Klac (KLAC) Q1 2027 earnings call transcript

Klac (KLAC) held its earnings call for the first quarter of fiscal 2027 on 28 October 2026. What follows is my machine transcription of the company's public webcast, made on 28 October 2026, and not the company's official text.

A machine mis-hears names and numbers, so where one reads oddly, the webcast is the record. This recording is not split by speaker.

Transcript

Please stand by your meeting is about to begin. Good afternoon, my name is Stephanie and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Kale A Corporation, September, quarter 2026, earnings conference call and vote guest. All participant lines have been placed in a listen early mode to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd 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. Please limit yourself to one question and one follow up. Lastly, should you need operator assistance, please press star zero. Thank you. I'll now turn the call over to Kevin Castle, Vice President of Investor Relations and Market Analytics. Please go ahead. - Welcome to the September, 2026, quarterly earnings call. Joining ER, CEO Rick Wallace and our CEO, Brian Higgins, we will discuss today's results as well as our outlook, which we released after the market closed, and it is available on our website, along with supplemental materials.

We are presenting today's discussion metrics on a non-gap financial basis, and some of us otherwise specified. All full year references we make always refer to calendar years. The earnings material contains a detailed reconciliation of gap to non-gap 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've become a 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 a rate providing commentary in the quarter in our overall business environment, followed by breadth with financial highlights in our outlook. I'll 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 planned for the second half of 2026. KLA's performance in the quarter was supported by continued strength and leading edge foundry logic related to AI infrastructure investments and increasing process control intensity across leading edge devices and advanced packaging. Other highlights of the quarter include KLA delivering operating margins above 46% for the first time ever.

Gross margin was 62.7%. Free cash flow was $1.34 billion. Over the course of calendar 2026, the AI-demand environment has continued to strengthen, has reflected in our performance. Additionally, our strong customer engagement has provided disability into a more favorable outlook for way for 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 type 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. Heavy conductors 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. So 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 and create, which will allow us to create durable shareholder value.

With that, I'll turn the call over to Brent to discuss the border's financial highlights. Thank you, Rick. KLA delivered strong sequential in year-of-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 discipline 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-Gaptoluted DPS was $1.22 and Gaptoluted DPS was $1.18 each above the midpoint of the respective guidance ranges. Rose margin was 62.7%, slightly above the midpoint of the guidance range. Opera and expenses were 688,000, including $395,000,000 in R&D and 293,000,000 in that's G&A. Operating margin rose 240 basis points sequentially to 46.1%. That income was $1.60 billion. Gaptoluted income was $1.55 billion. Cashflow from operations is $1.53 billion. And free cashflow was $1.34 billion. The company had $1.311 billion diluted weighted average shares outstanding for the quarter.

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 into 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 ratings 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're therefore raising our expectation of the way for 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 broad-based customers. We continue to plan for significant growth in calendar 2027. Well, 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 way for 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 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 26 and continuing into 2027.

Our expectations of revenue growth acceleration and the second half of 26 are playing out that more capacity comes online in our long lead time supply chain areas. This is resulting in growth in the second half of calendar year 26 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 billion. Boundary 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% when NAN 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 1 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're actively engaged across the portfolio to optimize memory efficiency in our systems along with other product cost reduction initiatives. These efforts coupled with driving are usual returns based value sharing with their 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 the next-generation product development, scaling our business execution and company infrastructure investments to support expected revenue growth over the next several years.

And we anticipate these expenses to grow sequentially through 2027, but at a much slower pace than revenue growth and consistent with our business model for operating margin leverage. As a reminder, our business models designed to deliver 40 to 50% incremental operating margin leverage on revenue growth over the long run. Other model assumptions include other income and expense net of approximately $25 million expense for the December quarter. We expect it to remain at approximately this quarterly level.

Planning tax rate is 14.5%. Our tax rate will vary quarter to quarter due to the geographic distribution of profit and various street items. In the December quarter, 90-actiluted EPS is expected to be $1.44 plus or minus 11 cents and gap diluted EPS is expected to be $1.41 plus or minus 11 cents. EPS guidance is based on a fully-deluded share count of approximately 1.306 billion shares. In conclusion, process control and KLA in particular remain critical to the AI ecosystem build-out and benefits for numerous ongoing relevance and collections, including increases in leading edge designs across Foundry and Logic, device size and value, rising complexity and performance requirements, and the growing importance of advanced packaging.

KLA is experiencing strengthening momentum and a broader set of growth drivers across the semiconductor ecosystem. The rate and pace of our backlog growth is a key signal of our accelerating momentum and increased confidence that our visibility leading into calendar 2027. Our September quarter results demonstrate the strength of KLA's market position and operating model execution and support continued confidence in our performance moving forward. These recent results also illustrate the strength of KLA's market leading portfolio, disciplined operating model execution, and continued confidence in improving our performance moving forward.

Looking ahead, we remain focused on supporting customer roadmaps, investing in innovation, and scaling our global capabilities to meet expected demand growth throughout calendar 27 and beyond. As we progress towards our 2030 target model, we remain committed to disciplined execution, technology leadership, our proven capital allocation strategy, and creating durable shareholder value. That concludes my prepare remarks. Kevin, please begin the Q&A. - Thank you. Can you please give instructions? Sorry, can you just give the instructions and we'll get started?

Thank you. - Thank you, Kevin. At this time, if you'd like to ask a question, please press star one on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing star two. We remind you to please unmute your line with introduce, and if possible, pick up your handset for optimal sound quality. In the interest of time, we ask you please limit yourself to one question and one follow-up. We'll now take our first question from Jim Schneider with Goldman Sachs.

Please go ahead, your line is open. - Afternoon, thanks for taking my question. Good to see the accelerated growth in the back half. You know, relative to counter 2027 in your view of 200 billion in WFE, you know, obviously you have some good things going for you with advanced packaging growth and so on. So can you maybe kind of articulate how you're thinking about the way counter 27 shapes up and your level of confidence and your ability to outgrow that 30% rough market number for 2027?

Thank you. - Yeah, Jim, thanks for the question. When we look at 2027, and we've been saying this for quite some time, as we think the construct for 27 sets up pretty favorably for us. First, we feel very good about our supply situation, right? We've been working at it for the last 12 months. We indicated we see an acceleration in the second half, certain components get to have very long lead times. And so getting that to come online was, with a bit of a challenge in the first half when we're seeing that play through, and that certainly informs our confidence in December quarter, but also our views into 27.

The set up for 27 around the leading edge, both in terms of the breadth of investment, the leading edge, new node investment, we think that sets up very well for the company, Greenfield investment and DRAM, the HBM dynamics and how that's affecting process control intensity. We're also seeing an uplifting process control intensity and conventional memory. Advanced packaging's been a nice growth driver. I don't see any reason why as we look at next year that that part of our business wouldn't continue to grow faster than the market.

So we feel overall that the set up is very leading edge-centric. Packaging is augmenting the growth, and we think we're well-positioned, and our supply should be there to be able to enable us to meet the demand. Demand is strong. I would say that we're still behind in supply, but I think that the trajectory is good, and we feel pretty confident about the guidance we've given. - Thank you. We'll take our next question. - I know. - Oh, yeah, sorry, and sorry, just one quick follow-up.

As you think about the way the shape of 2027 starts to materialize anything to call out in terms of, you know, the back half of 2026 was certainly much stronger than the first half. Do you think it's gonna be more ratable through 2027, or do you see it again, maybe being a little more back half loaded? Thank you. - Right now, I would say to the next several quarters, given the backlog growth and the visibility and the funnel that we'll see sequential growth for the next several quarters.

It sort of implies second half stronger. I think it's more linear. It won't have the same, I don't think, as of now, but the same significant uptick in half to half growth. It looks a little more linear to us, but we would expect the sequential growth looking forward. - Thank you. - Thank you. We'll take our next question from Harlan, sir, with JP Morgan. Please go ahead, your line is open. - Yeah, good afternoon. Thanks for taking my question.

On the gross margin fund, I know the team had some cost headwinds this year. Memory pricing headwinds, maybe GPUs, CPU pricing headwinds as well. Moving into next year, I know the team has the benefit of new platforms. It's carrier higher pricing. Obviously, you're going to be driving higher volumes. Maybe you've got other value pricing initiatives taking place. Can we expect the team to drive back into that sort of 63% plus range on a strong WFC outlook in 2027?

- Yeah, Harlan, it's a good question. As you said, there's some moving parts in it. When you look at the target range, our target range that we outlined back in March and August today was 63 to 64%. Certainly, some of the cost inputs have been challenging. We're doing a lot of work inside the company, both in terms of broader input costs, but also memory, I'll call memory optimization work in terms of our use of memory in our systems.

There'll be some mixed dynamics looking forward. We do have more advanced packaging growth. We have growth in our non-semi-PC businesses. So that tends to be a bit of a headwind to the overall margin, although a contributor to both revenue growth and gross margin growth. Scale will offset some of that. We'll see some manufacturing scale given the strong revenue growth environment. And some of our pricing initiatives, we think, similar to what we're hearing from peers, we think that that will play through as we introduce new capabilities and we're able to share in the value of those new capabilities with our customers.

So, I think as we move forward, as the memory environment will continue to be challenging, but I think as we go forward, we'll see improvement. I don't know exactly when we'll start to see it, but I think as we move through 27, certainly as we move into the middle to the back half of 27 into 28, will be, I think, consistent with the operating model for gross margin that we laid out back in March. - I appreciate that.

And then on the non-AI, kind of more legacy note segments, auto, industrial, IOT, obviously cyclical dynamics are strong. Supply is tightening at a very, very rapid pace and we are seeing new capacity addition announcements. Is this contributing to the strong growth outlook next year? And maybe what percentage of your process control system in business is much more on specialty. Thank you. - Yeah, I would say around power, I mean, power is certainly something that is an area of focus in the industry.

And, you know, there was obviously, there was a period of time where there was some over investment there, but I'm starting to see some indications of some recovery and that part of the market. Obviously, what's driving the business in a more significant way is everything related to high performance compute. But when I look at the customers that are serving the more legacy-centric markets, I do think that I'm seeing some improvement. So I think year to year, there's some growth.

I don't think it'll be at the level of what we expect from the leading edge. And you'll have activities in China, which will grow, but I don't think will grow. It'll grow at a much slower rate. And so I think when you look at the overall legacy, would expect to see some growth there. But the business is really being driven by what's happening at the leading edge. But I think that there's opportunities for us to augment growth moving forward from some more business than that part of the market.

Process control intensity tends to be lower in legacy nodes. If it's an established node, it's fairly mature unless our customers are changing designs or design rules or have new reliability requirements that could drive inflections and intensity. But the intensity levels and legacy are lower than what they are at the leading edge. Thank you, Brian. - Thank you. We will take our next question from CJ Muse with Cantor Fitzgerald. Please go ahead, your line is open. - Yeah, good afternoon, thank you for taking the question.

I guess a follow-up, Brian, on the gross margin side, if we isolate just to process control, you know, you were north of 65% in June of 25. And obviously, as you've talked about, you know, major headwinds from D-RIM in particular, we're curious, you know, as those contracts roll off and you kind of move to new contracts, should we start to see, you know, better pricing as you pass that incremental along? And is there kind of a timeframe, you know, where you see process control getting back to kind of that mid-60s level?

- On a consistent mix, I can see it trending there as we move into the second half of 27. We start to do deals around new products beyond the existing business that we have. It's very difficult to go increase prices when you have a deal in place on existing business and existing backlog. So I think as we move forward, I don't see any reason why so many mixes consistent that we won't start to see some improvement in the process control parts of the business, apples to apples.

And also CJ, for I mentioned in the last answer, but I'm not sure you've heard it was that there are, there is work going on to utilize less memory in the systems, engineering work, which takes some time to do it, but, you know, when we design these systems, nobody really imagined that kind of increase in memory costs. I think the common response to that is to make the systems more efficient around using memory. Therefore, that'll drive that percent content down over time.

That takes a while for those to go ahead. - Very helpful. And I guess as a follow up, can you kind of talk about, you know, what you've seen in the last kind of three to six months from a lead time perspective and how that informs kind of your outlook into 2028 and, you know, how you're thinking about hiring and what kind of work, you know, specifically on the supply chain, you know, to get ready for this multi-year growth cycle.

Thank you. - Yeah, CJ, the conversations we've had with customers last few months have been very consistent in that there's a huge request that we prioritize their projects and they're laying out multiple year investment cycles with an expectation that will support them through those ramps. So when we look out at the 2030 model that we laid out before, obviously, the assumptions in that model are gonna be exceeded before 2030. So there is a significant amount of investment that we need to do pretty much across the board with talent, but also with facilities and our investment in supply chain.

And so Brent can share some of his perspective on that. - Yeah, I'll lead times, I would say, at least in a very big product, but we're averaging right around 12 months or so and I would say that on the margin, they're extending certain products. It can be even further out than that, for example, Gen4, Gen5 product lines will have longer be times. So it does vary, but I think we're in a pretty good position, as Rick said, to support it.

I mean, we're making investments across the board. Well, we'll add headcount, both in manufacturing and service in the volume-centric parts of the business and applications and engineering over the course of the next 12 months. We're investing in every factory we have. And so there are expansion plans, not only near-term requirements and doing things quickly, but also supporting what we believe will be a multi-year investment cycle here. So we're encouraged by that in supply chain, particularly in those areas of long-term or long lead time items, particularly in the optics area.

We are working with our key suppliers to make investments. The investment show up in different forms, but also investing to support what we expect to be a very strong outlook over the next several years. So there's a lot of activity going on. Obviously that flows through our numbers, activity that's supporting future revenue streams. But we think that first of all, it contemplated the model and the guidance we've given, but certainly a lot of focus in those areas.

- Thank you. - Thank you. Our next question from Timothy Arcieri with UBS. Please go ahead. Your line is open. - Thanks a lot. Brian, you did a really nice job this year, only losing like 20 basis points worth of WSU share, despite what was a pretty bad mix actually. It sounds like you think WSU's gonna grow like low to mid-30s next year, and your lead times are 12 plus months, so you know like exactly what you're gonna ship next year.

So are you gonna grow more than that? Will you grow more than low to mid-30s? So you'll grow, so you'll gain share next year, gain WSU share. - Yeah, Tim, on 26th, I think the second half momentum is a highlight to where I think the business is trending, now I'm in the first half was weaker, and wasn't so much mix of business as much as it was just our ability to supply it. The backlog is pretty significant.

If I had, I've been short all year, same short now. So I feel that, you know, as we look at 2027, we feel pretty good. I talked about the setup, which I think is encouraging, but we feel pretty good about our ability to maintain and drive the growing ALA relevant story that we allied in investor day. The parts of the market that are reflecting are very good for process control. We think the uniquely benefit process control, and we think that as we're in a better position to supply the end meet the demand, that we can maintain the trajectory that we laid out.

Doesn't mean it happens, you know, in every, you know, six-month period or every quarter, but we think over time, similar to what we saw over the last five years, the next five setup is pretty strong, and we feel pretty comfortable about our views of share of market growth over the next, between now and 2030. - So we think we can outgrow next year, Tim. - Okay, got it, Rick. Thank you for that. Thanks. And then Rick, I wanted to ask you about DRAM.

So it sounds like $450 million in December. I mean, that's a ton. Your DRAM shares like 6% of WFP shares. So that's like 10 billion dollars of like DRAM WFP right there. Is there something unique going on? I know there's some big new fabs that are starting to get equipped. Is it as simple as that, or is maybe your, you know, your inspection intensity going up in DRAM? I mean, that's just, you know, I don't think I've ever seen you grow, you know, DRAM systems that much.

So can you speak to that, thanks? - Yeah, intensity is definitely going up. I mean, there's no question that we started seeing that's a while ago, and I think it took a little while for our customers to fully understand and appreciate the challenges of making these advanced devices. And given their supply shortages, the incremental value of yield. And so if you take back to, you know, how memory worked years ago, it's a pretty different world where anything they could squeeze out in terms of yield, but also the performance expectations are much higher as these go into these mostly commercial operations.

So yeah, it's a intensity, it's intensity improving, and we see that continuing as we go forward. I think the Greenfield opportunity is also driving or retooling a fast and retooling in a way where to risk point, our customers' profitability levels are pretty high, and so yield is equivalent to printing money in some ways. So I think there's renewed focus there. I think that the roadmaps are driving the need for more investment, the performance requirements from our stringent, particularly when you look at like HCM, for example, unless redundancy, IO counts, logic, in base die, all these things are driving opportunities in this part of the market.

In some products, we see intensity levels in DRAM that are similar to leading edge logic. So the market is definitely shifting there, and I think the new fabs is an accelerant to our views of growth. If you look at the second, in 2027, we expect overall memory to be about 60% of the business, and in an environment where to risk point, we feel pretty confident about our ability to perform pretty well relative to the overall market.

So it's definitely changing in terms of the way you used to think about the business historically, and at least in terms of the DRAM impact. - Okay, good, thank you. - Thank you, we'll take our next question from Chris Senkar with TD Kallen. Please go ahead, your line is open. - Yeah, thanks for taking my question. I look into my follow-up on the last question on DRAM. You know, you said it would also perform WP next year.

The two big drivers this year was DRAM and leading edge foundry. There's gonna be the same next year. I understand. It is mainly because greenfield and DRAM is coming in and leading edge foundry logic is going to two nanometers. Those are two key fairly specific drivers for all performance next year, besides advanced packaging, I mean, I just follow up. - So Chris, let me clarify. You're saying if the same, if the drivers are the same, why would it be different, is that your question?

- Yeah, I'm just wondering, is the mix shift going from DRAM from brownfield to greenfield and logic going from three to two? - Okay, so I think, yeah, those are drivers, but the other thing is we just weren't set up in the first half to be able to support. You know, assumptions, if you go back 12 months, we're not for the kind of growth rate we saw. In fact, we even talked about, we thought the growth was gonna be happening in 27, but 26 was gonna be pretty flat.

So it took a little while to get things going in 26, which is why you're seeing our accelerated growth now. The demand has been there, and the demand will continue as the technology nodes continue. And as we said, packaging is growing and it'll outgrow the market next year. So I think it was more, it was not a demand question for us as much as in the first half of 26 of supply questions. Friend? - No, I think you covered it, Rick.

The new facilities, well, I think create an opportunity for us that will drive some incremental, as customers are setting up a new facility in a market environment that is both challenging from a complexity point of view, but also where yield is critical. - Well, it's super helpful. A little bit of my follow-up, you know, I understand the time they're extending, but in general, like, you know, besides AS and now, here is one of the unique position that you always had long lead times.

I'm just kind of curious, you know, one of the views from some folks in the industry is that 300 billion could be the peak WFP a few years out. I'm just wondering from what you were seeing given the fact that you have a better facility than us, kind of like how high do you think this WFP can grow? I know obviously there's like, white cars are kind of bad, but obviously, you know, so specific to how good the yield of your customers are.

Just from this curious, from your vantage point, what do you see the WFP potential to get to? - Well, I'm not gonna guide a new number for 2030. Look, in investor day, we talked about 220 billion plus or minus 20 billion view. And back then, where a lot of folks, I think, thought, generally that was a generally a middle-of-the-road kind of plan. I would say today, it looks like a very conservative one. So, you know, we're certainly more optimistic about higher levels of industry investment.

We think the flow through in thesis in terms of KLA's participation in that is the same. And as we think about these growth scenarios, certainly given the lead times on some of our products and the parts that go into them, we have to contemplate those in terms of preparing our supply chain for those outcomes. We are having deep conversations with some of our key suppliers about our needs in 2029 and 2030 in that timeframe. So, we're trying to position the company to make sure that we can continue to drive the company consistent with the way we laid it out and support those higher-end scenarios that are being discussed in the industry.

- Thanks, everyone, good. - Thank you. We'll take our next question from states Raskin with Bernstein Research. - Hi, guys, thanks for taking my questions. So, there's a first one like to go back to that 2030 model. So, I mean, you're basically there on WC next year. You're there at the high end or maybe a little above on the operating margin target. But what stops you in that WC environment from getting to the revenue that you talked about in 2030 next year?

We saw the equipment side, I understand maybe services and some of the other stuff takes a little more time to ramp up, but is it just supply? Is it like the mix of demand? Like, why shouldn't I be looking at a 2030 model more, you know, into the 27 timeframe, if we were running? - Well, so there were assumptions underneath it. And the first there was the growth rate of function around service, which to your point, we won't be there.

That was based on a aggregate install base growth that would contribute to that. You also have the non-CEMEPC part of the business and the expected growth rate there. Within CEMEPC underneath, the number was an expectation of share growth over the next few years of a few points. And then overall share of market would slowly pick up to from 2025, which was about seven and a half percent of overall wait for equipment to closer to nine. So we're not there yet.

But in terms of how the financial model works underneath it, I don't see any reason why the financial model would not perform consistent with the way we laid it out. Does that growth is more demand from the same customers for a lot of the same products? So, you know, I think we feel pretty good about the way the financial model will perform. Obviously, the things like, you know, share count and other things that go into an EPS assessment, but at least from a top-line point of view, it'll be more or less consistent with the way that I laid it out.

I think there were some assumptions there that we're going to try to over the next few years that were not there yet. But in terms of the overall market and the current performance, I think that flows through. - Got it, thanks. My follow-up, maybe to dig into that financial model. So you've talked about 40 to 50% incremental operating margin. I think it's all that out in the shareholder level as well. But again, you're already running even close to the height of that range.

So if you can get operating leverage from here, it sort of implies that the incremental operating margin needs to be above where you're running today. So, I mean, into the height of that, even higher. Is there any reason I shouldn't think about that incremental operating margin range of these trucks we hire, given where things are running right now? - It depends a lot on year-to-year growth rates, right? So if you look at it in a more normalized growth rate environment, you know, we'll perform at the midpoint or so of the range.

If you look at it over the last year with revenue growth at 25% and you take the guidance we gave for Q4, that puts you slightly above the top end of the range. And if you think about 2030, given expectations for growth in 2030, I would expect we'll be beyond that. So it was more of a marker to give some sense to our shareholders and investors about how to think about how we're gonna scale the company, what kind of leverage we'll drive through the model.

But if we're looking at growth rates for the whole company that are close to the 20%, then I would expect we'll perform more in line with the top end of the model or better. But that's just, you know, long-term how we think about it, how we make investment decisions, how we size it. And then if the industry turns out to be stronger than that drives us up. - God, that's helpful, guys. Thank you. - Thank you.

We'll take our next question from Joe Quatroci with Wells Fargo. Please go ahead. Your line is open. - Yeah, thanks for taking the question. I was curious, your cap X, I think, this quarter was the highest that I've ever seen it. Wonder if you could just kind of give us some color on what was driving that, if they're just also related to, you know, supply chain dynamics or something else. - Well, in the quarter, we made a significant land purchase in India to build a new campus there supporting our long-term growth.

So that was a large portion of cap X. Now I do expect our cap X. I think as I laid out an investor today, I talked about two, three percent of revenue going forward, but of course revenue is growing. But on an absolute dollar basis, I would expect our cap X to trend up over the next year or somewhere between, you know, 600 and 800 million per year. As I said earlier, we're investing at every site.

And so I would expect cap X to trend north. It'll be mostly around our capacity. There will be some things obviously we're doing in supply chain, but what the big needle mover is is in the KLA space. - Thanks. And then the services that I think you talked about, you know, operating at the high end of your long-term growth, I'll go this year. Is there any reason that that wouldn't be the case in 2027 or how you would think about, you know, the growth in 27 per services?

- Yeah, no reason to think that that wouldn't be the case. I mean, given the growth in the industry and what we're adding to the install base, that our systems are running at very high utilization, the value of yield in this environment service, I think, is in terms of the target range, we're likely to operate here moving forward towards the higher end of the range. - Thanks. - Thank you. We'll take our next question from Melissa Weathers with Joy to thank, please go ahead.

- Hi, thank you. I wanted to go back to the supply chain kind of things. You guys were, as you said, you've been working on this for over a year. So, and maybe some of your competitors are just now starting to see some more acute shortages. So can you just, like, what ending would you say we're in in terms of you guys expanding your supply? Do you see risk of further, like, tightening on the supply chain?

Or do you think we're kind of through the worst of it? Just where do you think we are in that process? - Yeah, talking about this at Investor Day, I think when you look at our supply, given the nature of some of our components, that what drives our ability to ship is typically around optical components. And those have the longest lead time. Now, we run into all kinds of small issues, but once we set the volumes get set by those high-end components.

And so we just, I think the supply chain team does an excellent job here managing all those little issues as they happen between the time that, you know, we get things scheduled and we ship tools. In an environment of very strong growth, I think everybody runs into challenges of working through hedges and buffer stock and excess inventory. And then when you start living hand to mouth in terms of what your suppliers can provide and there's a lot of demand there that starts to create challenges.

I think for KLA, we don't really compete for the things that matter the most to us. We don't compete with any of our competitors. We compete within KLA sometimes for those components. But once we have visibility there, it tends to be pretty reliable. And then we manage all the small component issues that happen a lot the way. - Thank you. So I guess your December quarter outlook, is that supply continuing at all? Like, could that not that I'm complaining?

But could that have been higher if you had more supply? And then same thing with the over $200 billion WCL look, is that like you have on a site to that supply at this moment or like, I guess, how unconstrained is the number. - Yeah, Melissa, I can't believe in reality here I don't get in wrapped up into what ifs. It's what can we ship? And how does our supply chain position for that? And that then translates into how we provide the guidance.

As I said earlier, move rates on key components are increasing month by month. And so that informs not only what we expected to see in December, but how we're thinking about 20, 27. I would say over the course of this whole year, I could absolutely have shipped more. My demand was ahead of my supply, but I do think we're in a position where moving forward, we're seeing incremental supply come online and that's informing the visibility and guidance that we've given.

- Yeah, I think Melissa, one thing to add, this is Rick. I think that for some customers, they can say that they want deliveries and then what they find is they've got delays themselves in terms of facilities. So it's not just the equipment, it's the readiness of the fabs. And so I think if you look out over time, yeah, could you ship? Yeah, maybe, but it doesn't mean they can utilize it right away. So that's why I think these, you know, when people talk about can you be there to support the industry, it's really, you need all the equipment suppliers to be able to do it.

You need the facilities, you need to build, so it's longer than just can the equipment guys ship. So there's a couple customers right now that have asked for some deliveries and then they're on hold because they're waiting for their facilities. Does that make sense? - Yeah, it does, thank you, Russ. - Thank you, we'll take our next question from Chris Kossett with Wolf Research. Please go ahead. - Yes, thank you, good evening. I just want to ask a follow-on to the capacity question as well.

And maybe in two parts. And one is, you know, as we look in the business and let's say, let's look into 28, do you think that the bottlenecks are more on the KLA side or more on your supply chain? And then for 28, you know, as most of us are expecting, you know, a pretty significant acceleration in 28 while our continued growth in 28 as customers have more clean room space, are there any impediments to that that you see, you know, given, you know, we've got some preparation time here.

- Yeah, I think again, if you go and look at the history of a lot of these build-outs, people can have these plans, but then they get into delays when they're building clean rooms. There can be delays in having enough power for those clean rooms. I mean, if you look across the supply chain over the last several years, there have been plans that have been delayed over time and equipment can be part of it, but it's only part of it.

So our customers are sending very clear messages that they want, you know, to bring on these additional facts and to do these build-outs, but we have to kind of move in concert, which is why you often find, like we're part of a group that will be a supplier days for all these customers and they'll be talking about those expansion plans. So they can have, right now it's theoretical how big it's going to be. But as you get closer to it, you know, we'll see it build out.

So it's not as simple as we're going to be late because we're working very closely with those customers as they're building. As I mentioned, there's one customer right now that's desperate for more capacity and they can't take equipment because their clean room is delayed. And that's because they don't have, so the bottleneck moves around. Bottleneck could be construction. It could be the fact that they can't get certain raw materials or they can't get power. So you kind of have to look at it collectively and in terms of it's a little bit like the challenges associated with data centers.

It's not just the data centers, the power for the data center, they have it. So that's why I think yes, this industry is going to keep growing. In some ways it's going to prolong the rate of growth because it's harder to add on as much capacity as some people are envisioning, for example, for 2028. But it does, I think, mean we're going to have a longer cycle in terms of the growth. So our motto is we're not going to be the constraint.

We said we're not going to be the bottleneck. We might have periods where we're a little behind. As Brent said, we'd like to ship, but we're doing everything we can, working with our customers, with our suppliers so that KLA is not the bottleneck. It doesn't mean there won't be bottlenecks, it's just our goal is not to be the bottlenecks. And we can do anything inside the company generally within the time fence it gets established within our long lead time components.

What I mean by that is that we can hire the people we need, we can drive the facility utilization, obviously we can get CAPEX decisions around new facilities as a long-term process, which is why we're making the investments. But you can also run extra shifts and so on to ensure that we're driving facility utilization. So we are never in a situation where we're the bottleneck, to Rick's earlier point. So I feel pretty very good about how KLA is positioned.

And if we can do anything inside the company that within the time fence it gets established by our long lead time components. - You got it, that's a helpful clarification. Thank you. As my follow-up, I'll ask about China. And it looked like it was up significantly in the quarter. I know that revenue tends to be lumpy. Can you talk about what your expectations are for China, what's embedded in the Q4 guidance and what your thoughts are for the China business as you head into next year?

- Yeah, it'll come down in Q4. And I said, actually I think I've been saying that since March is I thought that China as a percent of the total would be in the high 20, 20 percentile. So we'll call it somewhere between 27 and 29%. And I still believe that therefore implies that the fourth quarter is in that similar range given what we've done in the previous three quarters. So it did pop up a little bit in September, but China is growing in a much slower rate than the overall business.

And so it's coming down as a percent. And I think in 2027 that will continue. I expect China will likely grow a little bit, but not at the same rate as the growth and wafer equipment outside of China. So we're probably operating somewhere I would say in the low 20th percentile and in 2027. Now within our numbers, there's also our non-semi PC that also has business in China. There is more PCB type investment that happens in China, component inspection in China.

So it probably skews the numbers a bit up a little bit, but it's a small percentage of the overalls so not much. So I think the numbers I've provided give you, I think, enough directional clarity about where the business is today and where it's going. - Okay, thank you. - All right here, can you take the next question please? - Yes, my apologies. We will go next to Shane Bretton and Morgan Stanley, your line is open.

- My first question is on advanced packaging. Now you're invested today, you mentioned that Chronos is the workhorse of packaging. We have the next three systems already ready. Just are your customers requiring higher sensitivity tools? And if so, can you talk about the competitive environment at these higher sensitivity levels? Thank you. - Well, in advanced packaging, it's been selecting because of the move to more front end life processes. Most of it to your point has been in the macro products.

And we think the roadmap for those products will position there. You are seeing more hybrid bonding and logic devices, which is driving the need for greater levels of sensitivity. We also talked about that in yesterday. So you start to move from micron level sensitivity down to the 100 nanometer type sensitivity. It does drive the need for more advanced systems. So when we talk about our overall packaging exposure, the mix of systems is starting to trend more towards higher end systems.

So the macro products are still to use your word to the workhorse, but we're seeing more laser scanning. And even in some cases, some gen four deployment for packaging requirements. So we think this part of the market continues to be an opportunity for KLA. We've been able to leverage a lot of the R&D that we've done across the more advanced platforms. And so we think we're very well positioned with proven products that can meet the higher end requirements and our customers understand that capability well.

So we think we're pretty well positioned in terms of the growth opportunities in that part of the market. - Got it. Thank you. And my follow-ups on logic. I know you assess node-to-node share gain after a certain wave of star volume is installed, but internally, is there a preliminary expectation on your share gains from two nanometer, 1.4 nanometer? Are there any part of your product portfolio where you think the financial market would be surprised on just the magnitude of share gains?

Thank you. - Yeah, we think the trend is in the right direction. I mean, one thing about the next generation nodes is they're starting to tune those nodes for high performance compute requirements. And those required some of the more advanced capabilities and more sampling steps because of the value of the die. So high performance compute, you have large die. They're very valuable defect densities of challenge. You also have a very rich design environment. All those are good contributing factors.

I don't have a point position to give you in terms of the directional trend, but we feel pretty good about the ability to continue to grow our share of the market note to note. - Yeah, and I think our relevancy with e-beam inspection capability and the linkage we have to our optical becomes more pronounced. And so it's not as much share as it is adoption, but those investments were made to really, they'll show up more as we go to smaller designs.

- Got it. Thank you very much. - And we will take our final question from Tim Schill's Melander with Ross Child and Company. Redburn, please go ahead. - Yeah, hi there. Thanks for taking my questions at one, one for Rick and one for Brent. Maybe the first one just comparing 27 to 2026. When you look at the CAPEX that was spent on it or is being spent on established nodes this year as a percents of the total market, and you look forward to 2027.

Could you just maybe describe how that ratio changes and then how to follow up? - Well, you've seen more investment in two nanometers. I think two nanometer and three nanometer investments will be a focus in logic. You'll see more there. You'll also see some investment in the next generation notes at 1.4. So if you didn't have any of that, that more advanced investment, and it was more three nanometer centric in 26. So I think it sets up, I think good for us, constructively in terms of just, you know, more to nanometer and, you know, more leading edge investment in 1.4.

- That's very clear. And maybe just, thank you. And then maybe one on memory in 2027, you've discussed your engineering strategy. About how you're going to address that memory, kind of impact your bill of materials. Can you just maybe talk about what your purchasing strategy is for 27 for memory, please? Thank you. - Well, certainly our focus early on, and through this year has been mostly around securing supply. Look, when things started to ramp in early 26, we felt pretty good about ensuring we had the supply, which was no easy feat, generally, because of the constraints in the overall industry.

And as demand has strengthened, we've had to go out and buy more at higher prices. Less concerned about supply, but certainly we're exposed to the pricing market. And, you know, that's informing the commentary that we've provided. But I think from a supply point of view, we feel pretty good about the supply. We've secured to meet the requirements that we have going forward. - It's pretty helpful, thank you. - This does conclude our question and answer session.

I'd like to turn the program back over to Kevin Kessel for any closing remarks. - Yes, thank you. Thank you, everyone again, for your interest in KLA. We know it's a very busy earnings date, busy earnings week, so we appreciate it. If we can get your questions, hopefully we can connect here after the call in our callbacks. And with that, I'll turn it back to the operator to formally close off the call. - Thank you. This includes the KLA Corporation September quarter, 2026 earnings call and webcast.

Please disconnect your line at this time and have a wonderful day. - Goodbye.

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