KLAC Q4 2025 Gross Margin to 62.5%, Inspection Revenue Surges
- Robust Long‐Term Growth Outlook: Management’s Q&A responses highlight encouraging early customer discussions and expectations for 2026 growth, driven by increased investments in advanced logic, higher‐value memory (HBM), and advanced packaging trends, which position KLA for share gains in its core markets.
- Increasing Process Control Intensity: Answers emphasized that as customers transition from traditional DRAM to higher bandwidth memory, process control intensity has risen—adding roughly 100–200 basis points in effective utilization—which not only validates KLA’s tool deployment strategy but also suggests improved margins through more rigorous inspection requirements.
- Record Growth in Inspection Revenue: During the Q&A, management detailed strong momentum in their reticle inspection and defect detection segments, driven by high inspection sampling rates and increased demand in advanced packaging applications. This demand validates KLA’s technological differentiation and bodes well for expanding market share.
- Tariff Cost Pressure: Analysts expressed concerns about 50 to 100 basis point headwinds on gross margins due to structural tariff impacts, with uncertainty around how effectively mitigation actions (e.g., leveraging free trade zones) can restore margins to trend levels.
- China Business Headwinds: There was discussion about volatile customer spending in China, where percentages have dropped from 41% to around 30%, raising the risk that continued geopolitical or regulatory pressures could further erode revenue from that region if investments decline.
- Uncertain 2026 Growth Outlook: Multiple questions highlighted the early and non-quantified nature of customer discussions for 2026, with some indications of potential headwinds (e.g., legacy market normalization and export control impacts) that could dampen future growth expectations.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | Q3 2025 | $3.75B ± $150M | $3,150,000,000 ± $150,000,000 | lowered |
Gross Margin | Q3 2025 | 63% ± 1 percentage point | 62% ± 1 percentage point | lowered |
Other Income and Expense (Net) | Q3 2025 | Approximately $35M expense | Approximately $33M expense | lowered |
Effective Tax Rate | Q3 2025 | 13.5% | 13.5% | no change |
GAAP Diluted EPS | Q3 2025 | $8.28 ± $0.78 | $8.28 ± $0.77 | no change |
Non-GAAP Diluted EPS | Q3 2025 | $8.53 ± $0.78 | $8.53 ± $0.77 | no change |
Operating Expenses | Q3 2025 | no prior guidance | Approximately $615,000,000 | no prior guidance |
Fully Diluted Share Count | Q3 2025 | no prior guidance | Approximately 132,400,000 shares | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Long-Term Growth Outlook & 2026 Growth Uncertainty | Q3 discussions centered on optimism driven by AI build‐out and macroeconomic uncertainties—with mention of long‐term growth prospects and some concern on 2026 growth uncertainty. Q2 did not include details on 2026. | Q4 introduces a new emphasis with detailed early customer discussions, revenue targets (e.g., the 2026 revenue target of $14 billion) and broader discussion on geopolitical challenges (China, export controls). | Increased emphasis and depth in Q4 compared to earlier periods; added clarity on revenue targets and geopolitical risks. |
Increasing Process Control Intensity | Q3 highlighted market leadership, challenges in high-volume manufacturing and the need for enhanced process control at advanced nodes. Q2 provided detailed technical drivers such as larger die sizes and HBM requirements. | Q4 offers a comprehensive discussion that includes drivers like advanced designs, AI infrastructure, and advanced packaging, with detailed examples (e.g., increased sampling rates, 100% reticle inspection). | Consistent focus across periods with Q4 adding richer detail and broader scope, reinforcing a strengthening narrative. |
Advanced Packaging Growth | In Q3 and Q2, advanced packaging was a recurring bullish theme with revenue forecasts moving from $500 million in 2024 towards $850 million in 2025, and noted growth outlook in the 60% range. | Q4 provides updated figures with advanced packaging revenue expected to exceed $925 million in 2025, highlighting strong adoption, market share gains and strategic importance in AI and high-performance computing. | Steady and robust growth with accelerated revenue projections and increased market penetration highlighted in Q4. |
Inspection Technology and Revenue Expansion | Q3 focused on e‑beam and optical inspection tools, mentioning strong revenue expansion and market share gains. Q2 emphasized the role of inspection in driving yield and process control improvements. | Q4 underscores significant revenue expansion (50% year-to-date growth), backlog clearance and its critical role in advanced packaging and inspection innovation. | A consistently robust focus across periods with sustained strong performance and revenue expansion maintained in Q4. |
Tariff and Trade Regulation Impacts | Q3 detailed a 100 basis point margin headwind driven by global tariffs and trade uncertainty. Q2 referenced related impacts indirectly through discussion of export controls. | Q4 confirms tariffs as a structural challenge, noting a 50 to 100 basis point headwind and detailing mitigation strategies (e.g., leveraging free trade zones, process improvements). | An evolving negative sentiment that persists, with Q4 providing nuanced mitigation steps while reaffirming tariff impacts on margins. |
China Business Risks and Export Controls | Q3 described declining revenue contribution from China (26–30%) and a projected 15–20% decline overall, along with export control impacts of around $500 million. Q2 offered similar figures, noting a drop from 41% to 29% and a $500 million impact. | Q4 reiterates persistent headwinds with China’s revenue contribution now stated around 30%, revised decline estimates, and a focus on normalization after past elevated levels. | A persistent concern with ongoing risks; while the numbers adjust slightly, the headwinds remain a significant factor for future revenue implications. |
Services Growth Slowdown | Q2 noted high single-digit growth in services due to China restrictions, with caution expressed around lower than long-term growth expectations. Q3 mentioned a slowdown in Q1 from loss of fab access in China, projecting around 10% growth. | Q4 confirms services growing roughly 10% for the year and celebrates the 52nd consecutive quarter of year-over-year growth, indicating stable but modest growth despite external pressures. | Despite short-term slowdown factors (mainly due to China restrictions), overall services growth remains stable, with a consistent 10% outlook maintained. |
Operational Resilience and Global Adaptability | Q3 introduced the topic by discussing global trade uncertainty, tariff impacts and the importance of a diverse global footprint and operational adjustments. | Q4 contains no mention of this topic. | The topic has been deprioritized or removed from the current period’s discussion. |
High Customer Concentration Risk | Q2 mentioned risk regarding high concentration with its top foundry customer and engagement with struggling foundries, noting reliance on a dominant customer. | Q3 and Q4 do not discuss this topic. | The concern is no longer emphasized in later periods, suggesting either mitigation or a reduced focus on customer concentration risk. |
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2026 Outlook
Q: How do early ‘26 signals look?
A: Management noted it’s too early to quantify next year’s growth, but they are encouraged by strong customer conversations, expanding investments in advanced logic and packaging, and expect a normalization after current headwinds. -
Margin Outlook
Q: Will margins improve this quarter?
A: Management expects gross margins to rise to about 62.5% due to a favorable revenue mix, while tariff pressures remain limited to a 50–100 bps headwind that is being mitigated through operational adjustments. -
HBM Impact
Q: How is HBM changing process control?
A: Management explained that the shift to high bandwidth memory (HBM) adds tighter defect criteria, leading to roughly 100 basis points more process control intensity, as customers demand higher precision in yield management. -
Process Control
Q: Why is inspection growing faster?
A: They mentioned that inspection growth is driven by resolved supply constraints and robust backlog clearance, while patterning remains mixed due to evolving design cycles, though it is expected to improve later. -
Memory Mix
Q: Will memory revenue rebound in December?
A: Management expects foundry logic revenue to strengthen sequentially and sees an uptick in DRAM revenue in December driven by shipment timing and improved process control in new DRAM profiles. -
China Sales
Q: What share of sales comes from China?
A: Management reiterated that China sales are expected to remain around 30% of total revenue, with slight seasonal variations as the second half of the year unfolds. -
Backlog Update
Q: What is the current RPO level?
A: They reported a current RPO of about $7.9B, corresponding to normalized lead times of roughly 6–8 months for longstanding customers, reflecting a more standard order-to-shipment cycle. -
Advanced Packaging
Q: Which packaging areas offer near-term growth?
A: Management highlighted that while co-packaging in logic drives most share gains, there is increasing momentum in HBM-related inspection, with advanced packaging benefiting from strict defect control requirements. -
Reticle Revenue
Q: What is fueling record reticle revenue?
A: They attributed the record reticle inspection revenue to rigorous quality demands—inspecting 100% of high-cost, single-die reticles—as well as legacy node requalification and strong customer investments, particularly in China.
Research analysts covering KLA.