KLA (KLAC) Q1 FY2026 Earnings Call — October 29, 2025

Date: October 29, 2025 | Source: Motley Fool (fool.com) KLA Q1 2026 Earnings Call Transcript + KLA IR press release

Participants:Richard Wallace (CEO), Bren Higgins (CFO), Kevin Kessel (VP, IR).

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Kevin Kessel, VP IR: Welcome to the September 2025 quarterly earnings call. I'm joined by our CEO, Richard P. Wallace, and our CFO, Bren D. Higgins. We will discuss today's results as well as our December outlook, which was released after the market closed. We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified.

Richard Wallace, CEO: Thank you, Kevin. KLA delivered strong results across the board in the September quarter with revenue of $3.21 billion and non-GAAP diluted EPS of $8.81. GAAP diluted EPS was $8.47. 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.

Accelerating investment in scaling AI infrastructure is fueling technology development investment across the leading edge, driving more designs, increased complexity, shorter product cycles, and higher value wafers. In this complex environment, process control accelerates time to results and optimizes yield, resulting in increasing process control intensity.

We're seeing rapid growth in demand for KLA's advanced packaging portfolio, which has emerged as a meaningful market for the company. For calendar year 2025, we expect advanced packaging-related revenue to exceed $925 million, up approximately 70% year over year.

KLA's service business also continues to deliver strong growth. Services grew to $745 million in September, up 6% sequentially and 16% year over year. September was strong on both cash flow and capital returns — free cash flow was a record $1.06 billion, and total capital return in September was $799 million.

Bren Higgins, CFO: KLA's September results reflect double-digit year-over-year growth and improved profitability. 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. Gross margin was 62.5%, 50 basis points above the midpoint. Non-GAAP operating expenses were $618 million, and non-GAAP operating margin was 43.2%. Cash flow from operations was $1.16 billion, and free cash flow was $1.07 billion. We ended the quarter with $4.7 billion in total cash and $5.9 billion in debt.

Turning to the outlook. We continue to expect mid to high single-digit growth in WFE for 2025, modestly improved from our previous outlook. Growth is being driven principally by increasing investment in both leading-edge foundry logic and memory to support growing AI and premium mobile demand, partially offset by lower demand from domestic China. The advanced packaging market is also expected to grow more than 20% compared to last year.

Discussions have become more constructive on expectations for calendar year 2026 to be a growth year for the industry, with a broader spending profile than 2025 for both WFE and advanced packaging. Our view today is that first-half revenue levels will be roughly flat to modestly up compared to 2025, with accelerating growth in the second half of the calendar year.

This outlook is inclusive of the revenue impact related to additional market access loss related to certain customers in China resulting from extended export controls from the U.S. Government. We estimate the revenue impact on December and calendar 2026 to be approximately $300 million to $350 million for KLA.

KLA's December guidance is as follows. Total revenue is expected to be $3.225 billion, plus or minus $150 million. Foundry logic revenue is forecast to be approximately 59%, and memory approximately 41% of semi-process control systems revenue to semiconductor customers. Gross margin is forecasted to be 62%, plus or minus one percentage point. For December, 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.

Questions & Answers

Harlan Sur (JPMorgan): Has the magnitude of the WFE growth outlook for 2026 improved, or is it just confidence?

Bren Higgins: I don't know if it's really a strengthening outlook as much as it's just we're getting closer to it. Customers and their lead-time expectations are getting more constructive about exact timing. We're encouraged by leading-edge foundry logic, DRAM with HBM investments has been very process control intensive, and packaging has a lot of momentum.

Richard Wallace: The body language from customers is pretty strong in terms of wanting to make sure they're securing slots — they're worried they may not achieve their objectives if they don't line us up.

Vivek Arya (BofA): Foundry logic is guiding down to 59% from 74% of sales. What's causing the drop?

Bren Higgins: For semiconductor customers, leading edge is actually up-ticking in December, but it's being offset by a reduction in China. China was elevated in September at 39%. On the recent export controls, the impact on December is fairly immaterial as we were able to move slots around, but over the long term that's lost business — about $300 million to $350 million between now and the end of 2026.

Christopher Muse (Cantor): Gross margin guided down 50bps — is it mix?

Bren Higgins: It's mostly mix adjustments. There's also a tariff impact that's more or less consistent quarter to quarter, roughly 50 to 100 basis points. On the long-run operating model, our 40% to 50% incremental OM target drives how we size the company; above trend-line growth we should outperform it.

Tim Arcuri (UBS): Can you give us RPO? It was $7.9 billion last quarter.

Bren Higgins: We changed our disclosures and are not disclosing that anymore, aligning with our peers. Our lead times have normalized to between seven and nine months, and that order flow supports our growth expectations for next year.

Edward Yang (Oppenheimer): Is the industry positioned to serve the scale of AI demand being discussed?

Richard Wallace: The semiconductor industry is being prudent in adding capacity. Not enough wafers will be available to achieve those objectives in the timeframe, which means it's unlikely to overheat. It's easier to announce a data center investment than to build a fab.