KLA Corporation Common Stock 2027 Q1 Earnings Call

Joining me are 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 it is available on our website along with supplemental materials. We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified. All full-year references we make always refer to calendar years. The earnings material contains a detailed reconciliation of GAAP to non-GAAP results. Our comments today are subject to risks and uncertainties reflected in the disclosure of the risk factors in our SEC filings. 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. Our actual results may differ significantly from those projected in our forward-looking statements.

For any subsequent updates, please refer to KLA's IR website, which also contains investor events, presentations, corporate governance information, and links to our SEC filings. 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. I will pass the call now to Rick. Rick? Thanks, Kevin. KLA's September quarter beat the midpoint of our guidance ranges across all key metrics.

Revenue was another record at $4.14 billion. This, coupled with our December quarter revenue guidance of approximately $4.7 billion, demonstrates the growth acceleration we plan for the second half of 2026. KLA's performance in the quarter was supported by continued strength in leading-edge foundry logic related to AI infrastructure investments and increasing process control intensity across leading-edge devices and advanced packaging. Other highlights for the quarter include KLA delivering operating margins above 46% for the first time ever. Gross margin was 62.7%, and free cash flow was $1.34 billion. Over the course of calendar 2026, the AI demand environment has continued to strengthen as reflected in our performance. Additionally, our strong customer engagement has provided visibility into a more favorable outlook for wafer equipment investment for calendar 2026 and 2027.

We see this reflected in our growing backlog and sales funnel forecast. We expect momentum across our business to continue into the December quarter, and we're positioned to deliver significant growth in calendar 2027. We've been proactively working with our strategic supply chain partners over the past year to increase their capacity in order to keep up with our demand. Advanced packaging remains increasingly critical to AI infrastructure expansion, and advanced packaging roadmaps continue to incorporate more sophisticated wafer front-end processes, which drive additional process control requirements. KLA's leading process control portfolio enables the company to address these requirements across a growing range of applications. For calendar 2026, advanced packaging process control systems revenue remains on track to hit approximately $1.1 billion or more than 70% year-over-year growth, nearly twice the growth rate of the advanced packaging market.

The growing complexity of KLA's installed base and lengthening tool life cycles continues to increase demand for services. KLA services revenue was $850 million in the quarter, up 14% year-over-year, supported by a growing installed base and continued customer focus on tool performance, productivity, and availability in this tight system utilization environment. Finally, KLA's process, PCB, and component inspection businesses are also benefiting from technology transitions and the rigorous performance requirements of high-performance computing. In summary, KLA is experiencing strengthening momentum driven by growth across the semiconductor ecosystem. The pace of our backlog growth is a key signal of accelerating momentum and provides confidence in our visibility into calendar 2027. Our September quarter results demonstrate the strength of KLA's market position and operating model execution.

Semiconductors continue to play an increasingly important role across global industries, with growth driven by investment in AI infrastructure and expanding demand across a broader range of applications and end markets. Together, these trends are supporting stronger, more durable, and more diversified long-term growth for the industry. Additionally, the growing complexity of AI-enabled semiconductors is increasing process control intensity throughout the manufacturing flow, reinforcing KLA's long-term growth opportunity. KLA's differentiated portfolio is uniquely positioned to address these requirements, while sustained AI data center investment and broader adoption of advanced packaging architectures continue to expand the company's addressable market. As we look ahead, we remain focused on supporting customer roadmaps, investing in innovation, and scaling our global capabilities to meet expected demand growth through calendar 2027.

As we progress toward our 2030 target model, we remain committed to disciplined execution, technology leadership, and our proven capital allocation strategy, which will allow us to create durable shareholder value. With that, I'll turn the call over to Brad to discuss the quarter's financial highlights.

Thank you, Rick. KLA delivered strong sequential and year-over-year growth in the September quarter. For the first time in our company history, KLA delivered operating margins over 46%. These results reflect our market leadership and disciplined execution, supported by our global team's dedication and focus on customer success. Revenue of $4.14 billion was above the midpoint of guidance and rose 13% sequentially and 29% year-over-year. Non-GAAP diluted EPS was $1.22, and GAAP diluted EPS was $1.18, each above the midpoint of the respective guidance ranges. Gross margin was 62.7%, slightly above the midpoint of the guidance range. Operating expenses were $688 million, including $395 million in R&D and $293 million in SG&A. Operating margin rose 240 basis points sequentially to 46.1%. Net income was $1.60 billion. GAAP net income was $1.55 billion. Cash flow from operations was $1.53 billion, and free cash flow was $1.34 billion.

The company had 1.311 billion diluted weighted average shares outstanding for the quarter. The breakdown of revenue by reportable segments and markets, major products, and regions can be found within the shareholder letter and slides. Moving to the balance sheet, KLA ended the quarter with $4.7 billion in total cash equivalents, and marketable securities, and $5.95 billion of debt. The company maintains a flexible and attractive bond maturity profile, supported by investment-grade ratings from all three major rating agencies. The industry outlook continues to strengthen, with visibility improving as customers increase long-term investment plans. Despite these fab space limitations, customers have been very resourceful and are accelerating delivery expectations across all segments. We are therefore raising our expectation for the wafer equipment market, including advanced packaging, to approximately the mid $150 billion range in calendar 2026.

KLA backlog continues to grow, and our sales funnel visibility is unprecedented, supported by new fab investments by a broad base of customers. We continue to plan for significant growth in calendar 2027. While we'll have more to say about market and customer segment expectations for next year in our earnings call in late January, we currently expect the wafer equipment market to exceed $200 billion in calendar 2027. Customer engagement remains robust with numerous new fab projects and greenfield facilities scheduled to come online in the quarters ahead. The primary area of focus for our customers is on delivery urgency aligned with new project plans. Against this backdrop, KLA's business momentum and critical role in leading-edge process control positions us to deliver accelerating growth for the remainder of calendar 2026 and continuing into 2027.

Our expectations of revenue growth acceleration in the second half of 2026 are playing out as more capacity comes online in our long lead time supply chain areas. This is resulting in growth in the second half of calendar year 2026 over the first half of approximately 25% and positions the company for continued sequential growth into calendar 2027. KLA December quarter guidance is for revenue of $4.7 billion, plus or minus $200 million. Foundry logic revenue for semiconductor customers is forecasted to be approximately 60%, and memory is expected to be about 40% of Semiconductor Process Control Systems revenue to semiconductor customers. Within memory, DRAM is expected to account for approximately 84%, with NAND representing the remaining 16%. As a reminder, these business mix approximations pertain solely to our semiconductor customers and do not fully reflect our total Semiconductor Process Control Systems revenue.

Gross margin for the December quarter is forecasted to be 62.5%, plus or minus one percentage point. While the company is demonstrating expected operating leverage across the business as it grows, this is being offset by persistently high memory costs for our system image processing requirements, as we have discussed in prior quarters. We are actively engaged across the portfolio to optimize memory efficiency in our systems, along with other product cost reduction initiatives. These efforts, coupled with driving our usual returns-based value sharing with our customers, should offset this headwind over time. Operating expenses are forecasted to be approximately $710 million in the December quarter. We will continue to prioritize next-generation product development, scaling our business execution, and company infrastructure investments to support expected revenue growth over the next several years.