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    KLAC
    Earnings call· Mar 2025(Q3 FY25)

    KLA Q3 FY25 earnings call KLAC

    Apr 30, 2025 Source

    Executive summary

    KLA Q3 FY25 — Strong AI-Driven Performance and Capital Returns

    KLA delivered strong Q3 FY25 results, driven by robust demand in leading-edge logic, HBM, and advanced packaging, all fueled by AI infrastructure build-out. Despite global trade uncertainty and tariff headwinds impacting gross margins, the company maintains its WFE outperformance outlook and demonstrates confidence through significant capital returns. Management is actively assessing mitigation strategies for the evolving macro environment.

    Highlights

    5

    • Revenue of $3.06 billion and non-GAAP diluted EPS of $8.41 exceeded guidance midpoints.

    • Advanced packaging revenue grew to over $500 million in CY24 and is expected to exceed $850 million in CY25.

    • Services business achieved its 52nd consecutive quarter of year-over-year growth, up 13% YoY to $669 million.

    • Quarterly free cash flow was $990 million, with a TTM free cash flow margin of 30%.

    • Announced 16th consecutive annual dividend increase (12% to $1.90/share quarterly) and a new $5 billion share repurchase authorization.

    Concerns

    3

    • Global trade uncertainty and potential second-order effects on macro demand are unclear, leading to Investor Day postponement.

    • Newly announced market access restrictions and U.S. government export controls impacted service revenue growth in the March quarter.

    • Global tariffs are expected to have a roughly 100 basis point headwind to gross margin per quarter for the remainder of CY25.

    Guidance & targets

    20
    CategoryTargetConfidence
    WFE industry growth
    mid-single-digit percentage
    high materiality
    High
    KLA revenue growth vs WFE
    outperform the mid-single-digit WFE growth rate by several points
    high materiality
    High
    Advanced packaging revenue
    exceed $850 million
    high materiality
    High
    Total revenue
    $3.75 billion, plus or minus $150 million
    high materiality
    High
    Foundry/logic revenue % of Semi PC systems
    approximately 69%
    medium materiality
    High
    Memory revenue % of Semi PC systems
    approximately 31%
    medium materiality
    High
    DRAM revenue % of Memory
    about 76%
    medium materiality
    High
    NAND revenue % of Memory
    24%
    medium materiality
    High
    Gross margin
    63%, plus or minus 1 percentage point
    high materiality
    High
    Gross margin impact from tariffs
    roughly 100 basis point headwind
    high materiality
    Medium
    Gross margin
    approximately 62.5% plus or minus 50 basis points
    high materiality
    High
    Other income and expense net
    approximately a $35 million expense
    low materiality
    High
    Other income and expense net
    roughly consistent
    low materiality
    High
    Effective tax rate
    13.5%
    medium materiality
    High
    Effective tax rate (Pillar 2 impact)
    approximately 14%
    medium materiality
    High
    GAAP diluted EPS
    $8.28 plus or minus $0.78
    high materiality
    High
    Non-GAAP diluted EPS
    $8.53 plus or minus $0.78
    high materiality
    High
    Services business growth
    around 10% or so
    medium materiality
    Medium
    N2 wafer starts added
    somewhere around 40K to 50K wafer starts
    medium materiality
    High
    N2 wafer starts added
    at least a doubling of that
    medium materiality
    Medium

    Segment performance

    2
    SegmentRevenueYoYQoQMargin
    Foundry/logic (Semiconductor Process Control systems)
    Expected to be approximately 69% of Semiconductor Process Control systems revenue for Q4 FY25.
    Revenue mix: approximately 69% of Semiconductor Process Control systems revenue (Q4 FY25 forecast)
    		————
    Memory (Semiconductor Process Control systems)
    Expected to be approximately 31% of Semiconductor Process Control systems revenue for Q4 FY25, with DRAM comprising 76% and NAND 24% of the memory mix.
    Revenue mix: approximately 31% of Semiconductor Process Control systems revenue (Q4 FY25 forecast)DRAM mix: about 76% of Memory revenue (Q4 FY25 forecast)NAND mix: 24% of Memory revenue (Q4 FY25 forecast)
    		————

    Operational metrics

    28
    Non-GAAP EPS
    $8.41above the midpoint of all the guidance range
    Q3 FY25
    GAAP diluted EPS
    $8.16at the upper end of the respective guidance ranges
    Q3 FY25
    Non-GAAP diluted EPS
    $8.55
    Q3 FY25

    At the guided tax rate of 13.5%

    Non-GAAP gross margin
    63about 50 basis points higher than the midpoint of guidance
    Q3 FY25
    Operating expenses
    $575 millionabout $10 million below the guidance midpoint
    Q3 FY25
    R&D expenses
    $338 million
    Q3 FY25
    SG&A expenses
    $237 million
    Q3 FY25
    Operating margin
    44.2
    Q3 FY25
    Other income and expense net
    $36 million expense
    Q3 FY25
    Effective tax rate
    15
    Q3 FY25
    Net income
    $1.12 billion
    Q3 FY25
    GAAP net income
    $1.09 billion
    Q3 FY25
    Free cash flow margin
    30
    TTM

    ranks amongst the top 10% of companies in the S&P 500

    Total capital returns
    $733 million
    Q3 FY25
    Total capital returns
    $3 billion
    TTM
    Cash and investments balance
    $4 billion
    Q3 FY25

    total cash, cash equivalents and marketable securities

    Total debt
    $5.9 billion
    Q3 FY25
    Annualized dividend
    $7.60up 12%
    CY25
    Quarterly dividend per share
    $1.90up 12%
    CY25
    Share repurchase authorization (new)
    $5 billion
    Q3 FY25
    Share repurchase authorization (total)
    $5.46 billion
    Q3 FY25
    Services business revenue
    $669 millionup modestly sequentially and up 13% year-over-year
    Q3 FY25

    Marked its 52nd consecutive quarter of growth on a year-over-year basis.

    Services business growth
    16above trend line
    CY2024
    China revenue share
    26
    Q3 FY25

    Expected to be in the high 20s, maybe 30% for CY25 overall.

    China revenue decline
    15% to 20%
    CY2025
    Export control impact on revenue
    $500 million plus or minus $100 million
    CY2025

    Total impact over roughly 4+ quarters.

    N2 wafer starts added
    40K to 50K
    CY2025

    Customers are expected to add this amount in CY25.

    N2 wafer starts added
    at least a doubling
    CY2026

    Expected increase in N2 wafer starts in CY26 compared to CY25.

    Industry KPIs

    4
    MetricValueDetails
    Backlog order bookabout 8.9%%
    Wfe industry spend outlookmid-single-digit percentage growth%
    Node platform ramp scheduleN2wafer starts
    End market segment revenue mixFoundry/logic: approximately 69%; Memory: approximately 31%%

    Orderbook & backlog

    1
    Remaining Performance Obligations (RPO)about 8.9%Q3 FY25

    changed a couple of hundred million

    This is based on historical practice. Starting Q1 FY26 (quarter ending September 30, 2025), RPO disclosure will change to 'transaction price for contracts that have not yet been recognized as revenue' to align with industry peers.

    Product announcements

    1
    ProductTypeDetails
    E-beam pattern wafer inspectionupdate

    Risks & headwinds

    3
    Global trade uncertainty and potential second-order effects on macro demandfar from clear

    Unquantified, but led to Investor Day postponement.

    Mitigation: Postponed Investor Day to early-to-mid CY26, hoping for stabilization.

    Market access restrictions and U.S. government export controlsearly December 2024

    Impacted service revenue growth in Q3 FY25.

    Mitigation: Expects long-term business recovery as capacity offsets in other regions.

    Global tariffsremainder of the calendar year

    roughly 100 basis point headwind to gross margin per quarter

    Mitigation: Evaluating mitigation opportunities within operational processes and pricing strategies; assessing network management and parts movement.

    What to watch in Q4 FY25

    4

    Gross margin impact from tariffs

    Next quarter (Q4 FY25) and remainder of CY25
    Currentroughly 100 basis point headwind per quarter
    TargetStabilization or mitigation of tariff impact

    Why it matters

    Tariffs are a new, quantified headwind to profitability, and management is actively seeking mitigation.

    we expect global tariffs to have a roughly 100 basis point headwind to gross margin per quarter, assuming relatively stable quarterly revenue expectations for the remainder of the calendar year.

    Q&A highlights

    7

    Why postpone Investor Day given strong results? How do tariffs impact KLA, especially with a diversified manufacturing base? Can KLA modulate operations to minimize impact?

    Investor Day postponed due to unprecedented global trade uncertainty and potential macro impacts. Tariffs cause a 100 bps gross margin headwind, mainly from Services business (contract stream, parts importation) and U.S. factory imports. KLA has a diverse global footprint and will assess and optimize operations and pricing strategies over time, but significant changes require long-term investment.

    “The structure and construct that's being discussed today is really unprecedented, and we'll have to see how that settles out.”

    asked by Harlan Sur · answered by Bren Higgins

    2 min read6 chapters

    Detailed Narrative

    01

    AI as a Core Growth Catalyst

    KLA's strong Q3 FY25 performance, with revenue of $3.06 billion and non-GAAP EPS of $8.41, was primarily fueled by robust demand in leading-edge logic and high-bandwidth memory, directly supporting AI infrastructure build-out. The increasing complexity of semiconductor designs, accelerating product cycles, and growing advanced packaging demand driven by AI underscore the critical role of process control, uniquely benefiting KLA.

    02

    Advanced Packaging Momentum

    The advanced packaging business demonstrated strong momentum, with revenue growing to over $500 million in CY24 and projected to exceed $850 million in CY25. This growth is driven by high-value packages for AI applications, leveraging KLA's adapted front-end inspection and measurement solutions for back-end processes like CoWoS. This segment offers both growth and margin expansion opportunities as customers demand more capability.

    03

    Services Business Resilience Amidst Headwinds

    KLA's Services business grew to $669 million in Q3 FY25, marking its 52nd consecutive quarter of year-over-year growth (up 13%). Despite facing market access restrictions and U.S. government export controls in early December 2024, which impacted growth, the business demonstrated predictability and resilience. Full-year CY25 Services growth is expected to be around 10%, slightly below the long-term target due to these controls.

    04

    E-beam Inspection Progress and Differentiation

    KLA reported significant progress in e-beam pattern wafer inspection, doubling revenues and gaining 700 basis points of share in CY24. This success is attributed to long-term investments in platforms that now perform at a high level🎣, especially for challenging layers in advanced nodes. The synergy between e-beam and optical tools, and their interoperability, is driving customer adoption, leading to increased demand and capacity ramp-up.

    05

    Capital Allocation Strategy

    KLA reiterated its commitment to assertive capital allocation, announcing its 16th consecutive annual dividend increase (12% to $1.90 per share quarterly, or $7.60 annualized) and a new $5 billion share repurchase authorization, bringing the total authorization to $5.46 billion. This strategy is supported by consistent strong free cash flow generation, with $990 million in Q3 FY25 and $3.5 billion TTM, reflecting confidence in long-term business opportunities.

    06

    Global Trade Uncertainty and Tariff Impact

    The company acknowledged significant global trade uncertainty and potential second-order macro effects, leading to the postponement of its Investor Day to early-to-mid CY26. Specifically, global tariffs are expected to create a roughly 100 basis point headwind to gross margin per quarter for the remainder of CY25, primarily impacting the Services business due to contract structures and parts importation. KLA is evaluating mitigation strategies, including operational adjustments and pricing.

    AI-generated summary of the company’s earnings call. Not investment advice.