KLA Corporation - Earnings Call - Q3 2025

Executive Summary

• KLAC delivered a clean beat: revenue $3.06B and non‑GAAP EPS $8.41, both above guidance midpoints, with non‑GAAP gross margin at 63% on favorable Process Control product mix.
• Demand remained resilient at leading‑edge logic, HBM, and advanced packaging; management noted no changes to 2025 customer plans despite trade uncertainty, while announcing a dividend increase to $1.90 and a new $5B buyback authorization.
• June‑quarter (Q4 FY25) guide: revenue $3.075B ±$150M, GAAP GM 61.7%±1pt (non‑GAAP 63.0%±1pt), non‑GAAP EPS $8.53±$0.78; management also raised full‑year calendar 2025 gross margin outlook to ~62.5%±50 bps despite ~100 bps per‑quarter tariff headwind.
• Key stock drivers: AI infrastructure buildout supporting Process Control intensity; advanced packaging nearing #1 share; policy-driven tariff/export effects a manageable but tangible margin headwind; capital return acceleration (dividend +12%, $5B buyback) supports TSR.

What Went Well and What Went Wrong

What Went Well

• AI and leading‑edge exposure drove a 30% YoY revenue increase; CEO: “strong demand in leading‑edge logic and high‑bandwidth memory… advanced packaging… strong contribution”.
• Gross margin outperformed (63%) on stronger‑than‑modeled Process Control mix; opex came in ~$10M below midpoint as prototype material timing shifted.
• Services resilience: $669M (+13% YoY), marking the 52nd consecutive quarter of YoY growth, despite export control impacts; management expects ~10% service growth in 2025.

What Went Wrong

• Tariffs/export controls: management now embeds ~100 bps quarterly GM headwind from global tariffs (notably in service parts logistics) and maintained a cautious stance on licenses; Investor Day postponed to early/mid‑2026 due to uncertainty.
• China normalization: China was ~26% of March revenue; management still expects China to be ~~30% in 2025 and down ~15–20% YoY for the year, with ~$500M revenue impact from Dec. export controls (65–70% systems).
• PCB/Display: prior‑period impairments and continued PCB headwinds reduce EPC growth optics; exit of FPD systems is a mix tailwind but caps segment growth.

Transcript

Operator (participant)

Good afternoon. My name is Margo, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the KLA Corporation March Quarter 2025 Earnings Conference Call and Webcast. All participants' lines have been placed in a listen only mode to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star one on your telephone keypad. If you wish to remove yourself from the queue, please press star two. Please limit yourself to one question and one follow-up. Lastly, if you should need operator assistance, please press star zero. Thank you. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead.

Kevin Kessel (VP of Investor Relations)

Welcome to our earnings call to discuss the March quarter and our June quarter outlook. Joining me is our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results released after the market close and available on our website, along with supplemental materials. We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified. All full-year references 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 investor 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. Rick will begin with some introductory comments on the business environment and the quarter, followed by Bren with financial highlights and our outlook. Now, over to Rick.

Rick Wallace (President and CEO)

Thanks, Kevin. I will start our March Quarter results and talk about some comments about the current business environment, followed by some recent market share reports, and finish up with some business highlights. KLA's March Quarter results were above the midpoint of all the guidance range, with revenue of $3.06 billion, non-GAAP diluted EPS of $8.41, and GAAP diluted EPS of $8.16. KLA's results continue to be fueled by strong demand in leading-edge logic and high-bandwidth memory. KLA's growing advanced packaging business also made another strong contribution in the quarter. These drivers demonstrate the critical investment required for building out the infrastructure which is supporting AI. While there's notable macro uncertainty across many sectors globally, KLA has not seen any change in demand or indication from our customers of any adjustment to their announced investment plans.

That said, the current unprecedented global trade uncertainty and potential second-order effects on macro demand in the future are far from clear. Given this fluid business operating environment and potential implications for KLA, we've decided to postpone our investor day from June 18 to early to mid-calendar 2026. It's our hope that the macro environment will stabilize by then, and we look forward to expanding on the story of KLA's growth strategy and increasing market relevance. Our capital return announcements today reflect not only our commitment to assertive and explicit capital allocation, but also our confidence in the business opportunities for KLA over the foreseeable future. Moving along to market share reports, this quarter marks the annual release of industry research reports showing KLA maintain a strong global share of WFE and process control markets in calendar 2024.

KLA's continued share leadership was highlighted by persistently strong customer adoption and share gain in advanced wafer-level packaging. Over the past five years, KLA's share of process control has grown by nearly 250 basis points. Notably, KLA's process control share of advanced wafer-level packaging market has grown from being in third position in 2019 to being on track to assume the leading position in 2025. Turning to highlights for the quarter, KLA delivered a 30% year over year increase in revenue in the March quarter due to increased investment in leading-edge logic and HBM. Second, AI continues to be a key catalyst driving KLA's consistently strong performance. As AI continues to advance, the semiconductor industry is experiencing more complex design, accelerating product cycles, high-value wafer volumes, and growing advanced packaging demand.

These trends underscore the increased value of process control in assisting our customers in managing a dynamic production environment as investments and complexity increase, which uniquely benefits KLA. As a further demonstration of this, the March quarter captured another period of strong momentum for our advanced packaging portfolio. Customers' adoption of KLA's advanced packaging portfolio of products demonstrates the success of our market diversification, product technology roadmap, and growth strategies. KLA's advanced packaging revenue grew to over $500 million in calendar 2024 and is now expected to exceed $850 million in calendar 2025. Fourth, the KLA services business grew to $669 million in the March quarter, up modestly sequentially and up 13% year over year. Newly announced market access restrictions in early December 2024 from the U.S. government export controls impacted service revenue growth in the March quarter.

Still, as a sign of its predictability and resiliency, our service business marked its 52nd consecutive quarter of growth on a year over year basis. Finally, the March quarter was another solid quarter from a cash flow and capital returns perspective. Quarterly free cash flow was $990 million. Over the past 12 months, free cash flow was $3.5 billion, with a free cash flow margin of 30% over the same period. This free cash flow margin ranks amongst the top 10% of companies in the S&P 500. Total capital returns in the March quarter was $733 million, comprised of $507 million in share repurchases and $226 million in dividends. Total capital returns over the past 12 months was $3 billion. KLA's results once again demonstrated process control leadership and the success of our broad portfolio and competitive differentiation.

Our consistent performance further demonstrates the critical nature of KLA's products and services, which are uniquely positioned to enable growth at the leading edge, including the ongoing build-out of AI infrastructure. With that, I'll pass the call over to Bren to cover financial highlights and our outlook.

Bren Higgins (EVP and CFO)

Thanks, Rick. KLA's March quarter results demonstrate market leadership combined with the consistent execution and dedication of our global team to meet customer commitments and driving strong results, which fueled double-digit year over year growth and profitability improvement. Revenue was $3.06 billion, above the guidance midpoint of $3 billion. Non-GAAP diluted EPS was $8.41, and GAAP diluted EPS was $8.16, each finishing at the upper end of the respective guidance ranges. At the guided tax rate of 13.5%, non-GAAP diluted earnings per share would have been $8.55.

Gross margin was 63%, about 50 basis points higher than the midpoint of guidance, as product mix within our process control segment was stronger than modeled for the quarter. Operating expenses were $575 million, about $10 million below the guidance midpoint, as the timing of prototype material expenses were lower than expected. Operating expenses were comprised of $338 million in R&D and $237 million in SG&A. Operating margin was 44.2%. Other income and expense net was a $36 million expense. The quarterly effective tax rate was 15%. Net income was $1.12 billion. GAAP net income was $1.09 billion. Cash flow from operations was $1.1 billion, and free cash flow was $990 million. The breakdown of revenue by reportable segments and markets and major products and regions can be found within the shareholder letter and slides.

Moving to the balance sheet, KLA ended the quarter with $4 billion in total cash, cash equivalents, and marketable securities, debt of $5.9 billion, and a flexible and attractive bond maturity profile supported by strong investment-grade ratings from all three major rating agencies. KLA's balance sheet provides the ability to fund our growth strategies, organic and inorganic, and offer attractive capital returns to shareholders. A cornerstone of KLA's business is how consistently it generates strong free cash flow driven by one of the best operating models in the industry and a predictable and highly differentiated service business, which helps drive a capital return strategy that includes consistent dividend growth and increasing share repurchases over the long term. This strategy supports a strong track record of predictable and assertive capital deployment and remains an important differentiating element of the KLA investment thesis.

To further underscore our commitment to capital returns and our confidence in the long-term value accretion of KLA, today we announced the 16th consecutive annual dividend increase, which is up 12% to $1.90 a share per quarter for an annualized dividend of $7.60. Along with this action, we also announced a new $5 billion share repurchase authorization, raising our total repurchase authorization to $5.46 billion. Turning to the outlook, the industry outlook continues to be driven by increasing investments in leading-edge logic, high-bandwidth memory, and advanced packaging. For WFE in 2025, our outlook remains the same as in late January. We forecast WFE to grow by a mid-single-digit percentage from approximately $99 to $100 billion level in calendar 2024.

Growth is expected to be driven principally by increasing investments in both leading-edge foundry and logic and memory to support growing AI and premium mobile demand, partially offset by lower overall demand from China. Given KLA's business momentum, market share opportunities, and higher expected process control intensity at the leading edge across all segments, we are confident we will continue to deliver growth outperformance compared with the WFE market in 2025. KLA's unique product portfolio differentiation and value proposition are focused on enabling technology transitions, accelerating process node capacity ramps, and ensuring yield entitlement in high-volume production. We remain encouraged that our customer discussions have not changed and are working hard to align shipment slots with their requirements. In this industry environment, KLA will continue to focus on supporting our customers, executing on product roadmaps, and driving productivity across the enterprise.

KLA's June quarter guidance is as follows: total revenue is expected to be $3.075 billion, plus or minus $150 million. Foundry logic revenue from semiconductor customers is forecasted to be approximately 69%, and memory is expected to be approximately 31% of semiconductor process control systems revenue to semiconductor customers. Within memory, DRAM is expected to be about 76% of the revenue mix and NAND the remaining 24%. Gross margin is forecasted to be 63%, plus or minus 1 percentage point, inclusive of the impact of recently announced global tariffs. This estimate is to the best of our ability, given the complexity and fluidity of the regulations and how they align with our global processes. Consistent with this assessment, we expect global tariffs to have a roughly 100 basis point headwind to gross margin per quarter, assuming relatively stable quarterly revenue expectations for the remainder of the calendar year.

Of course, this environment is changing rapidly, and we will continue our assessment and evaluate mitigation opportunities within our operational processes and pricing strategies. For calendar 2025, based on results for the March quarter, guidance for the June quarter, and our expectations for business mix across systems and services, systems product mix, and factory utilization, we expect gross margins for the year to be approximately 62.5%, plus or minus 50 basis points. Other model assumptions include other income and expense net of approximately a $35 million expense for the June quarter, and expect this to be roughly consistent throughout the calendar year. The effective tax rate assumption for June is 13.5%.

Beginning in the September quarter, which is the first quarter of our fiscal year, our effective tax rate will reflect the adoption of global taxation pillar two, which is expected to increase the rate to approximately 14% for the second half of the calendar year. For the June quarter, GAAP diluted EPS is expected to be $8.28, plus or minus $0.78, and non-GAAP diluted EPS of $8.53, plus or minus $0.78. A quick update on our remaining performance obligations, our RPO disclosure, and our SEC filings. As a reminder, RPO is primarily a systems-only metric for KLA. Do not report RPO during earnings, as it is disclosed on our subsequently filed SEC 10Q and 10K reports. There is significant divergence in practice, and companies have different definitions and disclosure practices on RPO.

This lack of consistency among companies reporting can be a source of confusion for investors and make the disclosure difficult to compare across industries and peer companies. We will continue to provide our backlog balance annually in our 10K report. We will update our quarterly disclosures for RPO starting in the first quarter of fiscal 2026, which is the quarter ending September 30, 2025, to be a transaction price for contracts that have not yet been recognized as revenue as of the end of the quarter. This disclosure of RPO would be consistent with the disclosure of our industry peers. In conclusion, our near-term revenue guidance continues to point to relative stability around current business levels, despite the increased uncertainty from changes to global trade. We are staying close to customers as they also navigate this challenging environment.

We continue to see solid growth in calendar 2025 and expect to outperform the mid-single-digit WFE growth rate by several points. KLA's focus on delivering a differentiated product portfolio that addresses customers' technology roadmap requirements and drives our longer-term relevancy and growth expectations. With the KLA operating model guiding our best-in-class execution, KLA is focused on implementing our strategic objectives designed to drive outperformance. KLA's focus on customer success, innovative solutions, and operational excellence drives industry-leading financial performance and allows us to return capital consistently. That concludes the prepared remarks. Let's begin the Q and A.

Kevin Kessel (VP of Investor Relations)

Thank you, Bren. Operator, can you please provide the instructions and begin the queue?

Operator (participant)

Thank you. At this time, if you would 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, pick up your handset for optimal sound quality. In the interest of time, we ask that you please limit yourself to one question and one follow-up. We'll now take our first question from Harlan Sur with JP Morgan. Please go ahead.

Harlan Sur (Executive Director and Equity Research)

Good afternoon and great job on another solid quarter of execution. Despite the view that the team is still going to drive $3 billion plus per quarter throughout the year, you're holding your WFE view of up mid-single-digits % year over year. You're not seeing any major changes to your customer spending plans. Yeah, you did highlight the 100 basis points hit to gross margins due to tariffs, but at the same time, you did also take up your full-year guidance on gross margins. You're postponing your analyst day by nine months to a year on the potential trade and tariff uncertainty. I understand the direct impact concerns and risk on global demand for electronics, but is there also a significant tariff-related risk on your equipment and systems post, let's say, the 90-day reciprocal tariff reprieve?

I mean, the team I thought was fairly geographically diversified across your manufacturing base, so I would not think so. Maybe just take us through some of the puts and takes around tariffs and trade and your ability to modulate your global manufacturing operations under different tariff-related scenarios to minimize the impact on your system shipping to different geographies.

Bren Higgins (EVP and CFO)

Hey, Harlan, it's Bren. Thanks for the comments, and there's a lot in there. The first thing I'll say is, yeah, our decision to push the investor day was really just related to the current uncertainty. Obviously, global trade, the structure and construct that's being discussed today is really unprecedented, and we'll have to see how that settles out. I did talk a little bit about our view on tariff impact to KLA, and of course, that's very fluid and could change, but we do see a little bit of a headwind in our gross margin as it relates to mostly our service business and having such a strong contract stream, particularly in places like China where you have some reciprocal impact of parts going in that can have an effect on our business. You have that exposure. You also have whatever we bring into the U.S. factory.

Some of that is being mitigated through different exemptions, and I think there's some fluidity on that. We will see how that plays out over time. There are also some mitigation steps we can take from a process point of view in terms of how we manage in our network, move parts around the world, and so on. Obviously, when you do things like that, you are going to focus on what is the right thing for the business operationally. Certainly, in a higher structural tariff environment, you might consider doing things where return on investment might be higher. We have to go and evaluate those things. We are looking at that. We are also looking at longer-term pricing strategies as well in terms of mitigation effects.

When we thought about the investor day, we said, "Look, there's this tariff concern, what it does in terms of second-order impact to the macro, some unknowns associated with that." We thought it was prudent for us to just move it into early 2026 where we feel like we hopefully have a more stable environment. We're looking forward to it. We're pretty excited about what's happening in the business. You pointed out a lot of our strength and our results and what we've seen over the last few years in terms of our relative growth and share of WFE. We think we're pretty well positioned both in core WFE, but also opportunities in advanced packaging. Our service business is performing extremely well despite some of the challenges with export controls.

We think the business is in a pretty good place, and we are just reacting to a global macro environment that's changed a lot in the last three months. As it relates to the footprint, we have a pretty diverse footprint around the world. We've established it over the past two years to different locations. I'd say, again, that you start with where it makes sense to do things operationally, whether it's cost or execution, talent, and so on, and then you optimize as it relates to taxes or incentives or other potential regulations. Those things can change, and you have to make sure that the operational considerations are first and foremost. We have a global footprint. We'll assess the situation, and we'll do what we think is right for the business over time. That's pretty much all I have to say about it.

Harlan Sur (Executive Director and Equity Research)

I appreciate that. Maybe on a bright note, as you mentioned in your shareholder letter, calendar 2024, share rankings are up for process control. The team and the process control segment outgrew overall WFE last year. Despite your dominant number one position, you are six and a half times larger than your number two competitor in the space. You still gain 50 basis points of share and strong number one position. I think by my count, in five out of the six major subsegments within process control, the one area where it was a bit of a surprise where you made significant progress was in E-beam pattern wafer inspection. Despite Optical continuing to dominate at a 7x larger market versus e-beam, the KLA team did double their e-beam inspection revenues last year. You gained about 700 basis points of share there.

The team's strategy has always been to introduce new solutions when the market is ready to adopt. What's driving the incremental opportunity in E-beam, and how is KLA's E-beam platform sort of differentiated?

Rick Wallace (President and CEO)

Right. Thanks, Harlan. Yes, I think that the progress we made in E-beam has been long in coming. I mean, we've been investing in our platforms for many years in terms of getting the E-beam products to where we thought they could really be supplemental to the Optical and work in concert. I think a lot of the success that we're now seeing is we got those platforms to start performing at a high level, and customers have now had a chance to evaluate them. I think what we're finding, especially on the very high end of the most challenging layers, the most challenging nodes, is that people are actually doing both. They're doing Optical and E-beam on some of those layers.

The synergy between the two tools, I mean, one of the things we always look for is the interoperability between the two so that you could leverage the strength of E-beam with Optical. We are seeing those results. I think more importantly, our customers are seeing them. We felt good about it because, as you know, it takes months or quarters for customers to really test out the capability. We are confident that we are on a trajectory where we are going to keep growing that business. At this point, we are really glad we invested for so many years. I think there was a time where we were spending a lot of money on E-beam, and it took a long time to get these results. We are really thrilled with where we are now, and our customers are telling us we need more.

From that standpoint, we're excited about the forecast. We ran into a problem last year where, as we started getting demand, we didn't even have capacity. Bren and the ops team had to ramp it up to be able to support it. We're in good shape with that. We get great customer feedback and very excited about the progress we've made in E-beam.

Harlan Sur (Executive Director and Equity Research)

Yep. Thanks, Rick. Thanks, Bren.

Rick Wallace (President and CEO)

Thanks.

Operator (participant)

We'll go next to Atif Malik with Citi. Please go ahead.

Atif Malik (Analyst)

Thank you for taking my questions. I have a question on the services growth. I understand it's a bit pressured this year because of the loss of fabs in China. Can you talk about your full-year outlook on the services for this year?

Bren Higgins (EVP and CFO)

Sure, Atif. Yes, the biggest impact we felt was in Q1, where growth quarter to quarter was fairly limited. Despite losing access to some fabs to put up our 52nd quarter of year-over-year growth, consecutive quarter of year-over-year growth was, I think, pretty impressive, and the team did very well with that. Last year, and when I think about just the Semi-PC part of the business, now there's also our EPC part of service. Semi-PC grew in 2024, grew above trend line, about mid-teens, about 16%. This year, I think it'll be low double digits. If you look at total service growth, our expectations for the year are trending right around 10% or so. A little bit below the long-term target, but given the impact of those controls where you lose access to those tools.

Now, as those tools are providing or are limited in what kind of supply they can provide to the broader market to meet demand, you would expect some capacity to potentially get added in other places that offsets that. You would think over the long term that you get that business back as we model our service growth over the long run, really based on long-term growth expectations for internal in terms of useful life, rising ASP, but also growth in semi-revenue. Long term, we feel very good about the long-term target. In 2025, we're going to be slightly below it, around 10%.

Atif Malik (Analyst)

Great. As a follow-up on advanced packaging momentum, good to see you guys raising the bar to $850 million and number one market share this year. Rick, if you can just pull a curtain a little bit on your kind of competitive positioning in advanced packaging, are you stronger on the logic or the CoWoS Side or the HBM Side? What are your thoughts about hybrid bonding adoption?

Rick Wallace (President and CEO)

I think I mentioned this before, Atif, that what we've really seen is the market in many ways has come to us. This really kicked off a couple of years ago, mainly around packaging that we've seen pushed for AI applications and just the high cost of that entire package. Therefore, it can support the kind of cost per inspection that you couldn't support on, frankly, lower-cost solutions in terms of the packages. These packages, as you know, if you have a large chip combined with a number of memory chips that are stacked, the value of that's very high. It's both inspection and measurement, but also some of the process capability that we have in SPTS. That's really the differentiation is in the solutions.

In many ways, what we've done is we've taken the products that we had for the front end and adapted them for the back end, and that's what's getting traction now. Mainly, it's with CoWoS, and we've seen a lot of applications driving, and we see big growth. We talked about going to $500 million, $850 million, and frankly, that growth trend continues, and that's the message we're getting from our customers. One of the things that we're still sorting through is what the available market is for KLA because we think about how much of WFE do we talk about, but there's also all this investment that's not necessarily included in packaging. We are still sorting through what that looks like, and that's going to help us outperform the overall industry.

Bren Higgins (EVP and CFO)

I think one other point on this is to Rick's point about being able to adapt our front-end solutions to the back end, is there are some incremental engineering requirements as it relates to handling of substrates and so on and different environmental conditions, is that that's a lot of engineering, at least from a sensitivity and performance point of view in the systems that has already been done. The ability to take that also brings, say, a nice incremental profit stream to the company as we leverage some of that capability. As that market starts to move to needing more capability, then you move up the value stack in terms of KLA solutions to address those challenges for our customers.

It is a great opportunity from a growth point of view, but it is also an opportunity from a margin point of view of something that was a bit of a headwind given the nature of what was required that turns into a tailwind as customers demand more capability from us. We are really excited about that opportunity moving forward, particularly given the growth rates of advanced wafer-level packaging that is likely faster than overall WFE growth over the next several years.

Atif Malik (Analyst)

Thanks.

Bren Higgins (EVP and CFO)

Thank you, Atif.

Operator (participant)

Thank you. Next, we'll go to Vivek Arya with Bank of America Securities. Please go ahead.

Vivek Arya (Managing Director and Senior Analyst)

Thank you. I had a near and longer-term question. On the near term, I saw that China, I think, came in at about 26% in March. I think you had estimated closer to 29%. Does it go up in a kind of a flattish top line year? Related to that, the $500 million impact that you had mentioned for the year, how much did you see in calendar Q1? How much more is left to go?

Bren Higgins (EVP and CFO)

Yeah, Vivek, on the math for China, and you're right, we spent some time on it last quarter, and we thought that for 2025, the business would be somewhere overall, our % of business in China would be somewhere in the high 20s, maybe 30%. And our view is still consistent with that. Now, I think it'll be lumpy over the course of the year in terms of what shows up in any given quarter. It was 26% in Q1. We'll see. I'm not going to guide Q2. We'll see what ends up coming in from a revenue recognition point of view. Over the course of the year, right around 30%.

I think when you look at that relative to our expectations for the year, with some of the soft guidance we have given about second-half revenue, that translates into China being down about 15% to 20% or so for the year for the overall company. As far as the export control impact, we really sized that based on the impact that we had through the month of December of shipments as it related to certain other customers that might have taken tools through 2025. I did not really focus on what happened in the given quarters. Our business is pretty fluid, so things move around. Our view of the impact is still consistent with what I said last quarter at $500 million of revenue, plus or minus $100 million, with roughly 65% to 70% of that being systems. Still the same.

I'm not going to bridge back to what happened in Q1 versus other quarters. We looked at the total impact over the next, at the time, roughly four-plus quarters, and that's how we sized the impact.

Vivek Arya (Managing Director and Senior Analyst)

All right. For my follow-up, I know a little early, but I'm curious, Rick, what's on your dashboard to gauge whether 2026 WFE could be up, down, flat? How does China figure into it in terms of opportunity and risk? Because a lot of long-term investors in KLA, they're always looking out. How would you want them to think about what your opportunity set is in 2026? Thank you.

Rick Wallace (President and CEO)

Right. '26 for us right now, that was obviously a big question earlier this year as we thought about some of the macro uncertainty. The feedback we're getting for the AI build-out, I think it's really important for everybody to understand what our customers are telling us is that they're still building for capacity that is less than the stated demand out there for the capability. If you think about how many wafer starts are being started and what the implications on some of the hyperscaler CapEx would be, it's still understated. We think that that will continue to grow, and that's the feedback we're giving. Part of the thing that's so hard to handicap is how does this get impacted by some of the macro stuff? The driver for us, we said at the beginning of the year, clearly was leading edge.

It is the three things we talked about. It is advanced logic in support of all the design starts, the bigger die, everything in support of AI, whether it is the training or the inference chips and/or custom silicon. It is the HBM, and there are multiple players in that. That is a more inspection-intense technology than we have had in memory for a long time. There is this really strong growth in packaging. I think we are still early days in all of those areas in terms of the amount of silicon that is being brought online. I think in support of that, you are going to see continued growth at the leading edge, primarily driving those other sectors. The thing that has been slow has been we just have not seen much come back in terms of handsets or PCs.

Those are the markets that, as you know, consume a lot of the silicon. I think we'll know a lot more about 2026 as this build-out for 2025 continues. The conversations we're having right now, absent any other macro jolts, I think look pretty encouraging in terms of what the overall forecast looks like as we go out and really as we go out toward 2030. We think we're early on. Today, as you know, after market, there were some hyperscalers that announced continued and sometimes even increased investment in the AI infrastructure. We think we're in a great position right now.

Atif Malik (Analyst)

Thank you, Rick.

Rick Wallace (President and CEO)

Thank you, Vivek.

Operator (participant)

We'll go next to Joe Quatrochi with Wells Fargo. Please go ahead.

Joe Quatrochi (Executive Director and Equity Research Analyst)

Yeah, thanks for taking the question. Maybe just to follow up on that, Rick, I mean, is cleaner space a potential kind of gating factor as you look into 2026, or how do you think about that aspect of it?

Rick Wallace (President and CEO)

No, I don't think so. I mean, I think the question is going to be I think they can build, depending on where they're building, they can get the shelves up and get them positioned to invest. No, I don't think for the plans that we see. I mean, I've always felt that the connection that one would draw from all the hyperscalers and the concern that people had about is AI overheated, I would look to the silicon at the leading edge being the governing factor. The good news on that is I don't think they're going to overbuild. The good news is there's going to be steady growth in the next several years to support it. That's why we're a little more sanguine about what are people saying about the overbuild.

I do not think there is overbuild, and I think there is going to be additional capacity when needed. We are in a lot of conversations with our leading-edge customers about that, and we have pretty good insight into what their needs are going to be down to specific products. In some areas, just as I mentioned the E-beam one earlier, we are getting heads up that we have to add capacity. For us, it takes a while to be able to support that. I think we are in good shape as we look out into the rest of the year. I think as we look into 2026, we are feeling pretty excited about the opportunity.

Joe Quatrochi (Executive Director and Equity Research Analyst)

That's really helpful. Maybe one for Bren. I just wanted to kind of better understand just the uptake in the full-year gross margin, just given the fact of the dynamics around tariffs that you talked about. Maybe can you just help us understand kind of what's giving you the confidence there to increase it?

Bren Higgins (EVP and CFO)

Yeah, no, I appreciate the question, Joe. I think what we're seeing is from a mixed point of view, we've had a bit of a headwind over the last few years as it relates to some of the cost dynamics with the inflation that we experience and what that meant to product cost. As we're shipping new platforms, the opportunity for KLA generally to reset that as we deliver more favorable cost of ownership to our customers, but then reset that and the capability that exists in the next generation of product that comes to market. That's certainly been a factor. I mentioned earlier that we're starting to see some scale benefits as it relates to advanced packaging, which we're encouraged by as well. There's a number of factors.

I'd say most of it is in product mix, but there's been certainly some opportunities for us to deal with some of the cost pressures we've felt over the last few years. Yes, we've got the tariff impact, but despite that, I feel that we are trending more or less in line with this expectation of margin somewhere around 62.5% as we finish the year, plus or minus 50 basis points. 63% in March and then the guidance, 63% plus or minus 1% for June. As you look forward, we're going to be somewhere, even with a full quarter of potential tariff impact, it's roughly 100 basis points. We're still somewhere in and around that 62% range, given expectations for revenue levels that are relatively stable.

Joe Quatrochi (Executive Director and Equity Research Analyst)

Thank you.

Bren Higgins (EVP and CFO)

Thanks, Joe.

Operator (participant)

We'll take our next question from Timm Schulze-Melander with Redburn Atlantic. Please go ahead.

Timm Schulze-Melander (Head of Semiconductor and Technology Hardware research)

Yeah, hi. Thank you so much for taking my questions. Maybe the first one, just on the sequential QOQ, could you just help us maybe with a bit of the gross profit bridge? Pretty flat revenues, but a really decent impact on gross margin. Maybe if you just peel back some of the moving parts, that'd be really helpful. Thank you.

Bren Higgins (EVP and CFO)

I think your gross margin's roughly flat as you look at the because we were 63%, and then we're guiding in March, and we're guiding 63% at a roughly flat revenue number. There's some puts and takes. There's some puts and takes in there as it relates to the different products that are revenuing in the quarter. In general, our expectation is pretty consistent for the company overall.

Timm Schulze-Melander (Head of Semiconductor and Technology Hardware research)

Yes, but I was thinking more about the March quarter compared to the December quarter.

Bren Higgins (EVP and CFO)

Oh, March compared to December. Okay. No, that's a great question. If you look at March overall, it was mostly related to typically for KLA, our biggest issues tend to be really around the product mix of our business. We had some higher value systems. Not every product in the KLA portfolio carries the same margin. The margin was more weighted to some of our higher value products.

Timm Schulze-Melander (Head of Semiconductor and Technology Hardware research)

Okay. Maybe just as a quick follow-up, I think if I caught it correctly, you talked about the service business basically being the sort of source of potential tariff impact and margins. Maybe if you could just give us a bit of color about that and also maybe just kind of how you're thinking about how you might respond to that pressure kind of on a medium to longer-term basis. Thank you.

Bren Higgins (EVP and CFO)

Yeah. One thing that's unique about KLA's service business is it's a high percentage of our revenue is contract revenue. We deliver and customers buy a service contract, and we support the system and make commitments for service and support, uptime, and performance, availability, and so on as it relates to those systems. As part of that, we have to also ensure that we've got the parts whenever there are failures. Typically, in a particular region, we are importing those parts to support the tools. Given it's a contract stream, we're the importer. We potentially carry some exposure depending on where those parts might be coming from. There have been some exemptions that have come through as it relates to that, particularly as it relates to parts going into China. That's been where we do have some exposure.

We will see how that plays out. That is the aspect that is tied to service. Obviously, you have tariffs potentially on parts that are coming from outside the country into the U.S. for tools that we are building in our factory in the U.S. that then ultimately those tools stay in the U.S. If they round trip out of the U.S., then you can then draw back some of that. As it relates to the service piece, the issue is, as I talked about, now, if you are in a billable situation, you could potentially just the customer, because it becomes an ex-works type transaction, the customer would potentially then have to be the importer and then have the tariff liability. Because of the contract structure, it is a little bit different for us.

Now, ultimately, over time, if you're ending up with a structural cost increase, you have to come up with ways to pass that cost along. There are different pricing strategies that we need to consider in our business based on what the long-term implications are.

Rick Wallace (President and CEO)

Thank you, Tim.

Timm Schulze-Melander (Head of Semiconductor and Technology Hardware research)

Great. Thanks.

Operator (participant)

We'll go next to CJ Muse with Cantor Fitzgerald. Please go ahead.

CJ Muse (Senior Managing Director)

Yeah, good afternoon. Thank you for taking the question. I guess, Bren, I'm just trying to dig into your kind of relatively stable half-on-half revenue outlook better than some of your peers. Curious, is that a function of perhaps less memory exposure, sustainable foundry, or greater seasonality from PCB in the second half, or SPTS kind of taking off? I guess, what are the key drivers of driving that sustainability?

Bren Higgins (EVP and CFO)

Yeah, I'm taking a quick look here, CJ. As I look at it, it looks on a half-to-half point of view, it looks fairly stable. I would say memory potentially could tick up a bit. Foundry logic looks like it is probably making it tick down a little bit. I do not see a lot of moving parts here as I look at it moving forward. I'd say the % of businesses, at least as it relates to our semiconductor customers, is pretty consistent.

CJ Muse (Senior Managing Director)

Great. I guess as my follow-up, you highlighted great growth in advanced packaging. We will lie and share that as co-auths. Can you speak to kind of the work you are doing on HBM, how you are thinking about insertions? Is it HBM4E? Is there a way to kind of size the opportunity sitting here today, or is it too early? Thank you.

Bren Higgins (EVP and CFO)

Yeah. I would say that we're certainly seeing increasing momentum. Most of our exposure and the share that we've seen, the share gain we've seen has been on the logic side. In high bandwidth memory, as the customers are going to increase stacks of chips, it's creating incremental opportunities. We feel like we're getting more traction. It's driving the need for more capability, and we're getting more traction with certain customers. We think over time, as you see a selection process, as a customer transitions, it creates an opportunity for us to compete for some business. As you know, those customers are running at pretty aggressive capacity levels in terms of delivering for their customers. When you're in that environment, you don't necessarily want to change anything. I think we have to wait for a selection as you move into higher stacks.

Obviously, ultimately, as you think about technology changes with hybrid bonding down the road, it creates another incremental opportunity. We are seeing increasing momentum on the memory side and would expect that to continue as we go through, really, as we continue through this year and into next year.

CJ Muse (Senior Managing Director)

Thank you.

Operator (participant)

Next, we'll go to Krish Sankar with TD Cowen. Please go ahead.

Krish Sankar (Managing Director)

Yeah, hi. Thanks for the question. I have two of them. First one, Bren, when I look at your U.S. revenues, it's up Q over Q, but the dollar figures are still pretty low. I'm just trying to reconcile that with what TSMC said about investing in Arizona. Do you think the process control being an early cyclical, some of the early purchases for Arizona are done, or do you think there's still potential for the rest of the year? I have a follow-up.

Bren Higgins (EVP and CFO)

Most of our business with our biggest customers has been more into centric. That is, most of that is going to Taiwan and not into Arizona. Arizona has been a slow investment cycle over the last few years. There has been a level of business that we have had that has been at kind of low levels, lower levels consistently over the course of a longer period of time. Given the focus and the drive on into, that is driving most of our business into Taiwan.

Krish Sankar (Managing Director)

Got it. Got it. A quick follow-up on the tariffs. Thanks for the color on the service impact from the tariffs. I understand a lot of moving parts, but I'm just wondering, if it ever comes to it, can you meet non-U.S. demand from your non-U.S. manufacturing facilities and U.S. demand from U.S., or is it not as simple as that?

Bren Higgins (EVP and CFO)

As it relates to service?

Krish Sankar (Managing Director)

No, as it relates to systems.

Bren Higgins (EVP and CFO)

As I said in the first question, I think it was Carla's question at the beginning. Footprint, and we've established it over the last couple of decades. We've moved products around the world depending on what makes sense operationally for us. You can't do anything in a short period of time. In a longer period of time, you'd have to consider. I think it'd be very hard for us to have complete duplicative capability across factories. We certainly aren't in a position necessarily to do that today. Could you over time increase your flexibility? You'd have to make some investments to be able to do that. You potentially could do those things. You have to be comfortable that you're facing an environment that is not going to change because those are significant investments you'd have to make.

Krish Sankar (Managing Director)

Got it. Thank you very much. That's very helpful.

Operator (participant)

Next, we'll go to Tom O'Malley with Barclays. Please go ahead.

Thomas O'Malley (Equity Research Director)

Hey, guys. Thanks for taking my questions. My first was just in regards to CJ's question earlier just on the second half and whether it's weighted memory or foundry logic. It sounded like memory was up a little bit, foundry logic maybe down a little bit. If you look at the mix of memory, some of your peers have already talked about a sharper falloff in the second half when it comes to NAND, and I fully appreciate that your business is very small there. Is the correct interpretation of that that the DRAM side gets a little bit stronger and you see a little weakness on NAND? Or are you seeing anything different just given the makeup or the timing of your NAND business?

Rick Wallace (President and CEO)

I would say the DRAM is the biggest driver. What you're seeing in NAND is more technology investments and some upgrades. There's some activity there, but it's fairly limited. Most of what's driving our business is investment supporting high-bandwidth memory.

Thomas O'Malley (Equity Research Director)

Helpful. I think that it's obviously brave of you guys to go out there and kind of talk about tariff impacts already. When many of your peers have kind of said, "Hey, don't look at the second half," you guys are being pretty prescriptive when it comes to the gross margin. Maybe it's helpful. Can you guys talk about what you guys did in order to get to that 100 basis points per quarter? Did you look at different facilities? Did you take everything as a whole? Any kind of description or color as to how you got to that number would be super helpful. Thank you.

Bren Higgins (EVP and CFO)

Tom, what I didn't do was what we had to do was really just drill through all of our business, right? There's a fair amount of unknowns. What I didn't say early on was the various caveats, right, that if things could change. Certainly, we're in a pretty fluid dynamic, and who knows, something could change in a short period of time. We'll see what happens in 90 days and so on. We know what we're shipping, what we're bringing in with our bill plans, and given our lead times, what's coming into our factories around the world. Obviously, we have visibility into the contract streams from a service point of view, given how unique that business is in the industry and how our customers, our percent of business that's contract-based is much higher than what other companies might have. Look, we'll see.

I said roughly around 100 basis points. We'll see if things change. At the end of the day, I can look at what's in service. I can look at what's in the factories. There are some potential unknowns as you think about what might come from suppliers, but we think we handicapped that as best we could. There are obviously mitigation steps that we'll take over time to offset whatever pressures we might feel. That is what we can do.

Rick Wallace (President and CEO)

Let me add, because it reports to Bren, that we have a really strong logistics team. The same team that got us through COVID without missing deliveries and without lifting guidance was the team that drilled through all this. I would say that Bren's team was all over this.

That is why we were able to assess the impact and then change even during the week we were doing it or a few days as the rules changed. I do not think it was luck, and we are not guessing. We did a lot of detailed work. The assumptions could change. Concern we have about having everybody together for an investor day is something could change the morning of that day. We are kind of waiting for things to settle out. It was a lot of hard work. We know where our parts come. We understand the rules, and we applied them. That is how we got there.

Bren Higgins (EVP and CFO)

Thank you, Tom.

Operator (participant)

Next, we'll go to Srini Pajjuri with Raymond James. Please go ahead.

Vivek Arya (Managing Director and Senior Analyst)

Thank you. Sorry, guys. I have a follow-up about the second half comments that you made, in particular about the foundry logic. I think the comment was that it's going to tick down a little bit. It was down a bit, and then your guiding kind of flattish for this quarter. I'm guessing most of that is China. I'm just curious as to how you're expecting N2 demand to kind of fare, and if you can talk about where we are in the N2 cycle. I guess as we go to next year, when do we expect 1.4 to kind of kick in?

Bren Higgins (EVP and CFO)

I think around N2, the investment cycle we're seeing this year looks pretty strong, as we've said, and we feel pretty good about its continuation next year. Our customers are going to add in this first year somewhere around 40-50K wafer starts. We think that you'll see at least a doubling of that in the next year, maybe more. We feel pretty good about some of the moving parts as it's not our only customer that's investing here. Like I said earlier, I think half to half, things tick up a little bit, things tick down a little bit. More or less, our mix of business expectations from where we started the year is more or less about the same.

Srini Pajjuri (Equity Research and Capital Markets)

Got it. More of a longer-term question. I'm just curious to understand a little better what the implications from High NA. I know it's early days, but as we go to High NA, I'm reading that the reticle sizes will come down. I'm guessing the complexity will increase quite a bit. Of course, packaging complexity will go up. If reticle sizes come down, just curious to understand what the implications for Semi-PC intensities with the High NA. Thank you.

Rick Wallace (President and CEO)

I think those are exactly some of the issues that our customers are considering as they think about when to insert and how much to insert. I think that the one thing that is definitely true is the reason you want High NA is because you want to print smaller features. That's always been a driver for our business because the same thing that allows you to print smaller features means that smaller defects matter more. So our customers, when they increase the resolution on their lithography, have to increase their sensitivity on their inspection. That's a good thing. Also at the same time, it means that we've got to drive our capability to have more detection on those advanced devices. The reticle quality and the verification of reticles has been a huge driver in EUV in general.

That created a whole separate category of what we call print check, which is where people take the wafers that are being printed by EUV, and they inspect the wafer to verify the design. Even though there are tools for reticle, there is also that additional. We would expect, especially in the early days of High NA, that there would be more reticle check required. From our standpoint, it drives increased % of inspection and measurement because of the continued scaling. We are also working very closely with our customers who are considering that because one of the decision points they have is do they have the metrology and inspection to make those nodes work. That is a big part of the conversation.

I would say that the most likely scenario for High NA is when it gets introduced, it'll be at a limited number of layers on whatever device or node that it's introduced. Our customers, because they have to be thoughtful, will have a backup plan in terms of whether it's multi-patterning or other ways to achieve their objectives. It is in the end good for us as EUV has been good for driving relevance and of inspection. I think it remains to be seen when that timing actually happens and what devices. I'm quite sure because our customers keep telling us it's going to be based on their economics, not just on the performance, but on the total cost of implementation.

Srini Pajjuri (Equity Research and Capital Markets)

Got it.

Bren Higgins (EVP and CFO)

Thank you, Srini.

Operator (participant)

We'll next go to Timothy Arcuri with UBS. Please go ahead.

Timothy Arcuri (Analyst)

Thanks a lot. Bren, I wanted to ask about semi-systems half on half. You quantified in the presentation, you actually quantified the outgrowth relative to this mid-single digit WFE this year. You said you're going to outgrow by several points. If WFE is up 5, I take several to mean 3. That means systems will grow like 8. You did 7.5 in systems last year. That puts you at 8.1 for the year. If we know what you're doing in the first half, it implies the back half systems is down like 15% half on half. That's a lot. Do you take issue with that math? I thought systems were going to be more like flattish half on half. Did something change? Thanks.

Bren Higgins (EVP and CFO)

Yeah. Hey, Tim. I'm looking at the numbers here and based on revenue expectations, I think Semi-PC systems are going to be roughly five in the second half of the year.

Timothy Arcuri (Analyst)

Okay. You would outgrow by a lot more than seven.

Bren Higgins (EVP and CFO)

Yeah. Several points relative to the if WFE is up mid-single digits, I said we'd do several points better than that.

Timothy Arcuri (Analyst)

Yeah. If those are the numbers, you're going to be up like 12. That's like a lot more than several. Anyway, okay. On RPO, why stop reporting RPO mid-year? Was it causing a problem? I guess you said that you're going to include it to be the transaction price for contracts that have not yet been recognized as revenue at the end of the quarter. How is the new practice different from the current practice? Thanks.

Bren Higgins (EVP and CFO)

We're not going to stop at mid-fiscal year. We're just giving you a heads-up that we're going to make a change going into our new fiscal year, which begins on July 1. It's the September 30 ending quarter. If you look at the quarter we just completed, you'll see the actual numbers based on the historical practice in the 10Q that we'll file at the end of this week. The RPO came down to about $8.9 billion, changed a couple hundred million. Not really much change in it. Our view moving forward was one of the things that was, and it's something that we spent a significant amount of time on over the last several months, is that companies, the disclosure practices across companies vary widely here about what RPO really is.

What we're really trying to do here is converge towards where we think the majority of companies are. I mean, the whole point of disclosures is to be able to make adequate comparisons across companies, across industries. You certainly can't do that with this metric given the wide divergence in practices that people have related to it. We think our view is a good balance view moving forward. What's actually an obligation is something that has shipped to customers and hasn't FPA's, whether it's that or whether it's a service contract that's been signed. Our RPO guidance will converge to that, which is more of a deferred revenue disclosure across our systems and service. We'll provide a backlog assessment, which is more or less than what we were doing before in our 10Ks going forward.

We're going to continue doing what we're doing as we complete this year, and then we're going to make some changes moving next year so we can be a little bit more consistent with what the rest of industry and equipment is doing. I think you even look across large caps, you'll see that the three large caps have been doing it all differently. It's a source of confusion. I get it a lot. What we're trying to do is align more closely with what some of our peers are doing.

Timothy Arcuri (Analyst)

Okay, Brian. Awesome. Thanks.

Bren Higgins (EVP and CFO)

Thank you, Tim.

Operator (participant)

We have time for one more question. We'll go next to Melissa Weathers with Deutsche Bank. Please go ahead.

Melissa Weathers (Director Equity Research)

Hello. Thank you for letting me ask a question and squeezing me in. I wanted to ask on the high-volume manufacturing side. This is a big theme that you guys talked about at your last analyst day as you shift from more of R&D-type spending to HBM spending and being a bigger part of the mix there. How are you seeing this play out in the current leading-edge nodes and maybe future nodes? Is there any way you can help us contextualize how much the HBM opportunity is for KLA?

Rick Wallace (President and CEO)

Historically, KLA was more levered towards R&D and Fab Ramp. As a Fab moved to entitlement yield levels, there was a reduction in process control intensity and a shift in our customer's strategy to focusing and driving productivity in the Fab. As the design start environment has picked up over the last several nodes, it has driven more challenges into high-volume production as customers are trying to manage yield across different process flows in a very different or robust design mix. As a result of that, you end up with different designs that test design rules in different ways. Our customers do not want to start any more wafers than they have to if they deliver to tight market windows. You are seeing the adoption of more process control in a high-mix foundry in high-volume production. It is changing.

We're also seeing even backboarding where they're seeing a change in mix where a Fab at N5, for example, had a certain toolset expectation based on an expected type of mix. As you've seen more and more HPC products move through those Fabs, it's driven the need for different and more capability. You are seeing a lot more adoption in production than what you used to see if you go back 10 to 20 years in the industry. I think it's just really reflective of the dynamic environment our customers are trying to manage to with process windows that are extremely tight with these leading-edge nodes.

Melissa Weathers (Director Equity Research)

Thank you.

Operator (participant)

Thank you. I would like to turn the call back over to Kevin Kessel for any additional and closing remarks.

Kevin Kessel (VP of Investor Relations)

Great. Thank you, everyone, for your time and your attention, your interest in KLA. We appreciate it. I know it's busy earnings day. We will be catching up with all of you at the upcoming conferences and meetings. With that, I'll turn it back to the operator for any final closing instructions.

Operator (participant)

Thank you. This concludes the KLA Corporation March Quarter 2025 Earnings Call and Webcast. Please disconnect your line at this time and have a wonderful day.