Shareholder letter
Page 1
Letter to Shareholders Q1 Fiscal 2026 QUARTER ENDED SEPTEMBER 30, 2025 | REPORTED OCTOBER 29, 2025
Page 2
KLA Earnings | Letter to Shareholders | September Quarter 2025 – Reported October 29, 2025 Page 1 Dear KLA Shareholders, This quarter’s shareholder letter provides business and financial highlights for the September 2025 quarter and guidance for the December 2025 quarter. September 2025 Quarter Results KLA delivered strong across-the-board results for the September quarter. Revenue was $3.21 billion, with non-GAAP diluted EPS at $8.81 and GAAP diluted EPS at $8.47. KLA’s leadership in process control uniquely positions the company at the forefront of the infrastructure build-out necessary to support Artificial Intelligence (AI). Demand for leading-edge logic, DRAM led by high- bandwidth memory (HBM) and advanced packaging capabilities were key drivers of KLA’s performance in the quarter. Investment in scaling AI infrastructure and capabilities has accelerated growth across the leading-edge of the semiconductor industry, driving more designs, increased complexity, shorter product cycles, higher-value wafers, and rising demand for advanced packaging. In DRAM, AI-driven investments have been focused on HBM, which demands superior performance, improved reliability, reduced redundancy, and advanced logic circuitry integrated into the base die that controls the HBM stack. The rising relevance of process control is driven by continued semiconductor scaling, the adoption of new architectures and materials, and increasingly complex and diverse device designs. Specifically, process control accelerates time-to-results by resolving process integration challenges during the fab ramp-up phase and optimizing yield in high-volume manufacturing with a diverse mix of semiconductor designs. Increasing design mix of high-value large chips presents new challenges for our customers as they optimize yield, limit process variability, drive capital efficiency, and manage delivery timing in a high-volume production environment. These dynamics serve as a tailwind for higher levels of investment in process control in high-volume production. Now, beyond traditional wafer manufacturing challenges in the front-end of the process, the evolution and growing complexity of advanced packaging is generating new demand and opportunity for KLA’s process control and process solutions. Finally, as KLA systems grow more technically advanced and have a longer service life in the fab, our Service business continues to gain importance, driven by rising customer expectations for tool performance and availability, creating a strong long-term tailwind. To meet this growing demand, the company applies the KLA Operating Model to facilitate customer collaboration, drive focus on productizing new innovations in our product roadmaps and ensuring that our business operations can scale and execute to capitalize on industry growth and expanded market share in the most critical markets for our customers. Top 5 Highlights September 2025 Quarter First, KLA revenue increased 13% year-over-year in the September quarter, fueled by continued investment in leading-edge Foundry/Logic and DRAM via High Bandwidth Memory (HBM). In Foundry/Logic, the continuation of scaling with an increasing pipeline of leading-edge design starts, adoption of larger die sizes in advanced architectures, and increasing capital intensity continue to serve as long-term secular drivers that uniquely benefit process control. Second, AI continues to be a core driver of KLA’s performance and a key differentiator in our industry leadership. KLA’s systems leverage AI to generate actionable insights that accelerate chip production for the next-generation AI applications. KLA has integrated AI into its systems, redesigning its compute infrastructure to a GPU-based architecture to enhance algorithm robustness and performance while
Page 3
KLA Earnings | Letter to Shareholders | September Quarter 2025 – Reported October 29, 2025 Page 2 driving greater cost efficiency and time-to-results. Future innovations with AI will produce actionable data for our customers that accelerate system performance, reduce the cost of ownership, and improve their return on investment in KLA systems. Third, our advanced packaging portfolio continues to perform well. The rising demand for more powerful systems of chips is driving increasingly complex heterogeneous device integration, enabled by advanced packaging. This trend is increasing the value of process control in the chip package and fueling significant growth in this expanding market for KLA. Customer adoption of KLA’s advanced packaging portfolio demonstrates the success of our strategic market diversification and validates the strength of our current product capabilities and our long-term technology roadmap. KLA’s advanced packaging systems revenue continues to gain momentum through a combination of market share improvement across all customer segments and intensity gains. As we enter the last quarter of the calendar year, we continue to see momentum in our product offerings versus our competition and expect advanced packaging-related revenue to exceed $925 million in calendar year 2025, rising approximately 70% year-over-year. Fourth, the KLA Services business grew to $745 million in the September quarter, up 6% sequentially, and 16% year-over-year. This was its 53rd consecutive quarter of year-over-year growth, as its consistency and resiliency remain key aspects of this differentiated business in the industry. Finally, the September quarter was strong from a cash flow and capital return perspective. Quarterly free cash flow was a record at $1.066 billion. Over the past 12 months, free cash flow was $3.9 billion, with a free cash flow margin (free cash flow as a % of revenue) of 31% over the same period. 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 twelve months was $3.09 billion. KLA’s performance reinforces our leadership in process control and the value of our broad and differentiated portfolio. It also underscores the critical role KLA’s products and services play in supporting semiconductor industry growth. 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. September 2025 Quarter Financial Highlights KLA’s September quarter results reflect double-digit year-over-year growth and improved profitability. The results also exemplify our market leadership, consistent execution, and the dedication of our global team in meeting customer commitments. Revenue was $3.21 billion, above the guidance midpoint of $3.15 billion. Non-GAAP diluted EPS was $8.81 and GAAP diluted EPS was $8.47, each above the midpoint of the respective guidance ranges. Non-GAAP gross margin was 62.5%, 50 basis points above the midpoint of guidance due to stronger product mix and manufacturing efficiencies. Non-GAAP operating expenses were $618 million. Operating expenses included $360 million in R&D and $258 million in SG&A. Non-GAAP operating margin was 43.2%. Non-GAAP other income and expense, net, was a $28 million expense with upside from guidance principally provided by a favorable mark-to-market adjustment of a strategic supplier investment. The quarterly non- GAAP effective tax rate was 14.1%.
Page 4
KLA Earnings | Letter to Shareholders | September Quarter 2025 – Reported October 29, 2025 Page 3 Non-GAAP net income was $1.17 billion, GAAP net income was $1.12 billion, cash flow from operations was $1.16 billion, and free cash flow was $1.07 billion. The company had 132.4 million diluted weighted average shares outstanding for the quarter. Breakdown of Revenue by Reportable Segments and End Markets KLA delivered double-digit growth on a year-over-year basis in the September quarter. Revenue for the Semiconductor Process Control segment, including its associated Services business, was $2.90 billion, up 1% sequentially, and 13% on a year-over-year basis. The approximate Semi Process Control systems- only mix for our Foundry/Logic and Memory semiconductor customers was 74% for Foundry/Logic and approximately 26% for Memory, with DRAM accounting for 79% of Memory revenue, driven by HBM investment, and NAND accounting for the remaining 21%. Revenue for the Specialty Semiconductor Process segment, which includes its associated Services business, was $120 million, down 16% sequentially and down 7% on a year-over-year basis. PCB and Component Inspection revenue was $190 million, up 23% sequentially and up 37% year-over-year.
Page 5
KLA Earnings | Letter to Shareholders | September Quarter 2025 – Reported October 29, 2025 Page 4 Breakdown of Revenue by Major Products and Regions Wafer Inspection systems were down 13% sequentially, but rose 12% year-over-year in the September quarter, totaling 48% of total revenue. Patterning systems, which include metrology and reticle inspection, were up 47% sequentially and 16% year-over-year, accounting for 21% of revenue in the September quarter. Demand in the quarter was driven by strong customer acceptance of products in our reticle inspection portfolio. Specialty Semiconductor Process systems revenue was down 19% sequentially and down 11% year- over-year and finished at 3% of revenue. The Specialty Semiconductor Process business creates new growth opportunities for KLA beyond w process control, including the growth in advanced packaging and specialty device manufacturing. Though this business is exposed to different market segments that are experiencing discrete growth profiles in 2025, we expect it to continue its year-over-year growth trajectory for the calendar year. PCB and Component Inspection systems revenue was up 37% sequentially and up 61% year-over-year, ending at 4% of revenue. The strong growth in this segment reflects the increasing value and more rigorous testing requirements in the final inspection of high performance compute devices after increasingly more complex advanced packaging processing is completed. Services revenue grew 16% year-over-year and increased 6% sequentially to $745 million, representing 23% of KLA revenue. Other, which is included in the Semiconductor Process Control segment, was 1% of revenue. In descending order, the September quarter regional revenue split was China at 39%, Taiwan at 25%, Japan at 9%, Korea at 9%, North America at 9%, Europe at 5%, and the Rest of Asia at 3% of total revenue.
Page 6
KLA Earnings | Letter to Shareholders | September Quarter 2025 – Reported October 29, 2025 Page 5 Strong Investment Grade Balance Sheet KLA ended the quarter with $4.7 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 investment-grade ratings from all three major rating agencies. KLA’s balance sheet enables us to fund our growth strategies, both organic and inorganic, and offer attractive capital returns to shareholders. FCF Generation Fuels Consistent Capital Return to Shareholders A 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, highly differentiated services business. This helps drive a comprehensive capital return strategy that includes consistent dividend growth and increasing share repurchases over the long term. This strategy supports a strong track record of predictable and assertive capital deployment and remains an important differentiating element of the KLA investment thesis.
Page 7
KLA Earnings | Letter to Shareholders | September Quarter 2025 – Reported October 29, 2025 Page 6 Our actions this year emphasize our commitment to capital returns and our confidence in the long- term shareholder value accretion of KLA. On April 30th, 2025, we announced the 16th consecutive annual dividend increase, 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 $5 billion share repurchase authorization. Return to Shareholders Across Both Share Repurchases & Dividends Free Cash Flow and Capital Return Highlights KLA’s well-documented history of consistent free cash flow generation, high free cash flow margins, and strong free cash flow conversion runs across all business cycles and economic conditions. KLA has grown the quarterly dividend level in line with an approximately 15% compound annual growth rate target since its inception. The company has also consistently repurchased shares. These capital return actions reflect our focus on assertive capital allocation, confidence in our long-term business model and growth strategies.
Page 8
KLA Earnings | Letter to Shareholders | September Quarter 2025 – Reported October 29, 2025 Page 7 Semiconductor Industry Demand Environment The Semiconductor industry has experienced significant market expansion and diversification over the past two decades. Semiconductors are a significant factor in the global economy, and as semiconductor end markets continue to diversify, we see continued innovations in semiconductor designs and manufacturing processes. Today, the expanding demands of high-performance computing and data centers, fueled by widespread adoption of AI, are driving industry growth. Combined with the broadening adoption of semiconductor-based technology and diversified end market demand, these changes are driving stronger, more resilient long-term industry growth. AI is creating a technology inflection point that is driving innovation and demand at the leading-edge. KLA’s portfolio of solutions are uniquely positioned to enable leading-edge demand and the ongoing buildout and upgrade of the world’s data centers serving both commercial and sovereign high- performance computing requirements. For providers of leading-edge semiconductor production capacity, this growth, coupled with rising and diverse design starts, accelerating product cycles and larger die, increases the opportunity but also the risk in accelerating time-to-market and ensuring chips function in line with higher performance specifications in increasingly higher value devices. These trends are encouraging and should lead to increasing relevancy for KLA as measured by the share of the WFE market over the next several years, as our broad product portfolio plays a critical role in enabling our customers' success. This growth opportunity, in combination with the emerging and faster-growing advanced packaging market, positions KLA well on a relative basis. Finally, increasing semiconductor content across diverse end markets, along with strategic investments in legacy nodes, are key drivers of dependable, long-term growth for the semiconductor equipment industry. Industry Outlook The industry outlook continues to be driven by increasing investment in leading-edge logic, HBM and advanced packaging. The growth of advanced packaging supporting heterogeneous chip integration has led to a new, meaningful served market for KLA. What was once a rounding error in WFE calculations is now, according to KLA internal estimates, an approximately $11 billion market growing faster than the core WFE market. This is particularly true as chip densities shrink and the processing required for packaging creates risk for our customers. For KLA, this creates a new served available market (SAM) that will augment the company’s revenue growth over the next several years. The market and technology roadmap for leading-edge WFE supporting high performance compute is driving relative inflections for process control. This opportunity, coupled with the evolving complexity of advanced packaging, supports an even broader market for KLA. As we approach the close of calendar year 2025, we continue to expect mid-to-high-single digit growth in WFE, modestly improved from our previous outlook discussed last quarter. Growth in 2025 is being 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 demand from domestic 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 on track to outperform the WFE market in
Page 9
KLA Earnings | Letter to Shareholders | September Quarter 2025 – Reported October 29, 2025 Page 8 2025. The advanced packaging market is also expected to grow more than 20% compared to last year. Finally, customer discussions have become more constructive on expectations for calendar year 2026 to be a growth year for the industry, with a broader spending profile than 2025 for both WFE and Advanced Packaging. While it is still too early to provide precise calendar 2026 revenue guidance, our view today is that first half revenue levels will be roughly flat to modestly up compared to the second half of calendar 2025, with accelerating growth in the second half of the calendar year. This outlook is inclusive of the revenue impact related to additional market access loss related to certain customers in China resulting from extended export controls from the US government. We estimate the revenue impact on the December quarter and calendar 2026 to be approximately $300 to $350 million for KLA. For calendar 2026, this impact is spread roughly evenly across the first and second half of the year. KLA’s unique product portfolio differentiation and value proposition are focused on enabling technology transitions, accelerating process node capacity ramps, and ensuring yield entitlement in high-volume production. The market environment and the complexity of our customers’ technology roadmaps are compelling and bring challenges and opportunities for KLA to continue its relative performance. In this industry environment, KLA remains focused on supporting customers, investing for the future, executing product roadmaps, and driving productivity across the enterprise. Outlook for the December 2025 Quarter KLA’s December quarter guidance is as follows: total revenue is expected to be $3.225 billion, plus or minus $150 million. Foundry/Logic revenue from semiconductor customers is forecasted to be approximately 59%, and Memory is expected to be approximately 41% of Semi Process Control systems revenue to semiconductor customers. Within Memory, DRAM is expected to be about 78% and NAND the remaining 22%.. As always, these business mix approximations pertain solely to our semiconductor customers and do not fully reflect our total semiconductor process control systems revenue. Non-GAAP gross margin is forecasted to be 62% plus or minus one percentage point based on relatively consistent factory output vs. September and product revenue mix expectations. Non-GAAP operating expenses are forecasted to be approximately $635 million in the December 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
Page 10
KLA Earnings | Letter to Shareholders | September Quarter 2025 – Reported October 29, 2025 Page 9 roadmap 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: Non-GAAP other income and expense, net, of approximately a $32 million expense for the December quarter. The non-GAAP effective tax rate assumption has risen slightly to 14% reflecting the impact of recent global tax changes. For the December quarter, GAAP diluted EPS is expected to be $8.46 plus or minus $0.78, and non-GAAP diluted EPS of $8.70 plus or minus $0.78. EPS guidance is based on a fully diluted share count of approximately 132 million shares. In Conclusion Our near-term revenue guidance shows modest growth and is consistent with our views from the start of this year of relative top-line stability. We expect to meaningfully outperform the mid-to-high single- digit WFE growth rate in 2025 driven by rising process control intensity inclusive of the significant growth of the advanced packaging market. KLA focuses on delivering a differentiated product portfolio that addresses customers' technology roadmap requirements which are driving our longer-term relevance and growth expectations. With the KLA Operating Model guiding our best-in-class execution, KLA is focused on implementing our strategic objectives designed to drive outperformance. KLA’s focus on customer success, innovative solutions, and operational excellence drives industry-leading financial performance, enabling us to return capital consistently. KLA’s business is well-positioned for today’s technology inflections and growth drivers. 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. KLA’s business has gone from being primarily indexed to leading-edge R&D investment and Foundry/Logic customers, to now addressing all growth markets in WFE, including memory, advanced packaging, and both leading-edge and legacy-node logic. In addition, the growing investment in custom silicon, particularly among hyperscalers developing their own custom chips, has led to a proliferation of unique device designs and increased demand on our customers to deliver performance, volume, and time-to- market. As design complexity and diversity grow, so does the need for advanced process control. As a result, KLA is seeing growth in process control intensity, as each new chip design requires rigorous inspection, metrology, and yield optimization solutions. KLA is uniquely positioned to benefit from these trends as we expand our market leadership and deliver differentiated value to our customers. Sincerely, Rick Wallace, CEO Bren Higgins, CFO
Page 11
KLA Earnings | Letter to Shareholders | September Quarter 2025 – Reported October 29, 2025 Page 10 Appendix
Page 12
KLA Earnings | Letter to Shareholders | September Quarter 2025 – Reported October 29, 2025 Page 11
Page 13
KLA Earnings | Letter to Shareholders | September Quarter 2025 – Reported October 29, 2025 Page 12 About KLA Corporation KLA Corporation (KLA) is the world's leading supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's comprehensive portfolio of products, software, analysis, services, and expertise is designed to help Integrated Circuit (IC) manufacturers manage yield throughout the entire wafer fabrication process-from Research & Development to final yield analysis. KLA offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. We provide advanced process control and process-enabling solutions for manufacturing wafers and reticles, integrated circuits, Packaging, and printed circuit boards. In close collaboration with leading customers across the globe, our expert teams of physicists, engineers, data scientists and problem-solvers design solutions that move the world forward. Additional information may be found at: www.kla.com. Investors and others should note that KLA announces material financial information to investors using an investor relations website (ir.kla.com), including SEC filings, press releases, public earnings calls, and conference webcasts. These channels are used to communicate with the public about the company, products, services, and other matters.
Page 14
KLA Earnings | Letter to Shareholders | September Quarter 2025 – Reported October 29, 2025 Page 13 KLA’s Broad Portfolio Addresses Entire Semiconductor Ecosystem Semiconductor Manufacturing Related Electronics Industries • IC Manufacturing • Compound Semiconductor • Wafer Manufacturing • Power Device • Reticle Manufacturing • LED • IC Packaging • MEMS • Printed Circuit Board • Data Storage/Media Head • General Purpose/Labs Investor Contact: Media Contact: Kevin Kessel, CFA Mike Dulin VP, Investor Relations & Market Analytics Corporate Communications kevin.kessel@kla.com mike.dulin@kla.com Reticle Manufacturing Wafer Manufacturing IC Manufacturing Materials OEMs Wafer-Level Packaging Packaging Printed Circuit Board
Page 15
KLA Earnings | Letter to Shareholders | September Quarter 2025 – Reported October 29, 2025 Page 14 Note on Forward-Looking Statements Statements in this letter other than historical facts, such as statements pertaining to: (i) future industry demand for semiconductors, WFE, and advanced packaging; (ii) our market position for the future and future growth in demand for our products; (iii) our forecast of financial measures for the following quarter and 202 5; (iv) our future revenues by customer segment for our Semi Process Control systems; (v) our long -term financial targets and underlying assumptions; (vi) our future investment plan on R&D, technology, manufactu ring capacity and infrastructure; and (vii) future shareholder returns, are forward-looking statements and subject to the Safe Harbor provisions created by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current information and expectations and involve a number of risks and uncertainties. Actual results may differ materially from those projected in such statements due to various factors, including but not limited to: our vulnerability to a weakening in the condition of the financial markets and the global economy; risks related to our international operations; evolving Bureau of Industry and Security of the U.S. Department of Commerce rules and regulations and their impact on our ability to sell products to and provide services to certain customers in China; tariffs and other trade restrictions; costly intellectual property disputes that could result in our inability to sell or use the challenged technology; ris ks related to the legal, regulatory and tax environments in which we conduct our business; differing stakeholder expectations, requirements and attention to ESG matters and the resulting costs, risks and impact on our business; unexpected delays, difficulties and expenses in executing against our environmental, climate, or other ESG target, goals and commitments; our ability to attract, retain and motivate key personnel; our vulnerability to disruptions and delays at our third-party service providers; cybersecurity threats, cyber incidents affecting our and our business partners’ systems and networks; our inability to access critical information in a timely manner due to system failures; risks related to acquisitions, integrations, strategic alliances or col laborative arrangements; climate change, earthquake, flood or other natural catastrophic events, public health crises or terrorism and the adverse impact on our business operations; the war between Ukraine and Russia, continued escalation of hostilities in the Middle East, and the significant military activity in those regions; lack of insurance for losses and interruptions caused by terrorists and acts of war, and our self -insurance of certain risks including earthquake risk; risks related to fluctuations in foreign currency exchange rates; risks related to fluctuations in interest rates and the market values of our portfolio investments; risks related to tax and regulatory compliance audits; any change in taxation rules or practices and our effective tax rate; compliance costs with federal securities laws, rules, regulations, NASDAQ requirements, and evolving accounting standards and practices; ongoing changes in the technology industry, and the semiconductor industry in particular, including future growth rates, pricing trends in end-markets, or changes in customer capital spending patterns; our vulnerability to a highly concentrated customer base; the cyclicality of the industries in which we operate; our ability to timely develop new technologies and products that successfully address changes in the industry; risks related to artificial intelligence; our ability to maintain our technology advantage and protect proprietary rights; our ability to compete in the industry; availability and cost of the materials and parts used in the production of our products; our ability to operate our business in accordance with our business plan; risks related to our debt and leveraged capital structure; we may not be able to declare cash dividends at all or in any particular amount; liability to our customers under indemnification provisions if our products fail to operate properly or contain defects or our customers are sued by third parties due to our products; our government funding for R&D is subject to audit, and potential termination or penalties; we may incur significant restructuring charges or other asset impairment charges or inventory write offs; we are subject to risks related to receivables factoring arrangements and compliance risk of certain settlement agreements with the government; and risks related to the Court of Chancery of the State of Delaware being the sole and exclusive forum for certain actions and proceedings . For other factors that may cause actual results to differ materially from those projected and anticipated in forward- looking statements in this press release, please refer to KLA’s Annual Report on Form 10 -K for the year ended June 30, 2025, and other subsequent filings with the Securities and Exchange Commission (including, but not limited to, the risk factors described therein). KLA assumes no obligation to, and does not currently intend to, update these forward-looking statements.