KLA Q2 2025 Earnings Report

KLA EPS Results

• Actual EPS: $8.20
• Consensus EPS: $7.73
• Beat/Miss: Beat by +$0.47
• One Year Ago EPS: N/A

KLA Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $2.95 billion
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

KLA Announcement Details

• Quarter: Q2 2025
• Date: 1/30/2025
• Time: After Market Closes
• Conference Call Date: Thursday, January 30, 2025
• Conference Call Time: 6:00PM ET

KLA (NASDAQ:KLAC), together with its subsidiaries, engages in the design, manufacture, and marketing of process control, process-enabling, and yield management solutions for the semiconductor and related electronics industries worldwide. It operates through three segments: Semiconductor Process Control; Specialty Semiconductor Process; and PCB and Component Inspection. The company offers inspection and review tools to identify, locate, characterize, review, and analyze defects on various surfaces of patterned and unpatterned wafers; metrology systems that are used to measure pattern dimensions, film thickness, film stress, layer-to-layer alignment, pattern placement, surface topography, and electro-optical properties for wafers; chemical process control equipment; wired and wireless sensor wafers and reticles; wafer defect inspection, review, and metrology systems; reticle inspection and metrology systems; and semiconductor software solutions that provide run-time process control, defect excursion identification, process corrections, and defect classification to accelerate yield learning rates and reduce production risk. It also provides etch, plasma dicing, deposition, and other wafer processing technologies and solutions for the semiconductor and microelectronics industry. In addition, the company offers direct imaging, inspection, optical shaping, inkjet and additive printing, UV laser drilling, and computer-aided manufacturing and engineering solutions for the PCB market; inspection and electrical testing systems to identify and classify defects, as well as systems to repair defects for the display market; and inspection and metrology systems for quality control and yield improvement in advanced and traditional semiconductor packaging markets. The company was formerly known as KLA-Tencor Corporation and changed its name to KLA Corporation in July 2019. KLA Corporation was incorporated in 1975 and is headquartered in Milpitas, California.

KLA Q2 2025 Earnings Call Transcript

Presentation

[Operator]

Good afternoon. My name is Todd, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation December Quarter 2024 Earnings Conference Call and Webcast. All participants' lines have been placed in a listen only mode to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

[Operator]

Thank you. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead.

[Kevin Kessel, Vice President-Investor Relations at KLA]

Welcome to our earnings call to discuss the December quarter and calendar year 2024 results and outlook. I'm joined by our CEO, Rick Wallace and our CFO, Brent Higgins. We will discuss today's results released after the market close and available at ir.kla. Com, along with supplemental materials. Today's discussion and metrics are presented on a non GAAP financial basis, unless otherwise specified.

[Kevin Kessel, Vice President-Investor Relations at KLA]

All full year references we make are to calendar years. The earnings materials contain the detailed reconciliation of GAAP to non GAAP results. KLA's IR website also contains future investor events, presentations, corporate governance information and links to our SEC filings, including our most recent annual report and quarterly reports on Forms 10 ks and 10 Q. Our comments today are subject to risks and uncertainties reflected in the disclosure of risk factors in our SEC filings. Any forward looking statements, including those we

[Kevin Kessel, Vice President-Investor Relations at KLA]

make on the call today,

[Kevin Kessel, Vice President-Investor Relations at KLA]

are also subject to those risks and KLA cannot guarantee those forward looking statements will come true. Our actual results may differ significantly from those projected in our forward looking statements. Rick will start with some introductory comments followed by Brent with financial highlights and our outlook. Before I turn the call over to our CEO, Rick Wallace, I wanted to remind everyone that our 2025 Investor Day will be held on the morning of June 18 in

[Kevin Kessel, Vice President-Investor Relations at KLA]

New York City. Now

[Kevin Kessel, Vice President-Investor Relations at KLA]

over to Rick.

[Rick Wallace, Chief Executive Officer at KLA]

Thank you, Kevin. I will summarize KLA's overall performance for calendar 'twenty four and the December quarter and cover company highlights and updates on the industry landscape. For calendar 2024, KLA again delivered relative growth outperformance, strong

[Rick Wallace, Chief Executive Officer at KLA]

profitability and healthy return to shareholders. Specifically,

[Rick Wallace, Chief Executive Officer at KLA]

outperformance, strong profitability and healthy return to shareholders. Specifically, 2024 revenue grew 12% to a record $10,850,000,000 and the process control revenue grew by over 12%, which indicates increased market share, while the services business grew 15% to $2,500,000,000 for the year. Also for the calendar year, KLA maintained industry leading gross and operating margins at 61% 41% respectively. The company grew free cash flow to $3,400,000,000 and returned $2,900,000,000 in a combination of dividends and share buybacks. Caly's outperformance for the year was driven by a return to growth at the leading edge, which includes increased investments in AI, high performance computing and continued momentum in advanced packaging as well as sustainable performance for KLA Services business.

[Rick Wallace, Chief Executive Officer at KLA]

And turning to the December quarter, results for KLA came in above the midpoint of non GAAP guidance range despite navigating through the business impact of new U. S. Government export controls, which were released late in the quarter. Specifically, the quarter revenue topped $3,000,000,000 for the first time. Diluted GAAP was $8.20 finishing at the upper end of the guidance range for the quarter.

[Rick Wallace, Chief Executive Officer at KLA]

GAAP diluted EPS was $6.16 The business landscape is performing as expected and we are encouraged by the strong demand we are experiencing in leading edge logic with specific memory customers supporting high bandwidth memory and advanced packaging. KLA's differentiated portfolio of solutions aligns exceptionally well with enabling our customers to navigate increasing complexity, growing design starts and larger semiconductor devices in an environment of rising semiconductor demand. Specific highlights in the quarter include a combination of strong sequential and year over year revenue growth, demonstrate an improving industry environment. KLA is specifically positioned to benefit from accelerating growth at the leading edge. Across all sectors, our technology development investments supporting AI and HBM as well as strengthening supply demand environment, which positions the wafer fab equipment industry for growth at calendar 2025.

[Rick Wallace, Chief Executive Officer at KLA]

AI continues to be a crucial catalyst for KLA. We are well aware of the recent revelations of DeepSeq and the implications that it portends to diminish demand for advanced semiconductor in support of the AI infrastructure build out. As a company that has been developing AI models for use in our own inspection systems for many years, our own experience supports the theory that increased compute efficiency enables more adoption of AI in our platforms. The demand is clearly elastic. As it pertains to the demand environment for advanced semiconductors, we see no reason to believe that the increased compute efficiency in AI will have an impact on the advanced demand environment in the foreseeable future.

[Rick Wallace, Chief Executive Officer at KLA]

AI is both an important driver and enabler of KLA's business. Specific drivers connected to AI that are a positive for KLA's growth are higher volume and higher value wafer demand, more complex designs, accelerating product cycles, larger die size and growing advanced packaging demand. These trends demonstrate the increasing value of process control and assisting our customers through managing a dynamic production environment as investments and complexity increase. Exemplifying this momentum for our advanced packaging portfolio continued in the quarter. The growing demand for more powerful systems of chips is driving more complex heterogeneous chip integration enabled by advanced packaging, which increases the value of process control in the chip package.

[Rick Wallace, Chief Executive Officer at KLA]

This is fueling growth for KLA and our broad portfolio systems. KLA advanced packaging revenue grew to approximately $500,000,000 in calendar 2024 and is expected to exceed $800,000,000 in calendar 2025, up from our last estimate of $750,000,000 Tailored Service business grew to $667,000,000 in the December quarter, up 4% sequentially 18% year over year. This makes 50 consecutive quarters of growth for our services business on a year over year basis. Finally, quarterly free cash flow was $757,000,000 at calendar 2024 and the free cash flow margin was 31% over the same period, putting KLA amongst the top companies in the S and P 500. Total capital return in the December quarter was $877,000,000 comprised of $650,000,000 in share repurchase and $227,000,000 in dividends.

[Rick Wallace, Chief Executive Officer at KLA]

Total capital return over the past 12 months was $2,900,000,000 KLA views consistent and healthy capital returns as fundamental to delivering value for shareholders. KLA's December quarter results delivered strong sequential and year over year growth, which validates KLA's process control leadership and portfolio strength. KLA operating model and the dedication of our global teams continues to be the foundation

[Rick Wallace, Chief Executive Officer at KLA]

of our sustained success.

[Rick Wallace, Chief Executive Officer at KLA]

I'll now pass the call over to Bren to cover financial highlights and our outlook.

[Bren Higgins, Chief Financial Officer at KLA]

Thanks, Rick. Stanley's December quarter results demonstrate market leadership combined with the consistent execution and dedication of our global team to meet customer commitments and drive sequential and year over year growth profitability improvements. Revenue was $3,080,000,000 above the guidance midpoint of $2,950,000,000 Non GAAP diluted EPS was $8.20 above the guidance midpoint. GAAP diluted EPS was $6.16 Gross margin was 61.7 percent, operating expenses were $596,000,000 Operating expenses were comprised of $342,000,000 in R and D $254,000,000 in SG and A.

[Bren Higgins, Chief Financial Officer at KLA]

Operating margin was 42.3%. Other income and expense net was a $31,000,000 expense. The quarterly effective tax rate was 13.7%. Net income was $1,100,000,000 cash flow from operations was $850,000,000 and free cash flow was $757,000,000 The breakdown of revenue by reportable segments, end markets, major products and regions can be found within the shareholder letter and slides. Moving to the balance sheet, KLA ended the quarter with $3,800,000,000 in total cash, cash equivalents and marketable securities, debt of $5,900,000,000 and a flexible and attractive bond maturity profile supported by strong investment grade ratings from all 3 major rating agencies.

[Bren Higgins, Chief Financial Officer at KLA]

During the December quarter, we retired our $750,000,000 November 2024 bonds at maturity with cash on hand. KLA's balance sheet provides the ability to fund our growth strategies, organic and inorganic, and offer attractive capital returns to shareholders. Turning to our outlook. The industry outlook continues to gain momentum in the near term, driven by an increasing investment in leading edge logic, high bandwidth memory and advanced packaging. We expect the WFE market to grow by a mid single digit percentage in 2025 from the high $90,000,000,000 level for calendar 2024.

[Bren Higgins, Chief Financial Officer at KLA]

Growth in calendar 2025 is expected to be fueled principally by increasing investment in both leading edge foundry logic and memory to support growing AI and premium mobile demand, offset by lower overall demand from China due to the digestion of elevated levels of investment over the past couple of years. In an encouraging development, our top customer recently said in an earnings call that they expect the number of new tape outs or N2 for the 2 nanometer node in the 1st 2 years to be higher than both N3 and N5 in their 1st 2 years, fueled by both smartphone and HPC applications. As communicated in early December, we continue to estimate the impact on KLA's revenue in calendar 2025 from recent export controls in China to be approximately $500,000,000 plus or minus $100,000,000 with roughly 70% of the impact affecting our systems business. While we are hopeful based on our interpretation of the regulations that there should be licensing opportunities that will mitigate some of this impact, we are taking a cautious view given the significant delays in processing license requests by the U. S.

[Bren Higgins, Chief Financial Officer at KLA]

Government over the past few years. However, given KLA's business momentum, market share opportunities and higher expected process control intensity is a leading edge across all segments, we are confident we will continue to deliver growth outperformance compared with the WFE market in 2025. Dailies March quarter guidance is as follows: total revenue is expected to be $3,000,000,000 plus or minus $150,000,000 Our revenue guidance is up 27% year over year at the midpoint, further illustrating the improvement we expect to see in calendar 2025. Foundry logic revenue from semiconductor customers is forecasted to be approximately 73% and memory is expected to be approximately 27% of semi process control systems revenue to semiconductor customers. Within memory, DRAM is expected to be about 75% of the revenue mix and NAND the remaining 25%.

[Bren Higgins, Chief Financial Officer at KLA]

Non GAAP gross margin is forecasted to be 62%, plus or minus 1 percentage point or up approximately 30 basis points sequentially at the midpoint, despite slightly lower revenue primarily due to more favorable product mix expectations. For calendar 2025, based on expectations for business mix across systems and service, systems product mix and factory utilization, we expect gross margin for the year to be approximately 62%, plus or minus 50 basis points. Non GAAP operating expenses are forecasted in the March quarter to be approximately $585,000,000 as we continue to make significant product development and scaling investments to support expected revenue growth. Given our expectations for company growth over the next couple of years, we will maintain our operating expense trajectory. For the remainder of calendar 2025, we expect sequential increases of approximately $15,000,000 in incremental operating expenses per quarter.

[Bren Higgins, Chief Financial Officer at KLA]

This is driven by our priority around our product development roadmap requirements as well as revenue growth expectations. Our business model is predicated on ensuring 40% to 50% incremental non GAAP operating margin leverage on revenue growth over the long run. Other model assumptions include non GAAP other income and expense net of approximately a $36,000,000 expense for the March quarter and expect this to be roughly consistent throughout the calendar year. The tax assumption for March remains at 13.5%, and we expect this to remain through the June quarter. Beginning in the September quarter, which is the Q1 of our fiscal year, our tax rate will reflect the adoption of Global Taxation Pillar 2.

[Bren Higgins, Chief Financial Officer at KLA]

Based on our current modeling,

[Bren Higgins, Chief Financial Officer at KLA]

we think Pillar 2 implementation

[Bren Higgins, Chief Financial Officer at KLA]

will drive the tax rate slightly higher to approximately 14% in the second half of the calendar year. We will provide an update on this planning rate mid year if necessary. For the March quarter, GAAP diluted EPS is expected to be $7.77 plus or minus 0.60 dollars and non GAAP diluted EPS of $8.05 plus or minus 0.60 dollars EPS guidance is based on a fully diluted share count of approximately 133,300,000 shares. In conclusion, our near term revenue guidance points to relative stability around current business levels. Based on the strength of our backlog and market position, we see growth in calendar 2020 5 and expect to outperform the mid single digit growth rate we expect from the WFE market.

[Bren Higgins, Chief Financial Officer at KLA]

KLA is focused on delivering a differentiated product portfolio that addresses customers' technology roadmap requirements and drives our longer term relevancy and growth expectations. With the KLA operating model guiding our best in class execution, KLA is focused on implementing our strategic objectives designed to drive outperformance. KLA's focus on customer success, innovative solutions and operational excellence drives industry leading financial and free cash flow performance and allows us to return capital consistently. That concludes the prepared remarks. Let's begin the Q and A.

[Kevin Kessel, Vice President-Investor Relations at KLA]

Thank you, Brent. Operator, can

[Kevin Kessel, Vice President-Investor Relations at KLA]

you please provide the instructions for

[Operator]

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

[Michael Mani, Equity Research Associate at Bank of America]

Hi. This is Michael Mongey on for Vivek Arya. Thank you for taking our questions. To start, we heard from 2 of your peers yesterday, the peer that is action deposition focused issued a pretty similar WFE view to you guys for Investecondegas, while the other reiterated their annual guide suggesting that litho spending remains healthy. So the question is if total WFE is increasing something like $5,000,000,000 or so this year, But within that, Lotto WFE is also increasing, acting up also growing pretty strong, so consuming a good part of that incremental growth.

[Michael Mani, Equity Research Associate at Bank of America]

What exactly is happening to the process control part of the market this year? And if process control WFE is growing solidly, which it seems like it is, does that suggest that mid single digits for WFE could be conservative? Or are there other parts of the market that are shrinking by that much? Thank you.

[Operator]

And pardon me,

[Operator]

do you speakers, do you have us muted?

[Kevin Kessel, Vice President-Investor Relations at KLA]

My apologies.

[Bren Higgins, Chief Financial Officer at KLA]

Yes. This is Brent. I'll take that one. And the guidance was clear that we think it's somewhere in that range of about $5,000,000,000 to use your number into 2025 versus 2024. We feel pretty good about KLA's share of overall WSE opportunity into next year.

[Bren Higgins, Chief Financial Officer at KLA]

Obviously, as we move into 'twenty five, we've got more investment in leading edge and that's certainly a nice driver for our business and we're already seeing KLA share of WFE at the N2 node being meaningfully greater than

[Bren Higgins, Chief Financial Officer at KLA]

what we saw at

[Bren Higgins, Chief Financial Officer at KLA]

N3. What's happening in the DRAM, 1st advanced DRAM is good for us with scaling in EUV, but also as you look at high bandwidth memory, high bandwidth memory is also driving process control intensity due to the lack of redundancy, more complex logic circuitry in the base die, the need for more reliability, bigger chips and so on. So we feel pretty good about all of that. And then I think finally, the growth that we referenced in the letter in advanced packaging is accelerating for the company. It seems like every quarter, I keep raising the numbers.

[Bren Higgins, Chief Financial Officer at KLA]

So I'm pretty excited about the opportunities that are there and it seems to be accelerating as we move into this year. So for all those reasons, it looks like process control intensity, KLA share of market looks to increase in 2025 based on our assessment. And in an environment where memory is probably a higher percent given expected growth in DRAM, I think the dynamics they talk about more than offset a slightly changing mix. That's still foundrylogic heavy, but a little bit more DRAM in terms of our views on 25.

[Michael Mani, Equity Research Associate at Bank of America]

Got it. That's helpful. Thank you. And for my next question, just could you help us with

[Michael Mani, Equity Research Associate at Bank of America]

the linearity for revenue this year to

[Michael Mani, Equity Research Associate at Bank of America]

the best extent you can just because we're kind of at a high watermark to revenue this quarter. So should we expect maybe to be more 1st half weighted versus second half, especially given China's normalized unit for the year and then

[Michael Mani, Equity Research Associate at Bank of America]

there's this impact of the export restrictions that we should consider? Thank you very much.

[Bren Higgins, Chief Financial Officer at KLA]

The second half, I'm not going to

[Bren Higgins, Chief Financial Officer at KLA]

comment on it. As we said in

[Bren Higgins, Chief Financial Officer at KLA]

the letter, we feel pretty good about relative stability as we look at the funnel here moving forward. We'll see as we start to move through the year what happens. But in terms of how we're modeling the company, it seems that we're bouncing around this $3,000,000,000 level plus or minus, at least as we look at the first half of the year. Next question, please.

[Operator]

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

[Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co]

On Process Control, strong outperformance for the team in calendar 'twenty four. I your Process Control Systems business was up 15% year over year, right? That's versus WSE at up in the mid single digits. But if I look back over the past 5 years, the team's Process Control business has outgrown WFE on average by about 500 to 700 basis points per year. So given this year is going to be more leading edge technology inflection driven, which is where obviously you guys have a strong leadership position.

[Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co]

Is it fair to assume that if WFE is up mid single digits percentage points this year that your process control business should grow kind of low to mid teens percent in calendar 'twenty five?

[Rick Wallace, Chief Executive Officer at KLA]

Harlan, that's a thank you for those comments. Obviously, we're not going to guide for the year. But clearly, we're feeling great about the position we have. And a couple of things have changed, as you well know, in terms of the dynamics. 1, because we've resumed scaling, there's more opportunity for more inspection.

[Rick Wallace, Chief Executive Officer at KLA]

So I've always viewed the opportunities as being 2 fold. 1, there needed to be an opportunity and then we had to have a solution. And so and sometimes we've had the case where, for example, if you go back years to 3 d NAND, where, of course, if we could have looked through and found defects, there would have been opportunity of stuff to do. But now we're really at an interesting point where the leading edge, every dynamic is going kind of in our favor. In terms of higher value wafers, you've got larger die size, we talked about this in the prepared remarks, and you've got accelerated technology nodes and more layers that need to be figured out.

[Rick Wallace, Chief Executive Officer at KLA]

The other dynamic, of course, that you know is HBM is looking more like logic than it used to, less redundancy, more valuable buy and of course the dynamic around packaging. So we feel great, as Bren said, about Process Control's position and overall the spend for our customers. And that's the conversation we're having with our leading customers is very focused on getting that availability and being supportive of their technology ramps as they make these big investments going forward.

[Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co]

That's great. Thank you for that. And then on the 60% growth outlook for your advanced packaging business this year, can you just kind of help us unpack that a bit? How much of that mix is 2.5D pachydermene technology like COOS versus HBM versus other pachydermene types? And what is the rough mix of process control versus semi manufacturing systems?

[Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co]

And then we're already starting to see some future AI designs moving to 3 d SOIC technology starting next year. Is this a further tailwind for the team given the higher complexity of these next generation 3 d architectures?

[Rick Wallace, Chief Executive Officer at KLA]

Yes. Great questions. I mean, I think 2 things have happened and we got this early indication from our leading customers a year and a half, 2 years ago that the challenges in packaging were going to look a lot more like what was going on in the front end and they asked us to make some of the platforms that we use for the front end available for packaging. And so back to the question, what is this, a lot of it's inspection and metrology. Derivatives of the projects and programs that we have and have many years of experience with.

[Rick Wallace, Chief Executive Officer at KLA]

There's clearly some plasma dicing, so SPTS is part of that overall solution. But there's no question that our customers are driving. As you know, it's a very expensive when you have these high end chips along with this complex packaging and this HCM, the risks are very high if there's yield loss. So there's more inspection opportunity there and we feel great about the continued growth as we go forward. HV, but we see it's going to go forward and our customers are this is an area that's moving very quickly and because they need solutions, they're very focused on making sure we understand them as we go forward.

[Bren Higgins, Chief Financial Officer at KLA]

Hey, Arlen, Bren here. It's about 65%, 70% semi PC versus process.

[Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co]

Great insights. Thank you.

[Operator]

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

[CJ Muse, Senior Managing Director at Cantor Fitzgerald]

Yeah. Good afternoon. Thank you for taking the question. I just wanted to dig a little bit deeper in your outperformance relative to WFE. Within that, you're including that $500,000,000 China hit.

[CJ Muse, Senior Managing Director at Cantor Fitzgerald]

And so we'd love to hear, I guess, beyond the rising process control intensity at 2 nanometer and HBM, are there other drivers? Are those the 2 principal ones we should be thinking about?

[Bren Higgins, Chief Financial Officer at KLA]

Yes. C. J, those are the 2 principal ones. Plus some sugar. Yes.

[Bren Higgins, Chief Financial Officer at KLA]

You've got higher intensity at the node. And to Rick's point, we feel very good about some product momentum in a number of our markets. So that's and then I think finally, as you look at that and you look at what's driving growth within Process Control, you've got an acceleration in certain products where we have a strong market position. So they're influencing the growth rate obviously more relative to the overall. So that also drives an improvement in share.

[Bren Higgins, Chief Financial Officer at KLA]

Optical pattern inspection being one of those areas. Well, and medical, and we saw some improvement in some of the work in medical and including the Gen 5 CTI for print check, which is obviously shows up in the optical, but it's part of that solution. So, look, we're feeling pretty good and there was some investment made by our customers to support prior notes once they realized that there was still a yield opportunity there.

[CJ Muse, Senior Managing Director at Cantor Fitzgerald]

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

[Rick Wallace, Chief Executive Officer at KLA]

Sure. So on the share side, I think there's a couple areas that might be more obvious than others. One is optical simply because optical grew disproportionately perhaps in the rest of the market and we have a large share there. So that creates a greater overall position there. We had some really strong momentum in e beam, but then the other area where we really saw some strong performance was in packaging.

[Rick Wallace, Chief Executive Officer at KLA]

And so that's the one where the teams have really done a great job focusing in the last couple of years and we've been able to see continued momentum there. So we feel pretty good about it. Obviously, the numbers for the year aren't going to come out, but we have gained a lot of share in the last couple of years and the question was would there be any retrenchment, we feel pretty good about where we are. For service, anytime you lose access to a fab, you have the immediate headwind that you can't get access to that equipment. So as I look at growth this year, I think growth is probably in the high single digits for service, which is below our the long term model.

[Rick Wallace, Chief Executive Officer at KLA]

We outperformed the long term model by a little bit in 2024. Over time though, it's generally our view at least in terms of how we run the company as we think about the efficiency of the market that if you have fabs that are inhibited from being able to supply that capacity has to get added somewhere else. And so that would create an opportunity for us to make some of that up over the very long term. So and obviously that would mean that you would end up with whatever was spent before would have to be replaced somewhere else. So I think over the long run, we feel pretty good about the growth trajectory in our long term model.

[Rick Wallace, Chief Executive Officer at KLA]

But in the short run, it does affect obviously your ability to get at that capacity, which puts pressure on the growth rate and also puts some pressure on our ability to move resources around. And so we'll have to deal with some inefficiency as we've staffed up to support those fabs and now we have to move those folks to support other customers. So there's a few moving parts. But in the long run, we feel pretty good about the trajectory given the higher value offerings, what we're seeing in terms of pricing as it relates to new products, the opportunities in packaging for incremental service. So I think that the drivers for service are all pretty compelling.

[Rick Wallace, Chief Executive Officer at KLA]

Obviously, the installed base is growing, lifetimes are increasing. So in the long run, we feel pretty good about the long term target.

[Operator]

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

[Joe Quatrochi, Director & Equity Research Analyst at Wells Fargo]

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

[Bren Higgins, Chief Financial Officer at KLA]

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

[Joe Quatrochi, Director & Equity Research Analyst at Wells Fargo]

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

[Bren Higgins, Chief Financial Officer at KLA]

Yes. So as I said earlier, right, with an HBM device, you've got a few things that are happening. You've got bigger die because you have to drill the TSGs. They're bigger, so you have less redundancy, which historically has been pretty significant to DRAM. And so that's been a headwind to process control intensity.

[Bren Higgins, Chief Financial Officer at KLA]

The logic circuitry is more complex. The reliability on all the die in the stack is higher. So for all those reasons, it's very good for process control intensity. I think overall for DRAM, it's moving the needle probably somewhere from, we'll call it, the 9% to 10% range where we've been historically as a percent of WFE that it probably moves up a good 100 to 150 basis points from there. Now obviously, mix will affect that.

[Bren Higgins, Chief Financial Officer at KLA]

Most of the focus is on HBM in terms of new requirements. So mix dynamics could affect that. But we feel pretty good about these dynamics as they affect and drive the DRAM market. And it's most pronounced in the latest technology nodes and that's where we're seeing it more. And so it's going to take a little bit of a time for us to really figure out what that overall looks like.

[Bren Higgins, Chief Financial Officer at KLA]

I think by Investor Day, we should be

[Bren Higgins, Chief Financial Officer at KLA]

in a pretty good position to talk about it

[Bren Higgins, Chief Financial Officer at KLA]

on a longer term basis.

[Operator]

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

[Timothy Arcuri, Managing Director at UBS Group]

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

[Bren Higgins, Chief Financial Officer at KLA]

Yes. So, RPO was down about 900,000,000 dollars About half of that was related to deep bookings we took due to the December 2 regulations. So about half of it related to that and then the other half, shipment levels were higher. So that's how it

[Bren Higgins, Chief Financial Officer at KLA]

played out in the quarter.

[Timothy Arcuri, Managing Director at UBS Group]

Got it. Okay, thanks. And then process control systems, you said pretty stable from here.

[Timothy Arcuri, Managing Director at UBS Group]

But what about EPC?

[Timothy Arcuri, Managing Director at UBS Group]

It was up a lot this quarter.

[Timothy Arcuri, Managing Director at UBS Group]

It grew a lot in well, I think

[Timothy Arcuri, Managing Director at UBS Group]

it didn't grow that much, but it grew a lot in Q4. So how

[Timothy Arcuri, Managing Director at UBS Group]

to think about it for this year? Can it grow 10%, perhaps low double digits this year?

[Bren Higgins, Chief Financial Officer at KLA]

Yes. I think overall, EPC is probably going to be about mid single digits. You have to remember that what shows up in EPC is flat panel business. And so at the end of this quarter, we will be done shipping systems for flat panel flat panel revenue coming out. And so obviously that in this year affects the overall growth rate of the EPC businesses as we report those segments.

[Bren Higgins, Chief Financial Officer at KLA]

So overall, we feel pretty good. If you look at SBTS, I think So overall, we feel pretty good if you look at SPTS growth, especially semiconductor mostly driven by advanced packaging growth year to year. IQOS, component inspection, again a packaging centric business is also growing. PCB businesses are more tied to mobility and capacity, so less growth in those areas. And then of course you got the offset from losing the FPD piece.

[Bren Higgins, Chief Financial Officer at KLA]

Now losing the FPD piece does enhance the margin ratios. Right gross margin is probably 20 bps higher. I think operating margins are probably 30 bps higher because the revenue mix is a little bit richer and certainly that's factored into how we guided gross margins as we look at next year or look at this year, 2025.

[Operator]

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

[Krish Sankar, Managing Director at TD Cowen]

And Rich and Brian, thanks for quantifying the $500,000,000 plus a minus impact from export control. We also spoke about China WFE digestion. I'm just kind of curious, if you lay in the digestion from China, how to think about your decline in China sales year over year on top of export controls in 'twenty five versus 'twenty four?

[Bren Higgins, Chief Financial Officer at KLA]

Yes, I'll try to help with that. I mean, obviously, we'll have to see how the year plays out. But if you look at how we finished the year, right, this last quarter was 36%. We finished the year at 41% of our business in China. As we look at 2025, I think that percentage drops to about 29% plus or minus a point or 2 as we go forward here.

[Bren Higgins, Chief Financial Officer at KLA]

And so when you do the math on that, assuming the stability that we articulated about our top line, as we think about where we are right now, that translates into the overall China business down somewhere around 20% or so.

[Krish Sankar, Managing Director at TD Cowen]

Got it. Got it. That's very helpful. And then another question is, can I know in China, I apologize for this, but when you look at your numbers compared to some of your peers, over the last two quarters, your China sales have been more resilient compared to your peers? Is it due to the wafer business or is it because China is building domestic critical capacity?

[Krish Sankar, Managing Director at TD Cowen]

Like what's happening there that kind of makes you relatively more resilient to your peers?

[Bren Higgins, Chief Financial Officer at KLA]

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

[Krish Sankar, Managing Director at TD Cowen]

Got it. Very helpful. Thanks a lot, Brent.

[Krish Sankar, Managing Director at TD Cowen]

Thanks a lot.

[Operator]

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

[Thomas O'Malley, Director - Equity Research at Barclays]

ahead. Hey, guys. Thanks for taking my questions. Mine's a little short term oriented, so forgive me here. But the last two evenings we've seen you and a competitor kind of talk about better NAND pretty significantly into the March quarter.

[Thomas O'Malley, Director - Equity Research at Barclays]

I was just hoping you could give us a little more detail. It didn't sound like from a sequential basis, you had really called that out. I don't think you gave a ton of details that would make sense sense. I mean, it's coming there. But just maybe describe what's happening there?

[Thomas O'Malley, Director - Equity Research at Barclays]

Is that coming from a single customer? Is that coming across multiple customers? I totally understand it's a much lower pace from you guys, but would love to try to figure out where the strength is coming from just on a sequential basis into March?

[Bren Higgins, Chief Financial Officer at KLA]

Yes, strength is pretty low levels. It's pretty broad based. We have seen the NAND business

[Bren Higgins, Chief Financial Officer at KLA]

tick up

[Bren Higgins, Chief Financial Officer at KLA]

right over the course of 'twenty four and into 'twenty five. We expect a little bit more improvement there. I think overall for the industry, off of a very low level, there's likely to be some WFE growth there, but it's not significant. And as a percent, it's bigger, obviously, given the level of WFE at that presently. But would expect to see that improve a little bit moving forward, but not a lot in 20 20

[Thomas O'Malley, Director - Equity Research at Barclays]

Got you. And then, on the DRAM side, clearly, there's debate in the broader market. You guys called out AI in some of your prepared remarks, but it seems like there's some share jockeying that's currently taking place. It sounded more positive for the year, your kind of view on the DRAM side. Any commentary just when you think about 6 months ago is when you talk to your customers, obviously people were putting in capacity for kind of all 2025.

[Thomas O'Malley, Director - Equity Research at Barclays]

Have you seen incremental spend there in the short term or rush orders to try to catch up by customers? Anything on that would be helpful. Thank you.

[Bren Higgins, Chief Financial Officer at KLA]

Well, I think our customers, Rick, our customers certainly set out their plans looking out for the year. So there's been no real short term change. I do think the strength in terms of what they're seeing in demand in support of the AI infrastructure continues to grow and we see momentum there. So, we are definitely in conversations and a lot of them about slot availability. Remember, we still have many products or a few critical products that are supply constrained.

[Bren Higgins, Chief Financial Officer at KLA]

So, we're in conversation about that. So we feel pretty good about the demand, especially at the leading edge. And the dynamics around advanced DRAM are playing to our strength because of the challenges, both the value of those devices, but also the yield challenges. And as we mentioned before, the die size are smaller, less redundancy, and it's looking more like higher process control intensity as we talked about.

[Operator]

Our next question will come from Chris Caso with Wolfe Research.

[Chris Caso, Managing Director at Wolfe Research LLC]

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

[Bren Higgins, Chief Financial Officer at KLA]

Yes, we've been pretty cautious with it overall. We'll see how it plays out, as I said in the prepared remarks, in terms of licenses that could mitigate the impact.

[Bren Higgins, Chief Financial Officer at KLA]

But when we look at it over the course of the year of what we expected, it was pretty consistent across the year. So it wasn't maybe again, that could be the nature to how customers buy process control versus other types of products. But it was pretty half to half was more or less pretty consistent.

[Chris Caso, Managing Director at Wolfe Research LLC]

Okay, got it. Consistent.

[Chris Caso, Managing Director at Wolfe Research LLC]

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

[Bren Higgins, Chief Financial Officer at KLA]

Yes. Look, we have mix issues that generally are the biggest impact item to our overall gross margins more so than customers or segments. But I would expect as we start to see overall revenue accelerate, we'll start to see the kind of leverage that we've seen historically. So I said 62% plus or minus about 50 basis points for a reason. I think some of that is predicated on what happens moving forward.

[Bren Higgins, Chief Financial Officer at KLA]

We do have depending on the mix, right, you do have markets like the packaging market, which carries a lower gross margin given the complexity of the tools than some of our higher end systems. But obviously, the gross margin dollars are quite significant and the relevancy in growth to KLA is significant. So, we're pleased with that. But I think as we move forward, I think you're likely to see us continue in that 60% to 65% range as we accelerate revenue over time. And as we talked about in our 2022 plan, we saw gross margins were around 63% or so, obviously predicated on a volume level of about $3,500,000,000 So that gives you a sense of kind of where we're at from here to there moving forward.

[Bren Higgins, Chief Financial Officer at KLA]

And I feel pretty good about our ability to achieve that given the investments we've made that are still I think we're in a good position to deliver against that. I don't think we have to go and make incremental investments in terms of the capacity, the hard asset capacity we have to execute to those business levels.

[Chris Caso, Managing Director at Wolfe Research LLC]

Got it. Helpful. Thank you.

[Operator]

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

[Srini Pajjuri, Managing Director at Raymond James Financial]

Thank you. One short term question on your March quarter guidance. Just the foundry logic, I think you're guiding for 7% to 3% of the mix to be foundry logic. That is, I think, implies at least in the mid single digit type decline. We haven't seen a decline in that business in a while.

[Srini Pajjuri, Managing Director at Raymond James Financial]

And I'm just trying to understand how that reconciles with your comment about F2 demand being strong in the short term?

[Bren Higgins, Chief Financial Officer at KLA]

Yes, I'm taking a look at it. I don't think it doesn't look like it changes all that much. So I think given the overall revenue guidance is what it was, I think for semi PC systems, I mean, we'll see how the quarter ends up. And we do have business that isn't infrastructure business, for example, that doesn't show up in those percentages. So when I look at the businesses that the semiconductor customers, it's pretty consistent.

[Bren Higgins, Chief Financial Officer at KLA]

So I don't think it'll change a little bit. But as we talked about, I think memory overall is a higher percentage of the mix in 2025 than it was in 2024.

[Srini Pajjuri, Managing Director at Raymond James Financial]

Okay, got it.

[Bren Higgins, Chief Financial Officer at KLA]

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

[Srini Pajjuri, Managing Director at Raymond James Financial]

Okay, okay. That makes sense. And then, I guess, as we go through the year, obviously, M2 is going to be relatively strong. Do you still have, I guess, material contribution? Are you still expecting material contribution from M3?

[Srini Pajjuri, Managing Director at Raymond James Financial]

Or is it at a minimal level? And then I guess just a follow-up to that, how does the, I guess, PC intensity change as we go from N3 to N2? Thank you.

[Bren Higgins, Chief Financial Officer at KLA]

Yes. So most of the focus in terms of new investment is on 2 nanometer. There still is some incremental investment that's happening through, but the vast majority of it is 2 nanometer centric. Obviously, there's There's packaging investment that's also happening. And I mentioned it earlier, at the store, I've been over the last couple of quarters or so, I've said that at N3 versus N2, at N2, we thought we were about 75 basis points higher in terms of Kaley's share of WFE.

[Bren Higgins, Chief Financial Officer at KLA]

I think that we're likely higher than that. It's probably 90 ish to 90 ish basis points, maybe 100 basis points. So trending in the right direction for sure.

[Operator]

Our next question will come from Brian Chin with Stifel.

[Brian Chin, Analyst at Stifel Financial]

Yes, I was just curious in terms of logic foundry chipmakers that are at the leading edge, but they've been expanding capacity aggressively. Can you comment on the magnitude of residual spending you still see with them besides R and D and technology development? Obviously, you're able to offset that for any drive there and route to outgrowing WFE this year, but just curious if you had any sort of commentary around that?

[Bren Higgins, Chief Financial Officer at KLA]

You're saying I'm sorry, you said ones that

[Bren Higgins, Chief Financial Officer at KLA]

aren't at the leading edge?

[Brian Chin, Analyst at Stifel Financial]

At the leading edge, but not expanding capacity aggressively. That's kind of one guy doing that. But in terms of the other ones, you're sort of on the pace or maybe on the pace that Net is not billing out aggressively. Maybe some sense of

[Brian Chin, Analyst at Stifel Financial]

the signal spending engagement you still have with them?

[Bren Higgins, Chief Financial Officer at KLA]

So let's say we derisk that in our 'twenty five plan.

[Brian Chin, Analyst at Stifel Financial]

Okay. Fair

[Brian Chin, Analyst at Stifel Financial]

enough. And then maybe just carrying forward that last question. How about the process control intensity going from 2 nanometer Gale around to 16A? Because I think they're kind of meant to be somewhat closely coupled to some degree.

[Bren Higgins, Chief Financial Officer at KLA]

Yes. We're a little early on that one. So I'd like to before we start making comments actually shipping to support that activity in a way to actually model it. And one of the things obviously we've seen over the course of the last several nodes for intensity reasons but also for share is that because of the design start environment, limiting reuse, customers are managing a much more dynamic design environment, you now have more designs that are driving leading edge ramps. All these things have been positive factors and then there's a share element as well.

[Bren Higgins, Chief Financial Officer at KLA]

This fundamentals, I think shift moving forward in the composition of semiconductor revenue to larger higher value die with defect density is very problematic, I think plays to growing opportunities for process control. We have to execute on our programs to be able to deliver the right solutions for customers to solve their problems and solve the right problems at scale to production. But I think if we execute in our own business, it does create an opportunity for us to see continued tailwinds in this area. Yes. And let me give a little more perspective too, because we've actually usually, if the spending is done in a node, debt process control intensity is kind of set.

[Bren Higgins, Chief Financial Officer at KLA]

But what we've seen happen is when we have new solutions that find new defect problems that are yield impacting, we've seen some back porting of that. So in other words, you might see some systems going into prior nodes, which actually drives those entities up the prior node, which is the new baseline to go forward. So we think part of the outperform is the fact that we actually have more solutions that solve the problems. We've always had more opportunities than we've had answers for in terms of customers trying to figure out how to learn quicker and adopt new technologies. But our technologies are really coming together in a way that we think there is it's both share, but also it drives adoption simply because we're solving more problems.

[Bren Higgins, Chief Financial Officer at KLA]

So when we look at what we're seeing for N2, we feel pretty good about the potential to help our customers ramp those nodes and that'll be a basis on which to build going forward. For example, a lot of people didn't model early on the reticle verification on wafer, the print check that we're using for Gen 5. That's essentially a new application. Once people value that, then they might even go back and back port some of that capability when there's yield opportunity. So we feel pretty good about where we are in terms of driving overall intensity and that will be part of the message we share at our Investor Day is how we see that going forward, which will include the node you talked about.

[Operator]

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

[Charles Shi, Managing Director - Senior Analyst at Needham & Company]

So, I think that you guys don't want to explicitly call out the direction for the second half in terms of the growth relative to the first half of the year. But it sounds like the base case assumption from you guys is that you're probably going to be around that RMB3 1,000,000,000 per quarter level, maybe throughout the year. Maybe some of that is contingent upon whether you can get some export licenses for that RMB500 1,000,000,000 impact from the latest export control. But is there any other swing factors that you probably don't have a conclusion yet, but that could support some of the second half growth. Is there anything that you haven't mentioned?

[Bren Higgins, Chief Financial Officer at KLA]

Well, look, licenses, as we said earlier, we haven't built that into the plan. And so we'll see how that plays out. And I think the stabilizing around current levels as we look forward, it seems like we're operating around this level. And as we even go beyond the middle of the year, we'll see what happens. We mentioned earlier about derisking some opportunities.

[Bren Higgins, Chief Financial Officer at KLA]

And so we'll see how those potentially play out around certain customers, but that could be a swing factor as well. And I think that back to what we said about certain parts of the market, we've been a little bit more cautious on. We'll see if there's more upside in China that I think we've tried to derisk that relative to the levels of investment we've seen over the last couple of years. But we'll see how that plays out as we move forward. But I think we're for now, it feels like around the current levels is the best that I

[Bren Higgins, Chief Financial Officer at KLA]

can do from a guidance point of view.

[Charles Shi, Managing Director - Senior Analyst at Needham & Company]

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

[Bren Higgins, Chief Financial Officer at KLA]

It will come down as a percent to be in high 20s. We'll see. We'll see what ends up revenue, right, because you've got different rev rec policy issues from whether it's a new customer and a new fab versus an established customer. So that could either accelerate revenue to revenue shipment or extend it to an acceptance process. So we'll see how things play out.

[Bren Higgins, Chief Financial Officer at KLA]

But in general, I would highest.

[Operator]

We'll take our next question from Atif Malik with Citi. Please go ahead.

[Atif Malik, Analyst at Citigroup]

Rick, the question on foundry concentration comes a lot with investors. Obviously, you guys have been very well with your top foundry customer on M2 and GED all around and there is a reference in Japan that's kind of ramping this year. How are you guys leaning into the 2 struggling foundries this year if that poses a risk to your business?

[Rick Wallace, Chief Executive Officer at KLA]

I'm sorry, Sadu. How are we dealing with how are

[Atif Malik, Analyst at Citigroup]

you guys like leaning into the 2 struggling foundries and what impact that could have both this year and outer years in terms of rate for year?

[Rick Wallace, Chief Executive Officer at KLA]

Well, we obviously work with all our customers. And so if there is a way for us to add value, we're doing that. I think the bulk of the stated CapEx number pretty clearly head towards the direction of the biggest player in the market in terms of investment. But the others, we engage. I mean, certainly, everyone that we work with wants to improve their ramp up time of new technology and improve their yield.

[Rick Wallace, Chief Executive Officer at KLA]

And so, of course, we're doing that, but that's not where the bulk of the business is these days. So, I don't see a huge difference in terms of how we think we're engaging now relative to how we were in the past. It's just the dynamics have shifted much more toward the leader who's further ahead now than they've been in quite a while.

[Atif Malik, Analyst at Citigroup]

Fair enough. And Brent, on the $500,000,000 restrictions impact, can you give some color, were those like trailing edge logic projects or was it a DRAM contribution

[Atif Malik, Analyst at Citigroup]

in those sales?

[Rick Wallace, Chief Executive Officer at KLA]

Yes, most

[Rick Wallace, Chief Executive Officer at KLA]

of it was logic. Yes, very little. In fact, all of it was logic. Very little. That was memory.

[Operator]

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

[Kevin Kessel, Vice President-Investor Relations at KLA]

Thank you very much and

[Kevin Kessel, Vice President-Investor Relations at KLA]

thank you everybody for your time and your attention. We know how busy today is

[Kevin Kessel, Vice President-Investor Relations at KLA]

and this week is. So we appreciate it.

[Kevin Kessel, Vice President-Investor Relations at KLA]

We'll be speaking with you all very soon. I'll turn it back now

[Kevin Kessel, Vice President-Investor Relations at KLA]

to the operator for any closing instructions.

[Operator]

Thank you. This concludes the KLA Corporation's Q4 20 24 earnings call and webcast. Please disconnect your line at this time and have a wonderful day.

Participants

Executives

• Kevin Kessel, Vice President-Investor Relations
• Rick Wallace, Chief Executive Officer
• Bren Higgins, Chief Financial Officer

Analysts

• Michael Mani, Equity Research Associate at Bank of America
• Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co
• CJ Muse, Senior Managing Director at Cantor Fitzgerald
• Joe Quatrochi, Director & Equity Research Analyst at Wells Fargo
• Timothy Arcuri, Managing Director at UBS Group
• Krish Sankar, Managing Director at TD Cowen
• Thomas O'Malley, Director - Equity Research at Barclays
• Chris Caso, Managing Director at Wolfe Research LLC
• Srini Pajjuri, Managing Director at Raymond James Financial
• Brian Chin, Analyst at Stifel Financial
• Charles Shi, Managing Director - Senior Analyst at Needham & Company
• Atif Malik, Analyst at Citigroup