in memory revenue, and inquired about progress towards the 2026 revenue target set at the 2022 Analyst Day.

Answer

EVP & CFO Bren Higgins explained the memory mix was simply a matter of project timing and revenue recognition, and that he expects to see an uptick in DRAM revenue in the December quarter. Regarding the 2026 target, Higgins stated that due to strong share of WFE and packaging growth, KLA does not need the originally assumed $125B WFE to hit the $14B revenue plan. He noted their share of WFE is approaching 8% (ex-packaging) versus the 7.25% originally modeled, and the underlying financial model is performing as expected, absent tariff effects.

Shane Brett of Morgan Stanley asked for clarification on the September quarter's business mix, noting the sequential decline in memory seemed counterintuitive, and inquired about the company's progress towards its 2026 revenue target set at the 2022 Analyst Day.

Answer

EVP & CFO Bren Higgins clarified that the memory mix is a matter of timing, confirming that DRAM revenue will be stronger in the December quarter than in September. Regarding the 2026 target, President & CEO Rick Wallace explained that due to strong market share gains and growth in packaging, KLA does not need the original $125B WFE assumption to achieve its $14B revenue goal, suggesting WFE in the mid-$110s could be sufficient.

Shane Brett asked if SOC test is expected to accelerate from the strong December quarter into the first half of next year, or if seasonal declines or conservatism should be factored into the March quarter. He also inquired about the memory market, specifically NAND growth expectations, how low NAND has been this year relative to prior years, and the expected growth for the NAND portion of memory going forward.

Answer

CFO Sanjay Mehta and CEO Greg Smith reiterated project acceleration into Q4, with robust demand expected into 2026, but cautioned against linear extrapolation due to lumpiness and timing uncertainty. For memory, Mr. Mehta stated NAND is 'really low' and tied to mobile industry growth. Mr. Smith added that Q3 was 75% DRAM and 25% Flash, expecting a protocol shift in mobile and potential SSD demand for AI data centers to strengthen Flash in 2026. Mr. Mehta noted Flash TAM was more than double in 2020/2021 compared to now.

Shane Brett asked if SoC test revenue is expected to accelerate from the strong December quarter into the first half of 2026, or if a seasonal decline or conservatism should be factored in. He also inquired about the historical and expected growth of NAND memory relative to DRAM, given its current low levels.

Answer

CFO Sanjay Mehta and CEO Greg Smith reiterated that projects are accelerating, with Q4 2025 being a new high watermark for memory and SoC. While demand for 2026 is expected to be robust, Mr. Smith cautioned against linear projections due to market lumpiness. Regarding memory, Mr. Mehta stated that NAND is currently 'really low' and tied to mobile industry growth. Mr. Smith added that Q3 memory was 75% DRAM and 25% Flash, with potential for Flash to strengthen in 2026 due to mobile protocol shifts and AI data center SSD demand, though it remains uncertain. Mr. Mehta noted that Flash TAM was more than double in 2020/2021 compared to now.

Shane Brett of Morgan Stanley sought to clarify the confidence level in the GPU opportunity, asking if it was a concrete win or still in discussion. He also asked about the customer breadth within the VIP compute business and visibility into further market share gains.

Answer

President & CEO Greg Smith reiterated it is not a win yet but an opportunity to compete where they have strong customer sponsorship for a dual-vendor strategy. He emphasized success depends on proving their value proposition. He described the VIP compute business as being driven by a few key customers ('less than six, more than one'), with the main prizes being CPU and AI accelerator designs.

Shane Brett asked about the catalysts needed to drive a recovery in NAND test demand and inquired about the current utilization levels of VIP testers, specifically at what point customers would need to buy new systems instead of upgrading existing ones.

Answer

CEO Greg Smith outlined that a NAND recovery would be driven by higher mobile unit volumes, increased storage in AI phones, and new interface standards. On utilization, he noted a clear upward trend, with an increase in new system orders for AI accelerators and a significant reduction in the number of idle, upgradable mobile testers compared to six months ago.

Shane Brett asked for finer details behind the revenue assumptions in the 2028 long-term model and questioned the visibility given the company's history of setting high targets.

Answer

CFO Sanjay Mehta outlined the model's CAGR assumptions of 12-17% for Test and 18-24% for Robotics, driven by AI-enabled SAM expansion in robotics and a segment-by-segment TAM analysis for test. CEO Greg Smith added that SOC growth is expected to be more linear, while memory growth will be lower due to the large 2024 increase. They also highlighted share gains and the growth of system-level test as key drivers supporting the model.

Shane Brett questioned the reduction in the full-year Gate-All-Around (GAA) revenue forecast from $5 billion to $4.5 billion, asking for characterization of Applied's market share and assurance that the reduction was not a share issue.

Answer

CEO Gary Dickerson responded with 'super high confidence' that the change is not a share issue. He reiterated that the transition to GAA and backside power increases Applied's revenue opportunity by 30% per wafer start. He emphasized that deep customer engagements and demand for integrated systems position the company to outperform and gain share as these critical AI-enabling nodes ramp.

Shane Brett of Morgan Stanley asked if strong E&P growth has changed long-term expectations, how a potential industry shift from COWAS to COWAP would impact the business, and what leading indicators exist for the Specialty Industrial segment.

Answer

President and CEO John Lee stated that while the long-term model isn't being updated, the AI-driven growth validates their strategy. He noted a shift to COWAP would be a tailwind, playing to MKS's strengths in complex HDI boards. For the industrial segment, he highlighted that while the overall market is muted, Defense has been a 'bright spot' and Life & Health Sciences remains stable.

Shane Brett of Morgan Stanley inquired about the impact of tariffs on gross margins, mitigation strategies, and any resulting changes in customer order patterns. He also asked for a preliminary outlook on the second half of the year, given the stronger-than-expected first half.

Answer

CFO Ram Mayampurath explained that MKS is mitigating tariff impacts through its global manufacturing footprint, resilient supply chain, and potential selective commercial actions, noting no top-line impact so far. CEO John Lee clarified the guidance incorporates a potential tariff impact of *up to* 100 basis points, not the full amount. Regarding the second half, Lee expressed satisfaction with first-half double-digit growth in Semi and E&P but noted that macroeconomic uncertainty from tariffs clouds the outlook for what would otherwise be a stable to improving demand environment.

Shane Brett from Morgan Stanley asked about the recent reduction in balance sheet inventory and the company's capacity to support a potential surge in demand given the increase in within-lead-time orders.

Answer

CEO John Lee expressed satisfaction with the progress made in reducing inventory toward more normalized levels. He explained that inventory was previously held at higher levels for strategic components to mitigate shortages seen in the last upturn. He affirmed that MKS is prepared to use working capital to build inventory ahead of any significant demand ramp.

Shane Brett, on for Joseph Moore, asked about the idiosyncratic gross margin tailwinds and headwinds envisioned for 2025. He also inquired about how MKS is positioned for the next NAND CapEx upcycle relative to the last one.

Answer

President and CEO John Lee identified higher volume as a key tailwind, expecting 50% gross margin flow-through, and noted the Atotech business continues to support profitability. He mentioned that while inflationary cost pressures have stabilized, they are not yet a tailwind. For the next NAND cycle, Lee affirmed MKS's leadership position in RF power for critical etch, expressing confidence they will benefit as they have in past cycles.