KLA Earnings Call Highlights Profits, Growth, Constraints

Kla Corporation ((KLAC)) has held its Q2 earnings call. Read on for the main highlights of the call.

KLA’s Earnings Call Signals Strength Despite Near-Term Margin Headwinds

KLA Corporation’s latest earnings call struck a decisively upbeat tone, underscoring record financial results and clear competitive momentum despite some manageable headwinds on costs and supply. Management highlighted double‑digit revenue growth, outsized EPS expansion, industry‑leading margins, and powerful free cash flow, all while reiterating confidence that the company will continue to outgrow its core markets into 2026. At the same time, executives were candid about pressures from rising DRAM costs and supply constraints, which are expected to weigh modestly on gross margins and limit upside in the first half of 2026. Overall, the call conveyed a picture of a company executing from a position of strength with strong visibility and disciplined capital allocation.

Record 2025 Revenue and Strong Top‑Line Growth

KLA delivered record full‑year 2025 revenue of $12.745 billion, up 17% year over year, underscoring robust demand across its core semiconductor process‑control and related markets. The December quarter alone generated $3.3 billion in revenue, landing above the midpoint of guidance and demonstrating solid execution in a still‑dynamic spending environment. This top‑line performance reflects both cyclical recovery in wafer fab equipment (WFE) and KLA’s structural share gains as chipmakers prioritize process control and yield management to support advanced nodes and complex manufacturing flows.

Significant EPS Expansion

Earnings power grew even faster than revenue. Full‑year 2025 earnings per share climbed 29% year over year, signaling strong operating leverage and disciplined cost control. For the December quarter, non‑GAAP diluted EPS came in at $8.85 and GAAP diluted EPS at $8.68, both above the midpoints of guidance. This EPS outperformance, on top of record sales, reinforces KLA’s positioning as one of the most profitable names in semiconductor capital equipment, with management continuing to translate scale and mix into bottom‑line gains.

Industry‑Leading Margins

KLA maintained its reputation for best‑in‑class profitability in 2025, posting a full‑year gross margin of about 62% and an operating margin of roughly 43.6%. In the December quarter, gross margin reached 62.6%, around 60 basis points above the guidance midpoint, reflecting strong product mix, pricing discipline, and operational efficiency. These figures highlight the high value of KLA’s metrology and inspection tools, as well as the recurring nature of its business model, providing a buffer against cyclical swings in capex spending.

Robust Free Cash Flow and Capital Returns

Cash generation remained a key highlight. Free cash flow for 2025 increased 30% to $4.4 billion, and the December quarter delivered a record $1.26 billion in free cash flow. KLA returned $3.0 billion to shareholders over the past 12 months, including $797 million in the fourth quarter alone, split between $548 million in share repurchases and $250 million in dividends. This combination of strong free cash flow and consistent capital returns underscores management’s confidence in the durability of the business and its commitment to shareholder value.

Process Control and Services Growth

Core process‑control systems and services continued to expand at healthy rates, reinforcing KLA’s strategic positioning. Process control systems revenue grew 19% in 2025, outpacing overall company growth and reflecting customers’ need for advanced inspection and metrology at leading‑edge and specialty nodes. The services business, which provides recurring revenue and high visibility, grew 15% for the year. December‑quarter services revenue reached $786 million, up 6% sequentially and 18% year over year. KLA noted that its services segment has now delivered 16 consecutive years of annual growth with a compound annual growth rate above 12%, underlining its importance as a stabilizing and expanding profit engine.

Advanced Packaging Momentum

Advanced packaging emerged as a key structural growth driver. KLA’s total systems revenue in advanced packaging reached $950 million in calendar 2025, representing over 70% year‑over‑year growth as chipmakers invest in heterogeneous integration, chiplets, and 2.5D/3D packaging architectures. Management expects this momentum to continue, guiding to mid‑ to high‑teens year‑over‑year growth in advanced packaging revenue in 2026. Importantly, KLA believes it is gaining share faster than the broader market in this segment, positioning the company at the center of a crucial technology transition in semiconductor manufacturing.

Strong Cash Position and Credit Profile

The balance sheet remains a strategic asset. KLA ended the quarter with $5.2 billion in cash, cash equivalents, and marketable securities, providing ample liquidity and flexibility for investment, capital returns, and potential M&A. The company maintains investment‑grade credit ratings and a well‑structured bond maturity profile, which together support financial resilience through cycles. This strength gives KLA room to fund R&D, navigate supply constraints, and continue returning capital without compromising its long‑term strategic agenda.

Positive 2026 Market and Company Outlook

Management painted a constructive picture for 2026, both for the broader market and for KLA specifically. The company expects core WFE spending to grow in the high single‑digit to low double‑digit range, putting core WFE in the low $120 billion range, while total WFE plus advanced packaging is projected in the mid‑$130 billion area. Within this expanding backdrop, KLA expects to outgrow the market again, forecasting mid‑single‑digit revenue growth in 2026 with growth skewed toward the second half as supply constraints ease and customer projects ramp. This view suggests that KLA’s share gains and exposure to structurally growing segments should drive continued top‑line expansion even as some cost pressures linger.

Solid Operational Execution and R&D Investment

Operating expenses in the December quarter totaled $653 million, with $384 million in R&D and $269 million in SG&A, emphasizing KLA’s ongoing commitment to technology leadership. Management reiterated its long‑term operating model, which targets strong incremental operating margin leverage as revenue grows. By investing heavily in next‑generation process‑control tools and software while maintaining cost discipline, KLA aims to sustain its competitive moat and margin profile. This approach is particularly important as device complexity rises and customers demand ever‑more sophisticated inspection and metrology solutions.

DRAM Cost Headwind to Gross Margins

One notable headwind stems from rapidly escalating DRAM prices for the image processing computers embedded in KLA’s tools. Management said these cost increases are largely transitory but are expected to persist through 2026. As a result, KLA now models a roughly 75–100 basis point negative impact on full‑year 2026 gross margins tied specifically to DRAM costs, within an overall gross margin framework of around 62% plus or minus 50 basis points. While this pressure is meaningful at the margin, the company emphasized that its profitability remains among the highest in the sector and that it expects to manage through the headwind over time.

Supply Constraints and Extended Lead Times

KLA is effectively sold out across many products in the first half of 2026, as supply chain bottlenecks and long‑lead components constrain shipment upside. Critical items such as optics and certain specialized components are limiting how quickly the company can convert strong demand into revenue. In addition, longer customer lead times and ordering patterns are driving elevated backlog. While this tightness restricts near‑term upside, it also provides visibility into future quarters, suggesting that demand remains robust and pushing more potential growth into the second half of 2026 and beyond.

Near-Term Margin Pressure and Mix Variability

The March‑quarter outlook reflects some mix‑driven margin variability. KLA guided to a gross margin of roughly 61.75%, plus or minus one percentage point, modestly below the December quarter due to a slightly weaker product mix. Tariffs and component cost dynamics are additional factors contributing to current margin volatility, with the tariff impact alone estimated at 50–100 basis points. Despite these pressures, KLA is signaling stability around its long‑term gross margin model, suggesting that investors should view these factors as tactical rather than structural.

China Market Still Recovering with Modest Growth

China remains a mixed but stabilizing piece of the puzzle. KLA noted that China WFE was modestly negative in 2025, reflecting prior export restrictions and uneven local demand. For 2026, management expects China to be flat to slightly positive, with the region accounting for roughly the mid‑ to high‑20% range of total company revenue. While uncertainties related to policy and spending patterns persist, the guidance suggests that the worst of the China correction may be behind the company, with a path back to modest growth.

Operational Constraints Could Delay Demand Realization

Beyond KLA’s own supply challenges, customers are facing facility and infrastructure constraints that can delay when demand converts into shipments and revenue. Issues such as cleanroom shell readiness and new fab construction timelines are pushing some equipment installations further out, with certain greenfield projects and large orders likely to shift into late 2026 and even 2027. These delays do not indicate demand weakness; rather, they are timing issues that could elongate the current upcycle and support a longer runway of elevated orders and shipments.

Debt vs. Cash Balance

KLA ended the quarter with $5.9 billion in debt against $5.2 billion in cash and marketable securities, resulting in a modest net debt position. Supported by investment‑grade credit ratings and strong cash generation, this leverage level appears manageable, but it remains a key metric for investors to monitor alongside ongoing share repurchases, dividends, and any potential acquisition activity. The balance between capital returns and balance sheet flexibility will be an important consideration as KLA navigates its investment needs and market opportunities.

Guidance and Forward-Looking Outlook

For the March quarter, KLA guided revenue to $3.35 billion, plus or minus $150 million, with non‑GAAP diluted EPS of $9.80, plus or minus $0.78, and GAAP diluted EPS of $8.85, plus or minus $0.78, based on roughly 131.7 million diluted shares. Gross margin is expected at 61.75%, plus or minus one percentage point, reflecting both DRAM‑driven cost headwinds and mix effects, while full‑year 2026 gross margin is modeled around 62% with a temporary 75–100 basis point drag from higher memory prices. Operating expenses are forecast at about $645 million for the March quarter and are expected to rise by roughly $15 million sequentially through 2026 as KLA continues to invest in R&D and customer support. The company’s planning tax rate for 2026 is 14.5%. Importantly, management reiterated expectations for mid‑single‑digit revenue growth in 2026 versus 2025, outpacing an expanding WFE market projected in the low $120 billion range and a total WFE plus advanced packaging market in the mid‑$130 billion range.

In closing, KLA’s earnings call painted a picture of a company firing on most cylinders: record revenue, accelerating EPS, robust cash flow, and sustained share gains in critical segments such as process control, services, and advanced packaging. While DRAM cost inflation, tariffs, and supply bottlenecks are set to pressure margins and cap near‑term upside, management framed these as temporary obstacles against a backdrop of strong structural demand and market outperformance. For investors, the message was clear: KLA remains one of the most profitable and strategically positioned players in semiconductor capital equipment, with a solid 2026 roadmap and visibility into continued growth as the industry’s next investment cycle unfolds.