Kla Corp (KLAC) September 9, 2026 Conference Transcript

Global TMT Conference. My name is Atif Malik. I cover U.S. semiconductors and semiconductor equipment stocks. It's my pleasure to welcome Bren Higgins, EVP and Chief Financial Officer, KLA, as well as Kevin Cassell, VPIR and Market Analytics at KLA. Welcome, Bren.

Thanks for having me. You know, you almost got through it. I know. Rick. It's been seven years.

Yeah. And Rick was not happy. I remember a couple of years ago when I almost said that. Tencore didn't exactly just flow off the tongue.

But thank you for having us.

Giving you a hard time. All right. Definitely, Kaley. All right. Ben, you lifted your wave of fab equipment expectations this year to mid $150 billion and talked about upside potential to $190 billion WFE next year. You mentioned you're having conversations around deliveries to second half of next year. Can you just kind of help us understand how you're seeing the market shape in terms of AFAFAB equipment this year, next year, and even to 28, if you have any commentary?

Yeah, maybe I'll just level set a little bit on where we're at right now and some of the themes that came out of our earnings results back in July. It's been a pretty exciting time at KLA. If you just go back and look at, you know, in 2024, we grew 12%. In 2025, we grew 17%. In 2026, if you take our performance plus some of the guidance we gave, you end up in the low 20%. So over that time frame, the financial model has moved. We've been at the upper end of our incremental operating margin model and gained about 400 basis points over that time frame. in terms of operating profits. So one of the strongest models in the industry, both in terms of opportunity and share of market, but also in terms of leverage and operating performance has played through and we're pretty proud of that performance. 2026 has shaped up to be a year of increasing momentum, as you said, right? We started the year, we went back to our investor day. We thought the industry would be somewhere around 135 billion. That was just in March, 135 to 140 billion. And we did talk about greater than 150 billion expectations. So while our customers are struggling with space, they are figuring out ways to take equipment. First half of the year, a little slower in terms of sequential performance growth into the second half of the year, half to half, 20% higher in the second half versus the first half. So we're excited about that We're starting to see the momentum building, not only in what's happening with our customer engagement, but also in our ability to supply and get the needed components that we need for our systems. 2027 looks to be a pretty favorable environment. I think growth rates into 2027 are probably in a similar range, maybe higher. We'll see as we get closer to it some different views on that. But our orders are certainly our backlog is very strong. We just disclosed our backlog. We're just short of $13 billion in our 10K that we filed back at the beginning of August. And the order funnel has been very strong. And I would expect that backlog to continue to grow. So the visibility that we have from our customers into shipment expectations through 27 and in some cases into early 28 is pretty good. So our customers' profitability levels are extremely high, and so they certainly can support the level of investments that they're making. And the priorities for the company in this environment for us is just to, first of all, the execution. I talked about supply chain and trying to get systems out the door, aligning to our customer expectations, delivering on next generation products. I talked about the operating model earlier that comes from the innovation that we do at KLA, the differentiation in our products that's reflected in our gross margins. Our gross margins, I think, are the best indicator of differentiation in the industry. So it's typically what we point people to. If you have a differentiated business or not, it typically is reflected in the gross margins. So we need to be able to deliver those programs. that allows us to do some adjustments for pricing, both in terms of delivering new capability, but also dealing with costs. So it's a pretty important effort for us not to lose sight of our development requirements at the same time we're ramping to execution. And then driving our ability to support our customers through service applications and so on so we can keep these fabs running at high utilization levels, given the value of the chips that they're producing, both in logic but in memory. Yield is really critical. Printing money, if you will, in terms of incremental yield performance and how that translates to their financial results. So that's important for us to make sure that we're in position to be able to support them.

Let me double click on two things you mentioned, backlog and the supply situation. On the backlog, in your filing, your backlog grew 60% versus fiscal 25 to 12.6 billion. How should you think about the quality and the duration or what portion of this backlog is expected to be converted to revenue in the next 12 months or so?

So we didn't disclose that, but we are taking orders basically for the next, you know, in most cases, it's, you know, 12 to 18 month timeframes in an environment like this, you might be further on the end of that. And it can be product specific. Certain products, for example, are Gen 4 and Gen 5 tools will have longer lead times than our metrology tools, for example. But it's typically in a delivery window that's more or less in that timeframe. You can have facility schedules that will drive a customer to place an order to ensure that they're getting tools when that facility opens. So those schedules are tied to construction. And in some cases, you'll see orders from customers to ensure that they are slotted in the appropriate time frame for that construction schedule. Our engagement with our customers is very high. I mean, like our top five customers drive a lot of our business. But getting the orders tends to solidify, particularly in a constrained environment, both timing, commitment, and pricing. And so certainly getting the orders is really, I think, important to just lining those customers up the way we'd like to see it. So quality is always good, right? I think in this environment, customers, we behave differently when we get an order. So we want to make sure we get the order. And I think it helps set up how we're thinking about how we're building our own capacity, how we're driving capacity into our supply chain.

On the supply side, Bren, where are the biggest constraints for KLA today? you have talked about optics components being tight and sensors compute and just help us understand a supply perspective and some investors are kind of extrapolating peer commentary of doubling manufacturing to some sort of doubling WFE in 28 to 300 billion type numbers. But from your perspective, where do we stand on supply constraints?

Typically where we see the most constraint typically is around optical components. Optics have an intrinsic lead time that is just very long. Calcium fluoride lead times can be 18 to 24 months or more. The equipment that's used to make optics has a long lead time. So it's something that you have to plan for, not just what you're doing in the short run, but you also have to think about long-term. We are having conversations with our key optics suppliers around capacity requirements out into the 29 and 30 timeframe. So you definitely have to plan with a long-term horizon. We think that generally ensuring that we've got the capacity will take inventory. It's important for us to ensure that we can meet where our customer lead times are not necessarily going to match that lead time. So that's something we have to take long-term. We take a very partnership-driven approach to how we work with those suppliers, how we invest in both development but also in capacity and it can take different forms but they're pretty critical to us and if I could get more I could probably ship more today but you know we feel like we've got a pretty good trajectory in terms of our plans and what we're planning for as it relates to the different scenarios of growth of the next year and a half or so part of the reason why we've seen the second half start to improve. And our construct on 27 is new capacity that's come online that supported the second half. The industry pivoted very quickly. If you go back to this time last year, we weren't talking about 150 billion plus. We weren't talking about growth rates into 27 that are similar to what I mentioned earlier. So anytime you have a quick turn like that, then it does put a little bit of pressure in the short run. But in the long run, and our customers understand this, and we work with them in terms of slotting out how we can deliver capability. But we're seeing more come online here in the second half and we'll see that continuous move into next year.

But we're fair to conclude, like you said, your outlook in the second half is indicating that some of those constraints are improving. Yes, for sure. Let's talk about the end markets. DRAM is expected to lead the growth this year and even in next year. You guys benefit the most from foundry logic growth. There are many more steps, many more types of chips and mass sets and all that. That kind of plays into your strength on your portfolio of different inspection and metrology. So where are we in terms of the foundry logic growth? There's been this transition to gate all around for the last couple of years. we're seeing somewhat more demand on three nanometer and then customers are moving to two nanometers. So help understand how do you look at the Foundry Logic market this year and next year?

Well, Foundry Logic tends to have higher intensity for a lot of the reasons you talked about than memory. And Foundry Logic over the last year to two years has had a broader level of participation it's more than just one player investing and so that's good for the for the efficiency yeah the industry was very efficient at the leading edge you could argue maybe a little less efficient going forward as more players are investing to meet what is a pretty compelling opportunity that's out there over the next several years the technology roadmap both from a scaling point of view but also architecture has been good for for our business the design environment tends to drive process control intensity, and that's a good thing. More designs moving through fabs means our customers have to manage a much more dynamic environment. They have to deliver to tight market windows, different designs, test design rules in different ways. And so more designs, I think, benefits KLA in a unique way. The fact that you have more designs moving through fab doesn't necessarily change a process opportunity, but changes process control a lot. The value of those chips that come from those designs also is a factor that just if you have more at risk, you tend to invest more to ensure that it's functioning, not just that it works and yields, but it also bins consistent with specs and performance. So those are all good factors for process control intensity. We've seen intensity in the two nanometer node is higher than what we saw at three nanometer. I think it's driven by a lot of these factors. Big dye also carry defect density challenges, which is also where you have the same number of defects on a wafer. The yield impact is more significant when you have much larger dye, fewer dye in a wafer than in mobile, where you'd have, for example, where you'd have more. So all those are unique opportunities for process control. And we've seen it translate over the years in terms of higher intensity, more relevance, not just in accelerating yield cycles and ramping a fab, but also in high volume production. So that's been, I think, a change that's been good for us. Memory is changing, though, and it's been good. High bandwidth memory carries some unique attributes, both in terms of performance, less redundancy, larger die, more logic-like attributes, more logic in the base die, for example. And in a high bandwidth memory stack, for example, the actual device only performs as good as the weakest DRAM in the device. And so that has been a good thing for process control intensity. In some products, we've seen intensity in high bandwidth memory that has been consistent with what we see in advanced logic. So overall, we think high bandwidth memory has been a positive. It's not the same memory. Conventional memory has been a driver this year, and there's been more tech upgrades in terms of upgrades of existing capacity that historically has been a bit of a headwind, although you have more EUV layers and DRAM, conventional DRAM devices today than what you had in the past. So conventional memory is better. High bandwidth memory is better than that. And advanced logic is carrying some of these unique opportunities that we think creates an environment, not just for more KLA relevance in the early phases of a ramp cycle, but also in production. And we're seeing backporting of capability into N3 today, in addition to some of the N2 investment. And as we move into 2027, we're going to see the next investment in the next node from multiple players. So I'm pretty excited about that.

Brent, you mentioned HPM is logic-like. There is higher process control intensity. One of the concerns clients have is that with this kind of memory de-specking aspect, that some of the AI servers are putting less memory into their servers and maybe kind of coming down the stack from 12 high to 8 high or something. And can you talk about what impact, if any, that will have on your overall equipment demand if the industry is in this transition period where they're stacking less dyes versus historically?

I think the roadmap dynamics I talked about earlier, those are generally unchanged in the HBM environment. Obviously, the reaction from customers is to the pricing environment that exists today in memory with the supply-demand imbalance. I think this is, these are techniques that I think, you know, customers are looking at how they can become more efficient. And because I don't, you know, as I even see with our own memory costs, I don't, I don't like paying the prices that I'm paying for memory today. I don't think they like it either. And so I think these are adjustments they're making to try to get more efficient with the memory that they are using. But the roadmap dynamics around redundancy and I.O. count, size of dye, performance specs, you can't bin into a lower end device, you can't bin an HBN device, all those things we think are pretty positive in terms of overall intensity. And so I think that's more about the pricing environment and what's happening in terms of supply relative to demand that's driving that behavior.

Let's talk about new customers. Are you seeing a broadening in FoundryLogic customers? There's a new fab or a new project in the US. There's the MPU makers talking about significant increase in their capex next year. It's not really a new customer, but they're definitely ratcheting up their plans and spending. But just in terms of the greenfield opportunities, you guys do benefit from that a lot more initially versus Brownfield. Just can talk about how you see the broadening of FoundryLogic customers kind of expanding your time.

Well, like I said earlier, I mean, one thing about the last several years, there was a lot of investment. If you go back a few years ago, you know, a lot of investment in Logic that was happening in the legacy nodes. But at the leading edge, it was incredibly efficient, effectively one player investing. So as you look moving forward, you have multiple players. And so we're excited about the opportunity. Obviously, they feel that it's appropriate to invest given the opportunities they're facing. But that inefficiency that comes from multiple players investing will be good for KLA. And I think we've gotten really good traction for the reasons I talked about in terms of the kinds of devices that they're making, but also in our collaboration model, working with customers to deploy our capabilities in ways that accelerate those learning cycles that show KLA value. And I'm optimistic that that because that's the way you translates into into high volume production capacity ads. So if we can demonstrate that value in in earlier on in the investment cycle, then it does translate into more investment in in capacity. And so we're excited about those opportunities. We're investing to ensure that we have the resources to support these fabs in different locations and also ensuring that we have, you know, not just people to do service and to do applications, but also inventory to be able to support. So there's a lot of activity there that more customers is better. Excited about that.

Let's talk about advanced packaging. I think one thing that has kind of bifurcated your stock performance as well, your fundamentals from lithography in the last few years has been your participation in the advanced packaging market. You're talking about 70% year-over-year growth, which is 2x the rate of the market growth in the advanced packaging market. And the idea is that you guys have these front-end tools that are very much capable of looking at larger geometries and all that. you've been able to enter that market and take share. Can you help us understand where are we in that kind of adoption cycle of your kind of front-end tools being increasingly adopted on back-end, advanced packaging side, how much more room there is to expand share?

Yeah, no, it's a great opportunity. If you just go back a few years ago, our share of the advanced packaging market was a couple percent, right? Just a few years ago, 23 timeframe. And today, I think this year in 2026, likely to be somewhere, you know, between seven and 8%. So it's been a great opportunity. And as you moved to more front end like processing in advanced packaging, historic packaging was, you know, fan out packaging, it wasn't particularly complex from a process control or inspection point of view. And so sampling rates weren't particularly high. The need for advanced capability was much lower. And so it was a very competitive market, multiple players investing, certainly on the logic front. But as we move to high-performance compute packages, that has changed. You've seen more front-end-like processing, and that processing has driven more front-end tools. Our CEO tells a story that he got pulled into a meeting just a few years ago about the need for our front-end tools in advanced packaging. And, of course, the reaction from us was, hey, these are higher-end tools. You might not like the price. And the response from the customer was that, no, we're moving to front-end processing in packaging, and so we're going to need front-end capability. We had to do some engineering, and we did some engineering in our macro products, which had the highest market share in the segmented part of macro inspection. There was the front-end part, and then there was the packaging part, and there's 2.5D and 3D. We had the front-end share, so it was in some ways kind of logical that when they moved to more front-end requirements that the front-end share leader would get pulled into that. So it's been very good for our business. More success or more momentum on logic side. OSATs are an opportunity. Memory, less complex, but we think the share opportunities there will grow over time as new technology is introduced. So it's been a great opportunity, very high sampling rates, because you assemble this package, you have to integrate the HBM with the GPU or the custom ASICs. There's a lot of surrounding peripheral die. You have to integrate it, you have to make sure it works and it's spec. So the sampling rates are very, very high. And so that's been really good for that business. There's new technology related to hybrid bonding, which is more exposure and moves the sensitivity requirements down in terms of, you know, sub sort of one micron sensitivity. And so we think that you're going to be even, in some cases, down to, you know, even more advanced sensitivity requirements. And so it's driving more of the front-end portfolio. And so we've been able to leverage the R&D we did in the macro product in the other parts of the front-end portfolio. So we're getting some leverage on the R&D investment, mostly for handling and handling the different substrates because they're different in packaging than the standard 300-millimeter hard wafer that you could use in the front end. And so we're starting to see now this year, for the first time we're actually seeing with the introduction of this new technology that we're starting to see some of the higher end tools adopted. It's a pretty small percentage today of the overall, say it's probably somewhere on the order of maybe 20% or so. So I think over time of the total number that we talked about, that 70% growth number was 1.1 billion. As we move into next year with what's happening with agentic and CPU growth rates and some of the inference chips is going to create even more opportunities. So we're pretty excited about the die stacking opportunities that will happen there in advanced logic in the packages.

Let's talk about gross margins. It has been a topical topic with investors. We were a bit surprised by some of your systems' gross margins being 70%. Those are top class. Any room for improvement in the gross margins to, let's say, to reach your target level or even beyond that? What knobs you have in kind of value-based pricing, operational efficiencies? Obviously, memory pricing coming down will be a huge tailwind whenever they start to normalize.

Yeah, no, memory has had an impact. And when this thought of us, we were pretty smart early on securing supply very early in the process, but then the momentum in the industry has driven more demand. So we've had to buy more memory at current prices, which we don't love. So the impact on our gross margins, which we thought was closer to 75 basis points is probably slightly ahead of 100 basis points today. So it's certainly more of a headwind. Our target model for gross margin is, if you look at our business, it's generally to drive 60 to 65% incremental gross margins. Target model we presented was between 63 and 64%. We're operating in the low 62 range today, you know, we do have the headwind that you mentioned. There are puts and takes. I mean, value pricing is nothing new for KLA. I mean, our approach to our customers is a deep understanding. We think it's a core competency of the company, of the value that our products deliver in terms of faster learning rates, yield improvement. And as we introduce new capability, we improve our customers' cost of ownership, and we get to share in that value that we create for them. So that's typically where we adjust our pricing is when you when you have you introduce new capability, improve cost of ownership, that's an opportunity to deal with your costs, if you do your engineering, right. And also to meet their their targets. So customer benefits, but we also benefit. So we're able to usually adjust and we have been. But things like memory have, you know, escalated in a pretty rapid rate. So we'll take time for that value pricing opportunity to play out. There are puts and takes and mix. Packaging, we just talked about it, but packaging generally carries a lower gross margin, a great gross margin dollar opportunity, which is, I think, really what we're here for. Not every market carries the same margin profile. Growth in our EPC businesses, our PCB businesses, our semiconductor process business, those margins are lower, but that business is now growing, supporting the high-performance compute environment, those carry lower margins too. So I think there's some puts and takes. We factored that in as we thought about the long-term gross margin model that we should be able to drive 63% to 64% over time. And that's our plan here moving forward. We will drive leverage out of our manufacturing operations on the scale of volume. There's a ton of investments that are happening really worldwide. I run facilities also inside the company. and every site, you know, you have a project plan. And when you're dealing with structural growth, the way we think, the way we laid it out at Investor Day, it's, you know, as soon as you get to a place where you think you're done, you're moving on to the next decision. For example, I'm going to Singapore later this year to do a grand opening and a groundbreaking on the same trip. I'm gonna try to be efficient with the trip. So it'll be clip and scoop and try to get it all done at once. So these are things that we're gonna invest in that support the growth moving forward. But I think that there's leverage in the model. Ultimately, it's going to translate in that 60-65, how we run the company, and 40% to 50% incremental operating margins.

Great. Let me pause here and see if there are any questions in the audience. If you have a question, please raise your hand. All right, we'll just keep moving. Brent, Kaylee uses a lot of AI and software in your tools, and I believe that that's one of your key moat. Do you view that AI models becoming more capable to be a net positive for KLA? It's interesting.

We started investing in AI back in 2015 or so. We've had it in basically in all of our products. The first product was 2018, 2019, an electron beam inspection product. It's deployed across the portfolio today, physics-based AI. One of the way we, I think we bring a unique, First of all, no one generates more data in a FAB than KLA. And so the ability to process that data, move from a raw image to a processed image that factors in both hardware dynamics, context, applications, and then the algos that ultimately allow us to understand what's going on in terms of signal-to-noise and get ultimately speed, time, to results as a core competency of the company. And we're able to then take some of that capability. For example, I mentioned the electron beam tools where you can use AI to train your inspectors, to point your inspectors more effectively, as an example. So we're using it in a number of ways. We're using it in recipe development and applications. We use it in our systems. We're doing things inside the company to drive productivity, both from an RD point of view, but also in our business operations. We're pretty excited about it. The architecture benefit is clear. We see it in our own image computing, where we're able to drive more capability at lower cost. And so we're big believers in this transition to in high performance compute. what it means. We think it's a pretty good microcosm of what an AI data center is facing in terms of the compute transition. And so we're seeing it in our own systems and we think it translates. So we're pretty excited about the benefits we see in our own systems. And we're able to use the capability in a lot of different ways.

We didn't talk about services business with all these increased shipments this year, next year to reflect WFE, should we be thinking differently about the services growth rate beyond the kind of the mid-teens range with these higher tool shipments?

Now our service business is pure service, right? So there's no systems in there. And we have a updated target growth model of 13 to 15% moving forward. 80% is contract-based. So subscription like in a lot of ways. And the service business, we believe, carries an operating margin profile in terms of profitability that's secreted to the overall. So it's a very resilient business for the company. It provides a nice anchor through any sort of cyclical dynamic where it's only had one down year, I think, in 25 years. Right. So it's a it's a very unique service business. As we ship more tools, it creates more opportunities. I mean, what our business is, it's a very relatively low volume, very high mix, high complexity service business. It's very hard for our customers, given the fleets they have. They don't have redundancy. They tend to run them at very high uptimes to do their own service. So they rely on us to do service and to have a predictable level of support that shows up in that contract that we can customize to their needs. So we can deliver uptime, we can deliver matching performance, and so on. So it carries a resiliency and it will grow as new systems are shipped. And if we end up at a higher growth rate overall in terms of our system expectations, certainly when we laid out that target at 13% to 15% back in March, we had a view of the industry over the next five years. I would say that that view looks conservative today. So I think it does create an opportunity for us to drive more growth out of service. it will move slowly, but it tends to be pretty resilient over time and would expect it to be pretty predictable as well.

All right. And one question on the e-beam product and the attach rate, you've talked about expecting 80 to 20 optical to e-beam split. When do you see that reaching that level?

Yeah, I mean, historically, it's been about 80, 20, and there's been periods of time where it's been higher. I think today it's probably a little bit higher in the higher end of the, you know, maybe 85% plus. A lot of it has to do with the relative growth rates of both parts of the market. Customers will use, I mean, eBeam inherently is a slow technology, so its applicability in production is not as high as an optical solution. So a customer is really trying to, you know, what's the most advanced capability to meet the problem at the most effective cost. And so typically, what you see is optical technologies in production. But there are certain electron beam opportunities where, again, you use it around certain defect types where you can only find it with eBeam. And so customers will deploy it in production because they're inspecting for a very specific type of defect. There are a number of those buried defects and a gate all around structure that we have participated in. Or we use it to point the inspectors. So I would expect that ratio to hold more or less consistent. You're using multi-beam technologies, which are you sacrifice a little bit of resolution relative to a single beam, but there's some electrical defects and buried defect use cases that make sense. So the tools will continue to be complementary. I would expect that, you know, where the fastest growing market, certainly process control, maybe in the overall industry will be an optical inspection, optical high-end optical pattern inspection and and so you'll see that continue but e-beam will has its place and will continue to grow you know i think along with that so i don't think the ratio changes all that much moving forward um and i think it's just because of the the the nature of the physics it's the optical solution meets the requirements in high volume production so you'll see that in the vast majority of the use cases great we're almost out of time and brand thank you oh sorry you have a question can we have the mic here yeah oh right here right i had a question on market share yes

you know applied has been pretty vocal in describing you know process control is one of the best growth opportunities there that business for them is going to grow 50 this year um how do you think of you know and their approach is this integrated uh you know bundling strategy how do you think about that that threat versus your position as you know best in class in process control so we've gained share over the last several years we've gained share in the last year over the last several years we've continued to gain share uh within process control we're the only provider that that comes to uh in this industry with a portfolio that we have that

allows our customers to mix and match, depending on where they are in a development or in a yield cycle, mix and match the kind of capability they need to meet their needs. So we feel pretty good about our competitive position. Our business model and market attracts competition. I think that they like the profitability, but we feel pretty good about our strategies. We feel pretty good about the portfolio. If I had a nickel for every time one of our competitors talked about gaining share in the industry, I'd have a lot of nickels. So I feel pretty good about our position. And I think we'll continue to gain share here moving forward. One thing that is clear is that if we can deliver more capability, there's room for us to have more share. And we've seen, as we've worked with customers in the most critical areas, but even in less critical areas, that we can work in a much more collaborative way to gain share. So we feel the packaging we talked about earlier, E-Beam is another opportunity. And then some of the core markets, we continue to maintain the momentum we've seen. Thanks. Thank you, Brent, for coming to City Conference. Thanks for having us.