KLA (KLAC) Q3 2026 Earnings Call Transcript

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DATE

Wednesday, April 29, 2026 at 5 p.m. ET

CALL PARTICIPANTS

- Chief Executive Officer — Richard Wallace

- Chief Financial Officer — Bren Higgins

- Vice President, Investor Relations and Market Analytics — Kevin Kessel

Full Conference Call Transcript

Operator: Good afternoon. My name is Leo, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation March Quarter 2026 Earnings Conference Call. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead.

Kevin Kessel: Welcome to the March 2026 quarterly earnings call for KLA. I'm joined by our CEO, Rick Wallace; and CFO, Brent Higgins. We will discuss today's results as well as our outlook, which we released after the market closed and 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. We will not reference fiscal years in our discussion, all full year references we may refer to calendar years. The earnings material contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future events presentations, corporate governance information and links to our SEC filings.

Our comments today are subject to risks and uncertainties reflected in the disclosure of 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. We will begin the call with Rick providing commentary on the business environment in our quarter, followed by Brent with financial highlights on our outlook. Now over to Rick.

Richard Wallace: Thanks, Kevin. KLA delivered strong results across the board for the March quarter with revenue of $3.415 billion, up 4% sequentially and 11% year-over-year driven by increased investment in leading-edge foundry logic and high bandwidth memory. Non-GAAP diluted EPS was $9.40 and GAAP diluted EPS was $9.12. We continue to see AI as a core driver of KLA's performance and an enabler for our growing momentum. Highlights in the quarter include KLA achieving the #1 position in process control for advanced wafer level packaging for 2025 due to continued customer adoption KLA's packaging portfolio.

We continue to see improving momentum and advanced packaging revenue growth and market share, and we now expect semiconductor process control product portfolio revenue for advanced packaging will grow from approximately $635 million in 2025 to approximately $1 billion in 2026, well above our prior estimates. CLA service business was $775 million in the March quarter, up 16% year-over-year but down 1% sequentially due to the timing of revenue recognition. Consistent long-term growth in service is a key aspect of KLA's business model and delivers predictable cash flow to anchor our capital return strategy. Quarterly free cash flow was $622 million, over the past 12 months, free cash flow was $4 million, producing a free cash flow margin of 31%.

Total capital returned in the March quarter was $875 million comprised of $626 million in share repurchases and $249 million in dividends. Total capital return over the past 12 months was $3.2 billion. Additionally, recently published industry research shows KLA increased its global share of both the overall wafer equipment and the process control market in 2025. This growing market leadership was highlighted by significant gains in advanced wafer-level packaging, where KLA increased its market share by 14 percentage points and achieved approximately 70% year-over-year revenue growth. KLA's market share also improved across basket inspection, optical pattern wafer inspection and electron beam inspection.

Since 2021, KLA shared process control has grown by 360 basis points and is approximately 7x greater than the nearest competitor. Looking ahead to 2026 and 2027, our expectations for growth in the wafer equipment industry are accelerating. KLA's relevance has increased across all vectors of semiconductor manufacturing as process control enables a growing volume of design starts at the leading edge and supports the needs for increased performance and reliability in the production of high-bandwidth memory.

It's important to distinguish that design activity and rising memory complexity are not the only catalyst driving benefits for KLA and process control, faster product cycles, higher-value wafers and mask, rising design complexity and variability and the growing demand and complexity of advanced packaging all require significantly more process control solutions. These solutions shorten time to results by addressing process integration challenges in R&D and early fab ramp phases, while continuing to manage yield with strong design mix and high-volume manufacturing. Turning to services.

As KLA systems become more technologically advanced and have longer service lifetimes in fabs, our service business continues to gain strategic importance, driven by rising customer expectations for tool performance and availability across all customer segments, creating a strong, predictable long-term tailwind for overall KLA revenue growth. KLA also recently held an Investor Day in March, detailing our position in the semi-sector market and our unique portfolio approach to solving customer process challenges and enhancing yield learning cycles within process control. We introduced new long-term revenue growth targets along with a 2030 financial model and increased our capital allocation to target over 90% of free cash flow.

We also announced the 17th consecutive increase in our quarterly dividend level and an incremental $7 billion share repurchase authorization. KLA revised up 13% to 17% revenue CAGR objective through 2030 reflects strong growth across our key business segments and includes an increased long-term services revenue CAGR growth model of approximately 13% to 15%. Our long-term model assumes a baseline semiconductor industry growth CAGR of 11% from 2025 to 2030 and wafer equipment market growing 1% faster than the semiconductor industry to $215 billion, plus or minus $20 billion by 2030.

Given the growing relevance of process control across all customer segments, we expect KLA to continue to outperform the wafer equipment market on the top line, driving operating leverage and continuing to deliver our best-in-class financial model. I'll close my remarks by saying that KLA's sustainable outperformance reinforces the strength of our leadership and process control. It also underscores the critical role KLA's suite of products and services play and enabling AI field growth in the semiconductor industry. Our consistent execution reflects the resilience of the KLA operating model, the talent of our global team and our disciplined approach to capital allocation focused on long-term investment and maximizing total shareholder value.

With that, I'll turn the call over to Bren to discuss the quarter's financial highlights.

Bren Higgins: Thanks, Rick. KLA's March quarter results reflect strong year-over-year growth with an industry-leading margin profile, highlighting our market leadership, consistent execution and the dedication of our global teams and meeting customer commitments. Revenue was $3.415 billion, above the guidance midpoint of $3.35 billion. Non-GAAP diluted EPS was $9.40 and GAAP diluted EPS was $9.12 each above the midpoint of the respective guidance ranges. Gross margin was 62.2%, 45 basis points above the midpoint of guidance, driven by better-than-modeled service business mix and manufacturing scale due to higher business volume. Operating expenses were $670 million and included $389 million in R&D and $281 million in SG&A.

Operating expenses were higher than expected, principally due to [indiscernible] materials timing and other reserve adjustments. Operating margin was 42.6%. Other income expense net was $9 million in income. The variance relative to guidance was due to a significant mark-to-market gain of a strategic supply investment. The quarterly effective tax rate was 15.4% at the guided tax rate of 14.5% and non-GAAP earnings per share would have been $0.10 higher or $9.50. Breakdown of revenue by reportable segments and end markets, major products and regions can be found within the shareholder letter and slides. Moving to the balance sheet. KLA ended the quarter with $5 billion in total cash, cash equivalents and marketable securities and debt of $5.95 billion.

The company has a flexible and attractive bond maturity profile supported by investment-grade ratings from all 3 major rating agencies. KLA generates consistent strong free cash flow, driven by our high-performing operating model. Over the past 5 calendar years, Free cash flow has grown at approximately 20% CAGR, above the revenue CAGR of 16% over the same period. This growth, coupled with resilience across business cycles, enables a comprehensive capital return strategy, featuring double-digit dividend growth and share repurchases to support long-term shareholder value creation. This strategy prioritizes predictable, assertive capital deployment and remains an important differentiator of the KLA investment thesis. Now turning to the industry outlook for 2026, which continues to strengthen across all segments.

We expect the wafer equipment market which includes advanced packaging to exceed $140 billion in 2026. The strength of demand and customer engagement and ensuring KLA has the capacity to support numerous new fab projects currently under construction, has led to unprecedented demand visibility from our customers. While normally, we would not comment on 2027 growth rates at April of 2026. This demand environment gives us confidence in 2027 visibility for the wafer equipment market. Today, we expect the 2027 year-over-year growth rate to be higher than our growth rate expectations for 2026. KLA has strong business momentum, expanding market share and higher process control intensity at the leading edge across all segments.

Given all this, we are well positioned to continue to increase our share of the overall market in 2026 and 2027. The strong customer momentum that we are experiencing is reflected in our growing systems backlog and sales funnel. We continue to expect quarter-to-quarter revenue growth throughout 2026 and strong business momentum leading into 2027. For 2026, we expect sequential revenue growth for the company to accelerate, leading to high teen revenue growth year-over-year in the semiconductor process control systems business to grow over 20%. KLA's June quarter guidance is for revenue of $3.575 billion, plus or minus $200 million.

Foundry logic revenue from semiconductor customers is forecasted to increase to approximately 82% and memory is expected to be approximately 18% of semi process control systems revenue to semiconductor customers. In memory, DRAM is expected to account for roughly 84% with NAND accounting for the remaining 16%. As always, these business mix approximations pertains solely to our semiconductor customers and do not fully reflect our total semiconductor process control systems revenue. Gross margin for the quarter is forecasted to be 61.75% plus or minus 1 percentage point. Although volume levels are up quarter-to-quarter, product mix is modestly weaker than in the March quarter.

As discussed last quarter, the guidance also includes the persistent impact of elevated DRAM ship costs for the company's image processing computers that ship with our systems, creating a headwind to the company's gross margins. While the memory pricing environment remains challenging in the near term, we have secured the required supply to meet our build plan requirements. Our view of elevated memory pricing persisting through at least calendar 2026 is unchanged. And we continue to see a roughly 100 basis point negative impact on our gross margin over the next several quarters.

Considering this impact, the tariff environment, along with product mix and volume expectations, our view of gross margins remains unchanged at approximately 62%, plus or minus 50 basis points in calendar '26. Operating expenses are forecasted to be approximately $665 million in the June quarter. For 2026, 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 million sequentially throughout the calendar year. Our business model is 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 an approximately $25 million expense for the June quarter, and we expect it to remain at approximately this quarterly level for the calendar year. The planning tax rate is 14.5%. As always, we expect some quarter-to-quarter tax rate variance due to discrete items as we move throughout the year. In the June quarter, non-GAAP diluted EPS is expected to be $9.87, plus or minus $1, and GAAP diluted EPS is expected to be $9.66, plus or minus $1. EPS guidance is based on a fully diluted share count of approximately 131.4 million shares. In conclusion, our near-term revenue guidance reflects consistent growth and strong profitability.

We expect our semiconductor process control systems business to outperform the wafer equipment market in 2026 driven by rising process control intensity and growth in advanced packaging. KLA continues to focus on delivering a differentiated product portfolio that supports customer technology road maps and production efficiency, driving our long-term relevance and growth expectations. Daily operating model drives our best-in-class execution. Our focus on customer success, innovative solutions and operational excellence enables industry-leading financial performance and consistent predictable capital returns. As we detailed at our March Investor Day, KLA's business is uniquely positioned to capitalize on today's technology inflection points and growth drivers. We are encouraged by strengthening customer confidence and engagement, which informs our business forecast.

The long-term secular trends driving semiconductor industry demand and investments in wafer equipment are compelling and represent a relative performance opportunity for KLA over the next several years. KLA's business has gone from being primarily indexed to leading edge R&D investment and fab capacity ramps to now addressing all row phases in wafer equipment enabling leading-edge process development, time to results in fab capacit