KLA Corporation - Earnings Call - Q1 2026

Executive Summary

• Solid beat with revenue $3.21B and non-GAAP EPS $8.81, both above guidance midpoints; non-GAAP gross margin reached 62.5% on favorable mix and manufacturing efficiencies.
• September quarter strength underpinned by AI-driven investments and rising process control intensity; services revenue grew 16% YoY to ~$745M and free cash flow topped ~$1.07B.
• December (Q2 FY26) guidance implies modest sequential growth: revenue $3.225B ±$150M; non-GAAP GM 62.0% ±1.0; non-GAAP EPS $8.70 ±$0.78; mix shifting to ~59% foundry/logic and ~41% memory in semi process control systems, with DRAM ~78% of memory.
• Key 2026 setup: management more constructive on CY26 growth with broader spending; export controls expected to reduce revenue by ~$300–$350M through Dec and CY26 combined, but KLA still expects to outperform WFE given advanced packaging and DRAM/HBM intensity.

What Went Well and What Went Wrong

• What Went Well

  • “Strong all-around” quarter above guidance midpoints; double-digit YoY growth in revenue and EPS; positioned to benefit from AI infrastructure buildout across leading-edge logic, memory and advanced packaging.
  • Non-GAAP gross margin of 62.5% (50 bps above guide midpoint), driven by stronger product mix and manufacturing efficiencies; non-GAAP operating margin 43.2%.
  • Services momentum and cash generation: services up 16% YoY to ~$745M, free cash flow ~$1.07B; LTM FCF ~$3.9B (31% margin) and capital returns ~$799M in the quarter.

• What Went Wrong

  • Tariff headwinds persist at ~50–100 bps GM impact; mix guides non-GAAP GM modestly lower q/q to ~62% ±100 bps for December.
  • China normalization and export controls: China was elevated at 39% in September and is guided down to high-20s % in December; export controls reduce revenue by ~$300–$350M across Dec and CY26.
  • Advanced packaging carries more dilutive gross margin vs corporate average (though expected to become less of a headwind over time as capability mix rises).

Transcript

Operator (participant)

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 on 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 one on your telephone keypad. If you wish to remove yourself from the queue, please press star two. 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. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations for KLA. Please go ahead.

Kevin Kessel (VP of Investor Relations)

Welcome to the September 2025 quarterly earnings call. I'm joined by our CEO Rick 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 closed 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.

Our actual results may differ significantly from those projected in our forward-looking statements. We will begin the call with Rick 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 Rick, 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 Rick.

Rick Wallace (CEO)

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.

This performance demonstrates how KLA's 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.

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. Satellite service 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 service 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.

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 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 and 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 advanced packaging are compelling and represent a relative performance opportunity for KLA in this dynamic growth environment. Our consistent execution reflects the resilience, 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.

Bren Higgins (CFO)

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 respective guidance ranges.

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.

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.

Along with this action, we also announced a $5 billion share repurchase authorization. Turning to the outlook, it continues to be driven by increasing 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.

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.

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 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 and calendar 2026 to be approximately $300 million-$350 million for KLA.

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+ or -$150 million. Foundry logic revenue from semiconductor customers is forecasted to be approximately 59% and memory is expected to be approximately 41%.

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% ±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%-50% incremental non-GAAP operating margin leverage on revenue growth over the long run.

Other model assumptions include other income and expense net of approximately $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 ±$0.78 and non-GAAP diluted EPS of $8.70 ±$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.

ALA focuses on delivering a differentiated product portfolio that addresses customers' technology roadmap requirements, which are driving our longer term relevance and growth expectations. KLA'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 Valley, 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 a result, KLA has seen growth in process control intensity as each new chip design requires rigorous inspection, metrology, and yield optimization solutions. ALA 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 the Q and A.

Operator (participant)

Thank you.

Kevin Kessel (VP of Investor Relations)

Operator, I'm sorry, I was just going to pass it over to you to start the process. Thank you.

Operator (participant)

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 to 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.

Harlan Sur (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 AI data center infrastructure announcements, has the magnitude on the WFE growth outlook improved or is it more just confidence level on the growth that you were thinking about 90 days ago? You mentioned a broader spending profile on WFE and advanced packaging. Can you guys just elaborate on that a little bit?

Bren Higgins (CFO)

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, you know, we're getting closer to IT customers, particularly our longstanding customers and their lead time expectations. We're starting to get more constructive about exact timing. We're encouraged by what we're seeing certainly for KLA at the leading edge with a broadening level of investment. We think that's going to be positive. On leading edge foundry logic, DRAM is also constructive and with the investments in HBM that's been very process control intensive and so that's been a really good sign as well. Flash market is, I think, continues to grow. Rest of the legacy market, I'm not so sure there's much growth there and I think we'll have a little bit of a correction in China.

Obviously we're feeling the effects of some new control that's impacting our view into next year, but we were expecting China to normalize anyway. As we look at it all, we're pretty constructive on WFE growth rising in capital intensive 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.

Rick Wallace (CEO)

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.

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.

Harlan Sur (Analyst)

Got it. I appreciate that. Specifically on advanced foundry and logic, in addition to the increased process control intensity as the industry moves from 2 nm to less than 2 nm, there's an added dynamic where your foundry customers are standing up fabs in totally new geographies. More uncertainty on yield ramps, systematic defects, different type of workforce. 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.

Bren Higgins (CFO)

I do think that as the customers are dealing with the new design rules and some of them especially 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 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 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.

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.

Harlan Sur (Analyst)

Thanks, Rick. Thanks, Bren.

Operator (participant)

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

Saurabh Arya (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 at least, or 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?

Bren Higgins (CFO)

Yeah. So Saurabh, 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% range. It was a little bit elevated versus the annual trend. As China comes down, part of that is you have leading edge going up and then you also have memory, as particularly in DRAM, we see that upticking in the December quarter. There's some moving parts there, but that's what's happening as it relates to the recent export controls. I would say the impact on the December quarter is fairly immaterial to the company overall in 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, but obviously over the long term that's lost business. As we said in the prepared remarks, we think that's about $300 million-$350 million between now and the end of 2026. Hopefully that gives you a little color on the moving parts.

Saurabh Arya (Analyst)

Thank you, Bren.

Operator (participant)

Thank you. Our next question will come from CJ Muse with Cantor Fitzgerald.

CJ Muse (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%-50% incremental operating margins. If we are in a world where WFE continues to grow kind of in a double digit world over the next couple years, should we be thinking that you're at the higher end of that range given greater contributions from higher margin of silicon? Thanks so much.

Bren Higgins (CFO)

Yeah, CJ, 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 50-100 basis points 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%-50% long standing incremental operating margin target does drive how we size the company. Gross margin obviously is a factor in that. 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 trendline growth in 2025. As we move forward, I think the easiest way to think about that is if you're more or less at trendline, we're more or less in the middle of target range and if growth levels are above that high single digit trendline, we could outperform it.

Growth levels below, we'll probably underperform the target a bit. 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.

CJ Muse (Analyst)

Thanks so much.

Operator (participant)

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

Joe Quatrochi (Equity Research Analyst)

Yeah, thanks for taking the question. I appreciate the qualification or quantification on the advanced packaging WFE. 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 teens. Is that the right way to think about it? How do you think about where that goes over time?

Bren Higgins (CFO)

No, I wouldn't say it's that high. I think if you look at KLA 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. 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 or so, 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 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. 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 share of the market.

Kevin Kessel (VP of Investor Relations)

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, I think it creates an opportunity for us to drive something in the neighborhood or better than general corporate averages on margins. Thanks.

Operator (participant)

Thank you. We'll take our next question from Tom O'Malley with Barclays.

Tom O'Malley (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 [audio distortion] 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?

Rick Wallace (CEO)

I think in general, Rick, I think in general if you think about what goes into a data center, the percentage that is memory, the percentage 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.

The intensity on that kind of gets you to that run rate, but 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 $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. Larger die, more valuable die where 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. Super helpful.

Tom O'Malley (Analyst)

Thank you.

Operator (participant)

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

Timothy Arcuri (Analyst)

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

Bren Higgins (CFO)

Hey Tim, 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 longstanding 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, 2021, even go back historically for KLA, it used to be about six months. 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 in terms of our expectations for growth next 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 is how you should think about it. In the 10-K each year, as we have historically, we will provide our backlog. That will give you an anchor point in terms of backlog on an ongoing basis. Seven to nine months, and it looks pretty consistent in that range as we go forward.

Timothy Arcuri (Analyst)

I guess you did give it the last quarter, Bren. Is that new this quarter?

Bren Higgins (CFO)

Yeah, we changed our disclosure, Tim, and we highlighted that we were going to make that change back in the March quarter results. We said when we started the new fiscal year beginning July 1 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.

Timothy Arcuri (Analyst)

Okay, then I guess it's 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 QoQ in December.

Is that the right number that China is going to be back to like 30, 31% in December?

Bren Higgins (CFO)

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

Timothy Arcuri (Analyst)

Okay, Brent, thank you.

Bren Higgins (CFO)

Yeah. The other thing I'd say is, as you look at 2026, we think it probably comes down into the mid-20s and obviously some of that is driven by the export restrictions, 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.

Timothy Arcuri (Analyst)

Thank you.

Operator (participant)

We'll take our next question from Chris [audio distortion] with TD Cowen.

Yeah, thanks for taking my question. I had a two-part question. One is, in the past you've spoken about 2 nm gate all around as a 100 basis point improvement in share for you. What's a [audio distortion]? Is that still the case? And 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 $9.5 million. It seems like advanced packaging WFE intensity is around mid-teens. Do you think advanced back end inspection process control is getting higher than front end or do you think it's still below?

Bren Higgins (CFO)

I think it's still below. I mean, since the first part of your question we haven't looked into has been a more intensive 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 lithoscaling 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. As I look at KLA share, the advanced packaging market, we're about 6%. If you look at KLA's share of the PC market, it's closer to 8%. The process control intensity is not as high.

Sampling rates are pretty elevated these days and 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.

Gotcha. I think you also mentioned that some of your front end tools are being used for backend. I'm just kind of curious, especially on the macro inspection or inspection side, is there an overkill? Even ASML scoped about introducing new I-line tool for advanced packaging. Would you consider introducing new tools for back end packaging or are you going to use the punk and tool?

Rick Wallace (CEO)

Thank you, no. 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. We did not come to them; it was almost the other way. 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 are still other technology inflections that are going to go into HBM 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 of years. It should outpace overall WFE growth. Our share position is great for two reasons.

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.

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

Operator (participant)

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

Charles Shi (Research Analyst)

Thanks for taking my question. I noticed that based on your Q4 guidance, the KLA profile 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 outside of the process control growth?

Rick Wallace (CEO)

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.

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 there, and when they start EUV then 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.

We thought it would happen years ago, we were hoping it would happen sooner, but it's definitely happening. 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 to 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 in an HBM device, the device is only as good as the weakest DRAM.

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.

Charles Shi (Research Analyst)

Got it. Maybe a quick follow-up. I think going back a couple of years ago, you guys talk about delayed pellicle-ization, what that means to the KLA mask inspection portfolio. I thought the thesis was that without pellicle your existing mask inspection plus screen 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. Maybe you shed some light on that.

Thank you.

Rick Wallace (CEO)

Yeah, so rather than go into specific strategies specific customers have, I can tell you we're in conversations with all the leading mask manufacturers in 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 recall, or you're doing verification and print check. We're heavily involved in those conversations. As you know, the challenges with pellicle utilization 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.

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

Charles Shi (Research Analyst)

Thanks.

Operator (participant)

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

Chris Caso (Analyst)

Thank you. 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, and is that just simply a function of where your lead times are, that some of the improvements we've seen over the past couple of months are just now flowing through in orders given where the lead times are right now?

Rick Wallace (CEO)

Yeah, as you 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 are 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.

Chris Caso (Analyst)

Thank you. Just a question on gross margins as we go into 26 also and with some of the mix changes, particularly with China probably coming down as a percentage of the mix. Anything we should think about with respect to gross margins as we start modeling through 26?

Rick Wallace (CEO)

Yeah, 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 diluted stream, as I mentioned earlier. I think over time that goes from being a headwind, and retail and 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. The tariff impact, when you compare year to year, we really. 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, low, 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. 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 that will have a 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.

Chris Caso (Analyst)

Helpful. Thank you.

Operator (participant)

Thank you. We'll take our next question from Shane Brett, Morgan Stanley.

Shane Brett (Analyst)

Thank you for letting me ask a question. I wanted to follow up on Charles's earlier question, but your memory customers 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?

Bren Higgins (CFO)

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 your process control timing relative to other products. As I look at where we're at, this year's 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. 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.

Shane Brett (Analyst)

Thank you.

Operator (participant)

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.

Edward Yang (Analyst)

Hi Rick, Bren, thanks for the time. Most of my question's 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 underinvested in yield improvement tools. Maybe that tune is changing. Are you seeing any change in engagement there?

Kevin Kessel (VP of Investor Relations)

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 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.

Rick Wallace (CEO)

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. Just as a quick follow up, yesterday the leading AI accelerator company talked about a half trillion dollar backlog. We're seeing these flurry of deals involving the major AI lab players.

Edward Yang (Analyst)

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.

Rick Wallace (CEO)

Yeah, 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. Right now when we talk to, when we try to reconcile the external discussions about CapEx and would that translate 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. It means it's not going to. It's unlikely to overheat if those forecasts remain intact. There are more gating factors than there are people making announcements.

It's easier to make an announcement about investment in a data center than it is to build a new fabric. 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.

Operator (participant)

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

Blayne Curtis (Analyst)

Hey, good afternoon. Thanks for squeezing me in. I just want to go back to the DRAM comments 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.

Rick Wallace (CEO)

I would say that you definitely feel there's more urgency on the DRAM front in terms of timing. We'll 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. As I said earlier, across 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 AI infrastructure build outs. You have obviously 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 phases of which one seems to be short supply. We kind of 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 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. Those are kind of 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.

Blayne Curtis (Analyst)

Thank you.

Operator (participant)

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

Jim Schneider (Analyst)

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 informal forecast from those customers at this stage?

Bren Higgins (CFO)

I would say we are seeing it and it 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. Thank you.

Jim Schneider (Analyst)

Maybe just as a quick follow up, maybe you can help us 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.

Bren Higgins (CFO)

Thank you. Yeah, you know, 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 strength in some of our billable business. I think our service growth will be in our target range of 12%-14% this year. I would expect right now that I look at next year that will be in the same range as well.

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.

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 high-bandwidth memory front supporting HPC.

Operator (participant)

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

Timm Schulze-Melander (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.

Bren Higgins (CFO)

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 isn't influenced by the adoption of high NA in that time frame. That's great. Thank you. Certainly not in a material way.

Operator (participant)

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

Brian Chin (Analyst)

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, probably some of the first that go into a greenfield path.

Rick Wallace (CEO)

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. Obviously, that would depend on the strength of demand.

That could change, but 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. Thanks. Maybe if I had time for a quick follow-up just on advanced packaging. I think today 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, and I think that that continues into next year.

Brian Chin (Analyst)

Good. Thank you.

Rick Wallace (CEO)

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

Kevin Kessel (VP of Investor Relations)

Turn it back over to the operator for any closing instructions.

Operator (participant)

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