Kla's 2026Q1 Earnings Call: Contradictions Emerge on 2026 Growth Outlook, China Revenue Projections, and Memory Process Control Intensity

Date of Call: October 29, 2025

Financials Results

• Revenue: $3.21B, double-digit YOY growth; above guidance midpoint of $3.15B
• EPS: $8.81 per diluted share (non-GAAP); $8.47 GAAP; both above guidance midpoints
• Gross Margin: 62.5%, 50 basis points above the midpoint of guidance
• Operating Margin: 43.2% non-GAAP operating margin (operating expenses $618M: R&D $360M, SG&A $258M)

Guidance:

• December quarter revenue $3.225B ± $150M.
• Semiconductor process control mix: foundry/logic ~59%, memory ~41% (DRAM ~78% of memory).
• December quarter gross margin ~62% ± 1pp; OpEx ≈ $635M; other expense ≈ $32M; tax rate ~14%.
• GAAP EPS $8.46 ± $0.78; non-GAAP EPS $8.70 ± $0.78; ~132M diluted shares.
• Export-control impact ~ $300M–$350M through end of 2026, spread roughly evenly H1/H2 2026.
• 2026 view: H1 roughly flat to modestly up vs H2 2025; stronger acceleration in H2 2026.

Business Commentary:

* Revenue and Financial Performance: - KLA Corporation reported revenue of $3.21 billion for the September quarter, with non-GAAP diluted EPS of $8.81. - Revenue was above the guidance midpoint, reflecting double-digit year-over-year growth and improved profitability. - The increase was driven by strong demand across growth markets in WFE, particularly in high-bandwidth memory and advanced packaging.

• Advanced Packaging and Process Control:
• KLA's advanced packaging systems revenue is expected to exceed $925 million for calendar year 2025, up approximately 70% year-on-year.
• This growth is due to increased process control intensity and market share improvements across KLA's portfolio.

• The demand for advanced packaging is rising as heterogeneous device integration becomes more complex, creating new market opportunities.

• China Market Dynamics:

• KLA expects revenue from China to be impacted by extended U.S. export controls, with an estimated impact of approximately $300 million to $350 million in the December quarter and 2026.
• The company anticipates a modest correction in China's domestic demand, especially in the domestic market.

• However, KLA remains focused on supporting customer engagement and capitalizing on long-term growth opportunities beyond China.

• Capital Returns and Cash Flow:

• KLA reported strong cash flow, with a record $1.066 billion in the quarter, and total capital return of $799 million comprised of $545 million in share repurchases and $254 million in dividends.
• The company maintains a disciplined approach to capital allocation, focusing on long-term shareholder value accretion and dividend growth.
• This strong financial performance reflects KLA's consistent operating model and predictable service business.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly described the quarter as "strong" with "double-digit" revenue growth, record quarterly cash flow of $1.066B, and said KLA expects to "outperform the WFE market in 2025"; advanced packaging revenue expected to exceed $925M, up ~70% YOY.

Q&A:

• Question from Harlan Sur (JPMorgan Chase & Co, Research Division): Has the magnitude on the WFE growth outlook improved or is it just higher confidence; can you elaborate on the broader spending profile on WFE and advanced packaging?
  Response: Management: It's more confidence and clearer timing—leading-edge and DRAM/HBM investment are constructive, packaging momentum is strong, and customers are securing slots, supporting stronger visibility.

• Question from Vivek Arya (BofA Securities, Research Division): Why does foundry/logic mix decline to ~59% (sequential ~$300M drop); how much is China/export controls and is it lumpiness or longer term?
  Response: Management: Leading-edge is rising but offset by a normalization in China (Sept was elevated at 39%); Dec China expected high-20s; export controls are ~ $300–350M impact through 2026, modest for Dec but a longer-term lost revenue.

• Question from Christopher Muse (Cantor Fitzgerald & Co., Research Division): Why guided gross margin down ~50 bps and how to think about the 40%–50% incremental operating margin range if WFE grows double digits?
  Response: Management: The 50 bps guide change is mainly mix (plus a steady tariff drag ~50–100 bps); the 40–50% incremental OM target holds—outperformance vs target if growth stays above trend.

• Question from Joseph Quatrochi (Wells Fargo Securities, LLC, Research Division): What is advanced packaging process-control intensity and how will it evolve?
  Response: Management: Intensity is meaningful but below the 'high-teens' assumption; KLA's share has grown (now ~6% of an ~$11B packaging SAM) and packaging should outgrow WFE, offering modestly higher-margin opportunity over time.

• Question from Thomas O'Malley (Barclays Bank PLC, Research Division): Do you agree with the mapping that $100B AI spend ~ $8–10B incremental WFE, largely memory?
  Response: Management: Broadly yes—memory and packaging are big contributors; including packaging you approach ~$10B per $100B of AI spend and KLA's participation likely exceeds average industry intensity.

• Question from Timothy Arcuri (UBS Investment Bank, Research Division): Can you provide RPO/bookings and lead-time color (RPO was $7.9B last quarter)?
  Response: Management: RPO disclosure changed and is no longer provided; lead times have normalized to ~7–9 months, supported by current order flow and sloting.

• Question from Timothy Arcuri (UBS Investment Bank, Research Division): Will China percentage be ~30% in December and down ~10–15% this year?
  Response: Management: Expect China in the high-20s in December and likely mid-20s for 2026, reflecting both export-control impact and normalization.

• Question from Sreekrishnan Sankarnarayanan (TD Cowen, Research Division): Is N2 still ~100 bps more intensive than N3 and is back-end packaging inspection intensity above or below front-end?
  Response: Management: N2 is more process-control intensive than N3 and shows some share gains for KLA; packaging intensity remains below front-end today, though rising.

• Question from Sreekrishnan Sankarnarayanan (TD Cowen, Research Division): Will you use front-end tools for back-end packaging or develop new back-end-specific tools?
  Response: Management: Customers requested front-end-capability tools for packaging to avoid costly yield failures; KLA has adapted front-end systems for high-value packaging needs.

• Question from Yu Shi (Needham & Company, LLC, Research Division): Why is KLA DRAM process-control revenue growing faster than DRAM WFE overall; role of EUV/HBM?
  Response: Management: EUV and HBM have materially increased process-control requirements (EUV ~+1pp, HBM ~+1pp), and HBM’s reliability/stack sensitivity drove higher KLA adoption in DRAM.

• Question from Christopher Caso (Wolfe Research, LLC): Can you detail the 2026 H1 vs H2 outlook and drivers?
  Response: Management: Current view is H1 roughly flat to modestly up vs H2 2025, with acceleration in H2 2026 driven by advanced logic and DRAM momentum, offset partially by China weakness.

• Question from James Schneider (Goldman Sachs Group, Inc., Research Division): Are you seeing actual diversification in leading-edge foundry engagement beyond the dominant Taiwanese customer?
  Response: Management: Yes—conversations have progressed into order forecasts and collaborative ramp planning, indicating broader leading-edge engagement is showing up in orders.

Contradiction Point 1

Growth Expectations for 2026

It involves differing perspectives on the growth outlook for the following year, which is crucial for investor expectations and strategic planning.

Are you seeing an improvement in the WFE growth outlook based on customer discussions indicating 2026 will be a growth year? How are new design starts and AI data center infrastructure announcements affecting your outlook? - Harlan Sur (JPMorgan Chase & Co, Research Division)

2026Q1: Our confidence is related to the timing of customer lead times becoming more constructive. We see rising process control intensity at the leading edge, particularly in foundry/logic and DRAM. - Richard Wallace(President, CEO & Executive Director)

Can you address your comment on early customer discussions contributing to 2026 growth? - Christopher James Muse (Cantor Fitzgerald)

2025Q4: It's a little early to quantify growth expectations for 2026, but discussions support growth. High-performance compute is strong, with potential broadening of investment. - Bren D. Higgins (Executive VP & CFO)

Contradiction Point 2

Process Control Growth in Memory

It highlights differing views on the growth and intensity of process control in the memory segment, which has implications for KLA's product offerings and market positioning.

Why is DRAM process control growing faster than DRAM WFE? What role does EUV insertion play? - Yu Shi (Needham & Company, LLC, Research Division)

2026Q1: EUV is a factor, increasing process control intensity by 1 point. HBM intensity has increased another point. - Bren Higgins(Executive VP & CFO)

How is process control intensity in memory changing as DDR DRAM shifts to HBM, and what benefits does this present for KLA? - Vivek Arya (BofA Securities)

2025Q4: As DRAM moved to HBM, there's another 100 basis points of opportunity. The value of process control is increasing due to reduced redundancy and reliability expectations. - Bren D. Higgins (Executive VP & CFO)

Contradiction Point 3

Impact of China Export Controls and China Revenue

It involves differing explanations of the impact of China export controls and changes in China revenue, which are crucial for understanding the company's exposure to geopolitical risks.

Why has there been a decline in foundry/logic sales to semiconductor customers but an increase in memory, especially DRAM? - Vivek Arya (BofA Securities, Research Division)

2026Q1: We ended the quarter with 39% of our sales to China. As a reminder, we've been operating to the new export regulations since May of last year, and we're committed to ongoing compliance. - Bren Higgins(CFO)

How did China's revenue compare to expectations, and what impact did export controls have on Q1 revenue? - Vivek Arya (Bank of America Securities)

2025Q3: There's been large parts of our revenue that have been impacted from the export controls. The U.S. effectively said that in May of last year, in May of 2024, we couldn't do business in China, and that was a significant impact. - Bren Higgins(CFO)

Contradiction Point 4

Investments in Leading-Edge Technology and AI Infrastructure

It highlights differing perspectives on the level of investment in leading-edge technology and AI infrastructure, which are critical for understanding the company's growth strategy and market positioning.

Are you seeing an improvement in WFE growth outlook due to customer discussions suggesting calendar year 2026 will be a growth year? How are new design starts and AI data center infrastructure announcements impacting your outlook? - Harlan Sur (JPMorgan Chase & Co, Research Division)

2026Q1: We're seeing more players doing leading edge, which strengthens process control intensity. We're constructive on investments in process control due to new design rules and the need for more leading-edge investment. - Richard Wallace(President, CEO & Executive Director)

How will the cleaner space affect 2026 growth expectations, and are there any gating factors? - Joe Quatrochi (Wells Fargo Securities, LLC, Research Division)

2025Q3: We don't expect an overbuild risk. The AI infrastructure build-out is supported by customer discussions, showing that they are preparing but not overinvesting. The leading edge is expected to continue growing as there are steady facility investments. - Richard Wallace(President, CEO & Executive Director)

Contradiction Point 5

China Revenue Contribution

It directly impacts regional revenue projections, which are crucial for financial forecasting and investor expectations.

How might advanced foundry and logic dynamics drive incremental process control spending? - Harlan Sur (JPMorgan Chase & Co, Research Division)

2026Q1: We expect a slight increase in China exposures for the first half of the year. Our current expectations for the first half of the year have China exposure between 28% and 30%. - Bren Higgins(CFO)

What will China's revenue contribution be to KLA in the March quarter? - Krish Sankarnarayanan (TD Cowen)

2025Q2: China's revenue contribution is expected to drop to high 20s or 30% at most, down from around 36% in the previous quarter. - Bren Higgins(CFO)