KLA expects advanced packaging revenue to surpass $925M in 2025 driven by AI and process control demand

Earnings Call Insights: KLA Corporation (KLAC) Q1 2026

MANAGEMENT VIEW

* CEO Richard Wallace stated that KLA delivered strong results in the September quarter with revenue of $3.21 billion and non-GAAP diluted EPS of $8.81. He emphasized, "This performance demonstrates how KLA's process control leadership has expanded beyond leading-edge R&D investment to address all growth markets in WFE, including high-bandwidth memory and advanced packaging."
* Wallace highlighted, "For calendar year 2025, we expect advanced packaging related revenue to exceed $925 million, up approximately 70% year-over-year." He noted that services revenue was $745 million, up 6% sequentially and 16% year-over-year.
* Wallace reported a record cash flow of $1.066 billion for the quarter and total capital return of $799 million, including $545 million in share repurchases and $254 million in dividends over the past 12 months.
* CFO Bren Higgins stated, "Revenue was $3.21 billion, above the guidance midpoint of $3.15 billion. Non-GAAP diluted EPS was $8.81 and GAAP diluted EPS was $8.47, each above the midpoint of the respective guidance ranges. Gross margin was 62.5%, 50 basis points above the midpoint of guidance, driven by a stronger product mix and manufacturing efficiencies."
* Higgins pointed out that KLA announced its 16th consecutive annual dividend increase on April 30, 2025, up 12% to $1.90 per share per quarter, and a $5 billion share repurchase authorization.

OUTLOOK

* Higgins provided guidance for the December quarter, stating, "Total revenue is expected to be $3.225 billion, plus or minus $150 million." Foundry/logic revenue is forecasted to be about 59% and memory about 41% of Semi Process Control systems revenue to semiconductor customers. Within memory, DRAM is expected to be about 78% and NAND 22%.
* Gross margin is projected at 62%, plus or minus 1 percentage point, and operating expenses are forecasted at approximately $635 million. For the December quarter, "GAAP diluted EPS is expected to be $8.46, plus or minus $0.78, and non-GAAP diluted EPS of $8.70, plus or minus $0.78."
* Higgins said, "We continue to expect mid- to high single-digit growth in WFE, modestly improved from our previous outlook discussed last quarter."
* The impact of extended export controls from the U.S. government on certain customers in China is estimated to reduce revenue by $300 million to $350 million for calendar 2026, spread roughly evenly across the year.

FINANCIAL RESULTS

* KLA reported revenue of $3.21 billion for the quarter, with non-GAAP diluted EPS of $8.81 and GAAP diluted EPS of $8.47.
* Gross margin was reported at 62.5%. Non-GAAP operating expenses were $618 million, with $360 million in R&D and $258 million in SG&A. Non-GAAP operating margin reached 43.2%.
* Net income was $1.17 billion, and GAAP net income was $1.12 billion. Cash flow from operations was $1.16 billion, and free cash flow was $1.07 billion. KLA ended the quarter with $4.7 billion in total cash, cash equivalents, and marketable securities and $5.9 billion in debt.

Q&A

* Harlan Sur, JPMorgan: Asked about WFE growth outlook for 2026. Higgins responded, "I don't know if it's really a strengthening outlook as much as it's just we're getting closer to it. Customers, particularly our long-standing customers and their lead time expectations, we're starting to get more constructive about exact timing."
* Vivek Arya, BofA Securities: Questioned the sequential decline in foundry/logic revenue. Higgins explained, "On the leading edge, it's upticking in the December quarter, but it's being offset by a reduction in China. China was elevated in September at 39%."
* Christopher Muse, Cantor Fitzgerald: Asked about gross margins and incremental operating margins. Higgins replied, "On the guide down, you're right, it's about 50 bps, and it's mostly related to just mix adjustments in the quarter."
* Yu Shi, Needham: Inquired about DRAM process control revenue outpacing DRAM WFE. Wallace said, "We're actually seeing, in some cases, higher sensitivity requirements, in some cases, for DRAM on some layers than we're even seeing in logic."
* Timothy Arcuri, UBS: Asked about RPO disclosure changes. Higgins stated, "We changed our disclosure, Tim, and we highlighted that we were going to make that change back in the March quarter earnings results."

SENTIMENT ANALYSIS

* Analysts' tone was generally constructive, with questions focused on clarity around geographic mix, segment outperformance, and margin sustainability, though some skepticism was evident regarding China and advanced packaging growth pace.
* Management maintained a confident but measured tone in prepared remarks and Q&A, emphasizing consistent execution and market share gains. Wallace used phrases such as "we feel pretty good about what's in front of us," while Higgins provided detailed breakdowns and transparency on guidance adjustments.
* Compared to the previous quarter, both analysts and management sustained a neutral-to-positive tone, with more detailed discussion this quarter on China headwinds and advanced packaging momentum.

QUARTER-OVER-QUARTER COMPARISON

* Revenue grew to $3.21 billion from $3.175 billion. Non-GAAP diluted EPS decreased from $9.38 to $8.81. Gross margin declined from 63.2% to 62.5%.
* Advanced packaging revenue expectation increased to over $925 million, up approximately 70% year-over-year, consistent with last quarter's revised guidance.
* Management's tone remained confident, but this quarter included more explicit discussion of U.S. export controls' impact and normalization of China demand.
* Analysts continued to focus on growth drivers, margin sustainability, and the evolving competitive landscape in advanced packaging and memory.

RISKS AND CONCERNS

* Export controls from the U.S. government on certain Chinese customers are projected to lower revenue by $300 million to $350 million for calendar 2026.
* Management noted tariff impacts on gross margin, estimating 50 to 100 basis points per quarter, and acknowledged ongoing efforts to mitigate these effects.
* Segment mix, particularly the volatility in China and the evolving share of advanced packaging and memory, present additional uncertainty.

FINAL TAKEAWAY

KLA highlighted strong revenue and profitability in the September quarter, driven by continued AI and advanced packaging momentum. Management expects advanced packaging revenue to surpass $925 million in 2025 and sees further opportunity in process control intensity for both logic and memory segments. While headwinds from export controls and China normalization are expected to reduce revenue in 2026, KLA remains confident in its ability to outperform WFE market growth, supported by consistent capital returns and robust free cash flow generation.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/klac/earnings/transcripts]

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