KLA Corporation (KLAC) Q1 2026 Earnings Call Transcript

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Overview

The earnings call summary shows mixed sentiments. While there are positive indicators like expected revenue growth and strategic investments, concerns about declining foundry/logic sales and margin guidance adjustments temper optimism. The Q&A reveals uncertainties around China sales and RPO disclosures, affecting investor confidence. Overall, the sentiment is balanced, suggesting limited short-term stock movement.

Key Financial Performance

Revenue $3.21 billion, above the guidance midpoint of $3.15 billion, driven by strong product mix and manufacturing efficiencies.

Non-GAAP diluted EPS $8.81, above the midpoint of the guidance range, reflecting improved profitability.

GAAP diluted EPS $8.47, above the midpoint of the guidance range, reflecting improved profitability.

Gross Margin 62.5%, 50 basis points above the midpoint of guidance, driven by a stronger product mix and manufacturing efficiencies.

Non-GAAP Operating Expenses $618 million, including $360 million in R&D and $258 million in SG&A.

Non-GAAP Operating Margin 43.2%, reflecting strong operational performance.

Net Income $1.17 billion (GAAP net income: $1.12 billion), reflecting strong revenue and operational performance.

Cash Flow from Operations $1.16 billion, reflecting strong cash generation.

Free Cash Flow $1.07 billion, with a free cash flow margin of 31%, driven by operational efficiency.

Service Business Revenue $745 million, up 16% year-over-year, driven by consistency and resiliency in the service business.

Advanced Packaging Related Revenue Expected to exceed $925 million for calendar year 2025, up approximately 70% year-over-year, driven by intensity gains and market share improvements.

Total Capital Return $799 million in the September quarter, including $545 million in share repurchases and $254 million in dividends.

Total Cash, Cash Equivalents, and Marketable Securities $4.7 billion, reflecting a strong balance sheet.

Debt $5.9 billion, supported by a flexible and attractive bond maturity profile.

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Operating Highlights

Advanced Packaging Portfolio: KLA's advanced packaging systems revenue is expected to exceed $925 million in 2025, up approximately 70% year-over-year. This growth is driven by intensity gains and market share improvements.

AI Infrastructure and Semiconductor Growth: Accelerating investment in AI infrastructure and semiconductor technology is driving demand for KLA's process control solutions, particularly in high-bandwidth memory and advanced packaging.

Service Business Growth: KLA's service business revenue grew to $745 million in the September quarter, up 6% sequentially and 16% year-over-year, showcasing consistency and resiliency.

Cash Flow and Capital Returns: Record cash flow of $1.066 billion in the September quarter. Over the past 12 months, free cash flow was $3.9 billion, with $3.09 billion returned to shareholders through dividends and share repurchases.

Market Expansion in Advanced Packaging: KLA is capitalizing on the growth of advanced packaging, which has become a meaningful market, estimated at $11 billion and growing faster than core WFE. This represents a new revenue opportunity for KLA.

Export Control Impact: Extended U.S. export controls on China are expected to impact KLA's revenue by $300-$350 million in 2026, spread evenly across the year.

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Risk or Challenges

Export Controls Impact: Extended export controls from the U.S. government are expected to result in a revenue impact of approximately $300 million to $350 million for KLA in calendar 2026, spread evenly across the first and second half of the year. This limits market access to certain customers in China.

Customer Challenges in High-Volume Production: KLA's leading-edge customers face challenges in optimizing yield and limiting process variability in high-volume production environments, which increases the demand for process control solutions.

Advanced Packaging Complexity: The evolving complexity of advanced packaging and heterogeneous chip integration increases risks for customers, requiring more sophisticated process control solutions.

Rising Operating Expenses: Operating expenses are forecasted to increase to approximately $635 million in the December quarter due to product development and infrastructure investments, which could pressure margins.

Economic and Market Uncertainty: While customer discussions indicate growth in 2026, the broader market environment remains uncertain, with risks tied to economic conditions and industry spending profiles.

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Guidance & Outlook

Advanced Packaging Revenue Growth: For calendar year 2025, advanced packaging-related revenue is expected to exceed $925 million, representing approximately 70% year-over-year growth.

WFE Market Growth: Mid- to high single-digit growth in WFE is expected for 2025, driven by increasing investment in leading-edge foundry/logic and memory to support AI and premium mobile demand, partially offset by lower demand from domestic China.

Advanced Packaging Market Growth: The advanced packaging market is expected to grow more than 20% compared to last year.

2026 Industry Growth Outlook: Customer discussions indicate that 2026 will be a growth year for the industry, with a broader spending profile than 2025 for both WFE and advanced packaging. First-half revenue levels are expected to be roughly flat to modestly up compared to the second half of 2025, with accelerating growth in the second half of 2026.

Revenue Impact from Export Controls: The revenue impact related to additional market access loss from extended U.S. export controls on certain customers in China is estimated to be approximately $300 million to $350 million for calendar 2026, spread roughly evenly across the first and second half of the year.

December Quarter Revenue Guidance: Total revenue is expected to be $3.225 billion, plus or minus $150 million.

December Quarter Gross Margin: Gross margin is forecasted to be 62%, plus or minus 1 percentage point.

December Quarter Operating Expenses: Operating expenses are forecasted to be approximately $635 million, reflecting continued product development and infrastructure investments to support expected revenue growth.

December Quarter EPS Guidance: GAAP diluted EPS is expected to be $8.46, plus or minus $0.78, and non-GAAP diluted EPS is expected to be $8.70, plus or minus $0.78.

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Shareholder Return Plan

Dividend Increase: On April 30, 2025, KLA announced its 16th consecutive annual dividend increase, up 12% to $1.90 per share per quarter, or an annualized dividend of $7.60 per share.

Dividend Payout: In the September quarter, KLA paid $254 million in dividends.

Share Repurchase Authorization: KLA announced a $5 billion share repurchase authorization on April 30, 2025.

Share Repurchase Activity: In the September quarter, KLA repurchased $545 million worth of shares.

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Key Q&A

Q: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?

A:Bren Higgins stated that it is not necessarily a strengthening outlook but rather getting closer to it. Customers are becoming more constructive about timing, and there is encouragement from leading-edge investments, DRAM, and HBM. However, the flash market is growing, but legacy markets may see corrections, particularly in China. Overall, they are constructive on WFE growth and process control intensity.

Q:Are additional dynamics driving the potential for incremental process control spend as the industry moves from 2-nanometer to less than 2-nanometer?

A:Richard Wallace and Bren Higgins confirmed that new design rules and broader investments are driving incremental process control spend. More players engaging in leading-edge technology and strategic investments are creating opportunities for process control intensity.

Q:What is causing the decline in foundry/logic sales from 74% to 59% of sales?

A:Bren Higgins explained that the decline is due to a reduction in China sales, which were elevated in the previous quarter, and an uptick in leading-edge and DRAM investments. The recent export controls have had an immaterial impact on the December quarter but will result in $300-$350 million lost business through 2026.

Q:What is the reason for the 50 bps guide down in gross margins?

A:Bren Higgins attributed the 50 bps guide down to product mix adjustments and consistent tariff impacts of 50-100 basis points. Gross margins are influenced by growth levels, with higher growth leading to better performance within their 40%-50% incremental operating margin target.

Q:What is the process control intensity in advanced packaging, and how is it expected to evolve?

A:Bren Higgins stated that advanced packaging process control intensity is not as high as front-end intensity but has grown significantly from 1% to 6% of KLA's business. It is expected to grow modestly faster than WFE over time, driven by density shrink and process complexity.

Q:Do you agree with Lam's statement that $100 billion of AI spend translates to $8 billion in WFE, mostly related to memory?

A:Richard Wallace agreed in general but added that packaging investments bring the total closer to $10 billion. KLA's participation in this market is above average intensity due to process control challenges in high-value die and HBM.

Q:What is the status of RPO (Remaining Performance Obligations) and lead times?

A:Bren Higgins stated that RPO is no longer disclosed due to inconsistencies in interpretation. Lead times have normalized to 7-9 months, supported by order flow consistent with growth expectations for next year.

Q:What is the outlook for China sales in the December quarter and beyond?

A:Bren Higgins expects China sales to be in the high 20% range in the December quarter, translating to 30%-31% for the year. By 2026, China sales are expected to settle in the mid-20% range due to export restrictions and normalization.

Q:What is the outlook for DRAM process control growth in 2026?

A:Richard Wallace and Bren Higgins highlighted that DRAM process control intensity has increased due to EUV and HBM requirements. They expect DRAM investment to grow in 2026, driven by customer urgency and pricing dynamics.

Q:What is the impact of pellicleization on KLA's mask inspection portfolio?

A:Richard Wallace stated that KLA is heavily involved in customer discussions about reticle qualification and requalification. While pellicleization poses challenges, KLA is well-positioned to support various scenarios and continues to see growth in its reticle business.

Q:What is the outlook for service growth in 2025 and beyond?

A:Bren Higgins expects service growth to be in the 12%-14% range for 2025 and similar levels in 2026. Growth drivers include increased installed base, tool complexity, and new opportunities in packaging and high-bandwidth memory.

Q:What is driving the broadening of investment in leading-edge logic and foundry?

A:Richard Wallace and Bren Higgins noted that customers outside the dominant Taiwanese foundry are increasing investments in leading-edge logic, driven by new design rules and strategic goals. KLA is seeing this reflected in order forecasts.

Q:What is the outlook for advanced packaging growth in 2026?

A:Bren Higgins stated that advanced packaging growth is expected to outpace overall WFE growth, with strong market share in both logic and memory. KLA's front-end tools are being used in back-end applications, driven by customer demand for high process control capability.

Q:Review of Unclear Management Responses

A:Management avoided directly answering questions about the specific RPO value for the quarter, citing a change in disclosure policy. They also provided limited details on the exact timing and scale of high NA engagements and the specific impact of pellicleization on their mask inspection portfolio.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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