Good afternoon, everyone. My name is Bo, and I will be your conference operator today. I would like to welcome everyone to the KLA Corporation June Quarter 2025 Earnings Conference Call and Webcast. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead, sir.

Welcome to the June 2025 quarterly earnings call. I am joined by our CEO, Rick Wallace; and our CFO, Bren Higgins. We will discuss today's results as well as our September quarter outlook released after the market close and 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 made refers to calendar years. The earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future events, presentations, corporate governance information, and links to our SEC filings. Our comments today are subject to risks and uncertainties reflected in the disclosure of risk factors in our SEC filings. Any forward-looking statements, including those we make on the call today, are also subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. Rick will start with introductory comments on the business environment and our quarter, followed by Bren with financial highlights and our outlook. Now over to Rick.

Thanks, Kevin. I'm going to cover KLA's business highlights for the June 2025 quarter, including commentary on KLA's relevance in the AI infrastructure build-out. For the June quarter, KLA's results were strong across the board, and we were at or above the high end of our guidance ranges. Specifically, revenue was $3.175 billion. Non-GAAP diluted EPS was $9.38, and GAAP diluted EPS was $9.06. We also had record free cash flow of over $1 billion for the quarter. KLA's leadership in process control has put the company in a unique position at the center of enabling success for our customers to build out infrastructure to support artificial intelligence. Prioritized investment to ramp AI capabilities has fueled growth at the leading edge across the semiconductor industry through more complex designs, faster product cycles, higher-value wafers, and increased demand for advanced packaging. In DRAM, investments in AI have been focused on high-bandwidth memory which demands higher performance, enhanced reliability, reduced redundancy, and more sophisticated logic circuitry at base die chips that control the HBM stack. Demand for leading-edge logic, HBM, and advanced packaging capabilities were the key contributors to KLA's performance in the June quarter. The importance of process control continues to increase due to semiconductor scaling, new architectures and materials, and increasing designs. In particular, process control can improve time to results by debugging process integration challenges in the fab ramp phase and optimizing yield across a high-volume manufacturing environment with high semiconductor device design mix. Additionally, the evolution and complexity of requirements for advanced packaging is creating new opportunities for the value of KLA's process control and process solutions. Finally, this leads to increased relevance for KLA's Service business as KLA systems become more technically complex, are utilized for longer periods in the fab with customers who are expecting optimal tool performance and availability. To deliver solutions to meet this demand, the company leverages the KLA operating model to focus on prioritizing and productizing new innovations in our product road maps and ensuring that our business operations can scale and execute to capitalize on strong growth and expanded market share in the most critical markets for our customers. To date, we've seen no material changes in customer demands or on announced investment plans. As a result, our WFE assessment for 2025 is consistent with our expectations that were stated last quarter. There are more details about this quarter's highlights in our shareholder letter, but in short, KLA grew revenue 24% year-over-year in the June quarter with sustained strong investment in leading-edge foundry and logic and HBM. This quarter also marked another period of strong momentum for our advanced packaging portfolio. We now expect advanced packaging systems related revenue to exceed $925 million in calendar 2025, up from our previous estimate of $850 million last quarter and over $500 million last year. In Services, our business grew to $703 million in the June quarter, up 5% sequentially and 14% year-over-year. Finally, the June quarter was strong from a cash flow and capital returns perspective. Quarterly free cash flow topped $1 billion for the first time, ending at $1.065 billion. For the last 12 months, free cash flow was $3.75 billion with a free cash flow margin of 31% over the same period. Total capital return in the June quarter was $680 million, comprising $426 million in share repurchases and $254 million in dividends. Total capital return over the past 12 months was $3.05 billion. KLA's June quarter results reaffirm our leadership in process control and the strength of our broad and differentiated portfolio. They also demonstrate the essential role of KLA's products and services play in supporting semiconductor industry growth. Our consistent execution reflects the resilience of the KLA operating model, the dedication of our global teams, and our disciplined capital allocation to invest in our business over the long run and maximize long-term shareholder value. And with that, I'll turn the call over to Bren.

Thanks, Rick. KLA's June quarter results were strong. Revenue was $3.175 billion, above the guidance midpoint of $3.075 billion. Non-GAAP diluted EPS was $9.38, above its guidance range. And GAAP diluted EPS was $9.06, which was at the upper end of the guidance range. At the guided tax rate of 13.5%, non-GAAP diluted earnings per share would have been $9. Gross margin was 63.2%, slightly above the midpoint of guidance as the quarter played out mostly as expected. Operating expenses were $603 million, about $8 million above the guidance midpoint. Operating expenses were comprised of $353 million in R&D and $250 million in SG&A. Operating margin was 44.2%. Other income and expense, net, was a $23 million expense with upside from guidance provided by a favorable mark-to-market adjustment of a strategic supplier investment. The quarterly effective tax rate was 9.9%, well below guidance as various discrete items impacted the quarter's result. Net income was $1.24 billion. GAAP net income was $1.2 billion. Cash flow from operations was $1.16 billion, and free cash flow was $1.06 billion. The breakdown of revenue by reportable segments and end markets in major products and regions can be found within the shareholder letter and slides. Moving to the balance sheet. We ended with $4.5 billion in total cash, cash equivalents and marketable securities, and debt of $5.9 billion. The company has a flexible and attractive bond maturity profile supported by strong investment-grade ratings from all three major rating agencies. The cornerstone of KLA's business is consistent strong free cash flow generation, driven by one of the best operating models in the industry, and a predictable and highly differentiated service business. This helps drive a comprehensive capital return strategy that includes consistent dividend growth and increasing share repurchases over the long term. Our recent actions emphasize our commitment to capital returns and our confidence in the long-term shareholder value accretion of KLA. On April 30, 2025, we announced the 16th consecutive annual dividend increase, which was up 12% to $1.90 per share per quarter or an annualized dividend of $7.60 per share. Along with this action, we also announced a new $5 billion share repurchase authorization. I'll now turn to the outlook. It remains driven by increasing investment in leading-edge logic, high bandwidth memory, and advanced packaging. For WFE in 2025, as stated earlier, we are maintaining our original outlook for mid-single-digit growth in WFE from approximately $100 billion in 2024. This growth is expected to be driven principally by increasing investment in both leading-edge foundry/logic and memory to support growing AI and premium mobile demand, partially offset by lower overall demand from China. Given KLA's strong business momentum, expanding market share opportunities, and higher process control intensity at the leading edge across all segments, we remain confident in our ability to outperform the overall WFE market in 2025. Finally, early customer discussions are constructive on expectations for calendar year 2026 to be a growth year for the industry. KLA's unique product portfolio differentiation and value proposition are focused on enabling technology transitions, accelerating process node capacity ramps, and ensuring yield entitlement and high-volume production. We continue to be encouraged that our customer discussions on product road maps and capacity planning have remained consistent. In this industry environment, KLA will stay focused on supporting customers, executing product road maps, and driving productivity across the enterprise. KLA's September quarter guidance is as follows: Total revenue is expected to be $3.15 billion, plus or minus $150 million. Our quarterly revenue expectation of general stability for the remainder of the calendar year remains consistent with that articulated over the past two quarters. Foundry/logic revenue from semiconductor customers is forecasted to be approximately 75% and memory is expected to be approximately 25% of Semi Process Control systems revenue to semiconductor customers. Within memory, DRAM is expected to be about 79% and NAND, the remaining 21%. As always, these business mix approximations are for our semiconductor customers only and do not completely represent our aggregate process control systems revenue. Gross margin is forecasted to be 62%, plus or minus 1 percentage point, reflecting a slightly weaker systems revenue mix expectation and a 50 to 100 basis point impact from announced global tariffs. This tariff impact estimate is below our original estimate of roughly 100 basis point headwind to gross margin that we discussed last quarter. This environment is new to our industry and the long-term tariff situation remains unclear. We continue to assess the impact across our business and identify potential mitigation actions to reduce our exposure to this headwind over time. We will provide periodic updates on our assessment when appropriate. For calendar 2025, based on the results for the June quarter, guidance for the September quarter and our expectations for the business mix across systems and services, including the systems product mix, tariffs, and factory utilization, we expect gross margins for calendar '25 to remain approximately 62.5%. Operating expenses are forecasted to be approximately $615 million in the September quarter as we continue to make product development and infrastructure investments to support expected revenue growth. Given our expectations for company growth and product development road map requirements, we will maintain our operating expense trajectory. Our business model is designed to deliver 40% to 50% incremental non-GAAP operating margin leverage on revenue growth over the long run. Other model assumptions include other income and expense, net, of approximately $33 million expense. The non-GAAP effective tax rate assumption for the September quarter and the remainder of the calendar year is 13.5%, lower than the 14% we had previously estimated based on our expectations for the geographic distribution of income. For the September quarter, GAAP diluted EPS is expected to be $8.28, plus or minus $0.77. And non-GAAP diluted EPS of $8.53, plus or minus $0.77. EPS guidance is based on a fully diluted share count of approximately 132.4 million shares. In conclusion, our near-term revenue guidance remains stable, indicating the continuation of current business levels and our customer discussions support this outlook. Based on conversations with customers, we anticipate continued solid growth in calendar 2025. Given the revenue commentary for the remainder of the calendar year, we expect to meaningfully outperform the mid-single-digit WFE growth rate. KLA focuses on delivering a differentiated product portfolio that addresses customer technology road map requirements, which are driving our longer-term relevance and growth expectations. KLA's business is well positioned for the current technology inflections. While we cannot ignore the near-term geopolitical trends, we are encouraged by the customer engagement that informs our business forecast. The long-term secular trends driving semiconductor industry demand and investments in WFE and advanced packaging are compelling and represent a relative performance opportunity for KLA over the next several years. That concludes our prepared remarks. Let's begin the Q&A.

Thanks, Bren. Bo, if you could please queue folks for questions.

We'll go first this afternoon to C.J. Muse of Cantor Fitzgerald.

So I just would love to hit on your comment around early customer discussions constructive for growth in 2026. You work typically from 8-plus month lead times. Obviously, you've got some visibility into '26. So I would love to hear kind of how those conversations are going, and what needs to happen to have firm conviction on growth in '26?

Yes, thank you for the question, C.J. I believe it's a bit early for us to provide specific numbers, but we are encouraged by the discussions we're having. Looking across the industry, we anticipate that customers will increase their investments. The current driver in the market is high-performance computing, which is strong. We will have to monitor how other end markets perform regarding growth. However, we are optimistic about the activity at the leading edge, supported by that market, and we may see broader investment opportunities. DRAM remains robust, supported by HBM. Although the flash market has been recovering from low levels, it seems to be promising as we move forward. Overall, it appears that legacy products have stabilized. We feel positive about the current situation, and we don't see any deterioration. Regarding our projections for native China activity, we believe it is likely to decrease following two years of high investment in 2023 and 2024. We expect a decline in 2025 and anticipate some headwinds in 2026 as the focus shifts back to legacy products.

C.J., I want to add that as we continue to invest in advanced logic, we're noticing momentum with more players bringing their designs. When you consider the ongoing investment in advanced logic and some investment reverting to a previous node, we feel very positive about the overall momentum in logic and foundry, as well as the packaging momentum we've discussed.

Very helpful. I guess on the domestic China front, you talked early indication of lower again in '26. Curious, as three regions, Wuhan, Shanghai, Beijing are competing for supremacy, and we've now gone from four to six large kind of players, how does that kind of inform your view? Does it give you a sense that things would only decline a little or a lot? Or just too early to tell?

Yes. I think it's too early to tell at this point. As I said, we had two years of a lot of backlog we had to ship through and work off, which we have done. And I think now that we're seeing investment from our other customers, we're seeing that drive our business outlook more strongly here moving forward. So we'll have to see as we move forward here. But my sense just in terms of looking at it bottoms up and trying to reconcile with some of the top-down kind of market outlook information, I feel like it's probably got some headwinds to it in terms of the investment levels relative to '25.

Great job on the quarterly execution, guys. Year-to-date, so March and June, your Process Control Systems business, right, that's inspection and patterning, that's up 35% year-over-year. So it looks like you guys are setting up for another strong year of growth and maybe even more share gains, right? But within that, inspection is up 50% year-to-date, while patterning is kind of flattish, kind of similar to the profile in calendar '24, where inspection drove most of the growth. So maybe you can just help us understand, a, the drivers of the massive strength in the inspection, is it broad-based? Is it across optical, darkfield, bare wafer, e-beam? And then maybe help us understand the relatively flattish growth in patterning. And do you guys anticipate another year of total share gains in process control?

Harlan, thanks for the comments. A lot there. I'll try to unpack it a bit. I mean, certainly, we've seen a strong inflection in our optical pattern inspection business. We were supply constrained in that business for some time. Now we have more supply, and so we're shipping through a lot of backlog for that product, and that product is well positioned and really critical for gate-all-around. So that's been a nice driver. Obviously, what's happened in packaging has also been a nice driver for this part of the business, sampling rates and inspection given the challenges are very, very high, and so that's been a nice tailwind for that part of the business as well. So inspection has definitely been inflecting. As it relates to patterning, you have really three businesses there in patterning. You have optical metrology, which is around overlay, and then you also have film measurement and reticle inspection. And with overlay, as we've seen some slowdown in advanced litho from a customer point of view, there's an attach rate of that business to litho. And so that's reduced, I'd call it more really non-consumption in that business. So that's been a little bit weaker. It's really the only business we have that has an attach to litho generally. Film measurement, I think it's a little bit lumpy but would expect better-than-market growth out of that business as we go through the year for 2025. And for reticle inspection, it's a lumpy business; we have some large integers in there but would expect to see that business grow meaningfully and at a record level for calendar '25 versus '24. So a little bit of just what happens in the quarter, but from a directional point of view, I think we'll see stronger patterning as we move through the second half of the year.

Yes. And Harlan, to your point, I think overall, we are seeing process control intensity continue to rise for all the reasons we've talked about, the advanced designs, large die. And so initially, at least a lot of that favors inspection and Bren talked about some of the facts in patterning. And then the reticle comes around. I mean, for KLA, reticle in 2025 is going to be a record year. So we feel good about where we are positioned there, and we have more products coming along. So we feel process control intensity continues to strengthen, and our market position is very strong.

Very insightful. And yet again, you guys upped your target for advanced packaging revenues from $850 million to now $925 million for calendar '25. That's up like 80% year-over-year. I assume it's a combination of HBM and 2.5D and 3.5D advanced packaging. We know that many of next-generation 2-nanometer AI GPU, XPU designs are targeted for this kind of 3.5D packaging architecture stack chips, more HBM stacks. Just overall significantly more complex versus 2.5D. But maybe you guys can just help us understand where are you guys seeing the incremental upside? I think this is like the third or fourth time that you revised your full year outlook for advanced packaging. So where are you guys seeing the incremental upside?

Harlan, you covered a lot of points. It took us some time to develop the products that were needed, which contributed to the adoption process and the momentum we experienced once we began. The ramp-up is mainly related to the development of our AI infrastructure, which is a crucial aspect for us. We've discussed logic/foundry, advanced designs, larger die sizes, HBM, and packaging, and it's particularly about the packaging component. As our customers experience success with our offerings, we are increasing our market share. The encouraging aspect for us is that, aside from the WFE dynamics, which we often focus on, there is growth occurring in the packaging sector, especially in inspection and metrology. Our competitive position is solid, and we are gaining market share, creating a strong combination. When we engage with customers, we believe we are still at the beginning of this trend rather than nearing its conclusion. We anticipate significant growth ahead.

Yes, Harlan, the other thing I'd say is just if you just go back just a short period of time, just go back a few years to 2022 as a percent of advanced packaging, our Semi Process Control business. Given the nature of the requirements was pretty low, we were probably about a 1% intensity. Today, we're sitting somewhere around in that 5% to 6% range. So just in a few years, we've seen our position change quite dramatically as the requirements, to Rick's point, have increased. So we're pretty excited about the growth rate and opportunity there. And we think that this continues to be a growth area as we move into next year.

On the first one, the process control intensity in memory, I wanted to get your views on this. Historically, it used to be low, closer to, I think, mature nodes. How is that process control intensity evolving as the industry is moving from traditional DDR DRAM to more high-bandwidth memory? Is there a way to quantify what the benefits are to KLA because HBM is expected to be one of the fastest growth drivers in AI accelerators? So I'm just curious to understand how your opportunity is evolving as the industry migrates to HBM and then advanced versions of HBM?

Yes. I can provide some qualitative insights, and Bren will follow up with more quantitative details. Qualitatively, we are seeing larger, more advanced, and valuable semiconductor chips that have more complex circuitry and reduced redundancy. There is significant demand for these components as they are being used extensively, resulting in them not being allowed to fail. The operational demands are high due to the expensive systems these chips are part of. Our customers have reported an increase in inspection during both development and production phases. They are realizing the need for comprehensive insights because the previously acceptable levels of defects are no longer tolerable. Consequently, they require greater coverage, enhanced tools, and are also adopting new technologies. All of this is leading to a heightened focus on process control intensity. While we haven't been surprised by this trend, we are pleased with the level of adoption and anticipate further demand as the challenges become clearer to our customers. They are operating on a different schedule than what we saw in the consumer sector, and they face significant pressure to achieve high yields. This evolution marks a distinct shift from the memory trends we have experienced in past years.

So when DRAM went to EUV, we started to pattern a couple of layers or a few layers with EUV, we saw a step-up in intensity. So process control intensity was somewhere around 9% to 10% of WFE back before. And then with the introduction of EUV, we saw that improve. We saw that improve about 100 basis points. When we move to HBM, we think that there's another 100 basis points or so of opportunity there. We'll see how that plays out over time. But as Rick said, as the requirements have changed, it's increased the value of our products and changed how customers sample and their expectations around reliability. You also have a bigger die, which benefits everyone, but I think some of these challenges that they have around the market requirements for HBM are benefiting process control uniquely. And so we're seeing that on the logic side, but we're also seeing that on the memory side as well. So right now, when we look at it, we think there's probably another incremental 100 bps on top of that. So if you go back pre-EUV to where we are today, it's probably somewhere in the neighborhood of 200 basis points of higher process control intensity. And our share position and momentum is in a pretty good place. So we're encouraged by what we're seeing.

All right. Very helpful. And then for my follow-up on gross margins, kind of near and a little more medium term. So if let's say, December quarter sales are flattish, should we assume gross margins stay flattish? Or are there any other mix effects, et cetera, that we should keep in mind? And then kind of more medium term, what are you doing to mitigate that tariff cost pressure? Can it be mitigated? Like when should we assume that you have some alternatives in place to get the gross margins back to the trend line?

Yes. Regarding your first question, we discussed our expectations for the gross margin in calendar year '25 at 62.5%. If you analyze the first two quarters and our guidance for the third quarter, you should see an improvement in gross margin for the fourth quarter based on our anticipated revenue mix for the next quarter. You can calculate how to reach that figure. Concerning tariffs, this is a new development for our industry and hasn't historically impacted our business operations. As we anticipate higher structural tariffs going forward, there are certain business strategies we can employ, such as optimizing how we move parts and utilizing free trade zones, which can help minimize tariff exposure. This involves situations where we pay tariffs but can recover some costs when exporting. These strategies serve as mitigating factors. If tariffs lead to structural cost increases, we will have to manage this impact in both our service and system businesses over time, just as we would with any other cost increase. However, we see opportunities in process improvements. Even when the return on investment wasn't strong, the added economic burden of extra tariffs can elevate the priority of addressing these issues. That's the perspective we have on this matter. For how you're modeling KLA, thinking about a 50 to 100 basis point guidance headwind is advisable. I'll provide updates on any improvements or changes that may lessen that pressure when the time is right.

Apologies for asking a bit of a near-term question. But if I'm understanding this correctly, your September quarter foundry/logic revenue is likely to strengthen sequentially, but your memory revenue across both DRAM and NAND will decline. I thought that the memory mix, specifically DRAM, may uptick a bit more in the second half. So just talk about the big business mix here and if we could see a memory uptick in the December quarter?

Yes, the way it's lining up, I think that we'll see DRAM stronger in the December quarter than the September quarter. It's just really about timing of revenue, revenue recognition, those dynamics. There's shipments, but there's final product acceptance processes that we run through that drive revenue into a particular quarter. But as I look at it and you think about some of the project timing that's out there, I would expect to see an uptick into the December quarter.

Got it. For my follow-up, during the 2022 Analyst Day, you set a revenue target of $14 billion for 2026, based on a $125 billion WFE assumption. It seems your market share gains have exceeded your projections from 2022. Can you discuss those market share gains and your current thoughts as we look towards 2026? I'm not looking for a revenue guide, but any insights on how to approach 2026 would be appreciated.

The 2026 plan anticipated a WFE level around $120 billion. We'll see if we reach that. However, for KLA, achieving that plan doesn't require us to hit $125 billion, considering our strong share of WFE and growth in packaging. We've faced some challenges due to export controls, impacting both opportunities and our service business. Overall, we believe we are well positioned in terms of our WFE share. We planned for a 7.25% share of WFE, and without packaging, our share is close to 8%, with additional opportunities in packaging. If WFE levels fall in the mid-teens, we believe we can achieve our goals. However, given our recent growth rates in market share, we don't need as much overall. This growth has been intensity-driven, particularly in packaging, and we are confident about our share opportunities. The financial model is performing consistently, and excluding tariff impacts, we would likely be meeting or slightly exceeding our gross margin expectations at that revenue level. The remainder is influenced by our operating margin model and our projection for EPS growth, which is 1.5 times our revenue growth rate. Ultimately, our performance will depend on where WFE settles, but the financial framework is functioning as anticipated.

My first question is about China. In March, China accounted for 26% of sales, and it increased to 30% in Q2. Is 30% still an accurate figure as we move into the second half of the year, or should we anticipate some growth? The data so far indicates there may have been some increase in China WFE. However, I'm curious since you still expect China WFE to decrease this year. I'd like to hear your thoughts on this.

Sure, Charles, let me clarify this for you. In January, we mentioned that our business in China was expected to drop to around 30%, based on an estimated run rate of about $3 billion, down from approximately 41% in 2024. We saw that Q1 was lower, which suggests that upcoming percentages may be higher. By April, our guidance remained consistent with this outlook. Currently, I estimate we're still around 30%, give or take a few points. The second half is anticipated to be better than the first, as we recorded 26% and 30% in Q2. Overall, we are still aligned with the expectation of about 30%. Our business has shown growth; we've moved from a $3 billion run rate to now guiding for $31.5 billion. This growth is reflected in China at a steady percentage. Initially, we expected our China business to decline between 15% and 20%. As of now, I think the decline is more likely between 10% and 15% due to overall strengthened performance. China is performing as we had anticipated, and we expect to end the year around 30%.

I appreciate the insights. I have a broader question. I listened to your responses to other analysts regarding process control intensity. Historically, there has been a positive correlation between process control intensity and lithography intensity. This year, there's been extensive discussion about lithography intensity, and it seems the consensus is declining. However, that historical correlation appears to have weakened over the past few years, as process control intensity has actually increased. Lithography seems to be decreasing, likely due to the reduction of stockpiling in China and other factors. I would like to understand your perspective on process control intensity. Why do you think this correlation is breaking down? What is the outlook moving forward? Do you anticipate that this divergence will be sustained, or do you foresee a potential reversion to the mean at some point in the future?

That's a great question. Historically, process control in lithography was linked to wavelength shifts, primarily influenced by a major microprocessor manufacturer. This established a rhythm for advancements. Under those circumstances, adopting new design rules necessitated new lithography, and variations in advanced designs led to increased intensity. Recently, we've seen a shift in dynamics starting a few technology nodes ago, with an increase in advanced designs at the leading edge. Previously, fewer companies engaged in leading-edge design, which created a strong correlation with lithography intensity. However, at around 7 nanometers, the number of designs surged. This increase in design intensity does not significantly elevate lithography intensity or capital intensity, except for process control, as greater variability emerges due to the higher volume of designs at the leading edge. Consequently, reticle consumption has risen, maintaining a stable market. Moreover, a higher mix of fabrication introduces more variability, necessitating effective management to ensure adequate yields without overloading wafers, which is primarily a process control issue rather than a lithography one. Additionally, the rise of large die sizes due to AI is another influencing factor. Advanced packaging is further enhancing integration while diminishing the demand for other equipment, but it heightens the need for process control. Finally, developments in HBM also play a role. For businesses focused on process control, this is an opportune time, as all these factors are amplifying the demand for process control while lessening the need for intensity in other semiconductor manufacturing aspects. You're correct in observing this trend, with the proliferation of designs and AI influences driving these changes.

We'll go next now to Tom O'Malley with Barclays.

When you answered the question earlier in the call on 2026, and I appreciate it's early, and you don't want to give more color, you talked about the broadening of leading edge, and I think you were very intentional around using that word. Are you talking about additional customers coming in on the leading-edge side? Or are you just talking about the broadening of opportunities in the existing pillars of customers that you already have?

Both, talking about both. We're seeing more people at the leading edge, as we've talked about, higher mix foundries. And for the first time, I think, in quite a while, we're seeing more players doing leading edge or very close in proximity to leading edge across. So we're seeing some momentum there. Some of that's been in the news. And as a result, what we're seeing is a broadening of customers as well as a proliferation of design. And I think it is the proliferation of design that is driving the broadening of customers.

Looking ahead to 2026, considering the environment you've just outlined, you've mentioned several areas where process control is expected to outperform other equipment sectors. How confident are you in discussing the strength of the overall market given that you're suggesting a scenario where you might take a larger share? If this is the case, the market could appear significantly larger. Could you explain what steps you are taking to assess your total wafer fabrication equipment (WFE) intensity for next year? Do you anticipate gaining market share, even if the overall market isn't growing, which could mean you hold a bigger slice of it? How do you approach this analysis as you prepare your forecasts for the upcoming year?

I'll start with the qualitative aspects, and Bren will handle the quantitative part. We don't have a complete understanding of our knowledge or the trends occurring. There has always been an issue with process control that has both positive and negative implications. The core question is whether you can solve these problems, and if so, customers would invest in systems to address them. However, there have been many unmet needs over time, leading people to seek alternative solutions because, eventually, they will find a way to address those issues. For instance, if you need to identify a specific defect at a certain stage in the process, you must segment that process effectively. Without the right tools to accomplish this, customers will devise less efficient methods. Fortunately, we now have more tools available, largely due to our investment in strengthening our portfolio over the years. As we discussed previously, the ongoing use of advanced processing within our systems, powered by AI, has enhanced our capacity to tackle these challenges. Alongside new product offerings, such as our e-beam portfolio, we can provide better solutions for our customers. That said, some customers are still dynamically assessing their process control needs, and it's essential for us to validate the value when they adopt these solutions. Our confidence going into 2026 stems from the increasing feedback from customers, where they echo sentiments we've shared with them previously about needing greater process control. They are ensuring we can meet those needs, which is encouraging. We also recognize that we're engaged in the intricacies of debugging these processes, which are being complicated by architectural changes. The dynamics of supporting advanced nodes, whether in HBM, advanced logic with larger die sizes, or the packaging, are presenting challenges. This context makes us optimistic about 2026, and Bren can perhaps provide further details.

Yes. We have a strong understanding of our businesses. Therefore, when we discuss the industry, it's based on our insights and experiences. We believe it's sensible to share our outlook for next year, particularly considering current customer discussions. As Rick noted, we see opportunities for growth in our business. Larger die sizes present a challenge in defect density; while larger wafers offer advantages, they also create new process control opportunities. With high-performance computing, the value of these die leads customers to invest more in ensuring that the chips perform as intended, adhering to strict performance specifications. This gives us confidence in our business outlook, and I aimed to share my perspective as of late July regarding what next year might hold.

Yes. Following up on that line of questioning, you mentioned how the increasing diversity in designs within high-performance computing is enhancing KLA's relevance. How do you view the impact on sample rates for process control? Should we consider that the peak to trough variation is less steep when ramping up a new node, or does this indicate a significant step up in terms of sample rates?

Yes, this is another interesting development, Joe. Historically, when a new node was introduced, it would ramp up at the beginning and then run at volume, with the highest process control intensity at the front end, which you are referring to. However, what we are seeing now is that with multiple designs, customers will debug a new process on a specific device type and wafer and ramp that up. Shortly after, other designs come in with their own ramp processes, which are often different. In many instances, the process flows vary by customer. This leads to a compounding of ramps within what appears to be HBM, as many HBM fabs are managing process ramps for new nodes alongside ongoing improvements within those nodes. We even observed a customer return to a prior node and add more process control due to a larger die being introduced. This deviates from the traditional model of simply ramping and then running, as there are multiple ramps occurring with each device. Some customers actually benefit from not being first with their advanced designs, as there can be an economic advantage to entering the market six months later, but this doesn't simplify the production ramp. Thus, when we examine the distribution and assess whether front-end loading is present, the answer is no. In fact, we sometimes observe a regression because these wafers are extremely valuable. If there's potential for higher yield, companies may implement additional process controls to maximize capability. This approach significantly differs from the conventional understanding of how process control ramps with new technology nodes.

Joe, the other thing is that when these nodes are well adopted. So the design levels are high, then that limits what our customers are able to do in terms of trying to reuse their equipment at least as it relates to our products. And so as we've had a litho roadmap, we've had new architectures, the Moore's Law attributes have been good that drive the design environment high, then it limits the reuse of capacity. There's a number of technical challenges that also limit it, but certainly, the adoption levels of the leading edge by multiple designs is a factor as well.

And let me add two more things. Because you have multiple reticles, reticles have always been 100%, right? You're inspecting all the reticles to make sure, and then you have a requal, but you're inspecting them to make sure they're good. And why? Because they're so expensive, and the cost of failure is so high. We're actually seeing that dynamic in packaging, too. Because the cost of these advanced packages are so high that they're running at 100%. So that doesn't even fall off. That's just because of the cost structure of those. So multiple situations, it's not as easy to model as it used to be, but it's good for process control intensity.

That's super helpful. As a follow-up, you mentioned that reticle inspection revenue this year would be a record or show strong growth. Can you help us understand what's driving that? I know that China has been a source of demand, but there seems to be significant demand at leading edge or in minus 1 nodes as well.

Yes, Joe. China is indeed a factor because there are very few captive mask shops, which necessitates investments to develop a merchant mask ecosystem. The older node reticle tools continue to play a role for us. There are requalification opportunities in the fabrication facility due to the number of designs, the value Rick mentioned, and the limited use of pellicles. Additionally, the growing prevalence of single die reticles is significant, as over 60% of reticles are single-die, requiring inspection against a reference. This could be either a database reference of the design or a different type of reference. We are also benefiting from print checks on the broadband plasma Gen 5 platform, which is involved in reticle qualification as well. This aspect contributes to our optical inspection results, rather than the patterning area. There are many driving factors and significant investments being made by customers to ensure that these reticles maintain good pattern fidelity and do not introduce defects. Achieving 100% defect detection during reticle inspection is crucial, as any defects would carry over to every die produced. There are several positive drivers across multiple products.

But just to point out, what Bren talked about using optical for print check, that is not included when we say we're having a record year in reticle, but it's without that.

Yes. So we'll report in the 10-K, I think we're going to file it here in another week or so. RPO will be somewhere around in the neighborhood of $7.9 billion.

So it came down by like $1 billion?

Came down by about that much, yes. We're starting to see, as we said earlier, as we've shipped through a lot of the long backlog customers now and some of the supply-constrained products, we're now seeing our business being driven by our long-standing customers that operate with shorter lead times. So now we're normalizing lead time. We've been talking about it for a number of quarters that we were moving towards it. I think now we're getting into that range where, look, our long-standing customers have historically 6- to 8-month lead times, the packaging business has 2- to 3-month lead times. So we're seeing a normalization of lead time that's happening here, and that's affecting the backlog level. It took a while to get here. We were up at, what, 18 months of backlog. Now we're down around 8 months of backlog. You have to remember, the RPO number is significantly a systems number. So when you do the math on it, you have to compare it against the systems revenue. And so when you do that math, you end up in that 7- to 9-month range that I talked about.

And just on service, you were thinking up 10% for the year, but you seem to be running ahead of that? It seems like maybe up like low teens this year. Can you talk about that in service?

I'm sorry, Tim, you're breaking up a little bit. In terms of service, I think we're in that ballpark. Yes, I expect it to be in the 10% plus range for the year.

Okay. So it's still expected to increase sequentially in September and December, correct?

Yes. It generally does, right? I think because as you add tools and tools come off of warranty, unless you have some situation where all of a sudden like you lose access to a fab, and we thought that might put some pressure on sequential growth. But we've also seen the dynamics in our service business start to inflect in terms of performance requirements, availability requirements, and our general attach rate. So it's the 52nd quarter of year-over-year growth for service, and we'd expect to see sequential growth in service as we continue through the year.

And ladies and gentlemen, we do have time for one more question this evening. We'll take that now from Brian Chin of Stifel.

I believe one of my questions has already been addressed, which you articulated well, regarding how these data center chips are revitalizing minus 1 nodes. That's an important point to highlight. My final question is, I could be mistaken, but it seems that in previous discussions, your near-term opportunity in advanced packaging was focused more on 2.5D or CoWoS packaging rather than HBM. Is that correct? Additionally, are you still addressing more inspection applications, or is metrology included in that as well?

Yes, most of our share gains that we've seen so far have been in the logic area with CoWoS, although we are seeing increased momentum in HBM. So we're pretty excited about the directionally where that's going. So it certainly is informing our view of share opportunities. It is more defect loaded than metrology because sampling rates for metrology tend to be a little bit lower as the design rules that are typically used in packaging are larger. And so that limits some of the metrology opportunities in the short run. But from an inspection point of view to Rick's earlier point, the sampling rates are incredibly high because you don't want to miss defects, you don't want to overkill devices either. So you don't want to underkill and miss something, you don't want to oversell either. And I think so that's driving higher sensitivity requirements from KLA.

Just thank you, everybody, for your time, for your interest in KLA. We appreciate it. We know it's a busy week of earnings, a busy day. We'll be in touch as we go forward. Thank you. Bye-bye.