KLA (KLAC)·Q2 2026 Earnings Summary

KLA Posts Record Year, Beats Q2, Stock Drops 7% After Hours

January 29, 2026 · by Fintool AI Agent

KLA Corporation (KLAC) delivered another quarter of beats, extending its winning streak to 8 consecutive quarters of outperformance. Q2 FY2026 revenue of $3.30B topped the $3.26B consensus by 1.1%, while non-GAAP EPS of $8.85 edged past the $8.82 estimate . The company also announced a record calendar year 2025 with $12.74B in revenue (+17% Y/Y) and $4.4B in free cash flow (+30% Y/Y) .

Despite the beat and above-consensus guidance for Q3, the stock dropped roughly 7% in after-hours trading to $1,570—suggesting elevated expectations after KLAC's 29% rally heading into the print .

Did KLA Beat Earnings?

Yes. KLA delivered its 8th consecutive quarterly beat:

The beat was narrower than recent quarters—KLA's trailing four-quarter average surprise was 5.86% . The modest outperformance may explain the muted market reaction.

Profitability remained exceptional:

*Values retrieved from S&P Global

What Did Management Guide?

KLA's Q3 FY2026 guidance came in above consensus on both revenue and EPS:

Key assumptions for Q3 :

• Semi PC Revenue by End Market: ~60% Foundry/Logic, ~40% Memory
• Memory mix: DRAM ~85%, NAND ~15%
• Non-GAAP Operating Expenses: ~$645M
• Effective Tax Rate: ~14.5%

Full-year CY2026 guidance :

• Non-GAAP Gross Margin: 61.5% - 62.5%
• Non-GAAP Operating Expenses: $2.67B
• Effective Tax Rate: 14.5%

The company noted that DRAM pricing escalation due to capacity constraints may impact gross margin for the March quarter and calendar 2026 .

How Did the Stock React?

The market's initial response was positive, but after-hours trading told a different story:

The stock hit a new all-time high during regular trading ($1,692.86) before reversing sharply after hours. The ~8.6% after-hours decline (or ~5.4% from prior close) likely reflects:

1. Narrow beat: EPS beat of just 0.3% vs. trailing 4-quarter average surprise of 5.86%
2. Gross margin headwind: 75-100 bps DRAM pricing impact for CY2026
3. Elevated expectations: Stock was up 29% heading into earnings

What Changed From Last Quarter?

Revenue acceleration continued:

• Q2 FY2026 revenue of $3.30B was +3% Q/Q and +7% Y/Y
• Semi Process Control (91% of revenue) grew +4% Q/Q and +9% Y/Y
• Specialty Semiconductor rebounded +17% Q/Q after declining in Q1

Margin expansion:

• Non-GAAP gross margin improved to 62.6% from 61.3% in Q1
• Operating margin expanded to 42.8% from 41.7%

Cash generation accelerated:

• Q2 FCF of $1.26B represented 108% FCF conversion (FCF/Net Income)
• FCF margin of 38% was the highest in recent quarters

Capital returns remained strong:

• $548M in share repurchases in Q2
• $250M in dividends paid
• CY25 total capital returns: $3.0B ($2.03B buybacks + $983M dividends)

Revenue Breakdown: Where Is Growth Coming From?

By Segment (Q2 FY2026) :

By End Market (System Revenue) :

• Foundry & Logic: ~60%
• Memory: ~40% (primarily DRAM)

By Region :

• Taiwan: 26%
• Rest of Asia: 30%
• China: 14%
• Korea: 12%
• North America: 7%
• Japan: 7%
• Europe: 6%

China revenue at 14% is down from historical levels following U.S. export restrictions—a headwind the company continues to navigate .

Record Calendar Year 2025: The Numbers

KLA delivered a record year across key metrics :

The company highlighted that its GEN 5 (39xx Series) products played a critical role in defect discovery for advanced devices and the transition to EUV lithography .

Balance Sheet & Capital Allocation

Strong investment-grade balance sheet :

Shareholder returns commitment:

• Target: >85% of FCF returned to shareholders
• 16th consecutive annual dividend increase announced (April 2025): +12% to $1.90/share quarterly
• ~15% dividend CAGR since 2006

Q&A Highlights: What Analysts Asked

The Q&A session revealed critical forward-looking insights:

WFE Market Outlook for 2026

CFO Bren Higgins provided detailed WFE market forecasts :

This clarifies the apparent disconnect with Lam Research's 23% WFE growth forecast—KLA separates core WFE from advanced packaging, while some peers aggregate them .

Supply Constraints Limiting First-Half Growth

KLA is "virtually sold out across most products" for H1 2026 . Key constraints:

• Long lead times: Optical components require decisions made in mid-2025 for H1 2026 shipments
• Extending lead times: Customer demand has accelerated in recent months, stretching delivery schedules
• Facility constraints: Customers are "frustrated with the shelves they have available"—they can't build fabs fast enough

CEO Rick Wallace noted: "They are constrained by the ability to build new fabs and new shelves... The setup for 2027 is pretty remarkable."

Half-Over-Half Growth Trajectory

DRAM Pricing Headwind on Gross Margins

A significant new headwind emerged: DRAM chip pricing for KLA's image processing computers has escalated sharply :

• Impact: 75-100 bps negative gross margin impact for CY2026
• Timing: Pricing environment "changed profoundly over the past 2-3 months"
• Duration: Expected to persist through 2026, normalize as DRAM capacity additions accelerate
• CY2026 gross margin guide: ~62% ± 50 bps (vs historical 63%+)

CFO Higgins emphasized this is transitory: "As DRAM capacity additions accelerate over the next several quarters, we expect this cost dynamic to improve as we exit the calendar year."

Advanced Packaging: From 10% to 50% Market Share

KLA's process control share in advanced packaging has transformed :

Advanced packaging revenue hit ~$950M in CY2025 (+70% Y/Y) with mid-to-high teens growth expected for CY2026.

China: Stable Outlook, Affiliate Revenue Returning

China expectations for 2026 :

• KLA China revenue: Mid-20% to high-20% of total revenue
• China WFE market: Mid-to-high $30B range (including restricted fabs)
• Growth: Flat to modestly positive (vs modestly negative in 2025)
• Affiliate rule revenue: ~$300-350M returning after restrictions lifted

Memory Intensity Rising—DRAM Looking More Like Logic

DRAM process control intensity is increasing dramatically :

Drivers:

1. Less redundancy—higher device value means no real estate for backup circuits
2. More metallization layers for data movement requiring more inspection
3. Increased EUV adoption requiring more inspection
4. High-performance compute demands tight specs with no binning flexibility

CFO Higgins: "The intensity of DRAM... looks much more similar to what logic did not that long ago."

End Market Growth Expectations

Key Risks Flagged

Management highlighted several risk factors :

1. DRAM pricing pressure: Capacity constraints driving 75-100 bps gross margin headwind for CY2026
2. China export restrictions: Bureau of Industry and Security rules continue to impact ability to sell to certain Chinese customers; also unfair competitive dynamics where non-US companies can sell to restricted fabs
3. Facility constraints: Customers can't build fabs fast enough—limits near-term equipment demand
4. Cyclicality: Semiconductor industry remains inherently cyclical with concentrated customer base
5. Geopolitical risks: War in Ukraine, Middle East tensions, and Taiwan relations create uncertainty

What's Next for KLA?

Near-term catalysts:

• KLA Investor Day: March 12, 2026—management will present 2030 targets and detailed market sizing
• Q3 FY2026 earnings (expected late April 2026)
• H2 2026 acceleration as supply constraints ease
• Continued AI infrastructure investment driving process control demand
• HBM growth expected to outpace overall logic/foundry

2027 setup is "remarkable": Management emphasized multiple times that conversations with customers about new orders are predominantly for late 2026 and 2027 deliveries . Foundry logic customers are facility-constrained today, setting up significant expansion potential next year .

Long-term targets :

• 40-50% incremental non-GAAP operating margin leverage on revenue growth
• Gross margins returning to 63%+ as DRAM pricing normalizes
• Market share expansion in advanced packaging and reticle inspection
• Process control intensity rising as chip complexity increases across all segments

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For the full earnings call transcript, see KLA Q2 FY2026 Earnings Call. For prior quarter analysis, see Q1 FY2026 Earnings.