Operator

Good afternoon. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation June Quarter 2026 Earnings Conference Call and Webcast. All participant lines have been placed in a listen-only mode. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star one on your telephone keypad. If you wish to remove yourself from the queue, please press star two. Thank you. I would now like to turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics.

Kevin Kessel

VP Investor Relations, KLA

Welcome to the June 2026 quarterly earnings call. I'm joined by our CEO, Rick Wallace; and our CFO, Bren Higgins. We will discuss today's results as well as our outlook, which we released after the market close and is available on our website along with supplemental materials. All full-year references we make refer to calendar years. The earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. It should also be noted that effective June 11, 2026, KLA completed a 10-for-1 stock split; all current and prior EPS and other per share amounts referenced on this call and our materials have been adjusted to reflect the split. Any forward-looking statements, including those we make on the call today, are also subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. We will begin the call with Rick providing commentary on the quarter and our overall business environment, followed by Bren with financial highlights and our outlook. Now, over to Rick.

Rick Wallace

CEO, KLA

Thanks, Kevin. Specifically, revenue reached a record $3.66 billion, supported by accelerating investment tied to AI infrastructure, continued strength in leading-edge foundry logic, and increasing process control intensity across memory and advanced packaging. These results continue to underscore KLA's market leadership and the growing strategic importance of process control as semiconductor innovation becomes more complex.

KLA remains uniquely positioned on the critical path of AI infrastructure expansion, where the increasing number and sophistication of leading-edge designs that are consuming a growing percentage of new wafer starts are driving greater demand for process control. The rapid expansion of the AI ecosystem requires more advanced logic and memory, new complex manufacturing and packaging flows, and additional KLA systems and services to ramp yield and sustain high-volume production. Customer engagements remain robust, visibility continues to improve, and the wafer equipment market outlook continues to expand.

Process control intensity has increased due to faster product cycles, higher value wafer masks, more rigorous device performance specifications, growing design variability, and advanced packaging. We now expect our advanced packaging process control systems revenue to grow to approximately $1.1 billion in calendar 2026, up more than 70% year-over-year, above our prior expectations of high 50% growth, and almost two times faster than the advanced packaging market.

Finally, in the quarter, KLA Services delivered $820 million in revenue, up 17% year-over-year, as customers rely on KLA to maximize tool performance, productivity, and availability across a growing installed base. Looking ahead, customer engagement and demand signals continue to support expected demand.

Bren Higgins

CFO, KLA

Thanks, Rick. Revenue of $3.66 billion was above the midpoint of guidance of $3.575 billion and rose 7% sequentially and 15% year-over-year. Non-GAAP diluted EPS was $1.05, and GAAP diluted EPS was $1.04, each at the upper end of the respective guidance ranges. Gross margin was 62.4%. Operating expenses were $682 million and included $399 million in R&D and $283 million in SG&A. Operating margin was 43.7%. Incremental operating margin in the quarter was 59%. Non-GAAP net income was $1.39 billion. GAAP net income was $1.36 billion. Cash flow from operations was $906 million, and free cash flow was $817 million. The company had 1.315 billion diluted weighted average shares outstanding for the quarter.

Switching to the balance sheet, KLA ended the quarter with $4.9 billion in total cash, equivalents, and marketable securities, and $5.9 billion of debt. KLA's strong cash generation continues to support meaningful capital return to shareholders. In the June quarter, free cash flow was $817 million, and KLA returned $876 million to shareholders, including $571 million in share repurchases and $305 million in dividends. KLA has made meaningful investments in our working capital and facilities. Given the expected aggregate investment in wafer equipment over the next several years, our expectation is that these investments will continue to ensure that the company is positioned to take advantage of the strong market opportunity.

We're raising our expectation for the wafer equipment market, including advanced packaging, to approximately the low $150 billion range in calendar 2026, up from our prior expectation of $140 billion-plus and mid-20% growth above the approximate $120 billion level in calendar 2025. High-performance computing, HBM, increasing EUV adoption in DRAM, and recently adopted advanced packaging technologies such as hybrid bonding are driving higher process control intensity across the semiconductor ecosystem. We anticipate this resulting in second half of calendar 2026 growth for KLA over the first half to be approximately 20% and positioning the company for continued sequential growth into calendar 2027.

Foundry logic revenue from semiconductor customers is forecasted to increase to approximately 73%, and memory is expected to be approximately 27% of semiconductor process control systems revenue to semiconductor customers. Within memory, DRAM's expected to account for approximately 90%, with NAND representing the remaining 10%. We will continue to prioritize next-generation product development and company infrastructure investments to support expected revenue growth over the next several years, and we anticipate these expenses to grow by roughly $15 to 20 million sequentially over the next several quarters.

The acceleration of AI infrastructure investment, the rising complexity of leading-edge logic and memory devices, the rapid adoption of HBM, and the increasing importance of advanced packaging are all raising the strategic value of process control. As we progress toward our 2030 target model, we remain focused on supporting our customers, investing in innovation, scaling our global capabilities, and executing our proven capital allocation strategy. We believe KLA is well positioned to enable the next era of growth and to create durable shareholder value. Kevin, please begin the Q&A.

Kevin Kessel

Great. Thank you very much, Bren. At this time, if you would like to ask a question, please press star one on your telephone keypad. Our first question today comes from CJ Muse with Cantor Fitzgerald. Your line is now open.

CJ Muse (Cantor Fitzgerald)

Good afternoon. I guess first question on gross margins. Hoping to kind of hear how you're thinking about the additional supply you're bringing on, any impact there.

Bren Higgins

CJ, this is Bren. On gross margin, we're certainly starting to see some benefit from leverage in the overall model. We talked about 2026 overall gross margins likely being in the 62%, plus or minus. From a product point of view, as we talked about, as we introduce new products, it gives us an opportunity to make some changes to our cost structure as we deliver new capability to customers, both to reflect the new cost structure, but also pricing. I would expect us to move consistent with our 60% to 65% general incremental operating or incremental gross margin models as we move through 2027, given the expectation for sequential growth through the year. I think we're pretty well-positioned. New products will come out, allow us to deal with some of these cost pressures that are structural in terms of the impact, and still deliver new capability to customers.

CJ Muse (Cantor Fitzgerald)

Very helpful. Are there enough products coming off warranty and/or kind of new product and/or kind of upgrades where you can sustain double-digit growth? Would love to hear your thoughts around the drivers there.

Bren Higgins

I would expect that to accelerate given the higher shipment levels that we're experiencing this year and into next year.

Operator

Our next question comes from Harlan Sur with JPMorgan. Your line is now open.

Harlan Sur (JPMorgan)

Hey, good afternoon. Jim has raised their WFE outlook, I think four times this year, including today, to now sort of that low $150 billion range, so up kind of mid to high 20% range. I know you just talked about services. You called out significant growth for next year, but do you still see WFE spending growth next year greater than the WFE growth this year?

Bren Higgins

Harlan, this is Bren. I'll start. All that contributed to the revised outlook for this year. Given how quickly the industry turned and started to ramp, we did, as we talked about in the past, deal with some supply chain shortages as it relates to some of our longer lead time materials and how that's impacted the first half. Certainly, in the second half, we're seeing that supply come on, and we're seeing in the second half acceleration, as we talked about, 20% over the first half. I think we're pretty well-positioned to support growth expectations into next year. We talked about a higher growth rate at Investor Day, and of course, as we've gone forward, we've seen the 2026 number move up. I would say our view of 2027, there's a consensus view out there, I would say, that's somewhere in and around the $190 billion range. Certainly, if you're in our position, given our lead times, you need to think about the more bullish scenarios in terms of ensuring we have the capacity to support that. I would say that more or less you're in and around $190 billion or so translates into a mid-20 type growth rate, which is similar to the growth rate in 2026. I think we're more or less in that ballpark, and we'll see as we get closer, maybe things strengthen, and we're driving the company to ensure that we can supply and support the more bullish views that are out there.

Harlan Sur (JPMorgan)

I appreciate that. In just over the past 90 days, we've seen, for example, Intel announce that they're pulling in their 14A production by a year, and your process control share at Intel continues to go up. You've got Rapidus and new Terafab initiatives, right?

Rick Wallace

Yeah, Harlan, it's Rick. Of course, those are factors that are driving us.

Operator

Our next question comes from Vivek Arya with Bank of America. Your line is now open.

Vivek Arya (BofA)

For my first one, I'm curious to hear your views on competition in China. I'm just curious to hear your perspective on how competition from China could evolve as a share of the WFE wallet.

Rick Wallace

Yeah, thanks, Vivek. Unlike litho, frankly, our process control is much higher kind of similar tool, higher volume. Add to that the 1,600, 1,700 applications engineers that KLA has worldwide, and it's a pretty good competitive moat that we've established over time. We have seen people come at the market, but our job is to continue to innovate, to provide capability, and today we continue to see whenever there's fair competition and we're allowed to compete, we do quite well.

Vivek Arya (BofA)

All right. Thank you, Rick. I know it's very early, but let's say if I were to ask you to kind of rank order foundry logic versus DRAM versus NAND, how would you kind of rank order what would be the areas of growth above or below that range? Thank you.

Rick Wallace

We're really encouraged by that. We've talked a lot about high-bandwidth memory and how high-bandwidth memory from an intensity point of view is a unique animal for KLA, given some of the dynamics around it, both in terms of more customization in the die, the base die, the integration of each DRAM, and then the ultimate value. We're encouraged by what's happening there. We think the construct is pretty good at how it sets up for 2027, both in terms of the broadening of investment in logic, high-bandwidth memory continuing to grow, greenfield fabs, advanced packaging. We think the construct is pretty strong. As I said, we're building and sort of sizing the company to be able to serve the more bullish scenarios that are out there.

Operator

Our next question comes from Krish Sankar with TD Cowen. Your line is now open.

Krish Sankar (TD Cowen)

Hi, thanks for taking my question. Part of it was due to equipment pricing going up. To the extent you can answer, in this environment with strong demand and capacity constraints, is KLA raising prices either due to value pricing or increasing supply chain costs, especially on existing tools?

Rick Wallace

One is the volume, the mix of products and the other services that are available when we deal with customers. I think in general, the input prices have gone up. We've had those discussions. When we bring out new products, that's when new pricing decisions get made.

Bren Higgins

A combination of being able to pass along, but also to, I think of just the incremental value of our offerings and some of the things Rick talked about.

Krish Sankar (TD Cowen)

Got you. Thanks for the color, Bren. I'm just wondering why. Thank you.

Bren Higgins

I think an important message was that as we start to see that accelerating as we move through here in the second half of this year, that we feel like we're in a pretty good position to be able to drive sequential growth moving forward and support some of the outlook that we talked about. I think the construct as I talked about is pretty good. If you look at our SEMI-PT business, I would expect that to grow at least a few points, maybe a little more than that, faster than the overall company as it's being diluted by service growth.

Operator

Our next question comes from Blayne Curtis with Jefferies. Your line is now open.

Blayne Curtis (Jefferies)

Hey, guys. I'm not expecting you to answer that, but I'm just curious from a supply chain perspective, how long would it take to prep for a $300 billion WFE market?

Bren Higgins

Yeah. It's an interesting question.

Rick Wallace

We wouldn't be the ones not able to support that. Some of the view I talked about earlier is predicated on what's happened with backlog growth. We'd expect that the RPO, or backlog, would be about $12.5 billion. Hopefully that provides the color you need.

Operator

Our next question comes from Timothy Arcuri with UBS.

Timothy Arcuri (UBS)

Thanks a lot. Bren, gross margin is being guided flat on up 10% revenue. I know you went through why that is, you're basically giving us Q4 guidance as well. Are we talking about another flat gross margin quarter for December?

Bren Higgins

We'll see how mix plays out. Mix is the biggest factor in our gross margin quarter to quarter. As we talked about at Investor Day, we see that the gross margin is generally going to track 60% to 65% towards that 63.5%, ±500 basis point view that we articulated. We'll see how it plays out.

Timothy Arcuri (UBS)

I know that you're coming from a different place than others are, but even ASML is talking about raising prices on EUV. Is there something like you don't want to anger customers, or is there some reason why you're not able to at least offset that and maybe even get proactive and move margins higher than what was in your model?

Bren Higgins

As I said earlier, we get price increases as it relates to increases in our cost structure. We deliver new capability to customers that meets their cost of ownership targets. We'll continue to do that. I think we're pretty comfortable with our view. Rick talked about how we're talking to customers about some of the value opportunities that exist here.

Operator

Our next question comes from Joe Quatrochi with Wells Fargo. Your line is now open.

Joe Quatrochi (Wells Fargo)

Yeah, thanks for taking the question. I think last quarter you talked about maybe foundry logic being in the low 60% of semi PC systems for 2026. Just kind of curious, just given the guidance that you've provided for the mix in the 3Q, how that looks.

Bren Higgins

It more or less is playing out the way that we thought, and I would say you're probably somewhere close to 65-ish%, so I'll call it low to mid-60s as I look at 2026.

Joe Quatrochi (Wells Fargo)

Just wondering if you could talk about your lead times and how do we think about just the cadence of capacity that's coming online as we move through next year?

Bren Higgins

All our conversations today with customers are about deliveries really in the second half of 2027. We do a lot of moving things around and juggling to meet changing customer expectations and also to ensure that we don't lose business because we can't deliver.

Operator

We'll go next to Stacy Rasgon at Bernstein Research. Your line is now open.

Stacy Rasgon (Bernstein)

Hi, guys. My first one, you talked about sizing your supply for the most bullish scenarios. Can you give us a little more color on what that means? I realize that for you, it's not just capacity, it's also component supply and that sort of thing.

Rick Wallace

What I was saying is we would be in a position to support any scenario that the industry could support, simply because we would see it coming and be able to respond. What we're doing now in terms of supporting capacity is supporting the outlook; there's a huge premium right now on being able to deliver to support the ramps that are going on around the industry. As we think about scenarios, we go, "Okay, so based on that view, what if demand was 10% higher? What if 20% was higher?" Again, it assumes that all peer companies can deliver to it. In general, we will take the cost of that flexibility in terms of ensuring our capacity exists. In the long term, certainly around certain product types, I'm willing to make bets from an inventory point of view to ensure I'm in a position to support what customers might need.

Stacy Rasgon (Bernstein)

That's helpful. Your 2030 model had $215 billion, which isn't that much higher than that.

Rick Wallace

Yeah, Stacy, that's a very good point. Some of it has been price-driven. What we really were trying to do with 2030 was give a, what would the industry look like if it's growing at a high single digit for the semi industry and capital intensity continues to go along at its level and process control strengthens and we gain share. We said the caveat to that is we really don't know what it's going to build out. If you have more capital required, then we would exceed the model that we laid out for 2030, and that's how that would work. We only had our Investor Day in March, and here we are in July, so we're in no position to reset anything as it pertains to 2030.

Rick Wallace

Just one more thing. Stacy, I think we're really good at creating systems that are valuable to our customers for process control and engaging with them. We are not very good at forecasting. I think it's an unsolved problem in the industry anyways.

Operator

We'll take our next question from Melissa Weathers with Deutsche Bank. Your line is now open.

Melissa Weathers (Deutsche Bank)

Hi. Thank you for the question. I wanted to ask, maybe go back to that EPC side, and the Orbotech thesis that you guys had laid out years ago. Any update to how you're thinking about the longer-term growth rate of that business? I think at the Analyst Day you said mid to high single digits, if I have that right. Any updated thoughts?

Bren Higgins

It's pretty exciting what's happening with high-performance computing and how that's translating into opportunities both for specialty semi, which is in our process tools, but also in the Orbotech — specialty semi and PCB. We're encouraged by what we're seeing there. I wish I could ship more. It certainly turned on much faster than we thought. I would expect the long-term growth rate. I would say in the long term, the mid part of that CAGR is out. It is a new change and something that we're going to have to monitor.

Rick Wallace

It's been great to see, but it was kind of a continuation of the trend that we saw. A lot of it was leveraging the portfolio that we already had, and it was our customers pulling us into that. Now we're seeing, and there's even more coming. We look at things like die-to-wafer bonding, you've got more opportunities. I think that you continue to see growth in those areas as you move into next year.

Operator

We'll take our next question from Atif Malik with Citi. Your line is now open.

Atif Malik (Citi)

Hi. Thank you for taking my questions. Rick, you called out the visibility of investments into 2027. What signs, if any, that it's advanced payments or deposits that you're seeing that are different from prior cycles that is giving you the confidence in sustainability of this cycle?

Rick Wallace

It's a ways out. It's pretty clear that the build-out continues.

Atif Malik (Citi)

Great. One of your customers, SpaceX, and publicly Terafab, has talked about improving fab manufacturing efficiencies, cutting down steps and the cycle time and all that. I was curious if you guys are engaged on that project.

Rick Wallace

We don't talk about any specific customer engagements. We don't talk about specific engagements.

Operator

We have time for one final question. We'll go to Shane Brett with Morgan Stanley. Your line is now open.

Shane Brett (Morgan Stanley)

Thank you for letting me ask the question.

Bren Higgins

Well, as I said earlier, I think the construct is pretty good. You will also see some greenfield investment in flash.

Rick Wallace

No change. If anything, we continue to feel really good about our share position in the critical markets we've been in. We're definitely seeing positive momentum in markets where we've held last year, like E-beam. We talked about the process control intensity going up in packaging. We've gained share at a time where a number of our competitors have been able to ship into fabs in China that we haven't been able to ship into. To Rick's earlier point, where we can compete, we generally win.

Kevin Kessel

Great. Thank you very much, Shane, and thank you everybody for your interest in KLA and for your participation. We look forward to seeing many of you throughout the quarter as we participate in different conferences and meetings. With that, I'll turn the call back over to Angela, the operator, to close it out.

Operator

Thank you. Please disconnect your line at this time and have a wonderful day.

Source: Quartr/Yahoo Finance earnings call transcript (call held July 28, 2026). Light editing for readability of an automated transcript; some Q&A items condensed.