Good afternoon. My name is Todd, and I will be your conference operator today. I would like to welcome everyone to the KLA Corporation December Quarter 2024 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 our earnings call to discuss the December quarter and calendar year 2024 results and outlook. I'm joined by our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results released after the market close and available on ir.kla.com along with supplemental materials. Today's discussion and metrics are presented on a non-GAAP basis, unless otherwise specified, and all full year references we make are to calendar years. The earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future investor events presentations, corporate governance information, and links to our SEC filings, including our most recent annual report and quarterly reports on Forms 10-K and 10-Q. 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 our call today, are also subject to those risks, and KLA cannot guarantee that those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. Rick will start with some introductory comments, followed by Bren with financial highlights and our outlook. Before I turn the call over to our CEO, Rick Wallace, I wanted to remind everyone that our 2025 Investor Day will be held on the morning of June 18, in New York City. Now over to Rick.

Thank you, Kevin. I will summarize KLA's overall performance for calendar '24 and the December quarter and cover company highlights and updates on the industry landscape. For calendar 2024, KLA again delivered strong growth outperformance, profitability, and a healthy return to shareholders. Specifically, 2024 revenue grew 12% to a record $10.85 billion, and the process control revenue grew by over 12%, indicating increased market share, while the services business grew 15% to $2.5 billion a year. KLA maintained industry-leading gross and operating margins at 61% and 41%, respectively. The company grew free cash flow to $3.4 billion and returned $2.9 billion in a combination of dividends and share buybacks. KLA's outperformance for the year was driven by growth at the leading edge, which includes increased investment in AI, high-performance computing, and continued momentum in advanced packaging, as well as sustainable performance for KLA's services business. Turning to the December quarter results, KLA came in above the midpoint of the non-GAAP guidance range, despite navigating the business impact of new U.S. government export controls released late in the quarter. Specifically, quarter revenue topped $3 billion for the first time. Diluted GAAP earnings per share was $8.20, finishing at the upper end of the guidance range for the quarter. GAAP diluted EPS was $6.16. The business landscape is performing as expected, and we're encouraged by strong demand we're experiencing in leading-edge logic, with specific memory customers supporting high bandwidth memory and advanced packaging. KLA's differentiated portfolio of solutions aligns exceptionally well with enabling our customers to navigate increasing complexity, growing design starts, and larger semiconductor devices in an environment of rising semiconductor demand. Specific highlights in the quarter include a combination of strong sequential and year-over-year revenue growth, demonstrating an improving industry environment. KLA is specifically positioned to benefit from accelerating growth at the leading edge. Across all sectors, technology development investments supporting AI and HBM, as well as a strengthening supply-demand environment, position the wafer fab equipment industry for growth in calendar 2025. AI continues to be a crucial catalyst for KLA. We are well aware of the recent revelations of DeepSeek and the implications that it portends a diminished demand for advanced semiconductors in support of the AI infrastructure build-out. As a company that has been developing AI models for use in our own inspection systems for many years, our own experience supports the theory that increased compute efficiency enables more adoption of AI in our platforms. The demand is clearly elastic. Regarding the demand environment for advanced semiconductors, we see no reason to believe that increased compute efficiency in AI will impact the advanced demand environment in the foreseeable future. AI is both an important driver and enabler of KLA's business. Specific drivers connected to AI that are positive for KLA's growth include higher volume and higher value wafer demand, more complex designs, accelerating product cycles, larger die sizes, and growing advanced packaging demand. These trends demonstrate the increasing value of process control and assist our customers through managing a dynamic production environment as investments and complexities increase. The momentum for our advanced packaging portfolio continued in the quarter. The growing demand for more powerful systems on chips is driving more complex heterogeneous chip integration enabled by advanced packaging, increasing the value of process control in the chip package. This is fueling growth for KLA and our broad portfolio systems. KLA advanced packaging revenue grew to approximately $500 million in calendar 2024 and is expected to exceed $800 million in calendar 2025, up from our last estimate of $750 million. KLA service business grew to $667 million in the December quarter, up 4% sequentially and 18% year-over-year, marking 50 consecutive quarters of year-over-year growth for our services business. Finally, quarterly free cash flow was $757 million in calendar 2024, and the free cash flow margin was 31% over the same period, putting KLA among the top companies in the S&P 500. Total capital return in the December quarter was $877 million, comprised of $650 million in share repurchase and $227 million in dividends. Total capital return over the past 12 months was $2.9 billion. KLA views consistent and healthy capital returns as fundamental to delivering value for shareholders. KLA's December quarter results delivered strong sequential and year-over-year growth, validating KLA's process control leadership and portfolio strength. KLA's operating model and the dedication of our global teams continue to be the foundation of our sustained success. We'll now pass the call over to Bren to cover financial highlights and our outlook.

Thanks, Rick. KLA's December quarter results demonstrate market leadership, combined with the consistent execution and dedication of our global team to meet customer commitments and drive sequential and year-over-year growth and profitability improvements. Revenue was $3.08 billion, above the guidance midpoint of $2.95 billion. Non-GAAP diluted EPS was $8.20, above the guidance midpoint. GAAP diluted EPS was $6.16. Gross margin was 61.7%. Operating expenses were $596 million, comprised of $342 million in R&D and $254 million in SG&A. Operating margin was 42.3%. Other income and expense met with a $31 million expense. The quarterly effective tax rate was 13.7%. Net income was $1.1 billion, cash flow from operations was $850 million, and free cash flow was $757 million. The breakdown of revenue by reportable segments, markets, major products, and regions can be found within the shareholder letter and slides. Turning to the balance sheet, KLA ended the quarter with $3.8 billion in total cash, cash equivalents and marketable securities, debt of $5.9 billion and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all three major rating agencies. During the December quarter, we retired our $750 million November 2024 bonds at maturity with cash on hand. KLA's balance sheet provides the ability to fund our growth strategies, both organic and inorganic, and offer attractive capital returns to shareholders. Looking at our outlook, the industry outlook continues to gain momentum in the near term, driven by increasing investment in leading-edge logic, high bandwidth memory, and advanced packaging. We expect the wafer fab equipment market to grow by a mid-single-digit percentage in 2025 from the high $90 billion level for calendar 2024. Growth in calendar 2025 is expected to be fueled principally by increasing investment in both leading-edge logic and memory to support growing AI and premium mobile demand, offset by lower overall demand from China due to the digestion of elevated levels of investment over the past couple of years. In an encouraging development, our top customer recently said in an earnings call that they expect the number of new takeouts for N2, or the 2 nanometer node, in the first 2 years to be higher than both N3 and N5 in their first 2 years, fueled by both smartphone and HPC applications. As communicated in early December, we continue to estimate the impact on KLA's revenue in calendar 2025 from recent export controls in China to be approximately $500 million, plus or minus $100 million, with roughly 70% of the impact affecting our systems business. While we are hopeful, based on our interpretation of the regulations, that there should be licensing opportunities that will mitigate some of this impact, we are taking a cautious view given the significant delays in processing licensing requests by the U.S. government over the past few years. However, given KLA's business momentum, market share opportunities, and higher expected process control intensity at the leading edge across all segments, we are confident we will continue to deliver growth outperformance compared with the wafer fab equipment market in 2025. KLA's March quarter guidance is as follows: Total revenue is expected to be $3 billion plus or minus $150 million. Our revenue guidance is up 27% year-over-year at the midpoint, further illustrating the improvement we expect to see in calendar 2025. Foundry/Logic revenue from semiconductor customers is forecasted to be approximately 73%, while memory is expected to be approximately 27% of semiconductor process control systems revenue to semiconductor customers. Within memory, DRAM is expected to be about 75% of the revenue mix and NAND the remaining 25%. Non-GAAP gross margin is forecasted to be 62% plus or minus 1 percentage point, or up approximately 30 basis points sequentially at the midpoint despite slightly lower revenue, primarily due to more favorable product mix expectations. For calendar 2025, based on expectations for business mix across systems and service, systems product mix, and factory utilization, we expect gross margins for the year to be approximately 62% plus or minus 50 basis points. Non-GAAP operating expenses are forecasted in the March quarter to be approximately $585 million as we continue to make significant product development and scaling investments to support expected revenue growth. Given our expectations for company growth over the next couple of years, we will maintain our operating expense trajectory. For the remainder of calendar 2025, we expect sequential increases of approximately $15 million in incremental operating expenses per quarter. This is driven by our priority around our product development roadmap requirements as well as revenue growth expectations. Our business model is predicated on ensuring 40% to 50% incremental non-GAAP operating margin leverage on revenue growth over the long run. Other model assumptions include: non-GAAP other income and expense, net, of approximately a $36 million expense for the March quarter and expect this to be roughly consistent throughout the calendar year. The tax rate assumption for March remains at 13.5% and we expect this to remain through the June quarter. Beginning in the September quarter, which is the first quarter of our fiscal year, our tax rate will reflect the adoption of global taxation pillar 2. Based on our current modeling, we think pillar 2 implementation will drive the tax rate slightly higher to approximately 14% in the second half of the calendar year. We will provide an update on this planning rate mid-year if necessary. For the March quarter, GAAP diluted EPS is expected to be $7.77 plus or minus $0.60, and non-GAAP diluted EPS of $8.05 plus or minus $0.60. EPS guidance is based on a fully diluted share count of approximately 133.3 million shares. In conclusion, our near-term revenue guidance points to relative stability around current business levels. Based on the strength of our backlog and market position, we see growth in calendar 2025 and expect to outperform the mid-single-digit growth rate we expect from the wafer fab equipment market. KLA is focused on delivering a differentiated product portfolio that addresses customers' technology roadmap requirements and drives our longer-term relevancy and growth expectations. With the KLA operating model guiding our best-in-class execution, KLA is focused on implementing our strategic objectives designed to drive outperformance. KLA's focus on customer success, innovative solutions, and operational excellence drives industry-leading financial and free cash flow performance and allows us to return capital consistently. That concludes the prepared remarks. Let's begin the Q&A.

Thank you, Bren. Operator, can you please provide the instructions for Q&A?

We will take our first question from Vivek Arya with the Bank of America. Please go ahead. Your line is open.

Hi, this is Michael Mani filling in for Vivek Arya. Thank you for addressing our questions. To begin, we heard from two of your competitors yesterday. The competitor focused on action deposition provided a similar outlook on wafer fab equipment, while the other confirmed their annual forecast, indicating that spending remains strong. So, my question is, if total wafer fab equipment is expected to increase by around $5 billion this year, and within that, wafer fab equipment is also on the rise, which is consuming a significant portion of that growth, what is happening in the process control segment of the market this year? If the process control wafer fab equipment is indeed growing steadily, as it appears to be, does this imply that mid-cycle estimates for wafer fab equipment may be overly cautious, or are other segments of the market declining to that extent? Thank you.

Yes, this is Bren. I'll take that one. And the guidance was clear that we think it's somewhere in that range of about $5 billion, to use your number into 2025 versus 2024. We feel pretty good about KLA's share of the overall wafer fab equipment opportunity into next year. Obviously, as we move into 2025, we've got more investment in leading edge and that's certainly a nice driver for our business, and we're already seeing KLA's share of wafer fab equipment at the N2 node being significantly greater than what we saw at N3. What's happening in DRAM, first advanced DRAM is good for us with scaling and EUV, but also as you look at high bandwidth memory, high bandwidth memory is also dragging process control intensity due to the lack of redundancy, more complex logic circuitry in the base die, the need for more reliability, bigger chips and so on. So, we feel pretty good about all of that. And then I think finally, the growth that we referenced in the letter in advanced packaging is accelerating for the company. It seems like every quarter I keep raising the numbers, so I'm pretty excited about the opportunities that are there and it seems to be accelerating as we move into this year. For all those reasons, it looks like process control intensity, KLA's share of the market looks to increase in 2025 based on our assessment. And in an environment where memory is probably a higher percent given expected growth in DRAM, I think the dynamics I talk about more than offset a slightly changing mix that's still foundry/logic heavy but with a little bit more DRAM in terms of our views on '25.

Got it. That's helpful. Thank you. And for my next question, could you help us with the linearity for revenue this year to the best extent you can, just because we're kind of at a high watermark for revenue this quarter. So should we expect maybe to be more first half weighted versus second half, especially given China's normalizing into the year and considering the impact of the export restrictions? Thank you very much.

Yes, the second half, I'm not going to comment on it. As we said in the letter, we feel pretty good about relative stability as we look at the funnel here moving forward. We'll see, as we start to move through the year what happens. But in terms of how we're modeling the company, it seems that we're bouncing around this $3 billion level, plus or minus, at least as we look at the first half of the year.

Next question, please.

Thank you. Our next question will come from Harlan Sur with JPMorgan. Please go ahead.

Good afternoon. Thanks for taking my question. In process control, strong outperformance for the team in calendar '24. I think your process control systems business was up 15% year-over-year, right? That's versus wafer fab equipment at up in the mid single-digit. But if I look back over the past 5 years, the team's process control business has outgrown wafer fab equipment on average by about 500 to 700 basis points per year. So given this year is going to be more leading-edge technology inflection driven, which is where obviously you guys have a strong leadership position, is it fair to assume that if wafer fab equipment is up mid-single-digit percentage points this year, that your process control business should grow kind of low to mid-teens percent in calendar '25?

Thank you for your comments, Harlan. While we won't provide guidance for the year, we're optimistic about our current position. A few dynamics have shifted. With our resumed scaling, we have more opportunities for inspection. I’ve always believed that opportunities must align with viable solutions. In the past, as with 3D NAND, we faced challenges in identifying defects despite opportunities. Now, however, the leading edge is favoring us. We see higher value wafers, larger die sizes, accelerated technology nodes, and more layers to manage. Additionally, HBM is evolving to resemble logic more, with less redundancy and increased valuable die, influencing packaging dynamics. As Bren mentioned, we're confident about our position in process controls and our customers' spending. Our discussions with leading customers focus on ensuring availability and supporting their technology advancements as they invest significantly moving forward.

That's great. Thank you for that. Regarding the 60% growth outlook for your advanced packaging businesses, could you clarify how much of that is attributed to 2.5D packaging technology compared to HBM and other types? What is the approximate distribution of process control versus semi-manufacturing systems? Additionally, we are beginning to see future AI designs transitioning to 3D SoIC technology starting next year. Will this provide additional momentum for the team, considering the increased complexity of these next-generation 3D architectures?

Yes, great questions. I mean, I think two things have happened and we got this early indication from our leading customers 1.5 to 2 years ago, that the challenges in packaging were going to look a lot more like what was going on in the front end, and they asked us to make some of the platforms that we use for the front end available for packaging. So back to the question, what is this? A lot of it's inspection and metrology, derivatives of the projects and programs that we have and have many years of experience with. There's clearly some plasma dicing, so SPTS is part of that overall solution. But there's no question that our customers are driving, as you know, it's a very expensive process when you have these high-end chips with complex packaging and HBM; the risks of yield loss are very high. So there's more inspection opportunity there, and we feel great about the continued growth as we go forward. Right now it's mostly 2.5 HB, but we see it's going to go forward, and our customers are focused on making sure we understand them as we go.

Hey, Harlan, it's Bren here. It's about 65%, 70% semi-process control versus semi-manufacturing systems.

Thank you. Our next question will come from C.J. Muse with Cantor Fitzgerald. Please go ahead.

Yes, good afternoon. Thank you for taking the question. I just wanted to dig a little bit deeper into your outperformance relative to wafer fab equipment. Within that, you're including that $500 million China hit. So, we'd love to hear, I guess, beyond the rising process control intensity at 2 nanometer and HBM, are there other drivers? Are those the two principal ones we should be thinking about?

Yes, those are the two principal ones, C.J. You've got higher intensity at the node. And to Rick's point, we feel very good about some product momentum in a number of our markets. So that, and then I think finally, as you look at that and you look at what's driving growth within process control, you've got an acceleration in certain products where we have a strong market position. So they're influencing the growth rate, and obviously more relative to the overall. So that also drives an improvement in share. Optical pattern inspection being one of those areas.

Well, and reticle. I mean, we saw some improvement in some of the work in reticle, including the Gen 5 CTA for print check, which obviously shows up in the optical, but it's part of that solution. So, look, we're feeling pretty good, and there was some investment made by our customers to support prior nodes once they realized there was still a yield opportunity there.

Just to follow-up on that, Rick, you talked about share gain. Can you elaborate on that? And then my second question would be on service. You talked about hitting kind of a long-term growth rate over time, but would be curious, given kind of the China impact, how you're thinking about growth for overall service in calendar '25. Thanks so much.

Sure. So on the share side, I think there are a couple of areas that might be more obvious than others. One is optical, simply because optical grew disproportionately perhaps in the rest of the market and we have a large share there, so that creates a greater overall position. We had some really strong momentum in e-beam, but the other area where we really saw some strong performance was in packaging. And so that's the one where the teams have really done a great job focusing the last couple of years, and we've been able to see continued momentum there. So we feel pretty good about it. Obviously, the numbers for the year aren't going to come out, but we have gained a lot of share in the last couple of years, and the question was, would there be any retake, and we feel pretty good about where we are. For service, anytime you lose access to a fab, you have the immediate headwind that you can't get access to that equipment. So as I look at growth this year, I think growth is probably in the high single digits for service, which is below the long-term model. We outperformed the long-term model a little bit in 2024. Over time, though, it's generally our view that if you have fabs that are inhibited from being able to supply, that capacity has to get added somewhere else. That would create an opportunity for us to make some of that up over the very long term. And obviously that would mean that whatever was spent before would have to be replaced somewhere else. So I think over the long run, we feel pretty good about the growth trajectory in our long-term model, but in the short run, it does affect, obviously, your ability to get at that capacity, which puts pressure on the growth rate and also on our ability to move resources around. So we'll have to deal with some inefficiencies. We've staffed up to support those fabs, and now we have to move those folks to support other customers. So there are some moving parts, but in the long run, we feel pretty good about the trajectory, given the higher value offerings, what we're seeing in terms of pricing with new products, and the opportunities in packaging for incremental service. So I think that the drivers for service are all pretty compelling. The install base is growing, and lifetimes are increasing. So in the long run, we feel pretty good about the long-term target.

Thanks so much.

Thank you. Our next question will come from Joe Quatrochi with Wells Fargo. Please go ahead.

Yes, thank you for taking the question. Just to follow-up on the services impact from China, just given the fact that most of your services are highly recurring, do we just take that, I guess, quarterly kind of run rate impact all in the March quarter and then grow from there? Or is there further kind of headwinds to consider in the out quarters?

Yes, I think that's the way to think about it. Because you lose what you would have gotten at those fabs, and then it grows from there. So I think that's a reasonable way to think about it.

Okay, perfect. And then just thinking about capital intensity for process control on the DRAM side, can you talk about just the difference in HBM process control intensity relative to conventional DRAM, just how to think about that adoption? I know, obviously, EUV being adopted across the board is helpful for you guys, too.

Yes, so as I said earlier, right, with an HBM device, you've got a few things that are happening: you've got bigger die because you have to drill the DSPs; they're bigger, so you have less redundancy, which historically has been significant in DRAM, and that has been a headwind to process control intensity. The logic circuitry is more complex, and the reliability on all the die in the stack is higher. For all those reasons, it's very good for process control intensity. I think overall for DRAM, it's moving the needle probably from, we'll call it the 9 to 10 range where we've been historically as a percent of wafer fab equipment; that probably moves up a good 100 to 150 basis points from there. Now, obviously, mix will affect that. Most of the focus is on HBM in terms of new requirements. So mix dynamics could affect that. But we feel pretty good about these dynamics as they affect and drive the DRAM market. And it's most pronounced in the latest technology nodes, which is where we're seeing it more. And so it's going to take a little bit of time for us to really figure out what that overall looks like. I think by Investor Day, we should be in a pretty good position to talk about it on a longer-term basis.

Helpful. Thank you.

Thank you. Our next question will come from Timothy Arcuri with UBS. Please go ahead. Your line is open.

Thanks. Bren, can you give us RPO? It was supposed to be up. Can you give us the number?

Yes, so RPO was down about $900 million. About half of that was related to deep bookings we took due to the December 2nd regulations. So about half of it related to that and then the other half shipment levels were higher. So that's how it played out in the quarter.

Got it. Okay, thanks. And then process control systems, you said pretty stable from here, but what about EPC? It was up a lot this quarter. It grew a lot in Q4. So how to think about it for this year? Can it grow 10, perhaps low double digits this year?

Yes, I believe that overall EPC will likely be around mid-single digits. It's important to keep in mind that the EPC figures include the flat panel business. By the end of this quarter, we will have completed shipments for flat panel systems following our announcement to cease manufacturing a year ago. As a result, the revenue from flat panels will impact the overall growth rate of the EPC business as we report these segments. Overall, we feel optimistic, particularly regarding SPTS growth in semiconductors, which is largely driven by year-over-year growth in advanced packaging. ICOS, which focuses on component inspection and is also centered around packaging, is experiencing growth as well. The PCB business, however, is more closely linked to mobility and capacity, resulting in slower growth in those areas. We are offsetting the impact of losing certain revenue, which actually improves our margin ratios; gross margins are likely about 20 basis points higher, and operating margins may be around 30 basis points higher due to a more favorable revenue mix. This is certainly factored into our guidance for gross margins this year.

Thank you, Bren.

Thank you. Our next question will come from Krish Sankar with TD Cowen. Please go ahead.

Yes, thanks for taking my question. And Rick and Bren, thanks for quantifying the $500 million plus or minus impact from export control. You also spoke about China wafer fab equipment digestion. I'm just kind of curious, if you lean into the digestion from China, how to think about your decline in China sales year-over-year on top of export controls in '25 versus '24?

Yes, I'll try to help with that. I mean, obviously, we'll have to see how the year plays out. But if you look at how we finished the year, right, this last quarter was 36%. We finished the year at 41% of our business in China. As we look at 2025, I think that percentage drops to about 29%, plus or minus a point or two as we go forward here. When you do the math on that, assuming the stability that we articulated about our top line, as we think about where we are right now, that translates into the overall China business being down somewhere around 20% or so.

Got it. That's very helpful. Another question I have is about China. When you compare your numbers to some of your peers over the last two quarters, your China sales have shown more resilience. Is this due to the wafer business or because China is developing its domestic critical capacity? What factors are contributing to your relative strength compared to your peers?

Yes, I think the easiest way to think about it, you have to remember that KLA is really about helping customers qualify process and speed time to results, yield learning, and so on. So as a result, you end up with, particularly with Greenfield fabs, a higher level of adoption is that fabs opening and more continuous investment at lower levels. When a customer goes to add a significant amount of capacity, obviously more capacity-centric peers are going to participate, but then they'll get it in that quarter and then it'll fall off. Ours tends to be a little bit more consistent in terms of the investment profile. And so it also, I think, tends to hold up because the value of process control, given the maturity of those operations, is pretty high.

Got it. Very helpful. Thank you, Bren. Thank you.

Thank you. Our next question will come from Tom O'Malley with Barclays. Please go ahead.

Hey, guys. Thanks for taking my questions. Mine is a little short-term oriented, so forgive me here. But the last two evenings, we've seen you and a competitor discuss better NAND pretty significantly into the March quarter. I was just hoping you could give us a little more detail. It didn't sound like from a sequential basis you would really call that out. I don't think you gave a ton of details that would make sense. And we didn't see it coming there, but just maybe describe what's happening there. Is that coming from a single customer? Is that coming across multiple customers? I totally understand it's a much lower base from you guys, but we'd love to try to figure out where the strength is coming from on a sequential basis into March.

It's strength at pretty low levels. It's pretty broad-based. We have seen the NAND business tick up right over the course of '24 and into '25. We expect a little bit more improvement there. I think overall for the industry off of a very low level there is likely to be some wafer fab equipment growth, but it's not significant. As a percentage, it's bigger given the level of wafer fab equipment at that presently, but would expect to see that improve a little bit moving forward, but not a lot in 2025.

Got you. And then on the DRAM side, clearly there's debate in the broader market. You guys called out AI in some of your prepared remarks, but it seems like there's some share jockeying that's currently taking place. It sounded more positive for the year from your kind of view on the DRAM side. Any commentary when you think about 6 months ago, when you talked to your customers, obviously, people were putting in capacity for kind of all of 2025. Have you seen incremental spend there in the short term or rush orders to try to catch up by customers? Anything on that would be helpful. Thank you.

I believe our customers have established their plans for the year, and there hasn't been a significant short-term shift. However, the demand for AI infrastructure continues to grow, and we are seeing momentum in that area. We are actively discussing slot availability, keeping in mind that we still have some critical products that are supply constrained. We're optimistic about the demand, particularly at the leading edge, and the trends in advanced DRAM are advantageous for us due to the challenges related to both the value of those devices and yield issues. As previously noted, the die sizes are smaller with less redundancy, leading to greater process control intensity. Next question, please.

Thank you. Our next question will come from Chris Caso with Wolfe Research. Please go ahead.

Yes, hi. Thanks. A follow-up question regarding the China impact. And you've given some color on what you expect that for the year. From a quarterly basis, is there any sort of incremental headwind or benefit as we go into the second half? I know that you talked about some of the mitigations and licenses which are taking some time, but I guess how do we think about this as we go sequentially through the year?

Yes, we've been pretty cautious overall. We'll see how it plays out as I said in the prepared remarks in terms of licensing that could mitigate the impact, but when we look at it over the course of the year or what we expected, it was pretty consistent across the year. So, it wasn't maybe again, that could be the nature of customers buying process controls versus other types of products. But it was pretty - half to half was more or less pretty consistent.

Okay. Got it. And just to follow-up on gross margins, again, you're kind of starting out with 62; you're guiding to 62 for the full year. So, sort of assuming that remains stable as you go through the year. And I guess at what point with regard to some of the operating leverage that you typically get with the fall-through, what's kind of the starting point from that, that we can start to see some of the leverage kicked in as revenue starts to grow?

We have mixed issues that are generally the biggest impacting item to our overall gross margins, more so than customers or segments. But I would expect as we start to see overall revenue accelerate, we'll start to see the kind of leverage that we've seen historically. So I said 62% plus or minus about 50 basis points for a reason. I think some of that is predicated on what happens moving forward. We do have, depending on the mix, right? We do have markets like the packaging market which carries a lower gross margin, given the complexity of the tools, than some of our higher-end systems. But obviously, the gross margin dollars are quite significant, and the relevancy growth at KLA is significant. So we're pleased with that. But I think as we move forward, I think you're likely to see us continue in that 60% to 65% range as we accelerate revenue over time. As we talked about in our 2022 plan, we saw gross margins around 63% or so, predicated on a volume level of about $3.5 billion. So that gives you a sense of where we're at from here to there moving forward. I feel pretty good about our ability to achieve that given the investments we've made that are still - I think we're in a good position to deliver against that. I don't think we have to go and make incremental investments in terms of capacity, the hard asset capacity we have to execute to those business levels.

Got it. Helpful. Thank you.

Thank you. Our next question will come from Srini Pajjuri with Raymond James. Please go ahead.

Thank you. One short-term question on your March quarter guidance. Just the Foundry/Logic, I think you are guiding for 73% of the mix to be Foundry/Logic. That is - I think, implies at least a mid-single-digit type decline. We haven't seen a decline in that business in a while. I'm just trying to understand how that reconciles with your comment about end-to-demand being strong in the short-term.

Yes, I'm taking a look at it. I don't think it - it doesn't look like it changes all that much. Given the overall revenue guidance is what it was, I think for semi-PC systems, we'll see how the quarter ends up. We do have business that isn't - that's infrastructure business, for example, that doesn't show up in those percentages. When I look at the businesses of the semiconductor customers, it's pretty consistent, so I don't think it'll change a little bit. But as we talked about, I think Memory overall is a higher percentage of the mix in 2025 than it was in 2024.

Okay, got it.

If there were some other customers non-N2, N3 that showed up in December that aren't showing up.

Okay, that makes sense. Then I guess as we go through the year, obviously N2 is going to be relatively strong. Do you still have, I guess, material contribution or are you still expecting material contribution from N3 or is it at a minimal level? And then I guess, just to follow-up to that, how does the process control intensity change as you go from N3 to N2? Thank you.

Yes, so most of the focus in terms of new investment is on the 2 nanometer. There's still some incremental investment happening, Srini, but the vast majority of it is 2 nanometer centric. Obviously, there's packaging investment that's also happening. I mentioned it earlier; I've said that at N3 versus N2, at N2, we thought we were about 75 basis points higher in terms of KLA's share of wafer fab equipment. I think that we're likely higher than that; it's probably 90 to 100 basis points, so trending in the right direction for sure.

Got it. Thank you.

Thank you. Our next question will come from Brian Chin with Stifel. Please go ahead.

Good afternoon. Thank you for the opportunity to ask a few questions. I am curious about the leading chipmakers in Logic and Foundry who are aggressively expanding capacity. Can you provide insights on the extent of any remaining spending with them beyond research and development and technology development? Although you've indicated that you can offset some impacts from that growth, I'm interested in any additional commentary you might have on this matter.

Are you saying - I'm sorry, you said one that isn't at the leading edge?

At the leading edge, but not expanding capacity aggressively. That's kind of one guy doing that. But in terms of the other ones, you're sort of on the pace, or maybe - on the pace but not just not doing so aggressively. Maybe some sense of the signal spending engagement you still have with them.

So let's say we derisked that in our '25 plan.

Fair enough. Regarding that last question, what can you tell me about the process control intensity transitioning from 2 nanometer to 16A? I believe there’s a close connection between the two.

Yes, we're a little early on that one. So I'd like to, before we start making comments, actually shift the support to that activity in a way to model it. One of the things we've seen over the course of the last several nodes for intensity reasons, but also for share, is that because of the design start environment, limiting reuse, customers are managing a much more dynamic design environment. You now have more designs that are driving leading-edge RAMS. All these things have been positive factors, and then there's a share element as well. This fundamental shift moving forward in the composition of semiconductor revenue to larger, higher value die density is very problematic. I think it creates growing opportunities for process control. We have to execute on our programs to be able to deliver the right solutions for customers to solve their problems and solve the right problems at scale for production. But I think if we execute in our own business, it does create an opportunity for us to see continued tailwinds in this area.

Yes, and let me give a little more perspective too because we've actually - usually, if the spending is done in a node, that process control intensity is set. What we've seen happen is when we have new solutions that find new problems that are yield impacting, we've seen some back-porting of that. In other words, you might see some systems going into prior nodes, which drives those intensities up the prior node, which becomes the new baseline to go forward. We think part of the outperform is the fact that we're actually having more solutions that solve the problems. We've always had more opportunities than we've had answers for regarding customers trying to figure out how to learn quicker and adopt new technologies, but our technologies are really coming together in a way that we think there's both share but also it drives adoption simply because we're solving more problems. When we look at what we're seeing for N2, we feel pretty good about the potential to help our customers ramp those nodes, which will be a basis on which to build going forward. For example, a lot of people didn't model early on the reticle verification on wafer, the print check that we're using for Gen 5. That's essentially a new application. Once people valued that, they might even go back and back-port some of that capability when there's yield opportunity. We feel pretty good about where we are in terms of driving overall intensity, and that'll be part of the message we share at our Investor Day is how we see that going forward, which will include the node you talked about.

Okay, great. Thank you.

Thank you. Our next question will come from Charles Shi with Needham and Company. Please go ahead.

Yes, good afternoon. Thanks for taking my question. So I think that you guys don't want to exclusively call out the direction for the second half in terms of the growth relative to the first half of the year. But it sounds like the base case assumption from you guys is that you're probably going to be around that $3 billion per quarter level, maybe throughout the year. Maybe some of that is contingent upon whether you can get some export licenses for that $500 billion impact from the latest export control. But is there any other swing factors that you probably don't have a conclusion yet, but that could support some of the second-half growth? Is there anything that you haven't mentioned?

Well, with licenses, as we said earlier, we haven't built that into the plan. So we'll see how that plays out. And I think, the stabilizing around current levels as we look forward seems like we're operating around this level. As we go beyond the middle of the year, we'll see what happens. We mentioned earlier about derisking some opportunities. So we'll see how those potentially play out around certain customers, but that could be a swing factor as well. Back to what we said about certain parts of the market we've been a little cautious on. We'll see if there's more upside in China. We tried to derisk that relative to the levels of investment we've seen over the last couple of years, but that will play out as we move forward. For now, it feels like around the current levels is the best that I can do from a guidance point of view.

Thanks, Bren. Maybe a quick follow-up. What's the expectation for China revenue contribution into the March quarter?

It will come down as a percent, to be in the high 20s. We'll see what ends up happening, right? Because you've got different revenue-recognition policy issues from whether it's a new customer and a new fab versus an established customer. That could either accelerate revenue to revenue shipment or extend it to an acceptance process. So we'll see how things play out. But in general, I would expect it to drop from the 35% level, probably into the high 20s, maybe 30% at the highest.

That's very helpful. Thank you.

Sure.

Thank you. And it appears we have no further questions at this time. I would like to turn the call over to Kevin Kessel for any additional or closing remarks.

Thank you very much and thank you everybody for your time and your attention. We know how busy today and this week are, so we appreciate it. We'll be speaking with you all very soon. I'll turn it back now to the operator for any closing instructions.

Thank you. This concludes the KLA Corporation December quarter 2024 earnings call and webcast. Please disconnect your line at this time and have a wonderful day.