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    KLAC
    Earnings call· Dec 2025(Q2 FY26)

    KLA CORP KLAC

    Jan 29, 2026 Source

    Executive summary

    KLA Q2 FY26 — Strong Outperformance Driven by AI and Advanced Packaging

    KLA delivered strong Q2 FY26 results, driven by robust demand for AI infrastructure, advanced packaging, and leading-edge foundry/logic. The company continues to outperform the WFE market, leveraging its process control leadership and expanding market share. Management is focused on navigating supply constraints and DRAM cost headwinds while investing in next-generation product development and maintaining a strong capital return strategy.

    Highlights

    5

    • Full-year 2025 revenue grew 17% to a record $12.745 billion, outpacing industry growth by several points.

    • Full-year 2025 non-GAAP EPS grew 29% year-over-year, demonstrating strong leverage.

    • Full-year 2025 free cash flow grew 30% to $4.4 billion, with a record $1.26 billion in Q2 FY26.

    • Advanced packaging systems revenue grew over 70% year-over-year to approximately $950 million in calendar 2025.

    • Service business grew 18% year-over-year in Q2 FY26 to $786 million, marking 16th consecutive year of annual growth.

    Concerns

    4

    • Gross margin for Q3 FY26 is forecasted to be 61.75%, a modest sequential decline due to product mix and DRAM costs.

    • Rapidly escalating DRAM chip costs are expected to have a 75 to 100 basis points negative impact on gross margins for calendar year 2026.

    • Supply constraints, particularly for optical components, are limiting first-half 2026 growth potential across many products.

    • China WFE is expected to be flattish to slightly positive in 2026, after being modestly negative in 2025.

    Guidance & targets

    27
    CategoryTargetConfidence
    Calendar Year 2026 Core WFE Market Growth
    high single to low double digits
    high materiality
    High
    Calendar Year 2026 Advanced Packaging Market Growth
    similar rate to core WFE, approximately $12 billion
    high materiality
    High
    Calendar Year 2026 Total Market Forecast
    mid-$130 billion range
    high materiality
    High
    Calendar Year 2026 Advanced Packaging Systems Revenue Growth
    mid- to high teens percentage growth
    medium materiality
    High
    First Half 2026 Revenue Growth
    mid-single digits
    high materiality
    High
    Second Half 2026 Revenue Growth
    accelerating growth
    high materiality
    High
    Q3 FY26 Revenue
    $3.35 billion, plus or minus $150 million
    high materiality
    High
    Q3 FY26 Foundry/Logic Revenue Mix
    approximately 60%
    medium materiality
    High
    Q3 FY26 Memory Revenue Mix
    approximately 40%
    medium materiality
    High
    Q3 FY26 DRAM Revenue Mix (within Memory)
    roughly 85%
    low materiality
    High
    Q3 FY26 NAND Revenue Mix (within Memory)
    remaining 15%
    low materiality
    High
    Q3 FY26 Gross Margin
    61.75%, plus or minus 1 percentage point
    high materiality
    High
    Calendar Year 2026 Gross Margin
    approximately 62%, plus or minus 50 basis points
    high materiality
    High
    Q3 FY26 Operating Expenses
    approximately $645 million
    medium materiality
    High
    Calendar Year 2026 Operating Expenses Growth
    roughly $15 million sequentially throughout the year
    medium materiality
    High
    Long-term Incremental Operating Margin Leverage
    40% to 50%
    medium materiality
    High
    Q3 FY26 Other Income and Expense Net
    approximately $25 million
    low materiality
    High
    Calendar Year 2026 Other Income and Expense Net
    approximately $25 million quarterly level
    low materiality
    High
    Calendar Year 2026 Effective Tax Rate
    14.5%
    medium materiality
    High
    Q3 FY26 Non-GAAP Diluted EPS
    $9.08 plus or minus $0.78
    high materiality
    High
    Q3 FY26 GAAP Diluted EPS
    $8.85 plus or minus $0.78
    high materiality
    High
    Q3 FY26 Diluted Share Count
    approximately 131.7 million shares
    low materiality
    High
    Calendar Year 2026 China WFE Growth
    flattish, maybe slightly positive, modest growth
    medium materiality
    Medium
    Calendar Year 2026 Foundry/Logic WFE Growth
    up 10% to 15%
    high materiality
    High
    Calendar Year 2026 DRAM WFE Growth
    15% to 20%
    high materiality
    High
    Calendar Year 2026 NAND WFE Growth
    slower than DRAM
    medium materiality
    Medium
    Long-term Service Revenue Growth
    12% to 14%
    medium materiality
    High

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    Process Control Systems
    Outpaced industry growth by several points for the full year 2025. Expected to continue strong growth driven by AI, HBM, and advanced packaging.
    		—19%——
    Service
    Achieved 16th consecutive year of annual service revenue growth with strong Q2 FY26 performance.
    Consecutive annual growth years: 16CAGR over 16 years: >12%
    		$786 million18%6%—
    Advanced Packaging Systems
    Strong momentum in calendar 2025, driven by rising demand for powerful systems-on-chips. Expected to continue mid- to high teens growth in CY26.
    		$950 million>70%——

    Operational metrics

    24
    Non-GAAP Diluted EPS
    $8.85
    Q2 FY26

    Reported for the December quarter, above guidance midpoint.

    GAAP Diluted EPS
    $8.68
    Q2 FY26

    Reported for the December quarter, above guidance midpoint.

    Non-GAAP Gross Margin
    62.6%
    Q2 FY26

    Reported for the December quarter.

    Operating Expenses
    $653 million
    Q2 FY26

    Reported for the December quarter.

    Non-GAAP Operating Margin
    42.8%
    Q2 FY26

    Reported for the December quarter.

    Other Income and Expense Net
    $32 million
    Q2 FY26

    Reported for the December quarter.

    Effective Tax Rate
    15%
    Q2 FY26

    Reported for the December quarter.

    Non-GAAP Net Income
    $1.17 billion
    Q2 FY26

    Reported for the December quarter.

    GAAP Net Income
    $1.15 billion
    Q2 FY26

    Reported for the December quarter.

    Diluted Weighted Average Shares Outstanding
    132 million
    Q2 FY26

    For the December quarter.

    Cash and investments balance
    $5.2 billion
    Q2 FY26

    Total cash, cash equivalents and marketable securities at quarter end.

    Total Debt
    $5.9 billion
    Q2 FY26

    Total debt at quarter end, supported by investment-grade ratings.

    Revenue CAGR
    16%
    Past 5 years

    Revenue growth over the past 5 years.

    Total Capital Returned
    $797 million
    Q2 FY26

    Total capital returned in the December quarter.

    Total Capital Returned
    $3 billion
    TTM

    Total capital returned over the past 12 months.

    Non-GAAP EPS Growth
    29%YoY
    FY25

    Year-over-year growth in non-GAAP EPS for full year 2025.

    Non-GAAP Gross Margin
    62.8%
    FY25

    Industry-leading gross margin for full year 2025.

    Non-GAAP Operating Margin
    43.6%
    FY25

    Industry-leading operating margin for full year 2025.

    Revenue Growth
    17%YoY
    FY25

    Full year 2025 revenue growth to a record $12.745 billion.

    Revenue Growth
    17%YoY
    Q2 FY26

    Year-over-year revenue growth in the December quarter, fueled by leading-edge foundry logic, HBM, and DRAM.

    China Revenue Share
    mid-20% to high 20%
    CY26

    Expected percentage of KLA's total revenue from China in calendar year 2026.

    Total China WFE
    mid- to high $30 billion range
    CY26

    Total China WFE inclusive of restricted fabs.

    Gross Margin Impact from DRAM Costs
    75 to 100 basis pointsnegative impact
    CY26

    Expected negative impact on gross margins for calendar year 2026 due to escalating DRAM chip costs.

    Gross Margin Impact from Tariffs
    50 to 100 basis pointstop end of range
    Q2 FY26

    Current tariff burden impact on gross margins, expected to diminish over time.

    Industry KPIs

    4
    MetricValueDetails
    Lead timesIncreasing
    Backlog order bookStrong
    Wfe industry spend outlookCore WFE: low $120 billion range; Advanced Packaging: ~$12 billion; Total: mid-$130 billion rangeUSD
    End market segment revenue mixFoundry/logic: ~60%; Memory: ~40% (within semi process control systems revenue)%

    Risks & headwinds

    4
    DRAM Chip Cost EscalationCalendar Year 2026

    75 to 100 basis points negative impact on CY26 gross margins

    Mitigation: Expects pricing environment to be transitory, improving as DRAM capacity additions accelerate; modeling return to normalized pricing for memory requirements in longer-term forecast. Prioritizing securing supply for delivery commitments.

    Supply ConstraintsFirst Half 2026

    Limiting first half 2026 growth potential

    Mitigation: Managing extended lead times, balancing across customers to meet needs, not missing business. Investments in supply chain management to satisfy demand over 12-24 months. Second half expected to accelerate.

    Facility Readiness Constraints for CustomersCalendar Year 2026

    Slowing down advanced packaging growth in CY26

    Mitigation: Customers are working to get facilities ready, with more growth expected in 2027. KLA is prioritizing equipment delivery to facilitate customer ramps.

    Competitive Disadvantage in China due to Government ActionsOngoing

    Not permitted to sell in some cases where non-U.S. companies are

    Mitigation: Engaging with government to advocate for a level playing field. KLA feels confident in competing globally, including China, where permitted.

    What to watch in Q3 FY26

    5

    Q3 FY26 Revenue Performance

    Q3 FY26
    CurrentQ2 FY26 revenue: $3.3 billion
    Target$3.35 billion, plus or minus $150 million

    Why it matters

    Verifies KLA's ability to meet its near-term revenue guidance amidst supply constraints and market dynamics.

    KLA's March quarter guidance is as follows: Revenue at $3.35 billion, plus or minus $150 million.

    Q&A highlights

    5

    Clarify the difference between KLA's WFE forecast (high single to low double digits) and a peer's (over 20%), especially regarding advanced packaging inclusion, and explain why advanced packaging growth is not higher given AI demand.

    Bren Higgins explained that KLA disaggregates core WFE (traditional) from advanced packaging. KLA sees core WFE at $110B in 2025 growing to low $120sB in 2026, and advanced packaging growing from $11B to over $12B. Combined, this reaches the mid-$130sB, consistent with peer's total market view. Rick Wallace added that advanced packaging growth is constrained by customers' ability to build factories, with more significant growth expected in 2027.

    “If you look at our forecast, our view on consistent traditional core WFE in 2025, was around approximately, and we'll see how people report, but approximately $110 billion and that the advanced packaging market, as we look at it, the total market is roughly in that $11 billion range. So we'll call it the low $120 billion. As we look at 2026, looking at it in the same way, we see advanced packaging growing somewhere in excess of $12 billion.”

    asked by Vivek Arya · answered by Bren Higgins

    3 min read7 chapters

    Detailed Narrative

    01

    2025 Full-Year Performance Highlights

    KLA reported a strong 2025, with revenue reaching a record $12.745 billion, marking a 17% year-over-year increase. Non-GAAP diluted EPS grew 29%, reflecting significant leverage in the business model. The company maintained industry-leading gross margins of 62.8% and operating margins of 43.6%, alongside robust free cash flow generation of $4.4 billion, up 30% year-over-year. KLA returned $3 billion to shareholders through dividends and share buybacks.

    02

    AI as a Core Growth Driver

    AI remains a central driver for KLA's performance, fueling demand for AI infrastructure and increasing the relevance of process control. KLA's solutions enable customers to produce chips for AI applications and utilize AI-driven analytics to optimize chip manufacturing. The company's experience with GPU-based compute architectures is contributing to the ongoing HPC infrastructure build-out, with innovations in AI expected to improve system performance and reduce cost of ownership for customers.

    03

    Advanced Packaging Momentum

    The rising demand for powerful systems-on-chips is driving significant growth in advanced packaging, increasing the value of process control in this segment. KLA's advanced packaging systems revenue reached approximately $950 million in calendar 2025, representing over 70% year-over-year growth. This momentum is expected to continue into calendar 2026 with mid- to high teens percentage growth, outpacing the market.

    04

    Service Business Strength

    KLA's service business demonstrated consistent strength, growing to $786 million in Q2 FY26, an 18% year-over-year increase and 6% sequentially. This marks the 16th consecutive year of annual service revenue growth, with a compounded annual growth rate exceeding 12% over that period. Higher utilization rates, a growing and longer-lived installed base, and opportunities in memory and advanced packaging are key drivers for continued service growth.

    05

    WFE Market Outlook and KLA's Position

    The industry outlook for 2026 has strengthened, with the core WFE market expected to grow in the high single to low double digits to the low $120 billion range. The advanced packaging market is projected to grow to approximately $12 billion, bringing the total market forecast to the mid-$130 billion range. KLA anticipates outperforming the market in 2026 due to expanding market share and increased process control intensity at the leading edge across all segments, including advanced logic, HBM, and advanced packaging.

    06

    Supply Chain and Capacity Constraints

    KLA is experiencing supply constraints, particularly for long lead-time optical components, which are limiting first-half 2026 growth potential. Decisions made in mid-2025 are impacting first-half shipments. While the second half of 2026 is expected to see accelerating growth with more flexibility, customer lead times are extending. The company notes that customers are also constrained by the ability to build new fabs and shelves, making collective equipment delivery acceleration a priority across the industry.

    07

    DRAM Process Control Intensity

    DRAM process control intensity is increasing due to factors like less redundancy, higher metallization layers, and increased use of advanced lithography (EUV). This trend makes DRAM manufacturing more similar to advanced logic in terms of inspection requirements. The high value of HBM devices and the need for tight specifications in high-performance compute are driving more rigorous inspection and metrology, creating growth opportunities for KLA's service business as well.

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