KLA Corporation (KLAC) Earnings

Management highlights

- Business Environment and Demand Drivers • Strong June quarter results with all key metrics above the midpoint of guidance, driven by accelerating AI infrastructure investment, strong leading edge foundry logic demand, and rising process control intensity across memory and advanced packaging. • Demand signals for AI infrastructure have strengthened materially since the March 2026 Investor Day, supported by accelerated hyperscale data center investment, rising AI compute requirements, and broader adoption of AI-enabled applications. • KLA is uniquely positioned on the critical path of AI infrastructure expansion, as increasingly sophisticated leading edge designs and higher wafer start volumes drive growing demand for process control. • Process control intensity is rising industry-wide due to faster product cycles, higher value wafers/masks, stricter performance specifications, growing design variability, and advanced packaging adoption. - Strategic Positioning and Operational Progress • Advanced packaging process control revenue growth is outpacing the broader advanced packaging market, growing almost twice as fast as the market in 2026, driven by adoption of technologies like hybrid bonding. • The Orbitech acquisition thesis (centered on rising chip package value) is playing out better than expected, with faster-than-projected growth across specialty semiconductor, PCB, and component inspection markets. • KLA has been adding working capital and facility capacity to meet rising customer demand, and is actively securing long lead time supply chain capacity to support projected growth through 2027 and beyond. • Capital return remains a core priority: KLA returned $876 million to shareholders in the June quarter ($571 million in share repurchases, $305 million in dividends), with $3.3 billion in total capital returns over the prior 12 months.

Guidance

- KLA raised its 2026 global wafer equipment market (including advanced packaging) outlook to approximately the low $150 billion range, up from the prior expectation of over $140 billion, representing 25% year-over-year growth from 2025's ~$120 billion level. - KLA expects second half 2026 revenue to grow approximately 20% over first half 2026, with continued sequential growth into calendar 2027. Management anticipates significant broad-based growth in 2027 across leading-edge logic, foundry, conventional DRAM, HBM, NAND, and advanced packaging. - September 2026 quarter guidance: Revenue of $4 billion ± $200 million; gross margin of 62.5% ± 1 percentage point (up 75 basis points from prior quarter guidance); operating expenses of ~$690 million; non-GAAP diluted EPS of $1.16 ± 10 cents; GAAP diluted EPS of $1.14 ± 10 cents. - Management expects 2027 wafer equipment spending to be ~$190 billion, translating to a mid-20% year-over-year growth rate, similar to 2026's growth rate. KLA is planning capacity to support more bullish upside scenarios for 2027 demand. - Long-term service revenue growth target remains 13% to 15% annually, with growth expected to accelerate to the higher end of the range in 2027. The long-term business model targets 40% to 50% incremental operating margin leverage on revenue growth. - Reported backlog (RPO) as of the end of June 2026 is expected to be ~$12.5 billion, growing consistently over the past several quarters, with further growth expected from the current strong order funnel.

Segment performance

Total company revenue for the June 2026 quarter was $3.66 billion, up 7% sequentially and 15% year-over-year. KLA Services delivered $820 million in revenue, up 17% year-over-year, representing ~22.4% of total company revenue. For the September 2026 quarter, semiconductor process control systems revenue to semiconductor customers is forecasted to be 73% from Foundry Logic and 27% from Memory; within Memory, DRAM is expected to account for 90% and NAND for the remaining 10%. Advanced packaging process control systems revenue is projected to reach ~$1.1 billion in full year 2026, growing more than 70% year-over-year. Combined products from the Orbitech acquisition (specialty process, PCB, and component inspection businesses) are expected to grow over 25% in full year 2026.

Risks & headwinds

- Higher memory component procurement costs have created a gross margin headwind of slightly more than 100 basis points, a headwind expected to persist through 2027, before potential normalization in later periods. - Long lead time for specialized optical components (12 to 24 months to add new production capacity) creates supply chain risk, requiring proactive capacity planning with key suppliers far in advance of projected demand. - All forward-looking statements are inherently uncertain, and actual results may differ materially from projections due to market and supply chain volatility, as noted in KLA's SEC risk factor disclosures. - Fab space limitations across the industry could impact customer delivery schedules and near-term demand realization.

Analyst Q&A

• Q: CJ Muse (Tanner Fitzgerald) asked how gross margins will trend into 2027 and 2028, given new supply being added, mix shifts to tools, and potential pass-through of inflation costs. /

  A: Management notes current operating leverage is benefiting gross margins, but higher memory procurement costs will remain a headwind through 2027, with 2026 full-year gross margins expected to hold in the 62%+ range. Long-term, the business model is on track to deliver targeted incremental operating margin as scale increases.

• Q: Harlan Sir (JPMorgan) asked how much of KLA's improved 2026 and 2027 outlook is driven by broadening foundry/logic investment from multiple players (Intel, Samsung, Rapidus). /

  A: Rick Wallace confirmed that this broadening of foundry/logic supply beyond the existing market leader is a meaningful driver of stronger demand. Process control intensity is rising across both leading-edge logic and memory, and this dynamic sets up a very strong growth profile for KLA in 2027.

• Q: Vivek Arya (Bank of America) asked how competitive moats in process control work, and how Chinese domestic competition could impact KLA's market share going forward. /

  A: Rick Wallace explained that process control has a much wider moat than lithography, due to its high-mix low-volume nature, deep customer engagement, requirements for specialized algorithm development, and KLA's large global team of 1,600-1,700 applications engineers. KLA continues to compete successfully when able to participate fairly in the market.

• Q: Chris Sankar (TD Caledon) asked if KLA is raising prices in response to higher supply chain costs and strong demand, and when impacts will be felt. /

  A: Management confirmed that customers recognize higher input costs, and KLA has held productive conversations about sharing value to enable continued R&D investment. Price adjustments are typically tied to new product launches, while existing products see incremental adjustments to offset cost increases. Normalization of memory costs is expected to turn the current headwind into a tailwind over time.

• Q: Blaine Curtis (Jefferies) asked how long it would take KLA to prepare supply chain capacity for a potential $300 billion wafer equipment market in the long term. /

  A: Bren Higgins noted KLA is already negotiating long-term capacity agreements with critical component suppliers for demand through 2029 and beyond. KLA can adjust internal facility and headcount capacity relatively quickly; the main gating factor is long lead time optical components, so proactive planning now ensures KLA can meet future demand if the market grows to higher levels.