Date: January 29, 2026 | Source: Motley Fool (fool.com) KLA Q2 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 December 2025 quarterly earnings call. I'm joined by our CEO, Richard Wallace, and our CFO, Bren Higgins. We will discuss today's results as well as our March and calendar 2026 outlook, which we released after the market close. We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified.
Richard Wallace, CEO: Thank you, Kevin. I will summarize KLA's overall performance for 2025 and the December quarter, as well as cover the current industry landscape. For 2025, KLA continued to deliver relative growth outperformance along with strong profitability, free cash flow generation, and return to shareholders. For 2025, revenue grew 17% to a record $12.745 billion, with our process control systems business outpacing the industry growth by several points. EPS grew 29% year over year, demonstrating strong leverage in our model. KLA maintained industry-leading gross margins and operating margins of 62.8% and 43.6%, respectively. The company also grew free cash flow 30% to $4.4 billion and returned $3 billion in a combination of dividends and share buybacks.
KLA's process control system revenue grew 19% and our service business grew 15% for the year. In the December quarter, KLA delivered strong results across the board — revenue of $3.3 billion, non-GAAP diluted EPS of $8.85, and GAAP diluted EPS of $8.68. Highlights include 17% year-over-year revenue growth fueled by investment in leading-edge foundry logic, and high bandwidth memory and DRAM.
In the December quarter, KLA continued to grow in advanced packaging. KLA continues to see strong momentum in advanced packaging revenue growth and market share, with calendar 2025 total systems revenue of $950 million representing over 70% year-over-year growth. For calendar 2026, we expect this momentum to continue with year-over-year percentage growth in the mid to high teens.
The daily services business grew to $786 million in December, up 6% sequentially and 18% year over year. This was the sixteenth consecutive year of annual service revenue growth. Finally, December was strong for both free cash flow and capital returns. Quarterly free cash flow was a record $1.26 billion, and total capital return in December was $797 million.
Bren Higgins, CFO: KLA's December results reflect strong year-over-year growth with an industry-leading margin profile. Revenue was $3.3 billion, above the guidance midpoint of $3.225 billion. Non-GAAP diluted EPS was $8.85, and GAAP diluted EPS was $8.68, each above the midpoint of guidance. Gross margin was 62.6%, sixty basis points above the midpoint of guidance. Operating expenses were $653 million, and operating margin was 42.8%. Cash flow from operations was $1.37 billion, and free cash flow was $1.26 billion.
KLA ended the quarter with $5.2 billion in total cash, cash equivalents and marketable securities, and debt of $5.9 billion.
Turning to the outlook. The industry outlook for 2026 has strengthened over the past few months. We expect the core WFE market to grow high single to low double digits, reaching the low $120 billion range, up from approximately $110 billion in 2025. We expect the advanced packaging component of the market to grow at a similar rate to approximately $12 billion, for a total market forecast in the mid-$130 billion range, an increase of low double digits versus 2025.
Our view today is that 2026 revenue will grow mid-single digits compared to 2025, with accelerating growth in the second half of the calendar year. Customer lead times for our products are increasing due to supply constraints, limiting first-half growth potential.
KLA's March guidance is as follows. Revenue of $3.35 billion, plus or minus $150 million. Foundry logic revenue from semiconductor customers is forecasted to be consistent with December at approximately 60%, memory approximately 40% of semi-process control systems revenue. Gross margin for the quarter is forecasted to be 61.75% plus or minus one percentage point. This guidance includes the incremental impact of the rapidly escalating cost of DRAM shifts used in the company's image processing computers that ship with our systems. We expect this pricing environment to be transitory, with a roughly 75 to 100 basis points negative impact on gross margins for the calendar year.
For the March quarter, non-GAAP diluted EPS is expected to be $9.80 plus or minus $0.78, and GAAP diluted EPS is expected to be $8.85 plus or minus $0.78.
Vivek Arya (BofA): Your peer yesterday suggested WFE could grow over 20%, and you're suggesting high singles to low double. Why the disconnect?
Bren Higgins: One of the issues has been the rise of packaging as a market and its inclusion in WFE forecasts. Our view on traditional core WFE in 2025 was approximately $110 billion, with advanced packaging roughly an $11 billion market. For 2026, advanced packaging grows to over $12 billion and core WFE rises to the low $120s — together, mid-$130 billion, which is consistent with what Lam said yesterday.
Harlan Sur (JPMorgan): You expect inspection to outperform WFE again in 2026?
Richard Wallace: We're feeling really good about trends in inspection, especially the broad plasma products. HBM has become a huge driver and has changed the intensity profile around memory. Metrology recovers with capacity, and reticle will be very strong because it's tied to design starts.
Joseph Quatrochi (Wells Fargo): Can you quantify what growth you're leaving on the table due to supply constraints?
Bren Higgins: The biggest long lead-time aspect of our bill of materials is optical components — decisions we were making last summer affect what we ship in the first half. We're not losing business or share; lead times are extending and customers know that. In 2026 we see the business accelerate, with second half up high single to low double digits.
Christopher Muse (Cantor): How are you thinking about gross margin progression, and can you pass along higher DRAM costs?
Bren Higgins: March is probably the low point for the year and margins increment up as we move across the year. Our pricing is more value-oriented than cost-plus, but we continue to maintain product cadence. Over the long run I feel good about a 63% plus gross margin profile. The DRAM memory situation is transitory.
Stacy Rasgon (Bernstein): If H2 is up ~10% half-over-half, total revenue is up ~12-13% — where are the share gains vs your mid-single-digit revenue guide?
Bren Higgins: When we talk about share gain, we're looking at our semiconductor process control business relative to total equipment market, and there's also the service element and non-semi elements in our growth rate. We feel very good about growing faster than the market.
KLAC (KLA) — Q2 FY2026 (January 29, 2026). Beat & raise; record December; WFE view raised; new DRAM-cost GM headwind; stock ~-3.5% on the day (broad semi-cap pullback).