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

Welcome to the September 2025 quarterly earnings call. I'm joined by our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results as well as our December quarter outlook, which was released after the market close and is available on our website along with the supplemental materials. We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified. All full year references made refer 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. We will begin the call with Rick providing commentary on the business environment in our quarter, followed by Bren with financial highlights and our outlook. Before I turn the call over to Rick, I wanted to provide a save the date for our Investor Day. It has been rescheduled for Thursday, March 12, 2026, in New York. Now over to Rick.

Thank you, Kevin. To kick off our call today, I'll cover a few highlights from our quarter that showcase how the company is benefiting from the growing relevance of process control and AI infrastructure investment and our momentum in advanced packaging. KLA delivered strong results across the board in the September quarter with revenue of $3.21 billion and non-GAAP diluted EPS of $8.81. GAAP diluted EPS was $8.47. This performance demonstrates how KLA's process control leadership has expanded beyond leading-edge R&D investment to address all growth markets in WFE, including high-bandwidth memory and advanced packaging. Accelerating investment in scaling AI infrastructure is fueling technology development investment across the leading edge, driving more designs, increased complexity, shorter product cycles and higher-value wafers. Alongside this growth, the industry is also seeing rising demand for advanced packaging. In this complex environment of rapid AI technology development, process control accelerates time to results by resolving process integration challenges during the fab ramp-up phase to optimize time to market for a diverse mix of semiconductor designs. KLA's leading-edge customers are also challenged to optimize yield and limit process variability in high-volume production environments, resulting in increasing process control intensity. In this increasingly complex semiconductor device technology landscape, we're seeing rapid growth in demand for KLA's advanced packaging portfolio, which has emerged as a meaningful market for the company as heterogeneous device integration has become more complex. KLA's advanced packaging systems revenue continues to gain momentum through a combination of intensity gains and market share improvements across our portfolio. For calendar year 2025, we expect advanced packaging related revenue to exceed $925 million, up approximately 70% year-over-year. KLA's service business also continues to deliver strong growth. Services grew to $745 million in the September quarter, up 6% sequentially and 16% year-over-year. Consistency and resiliency are hallmarks of KLA's service business. Finally, the September quarter was strong on both cash flow and capital returns front. Strong cash flow in the quarter was at a record of $1.066 billion. Over the past 12 months, free cash flow was $3.9 billion, with a free cash flow margin of 31%. Total capital return in the September quarter was $799 million, comprised of $545 million in share repurchases and $254 million in dividends. Total capital return over the past 12 months was $3.09 billion. In summary, KLA's business is both enabled and benefits from today's technology inflections and the growth drivers related to AI as well as from growth in advanced packaging. KLA's business has gone from being primarily indexed to leading-edge R&D investments in foundry/logic customers to now addressing all growth markets in WFE, including memory, advanced packaging, and leading edge and legacy node logic. As we look ahead over the next several years, the long-term secular trends driving semiconductor industry demand and investments in WFE and advanced packaging are compelling and represent a relevant performance opportunity for KLA. In this dynamic growth environment, our consistent execution reflects the resilience of the KLA operating model, the strength of our global team, and our disciplined approach to capital allocation focused on long-term investment and maximizing total shareholder value. With that, I'll turn the call over to Bren to discuss the quarter's financial highlights.

Thanks, Rick. KLA's September quarter results show strong double-digit growth year-over-year and improved profitability. Revenue reached $3.21 billion, surpassing the guidance midpoint of $3.15 billion. Non-GAAP diluted EPS was $8.81, and GAAP diluted EPS was $8.47, both exceeding the midpoint of their guidance ranges. Gross margin stood at 62.5%, which is 50 basis points above the guidance midpoint, due to a better product mix and manufacturing efficiencies. Non-GAAP operating expenses totaled $618 million, with $360 million allocated to R&D and $258 million to SG&A. The non-GAAP operating margin was 43.2%. Other income and expense net was a $28 million expense, mainly from a positive mark-to-market adjustment on a strategic supplier investment. The quarterly effective tax rate was 14.1%, leading to a net income of $1.17 billion and a GAAP net income of $1.12 billion. Cash flow from operations was $1.16 billion, and free cash flow was $1.07 billion. Detailed revenue breakdowns by market and product are available in the shareholder letter and slides. Now, regarding the balance sheet, we finished the quarter with $4.7 billion in cash and equivalents and $5.9 billion in debt. The company benefits from a flexible bond maturity profile, backed by investment-grade ratings from all major rating agencies. KLA's strong free cash flow generation is a core aspect of our business, supported by an efficient operating model and a distinguished service business. This enables us to pursue a comprehensive capital return strategy that includes consistent dividend growth and increased share repurchases over time. Our actions this year highlight our commitment to capital returns and confidence in long-term shareholder value enhancement. On April 30, 2025, we declared our 16th consecutive annual dividend increase of 12%, raising it to $1.90 per share per quarter, which amounts to an annual dividend of $7.60 per share. We have also announced a $5 billion share repurchase authorization. Looking ahead, our outlook is driven by heightened investments in leading-edge logic, HBM, and advanced packaging. The growth in advanced packaging, which supports heterogeneous chip integration, has opened a new significant market for KLA. Once a minor part of wafer fab equipment, this market is now estimated to be around $11 billion, growing even faster than core WFE. This is particularly true as chip density decreases and the processing needed for packages intensifies risk for our customers. This scenario creates a new available market that will contribute to KLA's revenue growth in the coming years. The market and technology roadmap for leading-edge WFE that supports high-performance computing is creating significant opportunities for process control. Coupled with the growing complexity of advanced packaging, this further broadens the market potential for KLA. As we approach the end of 2025, we still anticipate mid- to high single-digit growth in WFE, which is a slight improvement from our previous forecast discussed last quarter. The expected growth in 2025 will mainly stem from increased investments in leading-edge foundry/logic and memory to cater to the rising demands of AI and premium mobile applications, albeit partially offset by reduced demand from domestic China. Given KLA's business momentum, expanding market share opportunities, and intensified process control needs at the leading edge across all segments, we are on track to outperform the WFE market in 2025. The advanced packaging sector is also projected to grow more than 20% compared to last year. In conclusion, discussions with customers have become more positive regarding expectations for 2026 as a growth year for the industry, presenting a broader spending profile than 2025 for both WFE and advanced packaging. Although it's too soon for precise revenue guidance for 2026, we currently believe that first half revenue will be around flat to modestly up compared to the second half of 2025, with growth accelerating in the latter half of the year. This outlook considers the revenue loss related to certain customers in China due to extended export controls imposed by the U.S. government, which we estimate to impact KLA by approximately $300 million to $350 million for the December quarter and throughout 2026. This revenue impact is anticipated to be fairly evenly distributed between the first and second halves of the year. KLA's distinctive product portfolio and value proposition are aimed at facilitating technology developments, speeding up capacity ramps on process nodes, and ensuring high-volume production yield. The industry landscape and the complexity of our customers' technology roadmaps present both challenges and opportunities for KLA to sustain and enhance its performance. In this evolving environment, KLA is focused on customer support, future investments, executing product plans, and enhancing productivity across the board. For the December quarter, total revenue is expected to be $3.225 billion, plus or minus $150 million. Foundry/logic revenue from semiconductor customers is projected to be about 59%, with memory representing approximately 41% of Semi Process Control systems revenue. In memory, DRAM is anticipated to comprise around 78% and NAND the remaining 22%. These business mix estimates only pertain to our semiconductor customers and do not fully reflect total Semiconductor Process Control systems revenue. Gross margin is estimated to be 62%, plus or minus 1 percentage point, based on consistent factory output relative to the September quarter and expected product mix revenue. Operating expenses are expected to be approximately $635 million in the December quarter as we continue to invest in product development and infrastructure to support anticipated revenue growth. Given our growth expectations and product development needs, we will keep our operating expense trajectory. Our business model is structured to deliver 40% to 50% incremental non-GAAP operating margin leverage on revenue growth in the long run. Other assumptions include an estimated other income and expense net of about $32 million for the December quarter. The effective tax rate has slightly risen to 14% due to recent global tax changes. For December, GAAP diluted EPS is projected to be $8.46, plus or minus $0.78, and non-GAAP diluted EPS is expected to be $8.70, plus or minus $0.78, based on a fully diluted share count of approximately 132 million shares. In summary, our near-term revenue guidance indicates modest growth, aligning with our earlier views of relative top-line stability. We expect to significantly exceed the mid- to high single-digit growth rate of WFE in 2025, driven by increased process control intensity, including the substantial growth of the advanced packaging market. KLA remains dedicated to providing a unique product portfolio that meets customers' technology roadmap needs, paving the way for our long-term growth expectations. Our business is well-positioned to capitalize on today's technology transitions and growth drivers. We are optimistic about the customer engagements that shape our business forecast. Long-term secular trends boosting semiconductor industry demand and investments in WFE and advanced packaging represent significant performance opportunities for KLA over the ensuing years. Additionally, the rising investment in custom silicon, particularly among hyperscalers developing their custom chips, has resulted in a surge of unique device designs, increasing the demand on our customers to deliver on performance, volume, and market timing. As designs become more complex and diverse, so does the need for advanced process control solutions. Consequently, KLA has experienced growth in process control intensity, as new chip designs necessitate rigorous inspection, metrology, and yield optimization solutions. KLA is in a prime position to leverage these trends while expanding our market leadership and offering differentiated value to our customers. That concludes our prepared remarks. Let's proceed with the Q&A.

Thanks, Bren. Operator, can you...

Sorry, I was just going to pass it over to you to start the process. Thank you.

And we'll take our first question from Harlan Sur with JPMorgan.

Congratulations on the strong quarterly execution. Last quarter, you had an early perspective based on your lead times and customer discussions indicating that 2026 will be a year of growth. You reiterated this today, mentioning a more positive outlook on that growth rate. With an additional 90 days of visibility and ongoing rapid expansion in leading-edge design starts, along with the recent significant announcements in AI data center infrastructure, has the outlook for wafer fabrication equipment growth improved? Or is it more about the confidence level in the growth you anticipated 90 days ago? You also spoke about the wider spending profile for wafer fabrication equipment and advanced packaging. Could you provide further details on that?

Sure, Harlan. I'll start. Thank you for the comments. I don't know if it's really a strengthening outlook as much as it's just we're getting closer to it. Customers, particularly our long-standing customers and their lead time expectations, we're starting to get more constructive about exact timing. We're encouraged by what we're seeing certainly for KLA at the leading-edge with a broadening level of investment. We think that's going to be positive on leading-edge foundry/logic. DRAM is also constructive. And with the investments in HBM, that's been very process control intensive. And so that's been a really good sign as well. Flash market is, I think, continues to grow. The rest of the legacy market, I'm not so sure there's much growth there, and I think we'll have a little bit of a correction in China. Obviously, we're feeling the effects of some new control that's impacting our view into next year. But we were expecting China to normalize anyway. So I think, as we look at it all, we're pretty constructive on WFE growth, rising capital intensity, or process control intensity. And packaging has a lot of momentum, both in terms of intensity. So we feel pretty good about what's in front of us, and we'll have a lot more to say specifically about growth in the industry and our expectations for KLA beyond what we said in the comments. We'll have a lot more to say when we report for December and January.

One thing, Harlan, just to add to Bren's comment. What we do see and kind of feel is body language from customers are pretty strong in terms of wanting to make sure they're securing slots. So we're having kind of conversations with people not wanting us to get away from them because they're worried that they may not be able to achieve their objectives if they don't line us up. And I suspect that's across the other equipment guys, too.

Got it. And I appreciate that. And then specifically on advanced foundry and logic, in addition to the increased process control intensity, as the industry moves from 2-nanometer to less than 2-nanometer, right? There's an added dynamic, I feel like where your foundry customers are standing up fabs in totally new geographies, right? So more uncertainty on yield ramps, systematic defects, like different type of workforce, right? And then on the advanced logic side, the large guy here is more focused on building out a world-class foundry business, which means way more focus on yield and manufacturability versus their historical trend. Wondering if these additional dynamics are driving the potential for incremental process control spend as you look into next year?

I believe there is a lot of activity as customers adjust to the new design rules. Some of them, particularly those pushing the boundaries, are evaluating their needs for process control, and we are having very positive discussions about that. It's becoming clearer how various players are considering their investments in process control. If more companies are engaging in leading-edge developments across different locations, that will enhance the overall intensity of the market.

Yes. One of the themes over the last couple of years has obviously been significant investment augmented by China and legacy design rules. But when you think about leading edge, leading edge was tremendously efficient, right, with most of the investment being really driven by one of our customers. I think as you start to see a broadening out there, it creates more opportunities for leading-edge engagement, process control intensity as a lot of the strategic investment happens to support what is an accelerating growth opportunity for our customers. So I think we're encouraged by that profile as we move forward.

We'll take our next question from Vivek Arya with Bank of America.

On the foundry/logic side, you are, I think, guiding it to decline to 59% from 74% of sales, I believe, so a decline of over $300 million sequentially. I'm curious what's causing this drop? How much of this is the China restriction? How much of this is the China impact? And is this kind of just a 1 quarter lumpiness? Or is there more to read into it as we look into the first half of next year?

Yes. For our semiconductor customers, the mix on the leading edge is increasing in the December quarter, but this is being balanced out by a decrease in China. China was at 39% in September, which is higher than our expectations for the entire year, typically around 30% plus or minus. As China decreases, the leading edge is rising, and we are also seeing an increase in memory, especially in DRAM for the December quarter. There are various factors at play here. Regarding the recent export controls, their impact on the December quarter is relatively minor for the company overall, as we were able to adjust our schedules. We have certain products where customers enter the queue, allowing us to bring business forward. However, it's important to note that this will lead to lost business in the long run, and we estimate that to be around $300 million to $350 million through the end of 2026. I hope this provides some clarity on the situation.

Our next question will come from C.J Muse with Cantor Fitzgerald.

I guess I was hoping to focus on gross margins. You guided down 50 bps. I'm assuming that's just product mix. I would love to hear your thoughts there. And then, Bren, you're highlighting, again, the 40% to 50% incremental operating margins. If we are in a world where WFE continues to grow kind of in a double-digit world over the next couple of years, should we be thinking that you're at the higher end of that range given kind of greater contribution from the higher-margin silicon?

Yes, C.J., on the guide down, you're right, it's about 50 bps, and it's mostly related to just mix adjustments in the quarter. As I've said over the last couple of quarters, there is a tariff impact that we're dealing with, which is more or less consistent quarter-to-quarter. That's roughly 50 to 100 basis points of the impact. So yes, we're guiding 62% and output is relatively consistent. So it's really a mix issue. In terms of how we were thinking about running the company and over the long run, certainly our 40% to 50% long-standing incremental operating margin target does drive how we size the company. Gross margin obviously is a factor in that. And so we have to think about where gross margins are trending as we consider that. We outperformed that target pretty significantly as revenue has grown in the mid-teens. I'd call it above trend line growth in 2025. So as we move forward, I think the easiest way to think about that is if you're more or less a trend line, we're more or less in the middle of the target range. And if growth levels are above that high single-digit trend line, we should outperform it. If growth level is below, we'll probably underperform the target a bit. But that's how we're going to size the company over time, and our performance over longer periods of time is obviously very consistent with that.

We'll move next to Joe Quatrochi with Wells Fargo.

I appreciate the qualification or quantification on the advanced packaging WFE. I was curious just to think about just the advanced packaging process control intensity. I think just based on some of the things you put out there or talked about in the past, it's like high teens. Is that the right way to think about it? And then how do you think about where that goes over time?

No, I wouldn't say it's that high. If you look at KLA's share of wafer fab equipment, one of the interesting things is that it wasn't much of a factor for us in our business. A few years ago, the percentage for KLA was around 1%. Now, with our projections for 2025 around $11 billion, we're nearing 6%. This shows an escalation in intensity due to the fundamental changes in requirements related to high-performance computing in both logic and memory sectors. We expect this trend to continue over time. Although we don't anticipate such rapid growth, we do foresee that as density decreases and processes become more complex, the need for advanced systems will increase. We have our front-end portfolio ready to leverage this evolving market. We're entering a new serviceable available market for KLA, with strong drivers within wafer fab equipment that we believe will enhance our market share in process control. We're also expecting to see growth in advanced packaging, which will likely outpace wafer fab equipment growth modestly over time. Overall, this presents a promising opportunity. As we move up the value chain and develop new capabilities, it creates potential for us to achieve margins that are better than general corporate averages.

We'll take our next question from Tom O'Malley with Barclays.

Nice results. I wanted to ask a bigger one that people have been trying to discuss in the earnings period here. I understand that it wasn't in the preamble. But Lam went out and talked about $100 billion of AI spend is roughly equivalent to $8 billion in WFE or additional spend. And they talked about most of that being related to memory. Do you agree with that statement? Or do you have any qualification for how you would look at that ratio?

I think generally, if you consider the components that make up a data center, the portion that consists of memory, the portion made up of GPUs or logic, and the remaining elements, you could estimate that in a scenario of $100 billion, around half would be related to semiconductors. The dynamics of that contribute to the overall run rate, but the distribution between memory and logic isn't necessarily equal. Our assessment is that you are close to the mark. Additionally, as we discussed in packaging, we estimate that packaging could account for nearly $10 billion of the $100 billion due to investments that extend beyond just semiconductors. We believe our opportunities in this area are promising, particularly considering the high-level process control challenges associated with larger and more valuable die, as well as more high-bandwidth memory, which add complexity. Therefore, we are generally aligned and would factor in the packaging aspect, believing our engagement in this area is greater than the industry's average intensity.

We'll take our next question from Timothy Arcuri with UBS.

Bren, Rick was talking about customers starting to want to get in line for their orders. So I would imagine bookings were pretty good. So can you give us RPO? I know it was $7.9 billion last quarter. Where did it end this quarter?

Tim, we have changed our disclosures, so we're not providing that information anymore. However, I can tell you that our lead times have been converging after a few years of elevated backlog due to several greenfield projects that have now been completed. Looking at our business composition going forward, it's connected to some of our long-standing customers who typically operate within 6-month lead time windows. Our lead times have normalized to between 7 and 9 months. Historically, KLA's lead times were around 6 months in 2020 and 2021. Now, our customer base is broader, and there is a bit more new fab activity that may increase those times slightly. Our growth expectations for next year and their impact on KLA's first and second half are supported by an order flow consistent with those lead times. Each year in the 10-K, we will continue to provide our backlog, which will give a regular reference point. The lead times will remain in the 7 to 9 months range as we move forward.

I guess you did give it there last quarter, Bren, is that like new this quarter?

Yes. We changed our disclosure, Tim, and we highlighted that we were going to make that change back in the March quarter earnings results. We said when we started the new fiscal year beginning July 1 that, that disclosure would change. There were a number of reasons for that. The primary reason being the inconsistency in how that disclosure was being interpreted and reported across our industry. So we have aligned more closely with the disclosure that our peers have, and that's what we're going to do here going forward.

Okay. Then I guess as my second question. So you said last quarter, Bren, that China was going to be down 10% to 15% this year. But even to get down 10%, I have to have China down like $250 million Q-on-Q in December. Is that the right number that China is going to be back to like 30%, 31% in December?

Yes. In the December quarter, I think China will be high 20s. So yes, you're in the range. We'll see how the quarter finishes up. But I think in the high 20s is how I'm modeling and then it translates into maybe 30%, maybe 31%, very consistent with the way I've talked about it all year long. And the other thing I'd say is, as you look at 2026, we think it's probably it comes down into the mid-20s. And obviously, some of that is driven by the export restriction, but also some general normalization that we've been talking about that would be coming. So we think it's likely to settle somewhere in the mid-20s as we look at 2026, at least how we see it today.

We'll take our next question from Krish Sankar with TD Cowen.

Bren, I have a two-part question. First, you mentioned in the past that moving to 2-nanometer gate-all-around could result in a 100 basis points increase in your market share compared to 3-nanometer gate-all-around. Is that still accurate? Second, I recall that the advanced packaging share is about 50%. Based on that $11 billion and $925 million, it appears that the WFE intensity for advanced packaging is around the mid-teens. Do you believe that the intensity for advanced back-end process control is higher than for the front end, or is it still lower?

I think it's still below. Regarding the first part of your question, we haven't seen N2 as being more process control intensive. There's a significant architecture change involved. Additionally, larger die sizes provide opportunities for increased process control intensity. The lithography scaling and the layers associated with larger die or high-performance computing designs tend to increase the number of lithographic layers in the process. When we compare N2 overall to N3, we do observe an improvement in overall intensity. There is also a share component to consider, and we are encouraged by some of the share movements we've noted. In terms of advanced packaging, our logic share appears to be higher than our memory share. We will provide more details on how this market segments. Currently, KLA holds about 6% of the advanced packaging market, while our share in the process control market is closer to 8%. The process control intensity in this sector is not as high, and we're seeing elevated sampling rates lately. Over time, we will determine if this changes. Clearly, there will be a need for greater capability moving forward, and we will monitor how these factors evolve as our customers advance.

Then I think you also mentioned that some of your front-end tools are being used for back end. I'm just kind of curious, especially on the macro inspection or inspection side, is that an overkill? Like even ASML spoke about introducing new i-line tool for advanced packaging. Would you consider introducing new tools for back-end packaging? Or are you going to use the front-end tool?

It's interesting you mention that because our initial reaction was to question whether customers truly needed our front-end portfolio for the back end. They were quite adamant that they did need it, particularly considering the costs associated with yield failure in packaging. We've observed that, while these may not be our most advanced tools now, they were considered the best available a few years back. The customers actually came to us requesting this capability. As we consider the roadmap for advanced packaging, we’re in the early stages, and there are more technology advancements to come in HBM as the market progresses with these advanced packages. Currently, only a small portion of available packages are being inspected at this high level. Over time, as people become more familiar with this, the inspection frequency may decrease. This suggests our growth will persist but not at the same pace we've seen recently, though it should still exceed overall WFE growth. Our competitive position is strong for two reasons: we possess this capability, and unlike our competitors who originate from the back end, we have well-defined roadmaps that provide significant value to our customers.

And we'll take our next question from Charles Shi with Needham.

I noticed that based on your Q4 guidance, the KLA process control revenue in DRAM is probably going to grow 50%-ish year-on-year. I don't think the overall DRAM WFE is growing that much. And I think historically, people don't really think of KLA as a DRAM house, more of a leading-edge logic house. So wonder what's happening this year? Why is it growing this much faster than DRAM WFE? Specifically, is it kind of tied to the EUV insertion DRAM? And how do we think about 2026 DRAM side of the process control growth?

It's an interesting observation. For those of us who have been around for a long time, we remember when DRAM was at the forefront of technology and was the largest market for inspection for KLA. There was a period when the design rules for DRAM became somewhat stagnant, reducing the need for process control. However, with the emergence of high-bandwidth memory and the challenges associated with new design rules, we are now witnessing higher sensitivity requirements for certain DRAM layers than we see in logic. This marks a reversal in some areas, and we have seen significant early adoption as companies debug their processes and realize they lack sufficient process margin. Additionally, as they begin EUV, they are utilizing our systems for print checks. There are numerous applications driving this increase, which we anticipated. We hoped for earlier developments, but we are definitely observing leadership in specific areas regarding the need for process control as DRAM facilities are revamped to meet new market requirements.

Look, the introduction of EUV was certainly a factor in terms of process control intensity. We think overall, probably changed it about 1 point. But then if you look at the requirements for HBM, we think it's increased it another point or so. Rick talked about a lot of the issues. The other thing you have to keep in mind is that the reliability requirements in a stack of DRAM chips in an HBM device, the device is only as good as the weakest DRAM. And so the performance requirements, the process variability that the customer can accept, you can't bin these devices that go into an HBM integration. So there are a number of things that are happening there that are positive for process control intensity.

Got it. Maybe a quick follow-up. A couple of years ago, you mentioned the impact of delayed pellicleization on the KLA mask inspection portfolio. I understood that without a pellicle, your current mask inspection combined with print check is likely the most effective. However, with a pellicle, it seems that actinic might perform better. I recognize this has been a long-standing topic, but we've recently heard reports from Taiwan about your leading foundry customers possibly converting a fab into a pellicle fab. I’m curious about what this means for your overall strategy regarding mask inspection. Could you provide some insight on that?

Yes. So rather than going to specific strategies, specific customers have, I can tell you we're in conversations with all the leading mask manufacturers and the fabs in terms of what is their strategy relative to reticle qualification and requalification because it's a critical area. And although we don't have all the pieces in that, we have many of the pieces because there's many points along the way, whether you're calling the reticles in the fab, you're doing recall or you're doing verification and print check. So we're heavily involved in those conversations. As you know, the challenges with pellicleization and the trade-off is throughput. And so that's always the issue of using pellicles as you give up some of the light performance. There have been advancements, and we're well positioned to support those. But when we talk about a record year in our reticle business, obviously, people are buying with the future in mind as they do that, and we continue to see growth going forward. We feel pretty good about our ability to participate as we go forward in terms of any scenario that plays out. But I can tell you, we're very heavily involved with customers with those conversations.

We'll take our next question from Chris Caso with Wolfe Research.

I guess the first question is regarding the commentary on 2026. Could you give a little more detail about what you're seeing first half versus second half? I assume that it's a combination of advanced logic and DRAM driving that second half? And is that just simply a function of where your lead times are that some of the improvements we've seen over the past couple of months are just now flowing through in orders given where the lead times are right now?

Yes. As we said in the prepared remarks, I think the first half is maybe flat to slightly up. We'll see as we move forward where that ends up. But at least that's how it looks today. And I think you'll see growth accelerate more into the second half. Lead time discussions, we're talking about slots, but I think there's some facility dynamics also that are influencing some of the timing. But would expect advanced logic and the broadening of the investment that I mentioned to be a driver into the first half. But there's continued momentum on the DRAM front, too. So we're pretty encouraged by what we're seeing there. Obviously, it'll be offset by some weaker numbers out of China, but the leading-edge dynamics are encouraging.

Just a question on gross margins as we go into 2026 also. And with some of the mix changes, particularly with China probably coming down as a percentage of the mix, anything we should think about with respect to gross margins as we start modeling through 2026?

Sure, Chris, I'll provide more specific guidance on margins and operating expense expectations based on our revenue outlook for next quarter. KLA's gross margins are mostly influenced by the products we sell rather than the customers or regions we sell to. This means the impact largely depends on the types of products in our extensive portfolio, which is the most comprehensive in our industry segment. Different products can have varying margin profiles. For example, parts of the market like packaging typically have lower margins. However, I believe that over time, this will shift from being a hindrance to a benefit. While service typically has lower gross margins, it contributes positively to operating margins. There are several factors at play here. The impact of tariffs, particularly when comparing year-to-year, is more of a second-half issue this year. I'm hopeful that, with our efforts to mitigate exposure, this will become a less significant challenge over time. Although we will likely continue to face higher tariffs structurally, we are exploring ways to optimize our operations to reduce costs related to logistics and other factors, which will help alleviate some of these challenges. Various dynamics will lessen their impact over time, and volume growth will also play a role. I'll provide additional insights as we move forward, but these are some key factors to consider regarding the different moving parts.

We'll take our next question from Shane Brett, Morgan Stanley.

I wanted to follow up on Charles' earlier question, but your memory customers have been talking of CapEx growth into 2026. But just given how strong this December quarter DRAM guide is, how should we think about your memory growth expectations into next year relative to this really strong December quarter?

Yes, I apologize. I know that Charles asked that and we didn't answer that question. There are definitely some timing factors that are influencing process control, timing relative to other products. As I look at where we're at, I mean, this year has been a very strong year in DRAM for the company. I would expect next year to be a growth year as well. And I think a lot of these announcements, I think, as we start to see that play out, we'll see whether that is more of a second half dynamic into next year and how much that sort of carries forward. But what is clear is, across all of our customers, I expect them to spend more and to see growth in our DRAM investment from our customers into next year.

We'll take our next question from Edward Yang with Oppenheimer.

Rick, Bren, most of my questions have been already answered, but maybe you could talk about your outlook for foundry-related revenue opportunities outside the dominant Taiwanese customer. I think at least one major foundry has historically underinvested in yield improvement tools. Maybe that tune is changing. So are you seeing any change in engagement there?

Yes, I would say that we're encouraged by the broadening of investment that we're seeing at the leading edge as we go into next year.

Yes. The conversation qualitatively, the conversations we have with customers that are looking to, as you mentioned, not the leader that are looking to do advanced logic, we do have a lot of conversations around what they're asking our advice, what do they need to be successful, especially since they maybe haven't been pressing the latest nodes. And so there's a lot of conversation we have about the specific things they're trying to accomplish. It depends on the dynamics. It depends on their mix. It depends on their die size. It depends on what their expectations are for how fast they want to ramp. But it is, for sure, a lot of conversations we're having. And as Bren says, we feel pretty good about those discussions. I think for a lot of people, the process control part, they haven't really fully understood how the world has changed in the last few nodes. And so those conversations are ongoing.

And just as a quick follow-up. Yesterday, the leading AI accelerator company talked about a $0.5 trillion backlog. We're seeing these flurry of deals involving the major AI lab players. From your vantage point, can you level set for us, is the semi-cap industry position to serve that scale of demand? Or is the ecosystem discounting some of these projections as aspirational?

Yes, I would frame this a bit differently. The semiconductor industry has been cautious about increasing capacity. Currently, when we look at the discussions regarding capital expenditures and how that translates to wafer availability, it appears that there won't be enough wafers to meet those projections in the given timeframe. We believe this isn't necessarily negative; it suggests that the market is unlikely to overheat if those forecasts hold true, as there are more constraints than announcements being made. It's easier to declare investments in data centers than to actually build a new fabrication facility. Therefore, it will likely take some time for the industry to meet and manage the capacity demands inferred from all the public statements.

We'll take our next question from Blayne Curtis with Jefferies.

I want to revisit the comments about DRAM, particularly regarding the increasing capital intensity. I'm curious about the discussions happening around this. There have been some significant figures mentioned. I want to know if it was always the plan to increase DRAM production to this extent, or if plans have changed. Additionally, could you provide more insight into the conversations you've mentioned regarding the search for capacity? What obstacles are there? Is it simply a matter of needing more fab space, or is there uncertainty about demand? Any insights would be appreciated.

I would say there's definitely a heightened urgency regarding DRAM timing. We'll need to see how that develops in terms of capacity as we approach next year. Based on our lead times and what we can handle, we aim to collaborate closely with our customers on this. From a pricing perspective, the factors influencing HBM prices indicate a clear sense of urgency from our customer base. As I mentioned earlier, I anticipate that investment levels among the top three will be higher next year compared to what we're observing in 2025.

I believe there are three main components that support the development of AI infrastructure: GPUs and their accelerators, packaging, and memory. Over time, we will see different phases where one component may be in short supply. We previously experienced a phase where packaging was delayed. Now, many of our customers are realizing there may be more opportunities in memory than they initially thought, which is a change from what they communicated a few months ago. This shift in perspective is part of what we're observing. People are increasingly surprised by the variety of applications emerging from AI. Even within KLA, we continually discover new ways to utilize this technology. I don’t believe we’re the only ones doing this. Currently, those in the memory sector are realizing there's significant opportunity if they can increase their capacity. Our discussions reflect this awareness, as they understand it takes longer to scale the supply chain than to announce capital expenditures.

We'll take our next question from Jim Schneider with Goldman Sachs.

Maybe just one follow-up relative to the earlier question about the diversification in your leading-edge logic and foundry customer base. Is that something that's more on the inquiry level at this point? Or are you actually seeing that either in your order book or in the form of forecast from those customers at this stage?

We are definitely observing this, and it shapes our outlook for next year, reflected in the order forecast. As Rick mentioned earlier, there is considerable collaboration on how we can assist in navigating, ramping up, and accelerating time to results in this area.

And then maybe just as a quick follow-up. Maybe you can help us just refresh your expectations about kind of confirming mid-teens is the right level for service growth in 2025 and maybe give us a sense about whether that could accelerate next year?

Yes. We've seen service actually pick up a little bit here. It's been a little stronger than we expected. Obviously, we've had some FX benefits, but we've also had some strengthening as utilization rates have gone up. We've seen some strengthening in some of our billable business. So I think our service growth will be in our target range of 12% to 14% this year. And I would expect right now, as I look at next year, that we'll be in the same range as well. So I think we feel pretty good about where that is, both based on the growth expected in the installed base, the lifetime increase in the tools, the incremental value that's coming from the complexity in the systems and how that's affecting the pricing as it relates to contracts, the opportunities in the acquired businesses that we've acquired over the last few years to drive their service business and new requirements that we're seeing, this is a factor in 2025 as well. But as you think about packaging, a different service model for packaging, but also for DRAM, where the utilization rates to some of the earlier questions have been higher and higher expectations of performance of our system. So I think there's some new opportunities for growth there that, frankly, if you go back a couple of years, I don't think we fully anticipated, both on the packaging front but also on the high bandwidth memory front supporting HPC.

We'll take our next question from Timm Schulze-Melander with Rothschild & Co.

Actually, I just had one with respect to your outlook for next year. You talked about this broadening in demand for 2026. Could I just ask, could you just paint some color around to what extent that already bakes in high NA engagements or whether that would be an upside to your outlook for '26?

One thing, look, on the R&D front, there's a lot of collaboration with customers. How that translates into revenue is not part of the outlook. Most of what the engagement is, is on ramping the continuation of the N2 ramp, our 2-nanometer ramp across our customer base. And so it isn't influenced by the adoption of high NA in that time frame, certainly not in a material way.

We do have time for one additional question. We'll take our final question from Brian Chin with Stifel.

I appreciate that. Maybe a question here. I think there was a reference earlier about the potential for some acceleration in the second half of next calendar year. I'm sure it's not one single thing, but how much of that second half outlook is tied to new cleanroom space availability, knowing that some of your tools, probably some of the first that go into a greenfield fab?

Look, there are some issues, I think, with space constraints potentially. It's not, of course, on every customer, but I do think that it could affect some timing as we move into the second half of next year and into '27 as you start to think about the next node ramping and some of the new fabs coming online in memory. So right now, I don't think space is going to be an issue. Obviously, that would depend on the strength of demand, yes, that could change. But for now, it's certainly a factor, but I don't think it's a big factor as it stands today. We'll see how things go.

Maybe if I have time for a quick follow-up. Just on advanced packaging, I think to date, a lot of your inspection business strength has been strongly tied to logic. How much of your continued optimism on market and KLA growth in packaging next year involves expansion opportunities in HBM packaging?

I feel good about market share, both in logic and in memory on the packaging front. We've seen positive trends in both segments over the last couple of years, and I think that, that continues into next year.

Thank you, Brian, and thank you, everybody, for your interest in KLA. We appreciate your time today, and we'll be in touch. I'll turn it back over to the operator for any closing instructions.

Thank you. And this does conclude today's KLA Corporation September Quarter 2025 Post-Earnings Call. Please disconnect your line at this time, and have a wonderful day.