KLA Corporation (KLAC) Q2 2026 Earnings Call Transcript
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Overview
The earnings call highlights strong growth in advanced packaging and process control systems, with optimistic guidance for 2026. Despite supply constraints, the company expects high single to low double-digit growth in the second half of 2026, with upward trending gross margins. The Q&A section reinforces positive sentiment with expectations of significant growth in DRAM and foundry/logic. Although management provided vague responses on some issues, the overall outlook remains positive, likely leading to a stock price increase in the short term.
Key Financial Performance
Revenue for 2025 $12.745 billion, a 17% year-over-year increase. This growth was driven by the process control systems business outpacing industry growth and strong demand for AI infrastructure.
Earnings per share (EPS) for 2025 29% year-over-year growth. This reflects strong leverage in KLA's business model.
Gross margins for 2025 62.8%, maintaining industry-leading levels.
Operating margins for 2025 43.6%, maintaining industry-leading levels.
Free cash flow for 2025 $4.4 billion, a 30% year-over-year increase. This was driven by strong profitability and operational efficiency.
Capital returns for 2025 $3 billion returned to shareholders through dividends and share buybacks.
Process control system revenue for 2025 19% year-over-year growth, driven by demand for advanced logic, high-bandwidth memory, and advanced packaging.
Service business revenue for 2025 15% year-over-year growth, marking the 16th consecutive year of annual service revenue growth.
Revenue for December quarter 2025 $3.3 billion, a 17% year-over-year increase. This was fueled by investments in leading-edge foundry logic, high-bandwidth memory, and DRAM.
Non-GAAP diluted EPS for December quarter 2025 $8.85, above the midpoint of guidance.
GAAP diluted EPS for December quarter 2025 $8.68, above the midpoint of guidance.
Advanced packaging revenue for 2025 Approximately $950 million, representing over 70% year-over-year growth. This was driven by rising demand for more powerful systems of chips.
Service business revenue for December quarter 2025 $786 million, an 18% year-over-year increase and a 6% sequential increase.
Free cash flow for December quarter 2025 $1.26 billion, a record for the company.
Capital returns for December quarter 2025 $797 million, including $548 million in share repurchases and $250 million in dividends.
Gross margin for December quarter 2025 62.6%, 60 basis points above the midpoint of guidance due to stronger-than-modeled service performance and manufacturing efficiencies.
Operating expenses for December quarter 2025 $653 million, including $384 million in R&D and $269 million in SG&A.
Operating margin for December quarter 2025 42.8%.
Non-GAAP net income for December quarter 2025 $1.17 billion.
GAAP net income for December quarter 2025 $1.15 billion.
Cash flow from operations for December quarter 2025 $1.37 billion.
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Operating Highlights
AI-driven analytics: KLA's systems are applying AI-driven analytics to streamline chip manufacturing and accelerate innovation for next-generation AI applications.
Advanced packaging: KLA's advanced packaging revenue grew significantly, with total systems revenue reaching approximately $950 million in 2025, representing over 70% year-over-year growth.
AI infrastructure demand: The demand for AI infrastructure is driving KLA's growth, with its solutions enabling customers to deliver products for AI and supporting semiconductor manufacturing growth vectors.
Advanced packaging market: The advanced packaging market is expanding, with KLA expecting mid- to high-teen percentage growth in 2026.
Revenue growth: KLA achieved 17% year-over-year revenue growth in 2025, reaching $12.745 billion.
Service business growth: KLA's service business grew 18% year-over-year in the December quarter, marking the 16th consecutive year of annual service revenue growth.
Free cash flow: KLA generated a record $1.26 billion in free cash flow in the December quarter.
Customer engagement: KLA is focusing on customer success and innovative solutions to address technology road map requirements and production efficiency objectives.
Market leadership: KLA is leveraging its unique product portfolio to maintain market leadership and capitalize on technology inflections and growth drivers.
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Risk or Challenges
Supply Constraints: Customer lead times for KLA products are increasing due to supply constraints, limiting first-half growth potential across many products.
DRAM Chip Pricing: Rapidly escalating cost of DRAM chips used in the company's image processing computers is creating a headwind to gross margin expectations, with a negative impact of 75 to 100 basis points on gross margins for calendar year 2026.
Product Mix: Weaker product mix compared to the December quarter is expected to modestly impact gross margins.
Operating Expenses: Operating expenses are forecasted to grow sequentially throughout 2026 due to prioritization of next-generation product development and infrastructure investments, potentially impacting profitability.
Tax Rate Changes: Recent tax changes in the United States and Pillar 2 adoption are expected to influence the effective tax rate, potentially affecting net income.
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Guidance & Outlook
Revenue Growth: KLA expects the core WFE market to grow in the high single to low double digits, reaching the low $120 billion range in 2026, up from approximately $110 billion in 2025. Advanced packaging is expected to grow at a similar rate to approximately $12 billion, contributing to a total market forecast in the mid-$130 billion range, an increase in the low double digits compared to 2025.
Customer Spending and Market Share: Customer spending is expected to broaden across all major end markets. KLA anticipates outperforming the market in 2026 due to strong business momentum, expanding market share, and higher process control intensity at the leading edge across all segments.
Revenue Growth in 2026: First half of 2026 revenue is expected to grow mid-single digits compared to the second half of 2025, with accelerating growth in the second half of the calendar year.
Gross Margin Outlook: Gross margins for 2026 are expected to be approximately 62%, plus or minus 50 basis points. However, the rapidly escalating cost of DRAM chips is expected to have a 75 to 100 basis points negative impact on gross margins for the calendar year. This pricing environment is expected to normalize as DRAM capacity additions accelerate over the next several quarters.
Operating Expenses: Operating expenses are forecasted to grow by roughly $15 million sequentially throughout 2026, prioritizing next-generation product development and company infrastructure investments to support expected revenue growth over the next several years.
EPS Guidance: Non-GAAP diluted EPS for the March quarter is expected to be $9.08 plus or minus $0.78, and GAAP diluted EPS is expected to be $8.85 plus or minus $0.78.
Long-Term Growth Drivers: KLA is positioned to capitalize on long-term secular trends in semiconductor industry demand, including investments in WFE and advanced packaging. The company expects consistent growth in process control intensity as new chip designs require advanced inspection, metrology, and yield optimization solutions.
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Shareholder Return Plan
Total dividends in December quarter: $250 million
Total dividends over the past 12 months: $3 billion
Dividend growth strategy: Features double-digit dividend growth to support long-term shareholder value creation
Share repurchase in December quarter: $548 million
Total share repurchase over the past 12 months: $3 billion
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Key Q&A
Q:What is the company's forecast for WFE growth compared to its peers, and why is there a disconnect?
A:The company forecasts WFE growth in the high single to low double digits, while a peer suggested over 20% growth. The disconnect arises from differences in what is included in WFE forecasts. The company includes advanced packaging, which it estimates to grow from $11 billion in 2025 to over $12 billion in 2026, with total WFE reaching the mid-$130 billion range by 2026. Advanced packaging growth is constrained by customers' factory readiness, which is expected to improve by 2027.
Q:What are the company's assumptions about China WFE growth and supply constraints?
A:China WFE is expected to be flattish or slightly positive in 2026, following modestly negative growth in 2025. China WFE is estimated to be in the mid- to high-$30 billion range in 2026, with the company's revenue from China comprising mid- to high-20% of total revenue. Supply constraints, particularly in optical components, are limiting growth, but the company expects acceleration in the second half of 2026 and has good visibility into 2027.
Q:How is the company performing in its core process control systems business, and what are the growth expectations for inspection and patterning?
A:The core process control systems business outperformed WFE growth, with inspection growing 25% and patterning growing 12%. The company expects continued strong growth in inspection and patterning, driven by AI, HBM, and advanced memory usage. Customers are also focusing on yield improvement and manufacturability, which is driving incremental demand for process control solutions.
Q:What are the supply constraints affecting the company, and how are they managing them?
A:The main supply constraint is in optical components, which have long lead times. The company is balancing customer needs and managing lead times, with expectations of high single to low double-digit growth in the second half of 2026. Customers are also constrained by their ability to build new fabs and shelves, which impacts overall ramp-up.
Q:What is the company's outlook on gross margins and pricing strategy?
A:Gross margins are expected to trend upward from 62% in March 2026, with a long-term target of 63% or higher. The company uses a value-oriented pricing model and expects normalization in cost areas, including tariffs and memory supply costs, over time. New product launches and cost of ownership improvements are key to maintaining margins.
Q:What is the company's view on DRAM process control intensity and its growth potential?
A:DRAM process control intensity is increasing due to less redundancy, more metallization layers, and advanced lithography. The company sees DRAM intensity approaching that of advanced logic but not matching it due to differences in design mix. HBM and high-performance compute are driving higher adoption and service opportunities.
Q:What is the company's perspective on foundry/logic growth and process control intensity?
A:Foundry/logic growth is expected to broaden, with intensity driven by technology nodes, die size, and mix. The company sees strong growth in advanced logic, with customers expanding capacity and preparing for significant growth in 2027. Process control intensity is increasing as customers adopt advanced technologies.
Q:What is the company's position on advanced packaging and its growth prospects?
A:Advanced packaging is expected to grow 10% to 20% in 2026, with the company holding close to half the market share. The market is evolving, with high sampling rates and broader portfolio adoption. The company sees advanced packaging as a significant growth driver alongside traditional WFE.
Q:What are the company's expectations for memory versus foundry/logic growth in 2026?
A:DRAM is expected to grow 15% to 20%, driven by HBM demand, while foundry/logic is expected to grow 10% to 15%. Flash growth is slower than DRAM. The company sees advanced logic and DRAM as the biggest drivers of WFE growth in 2026.
Q:What is the company's outlook on service growth and its drivers?
A:Service growth is expected to be 12% to 14%, driven by a growing installed base, higher utilization rates, and opportunities in memory and packaging. The company also sees growth in acquired businesses and expects service to operate at the higher end of the range over time.
Q:What is the company's perspective on the China market and competitive landscape?
A:China WFE is expected to grow modestly in 2026, with the company's revenue from China increasing. The company faces challenges from government restrictions but competes effectively in process control. It seeks a level playing field in markets where non-U.S. competitors are allowed to sell.
Q:What are the company's expectations for NAND growth and its impact on WFE?
A:NAND growth is expected to be slower than DRAM, with demand strengthening for 2027 deliveries. The company sees opportunities in technology transitions and greenfield capacity but notes that industry constraints limit immediate growth.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the specific impact of supply constraints on potential growth in the first half of 2026, instead focusing on general constraints and long-term visibility. Additionally, they provided vague guidance on advanced packaging growth, shifting from over 20% to a broader 10% to 20% range without clear reasons for the change. They also did not provide precise details on how share gains would translate into revenue growth relative to the overall WFE market.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI analytics
AI core
AI system
Analytics Vice
Bren highlight
Customer spending
Customer time
DRAM AI
DRAM capacity
Day invitation
Director KLA
GPU compute
HPC infrastructure
Highlights investment
KLA demand
KLA industry
KLA process
RD
WFE packaging
addition
compound rate
control system
customer success
demand AI
development
efficiency
end market
industry demand
infrastructure KLA
leverage
market KLA
mid
month industry
packaging KLA
packaging market
point calendar
pricing environment
product KLA
rate tax
road map
technology road
KLAC Transcript
KLA Corporation (KLAC) Q2 2026 Earnings Call Transcript
Positive1-29
The earnings call highlights strong growth in advanced packaging and process control systems, with optimistic guidance for 2026. Despite supply constraints, the company expects high single to low double-digit growth in the second half of 2026, with upward trending gross margins. The Q&A section reinforces positive sentiment with expectations of significant growth in DRAM and foundry/logic. Although management provided vague responses on some issues, the overall outlook remains positive, likely leading to a stock price increase in the short term.
KLA Corporation (KLAC) Presents at UBS Global Technology and AI Conference 2025 Transcript
Neutral12-3
KLA Corporation (KLAC) Q1 2026 Earnings Call Transcript
Unknown10-29
The earnings call summary shows mixed sentiments. While there are positive indicators like expected revenue growth and strategic investments, concerns about declining foundry/logic sales and margin guidance adjustments temper optimism. The Q&A reveals uncertainties around China sales and RPO disclosures, affecting investor confidence. Overall, the sentiment is balanced, suggesting limited short-term stock movement.
KLA Corporation (KLAC) Presents At Goldman Sachs Communacopia + Technology Conference 2025 Transcript
Neutral9-10
KLAC Slides
KLAC Report
Frequently Asked Questions
Where does this earnings call transcript come from?
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They are generated by a specialized financial-language model trained exclusively on 15+ years of earnings transcripts. The model extracts financial figures, guidance, and tone with 97%+ accuracy and is regularly validated against human analysts. The full raw transcript always remains available for verification.
