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Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation September Quarter 26 Earnings Conference Call and Webcast.
All participant lines have been placed in a listen only mode to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you.
I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead.
Welcome to the September 26 quarterly earnings call. Joining me are our CEO, Rick Wallace; and our CFO, Bren D. Higgins. We will discuss today's results as well as our outlook.
Which we released after the market closed 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.
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 through.
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 26.
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 are positioned to deliver significant growth in calendar 2027.
We have 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 wafer front end process, 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 $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.
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 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 expanded 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 will turn the call over to Bren 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 of 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 1.6 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 1.31 billion diluted weighted average shares outstanding. For the quarter, a 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 3 major rating agencies. The industry outlook continues to strengthen, with visibility improving as customers increase long term investment plans.
Despite these fast pace 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 will 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 26 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 26 over the first half of approximately 25%.
And positions the company for continued sequential growth into calendar 2027. KLA's 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 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 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. 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 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 net of approximately $25 million expense for December quarter and 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 discrete items. In the December quarter, non GAAP diluted EPS is expected to be $1.44 plus or minus $0.11 and GAAP diluted EPS is expected to be $1.41 plus or minus $0.11 EPS guidance is based on a fully diluted share count of approximately 1.31 billion shares. In conclusion, process control and KLA in particular remain critical to the AI ecosystem build out and benefits from numerous ongoing relevance inflections 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 in 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, remain focused on supporting customer roadmaps investing in innovation, and scaling our global capabilities to meet expected demand growth throughout calendar 2027 and beyond. As we progress towards our 2030 target model, remain committed to disciplined execution, technology leadership our proven capital allocation strategy and creating durable shareholder value.
That concludes my prepared remarks. Kevin, please begin the Q and A.
Thank you. At this time, can you please give the instructions? Can you just give the instructions and we will get started?
Thank you, Kevin. We will now take our first question from Jim Schneider with Goldman Sachs. Please go ahead.
Your line is open.
Good afternoon. Thanks for taking my question. Good to see the accelerated growth in the back half Relative to calendar 2027 in your view of $100 billion in WFE, 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 are thinking about the way calendar 2027 shapes up and your level of confidence that you will be able ability to outgrow that 30% rough market number for 2027?
Jim, thanks for the question. When we look at 2027 and we been saying this for quite some time, as we think the construct for 2027 sets up pretty favorably for us. First, feel very good about our supply situation, right?
We have been working at it for the last 12 months. We indicated we see an acceleration in the second half, certain components that have very long lead times. And so getting that to come online was a bit of a challenge in the first half, and we are seeing that play through.
And that certainly informs our confidence in the December quarter, but also our views into 2027. The setup for 2027 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 in DRAM, the HBM dynamics and how that is affecting process control intensity, We are also seeing an uplift in process control intensity and conventional memory.
Advanced packaging has been a nice growth driver. I do not see any reason why, as we look at next year that part of our business would not continue to grow faster than the market. So we feel overall that the setup is very leading edge centric.
Packaging is augmenting the growth and we think we are well positioned and our supply should be there to be able to enable us to meet the demand. Their demand is strong. I would say that we are I am still behind in supply, but I still I think that the trajectory is good, and we feel pretty confident about the guidance we have given.
We will take our next question from Yes.
Sorry. And sorry, just 1 quick follow-up. As you think about the way the shape of 2027 starts to materialize, anything to call out in terms of back half of 2026 was certainly much stronger than the first half.
Do you think it is going to be more ratable through 2027? Or you see again maybe being a little more back half loaded?
Right now, would say, for the next several quarters, given the backlog growth and the visibility in the funnel that we will see sequential growth for the next several quarters. Sort of implies second half stronger. I think it is more linear.
I do not think it will have the same, as of now, the same significant uptick in half to half growth that looks a little more linear to us, but we would expect sequential growth moving forward.
Thank you. We will take our next question from Harlan Sur with JPMorgan.
Good afternoon. Thanks for taking my question. On the gross margin front, 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 benefit of new platforms, which carry higher pricing. Obviously, you are going to be driving higher volumes.
Maybe you have 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 WFE outlook in 2027?
Yes, Arlen, it is a good question. And as you said, some moving parts in it. When you look at the target range--right, our target range that we outlined back at our Investor Day was 63% to 64%.
Certainly, some of the cost inputs have been challenging. We are doing a lot of work inside the company both in terms of broader input costs, but also memory, I will call memory optimization work in terms of our use of memory in our systems. There will be some mixed dynamics looking forward, right?
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.
That will offset some of that. We will see some manufacturing scale given the strong revenue growth environment. And some of our pricing initiatives, we think, similar to what we are hearing from peers, we think that will play through as we introduce new capabilities and we are able share in the value of those new capabilities with our customers.
So I think as we move forward, the memory environment will continue to be challenging. But I think as we go forward, we will see improvement. I do not know exactly when we will start to see it.
But I think as we move through 2027, certainly as we move into the middle to the back half of 2027 into 2028, we will be, I think, consistent with the operating model for gross margin that we laid out back at our Investor Day.
I appreciate that. And then on the non AI, kind of more legacy node 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 systems business is mature and specialties?
Yeah, I would say around power. I mean, power is certainly something that is an area of focus in the industry and there was obviously there was a period of time where there was some overinvestment there, but starting to see some indications of some recovery in that part of the market. Obviously, what is 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 am seeing some improvement So I think year to year, there is some growth. I do not think it will be at the level of what we expect from the leading edge. And you will have activities in China, which will grow, but I do not think will 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 is happening at the leading edge. But I think that there is opportunities for us to augment growth moving forward from some more business in that part of the market.
Process control intensity tends to be lower in legacy nodes. If it is an established node, it is fairly mature unless our customers are changing design or design rules or have new reliability requirements that could drive inflections in intensity. But the intensity levels in legacy are lower than what they are at the leading edge.
You. We will take our next question from C. J. Muse with Cantor Fitzgerald. Please go ahead.
Your line is open. Ahmad.
I guess a follow-up, Bren, on the gross margin side. If we isolate just to process control, you were north of 65% in June 2025. And obviously, as you have talked about major headwinds from DRAM in particular, But curious, as those contracts roll off and you kind of move to new contracts, should we start to see better pricing as you pass that incremental along?
And is there kind of a time frame where you see process control getting back to kind of that mid-60s level?
On consistent mix, I could see it trending there as we move into the second half of 2027. We start to do deals around new products beyond the existing business that we have. it is 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 do not see any reason why assuming mix is consistent, that we will not start to see some improvement in the process control parts of the business.
Apples to apples and also C. J, mentioned in the last answer, but I am not sure you heard it was that there are there is work going on to utilize less memory in the systems engineering work. It takes some time to do it. But, you know, when we designed these systems, nobody really imagined that kind of increase in memory cost.
I think the common response to that is to make the systems more efficient around using memory. Therefore, that will drive that percent content down over time.
It takes a while for those to get in. Very helpful. And I guess as a follow-up, can you kind of talk about what you have seen in the last 3 to 6 months from a lead time perspective and how that informs your outlook into 2028?
And how you are thinking about hiring? And what work, specifically on the supply chain, to get ready for this multiyear growth cycle.
Yes. C. J, The conversations we have had with customers the last few months, have been very consistent in that there is a huge request that we prioritize their projects. And they are laying out multiple year investment cycles with an expectation that we will support them through those ramps.
When we look out at the 2030 model that we laid out before, obviously, the assumptions in that model are going to 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, Bren can share some of the his perspective on that.
Yes. On lead times, would say, Lisa, and they vary by product, but we are averaging right around 12 months or so. And I would say that on the margin, they are extending certain products It can be even further out than that, for example, Gen4 and Gen5 product lines.
Will have longer lead times. So, it does vary But I think we are in a pretty good position as Rick said to support it. I mean, we are making investments across the board We will add headcount both in manufacturing and service in the volume centric parts of the business and applications and engineering over the course of the 12 months.
We are 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 multiyear investment cycle here. So we are 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 investments 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 is a lot of activity going on. Obviously, that flows through our numbers activity that is supporting future revenue streams.
But we think that, first of all, contemplated in the model and the guidance we have given. But certainly a lot of focus in those areas.
Thank you. We will take our next question from Timothy Arcuri with UBS. Please go ahead.
Your line is open.
Thanks a lot. Bren, you did a really nice job this year only losing 20 basis points worth of WFE share despite what was a pretty bad mix actually. It sounds like you think WFE is gonna grow, like, low to mid thirties next year.
And your lead times are 12-plus months. So you know, like, exactly what you are gonna ship next year. So you gonna grow more than that?
Will you grow more than low to mid-30s, so you will grow at the you will gain share next year, gain, you know, the weekly share?
Yes. Timothy, on 2026, I think the second half momentum is it highlights where I think the business is trending now. I mean the first half was weaker and was not so much mix of business as much as it was just our ability to supply it.
A backlog is pretty significant. If I had I have been short all year, say I am 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 KLA relevant story that we outlined in Investor Day. The parts of the market that are inflecting are very good for process control. We think they uniquely benefit process control.
And we think that as we are in a better position to supply and meet the demand that we can maintain the trajectory that we laid out. Does not mean it happens in every 6 month period or every quarter, but we think over time similar to what we saw over the 5 years, the next 5 set up 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. Good. Got it.
Thank you for that. Thanks. And then, Rick, so I wanted to ask you about DRAM.
So it is up, like, $450 million in December. I mean, that is a ton. Your DRAM share is 6% of WFE shares.
So that is, like, $10 billion of, like, DRAM WFE right there. Is there something unique going on? I know there is some big new fabs that are starting to get equipped.
Is it as simple as that or is maybe your inspection intensity going up in DRAM? Mean, that is just you know, I do not think I do not think I have ever seen you grow, you know, DRAM systems that much? Can you speak to that?
Thanks.
Yeah. Intensity is definitely going up. I mean, there is no question that we started seeing this 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 so, if you think back to how memory worked years ago, it is 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 is an intensity improving and we see that continuing as we go forward. I think the greenfield opportunity is also driving a retooling of fabs and retooling in a way where to Rick's point, our customers profitability levels are pretty high and so yield is equivalent to printing money in some ways. So I think there is renewed focus there.
I think that the road maps are driving the need for more investment. The performance requirements are more stringent, particularly when you look at, HBM, for example, and less redundancy, IO counts, logic. And 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 fab is an accelerant to our views of growth. If you look at the second half of 2027, we would expect overall memory to be about 60%. Of the business.
And in an environment where, to Rick's point, we feel pretty confident in our ability to perform pretty well relative to the overall market. So it is definitely changing in terms of the way you used to think about the business historically.
At least in terms of the DRAM impact? Okay.
Thank you. We will take our next question from Krish Sankar with TD Cowen. Please go ahead.
Your line is open.
Sreekrishnan Sankarnarayanan
Yes. Hi. Thanks for taking my question.
Looking below, follow-up on the last question on DRAM. You said you are to outperform WP The 2 big drivers this year was DRAM and leading edge foundry. that is gonna be the same next year. I understand.
So is it mainly because greenfield and DRAM is coming in and reading and phonological is going to 2 nanometer. Those are 2 key clearly specific drivers for outperformance next year. Besides advanced packaging?
And then have a follow-up.
So, Christopher, let me clarify. You are saying if the same. If the drivers are the same why would it be different is that your question?
Sreekrishnan Sankarnarayanan
Yeah. I am just wondering if the mix shift going from DRAM from brownfield to greenfield and logic going from 3 to 2.
Okay. So I think of. Yes.
Those are drivers But the other thing is we just were not set up in the first half to be able to support assumptions. If you go back 12 months, we were not for the kind of growth rate we saw in fact even talked about we thought the growth was going to be happening in 2027, but 2026 was going to be pretty flat. It took a little while to get things going in 2026.
Which is why you are 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 will outgrow the market next year. I think it was more it was not a demand question for us as much as in the first half of 2026, a supply question.
No, I think you covered it, Rick. Look, the new facilities will I think create an opportunity for us to 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.
Sreekrishnan Sankarnarayanan
Got it. Super helpful. And then I will do my follow-up.
I understand lead times are extending, but in general, like, you know, besides the ASML, in is 1 of the unique position that you always had long lead times. I am just curious, 1 of the view from some folks in the industry is that $300 billion could be the peak of WFE a few years out. I am just wondering from what you are seeing given the fact that you have a better view than us.
Kind of like, how high do you think this WT can grow? I know, obviously, blind buys are kind of flat, but obviously, you know, specific to how good the yield of your customers are? Just I am just curious from your vantage point, what do you see the WFE potential to get to?
Well, I am not going to guide a new number for 2030. Look, at 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 generally a middle of the road kind of plan.
I would say today it looks like a very conservative 1. So we are certainly more optimistic about higher levels of industry investment. We think the flow through and 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 pairing our supply chain for those outcomes.
We are having deep conversations with our of our key suppliers about our needs and 2029 and 2030 in that timeframe. So, we are 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.
Sreekrishnan Sankarnarayanan
Thanks a lot, Richard.
We will take our next question from Stacy Rasgon with Research. Please go ahead. Your line is open.
Hi, guys. Thanks for taking my questions. So the first 1, like, to go back to that 2030 model.
So, I mean, you are basically there on WFE next year. You are there at the high end or maybe even a little above on the operating margin target. But what stops you in that WP environment from getting to the revenue that you about in 2013?
Least on the equipment side, 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 a mix of demand?
Like, why should not I be looking at a 2030 model more, you know, into the 2027 time frame? given where we are running?
Well, so there were assumptions underneath it. I mean, first, there was a growth rate assumption around service, which to your point, we will not be there. That was based on a aggregate installed base growth that would contribute to that.
You also have the non semi PC part of the business and the expected growth rate there. Within semi PC, 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 tick up to from 2025, which was about 7.5% of overall wafer equipment to closer to 9% So we are not there yet.
But in terms of how the financial model works underneath it, I do not see any reason why the financial model would not perform consistent with the way we laid it out. So that growth is more demand from the same customers for a lot of the same products. So I think we feel pretty good about the way the financial model will perform.
Obviously, the things like share count and other things that go into an EPS assessment. But at least from a top line point of view, I think it will be more or less consistent with the way that I laid it out. I think there were some assumptions implicit in it that we are going to drive to over the next years.
That we are not there yet. But in terms of the overall market, and the current performance, I think that flows through.
Got it. Thanks. For my follow-up, maybe to dig into that financial model, So you have talked about 40% to 50% incremental operating margin.
I think you called that out in the shareholder letter as well. But again, you are already running close to the high end 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 are running today.
I mean, maybe the high end of that or even higher. Is there any reason I should not think about that incremental operating margin range to be structurally higher? given where things are running right now?
It depends a lot on year to year growth rates, right? So if you look at in a more normalized growth rate environment, we will perform at the midpoint or so of the range. If you look at 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 will be beyond that. So it is more of a marker to give some sense to our shareholders and investors about how to think about how we are going to scale the company, what kind of leverage will drive through the model. But if we are looking at growth rates for the whole company that are closer to 20%, then I would expect we will perform more in line with the top end of the model.
Or better. But that is just 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 upside.
Got it. that is helpful, guys.
Thank you. We will take our next question from Joe Quatrochi with Wells Fargo. Please go ahead.
Your line is open.
Yes. Thanks for taking the question. I was curious, your CapEx, I think this quarter was the highest I have ever seen it.
I wonder if you could just kind of give us some color on what was driving that? Is there just also related to 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 CapEx Now, I do expect our CapEx I think, as I laid out at Investor Day, I talked about 2% to 3% of revenue going forward, but of course, revenue is growing.
But on an absolute dollar basis, I would expect our CapEx to trend up over the next few years, somewhere between you know, $600 million and $800 million, per year As I said earlier, we are investing at every site And so, I would expect CapEx to trend north be mostly around our capacity. There will be some things obviously we are doing in supply chain. But what the big needle mover is, is in the KLA space.
Thanks. And then the services business, I think you talked about operating at the high end of your long term growth algo this year. Is there any reason that, that would not be the case in 2027?
Or how are you thinking the growth in 2027 for services Yes.
No reason to think that would not be the case. I mean, given the growth in the industry and what we are adding to the installed 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 are likely to operate here moving forward towards the higher end of the range.
We will take our next question from Melissa Weathers with Deutsche Bank. Please go ahead.
Hi, thank you. I wanted to go back to the supply chain side of things. You guys are as you said, you have 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 inning would you say we are in, in terms of you guys expanding your supply? Do you see risk of further tightening on the supply chain?
Or do you think we are kind of through the worst of it? Just where do you think we are on that process?
Yes. I talked 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 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 is a lot of demand there, that it starts to create challenges. I think for KLA, we do not really compete for the things that matter the most to us. We do not compete with any of our competitors.
We compete with KLA sometimes for those components. But once we have visibility there that it tends to be pretty reliable and then we manage all the small component issues that happen along the way.
Thank you. So I guess your December quarter outlook, is that supply constrained at all? Like could that not that I am complaining, but could that have been higher if you had more supply?
And then same thing with the $100 billion to over $200 billion WFE outlook. Is that like you have line of sight to that supply at this moment?
I guess how unconstrained is the number? Yeah, Melissa. I cannot live in reality here.
I get in. Wrapped up in the what ifs. it is what can we ship and how's 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 are thinking about 2027. 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 are in a in a position where moving forward we are seeing incremental supply come online and that is informing the visibility and guidance that we have given.
Yeah. I think, Melissa, 1 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 have got delays themselves in terms of facilities.
So it is not just the equipment, it is the readiness of the fabs. And so I think if you look out over time, could you ship? Yeah, maybe.
But it does not mean they could utilize it right away. So that is why I think these when people talk about, can you be there to support the industry, it is really you need all the equipment suppliers to be able to do it. You need the facilities.
You need to build--it is longer than just the equipment guys can ship. So there is a couple customers right now that have asked for deliveries and then they are on hold because they are waiting for their facilities. Does that make sense?
Yep, it does. Thank you, guys.
Thank you. We will take our next question from Chris Caso with Wolfe 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 2 parts. 1 is as we look in the business and let's say, let's look into 28, do you think that the bottlenecks are more in the KLA side or more in your supply chain? And then 28, I guess most of us are expecting pretty significant acceleration in 2028. or continued growth in 2028 as customers have more clean room space. Are there any impediments to that you see, given we have got some preparation time here?
Yeah, I 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 are 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 is only part of it.
So, customers sending very clear messages that they want to bring on these additional fabs and to do these build outs. But we have to kind of move in concert, which is why you often find like, we are part of a group that will be at supplier days for all these customers, and they will be about those expansion plans. So, they can have right now, it is theoretical how big it is going to be.
But as you get closer to it, you know, we will see it build out. So it is not as simple as we are gonna be late. Because we are working very closely with those customers as they are building.
As I mentioned, there is 1 customer right now that is desperate for more capacity and they cannot take equipment because their clean room is delayed. And that is because they do not have so the bottleneck moves around. Bottleneck could be construction.
It could be the fact that they cannot get certain raw materials or they cannot get power. You kind of have to look at it collectively in terms of.
it is a little bit like the challenges associated with data centers. it is not just data center. it is the power for the data center. They have it that is why I think, yes, this industry is going to keep growing. Some ways, it is going to prolong the rate of growth because it is harder to add on as much capacity as some people are envisioning for example, for 2028.
But it does, I think, mean we are going to have a longer cycle in terms of the growth. So our motto is we are not going to be the constraint. We have said we are not going be the bottleneck.
We might have periods where we are a little behind. As Brent said, we would like to ship. But we are doing everything we can working with our customers, with our suppliers so that KLA is not the bottleneck.
It does not mean there will not be bottlenecks. it is 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 make CapEx decisions around new facilities is a long term process, which is why we are making the investments. But you can also run extra shifts and so on to ensure that we are driving facility utilization.
So we are never in a situation where we are the bottleneck. And to Rick's earlier point. So I feel pretty very good about how KLA is positioned.
And we can do anything inside the company within the time fence it gets established by our long lead time components.
Got it. that is a helpful clarification. Thank you. As my follow-up, I will 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 is embedded in the Q4 guidance?
And what your thoughts are for the China business as you head into next year?
Yes. It will come down in Q4 As I said, actually, I think I have been saying this since Mary is I thought that China as a percent of the total would be in the high 20s percentile. So, we will call it somewhere between 27% to 29% And I still believe that, that therefore implies that the fourth quarter is in that similar range given what we have done in the previous 3 quarters.
So it did pop up a little bit in September. But China is growing at a much slower rate than the overall business. And so it is 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 in wafer equipment outside of China. So we are probably operating somewhere, I would say, in the low 20s percentile in 2027.
Now within our numbers, there is 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 probably skews the numbers a bit up a little bit, but it is a small percentage of the overall, so not much.
So I think the numbers I provided give you I think, enough directional clarity about where the business is today and where it is going.
Operator, can you take the next question, please?
We will go next to Shane Brett with Morgan Stanley. Your line is open.
The first question is on advanced packaging. At your Investor Day, you mentioned that Cronos is the workhorse of packaging. We have the next 3 systems already ready.
Are your customers requiring higher sensitivity tools And if so, can you talk about the competitive environment at these higher sensitivity levels?
Well, in advanced packaging, it is been flexing because of the move to more front-end-like processes. Most of it, to your point, has been in the macro products And we think the roadmap for those products, we are well positioned 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 at Investor Day. 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, the workhorse, but we are seeing more laser scanning and even in some cases, some Gen4 deployment in for packaging requirements. So we think this part of the market continues to be an opportunity for KLA.
We have been able to leverage a lot of the R and D that we have done. Across the more advanced platforms. And so we think we are very well positioned with proven products that can meet the higher end requirements.
And our customers understand that capability well. So we think we are pretty well positioned in terms of the growth opportunities in that part of the market.
Got it. Thank you. And my follow-up is on logic, I know you assess node to node share gain after certain wafer start volumes installed.
Internally, is there a preliminary expectation on your share gains from 2-nanometer and 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?
Yes. We think the trend is in the right direction. I mean, the thing about the next generation nodes is they are 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 dye. So with high performance computing, you have large die. They are very valuable.
Defect density is a challenge. Also have a very rich design environment. All those are good contributing factors.
I do not 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 node to node. And I think our relevancy with e beam inspection capability and the linkage we have to our optical becomes more pronounced, And so not as much share as it is adoption. But those investments were made to really they will show up more as we go to smaller designs.
Got it. Shane you very much.
And we will take our final question from Timothy Scholes Malander with Rothschild and Company, Redburn. Please go ahead.
Yes. Hi, there. Thanks for taking my questions. 1 for Rick and 1 for Bren.
Maybe the first 1, just comparing 2027 to 2026. When you look at the CapEx, that was spent on it or is being spent on established nodes, this year as a percent of the total market and you look forward to 2027, could you just maybe describe how that ratio changes? And then I had a follow-up.
We have seen more investment in 2-nanometer. I mean, look, I think, 2 nanometer and 3-nanometer investments will be the focus in logic. You will see more there.
You will also see some investment in the next generation node, so 1.4 So it is different. You did not have any of that, that more advanced investment, and it was more 3-nanometer centric and 26. So I think it sets up I think, good for us constructively in terms of just more 2-nanometer and more leading edge investment in 1.4.
that is clear. And maybe just thank you. And then maybe 1 on memory in 2027.
You have discussed your engineering strategy. About how you are going to address that memory kind of impact to your bill of materials. Can you just maybe talk about what you are purchasing strategy is for 2027, from memory, please?
Well, certainly, our focus early on and through this year has been mostly around securing supply. 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 have had to go out and buy more at higher prices.
Less concerned about supply. But certainly, we are exposed to the pricing market. And that is informing the commentary that we provided.
But I think from a supply point of view, we feel pretty good about the supply we have secured to meet the requirements we have going forward.
This does conclude our question and answer session. I would 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 is a very busy earnings day, busy earnings so we appreciate it. If we could not get to your questions, hopefully, we can connect here after the call in our callbacks. And with that, turn it back to the operator to formally close-up the call.
Thank you. This concludes the KLA Corporation's September quarter 26 earnings call and webcast. Please disconnect your line at this time, and have a wonderful day.
Goodbye.
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