KLA Corporation delivered a strong finish to fiscal 2025, achieving record annual revenue of $12.745 billion (up 17% year-over-year) and non-GAAP EPS growth of 29%. The December quarter revenue of $3.3 billion and EPS of $8.85 exceeded guidance, driven by robust investments in AI infrastructure, high-bandwidth memory (HBM), and advanced packaging. For 2026, management forecasts mid-single digit revenue growth with acceleration in the second half, positioning the company to outperform the total WFE market growth of low double digits. However, investors should note a projected 75-100 basis point headwind to gross margins in 2026 due to rising DRAM component costs, though this is viewed as transitory.
| Metric | Value | Change |
|---|---|---|
| Quarterly Revenue | $3.30 Billion | +17% YoY |
| Annual Revenue | $12.745 Billion | +17% YoY |
| Quarterly Non-GAAP EPS | $8.85 | Above Guidance |
| Quarterly Gross Margin | 62.6% | +60 bps vs Guide Midpoint |
| Annual Free Cash Flow | $4.4 Billion | +30% YoY |
| Advanced Packaging Revenue | $950 Million | >70% YoY |
| Service Revenue | $786 Million | +18% YoY |
AI Infrastructure and HBM are acting as primary growth vectors, significantly increasing process control intensity. Management noted that DRAM intensity is rising due to HBM requirements, resembling logic profiles, which drives higher inspection and metrology adoption. Rick Wallace stated, 'The demand for AI infrastructure... positions the company well in supporting all major growth vectors,' indicating that KLA is a key enabler of the AI build-out.
Advanced Packaging is a rapidly expanding segment for KLA, with 2025 revenue reaching $950 million (over 70% year-over-year growth). Management expects this momentum to continue with mid-to-high teens growth in 2026. KLA has significantly increased its market share in this space, moving from roughly 10% share in 2021 to nearly 50% in 2025, solidifying its dominance in this critical market.
KLA continues to deliver consistent share gains in the core WFE market. The Process Control segment grew 19% for the full year, outpasing industry growth. Bren Higgins emphasized, 'We begin 2026 well-positioned to outperform and increase our share of the overall market,' driven by 'higher process control intensity at the leading edge across all segments.'
The Service business remains a resilient cash generator, achieving its 16th consecutive year of growth with an 18% year-over-year increase in the December quarter. Management maintains a long-term target of 12-14% service growth, supported by a growing install base and higher utilization rates, which provides a stable revenue base and high-margin earnings stream.
Gross Margin Headwinds from DRAM Costs: KLA faces a significant margin pressure in 2026 due to the 'rapidly escalating cost of DRAM shifts' used in their systems. Management estimates a 75-100 basis point negative impact on gross margins for the calendar year. Bren Higgins noted, 'This pricing environment has changed profoundly over the past two to three months,' creating uncertainty about cost pass-throughs.
Supply Constraints Limiting Near-Term Growth: The company is currently 'virtually sold out' for the first half of the year, with lead times extending, particularly for optical components. This supply tightness is limiting KLA's ability to fully meet robust customer demand in the near term, potentially pushing revenue into future periods.
Customer Facility Readiness: Management highlighted that customers are 'frustrated with the shells that they have available,' meaning they are struggling to build fabs fast enough to absorb equipment. This bottleneck could delay shipments and revenue recognition, acting as a cap on immediate upside despite strong order momentum.
China Market Uncertainty: While China revenue is expected to be 'flattish, maybe slightly positive' in 2026, the market remains complex. The recovery of revenue from previously restricted fabs is a variable, and geopolitical factors continue to add a layer of unpredictability to the demand profile in the region.
Overall: Management displayed a confident and assured demeanor throughout the call, emphasizing KLA's 'industry leadership' and 'strong business momentum.' They were direct and transparent regarding operational challenges like supply constraints and component inflation, using terms like 'transitory' to describe the DRAM pricing issue, suggesting they view these as manageable short-term hurdles rather than structural threats.
Confidence: HIGH - Management demonstrated high conviction in their strategic positioning and ability to gain market share. They provided specific guidance ranges and detailed reasoning for margin headwinds, indicating a strong command of the business environment.
$3.35 Billion +/- $150 Million
61.75% +/- 1%
Mid-single digits
~62% +/- 50 bps
14.5%
Hedging & Uncertainty: Management employed specific hedging regarding the duration of the DRAM cost inflation, repeatedly using the word 'transitory' to describe the pricing environment while simultaneously admitting it would persist through all of 2026. Bren Higgins stated, 'We expect this pricing environment to be transitory,' but immediately followed with, 'current modeling suggests that this situation will persist through 2026.' This creates a temporal hedge, acknowledging a near-term negative while reassuring investors of long-term normalization. They also used probability hedges regarding the second half of the year, stating they 'expect' growth to accelerate, which provides them flexibility if supply constraints persist longer than anticipated.
The demand for AI infrastructure... positions the company well in supporting all major growth vectors. - Richard Wallace, CEO
We begin 2026 well-positioned to outperform and increase our share of the overall market. - Bren Higgins, CFO
This pricing environment has changed profoundly over the past two to three months. - Bren Higgins, CFO
We are experiencing strong customer momentum that has accelerated over the past three months. - Bren Higgins, CFO
Our view today is that 2026 revenue will grow mid-single digits compared to 2025, with accelerating growth in the second half. - Bren Higgins, CFO
We're virtually sold out across most of our products. - Bren Higgins, CFO
The industry dynamics to support the demand for AI infrastructure reinforce KLA's growing relevance. - Richard Wallace, CEO
Analyst Sentiment: Analysts were generally inquisitive and slightly skeptical regarding the conservative nature of the WFE outlook compared to peers, pressing for clarification on definitions and growth rates. There was significant focus on the sustainability of margins and the specific mechanics of the supply constraints.
Management Responses: Management remained composed and defensive of their data, particularly regarding the WFE market definition. They were transparent about the 'sold out' status for the first half and used the Q&A to educate analysts on the distinction between core WFE and advanced packaging, reinforcing their thesis of market share gains.
Analysts sought clarification on the discrepancy between KLA's WFE growth forecast (high single to low double digits) and a competitor's forecast (>20%). Bren Higgins explained the difference lies in the inclusion of advanced packaging, noting that when combined, their view aligns with the mid-$130 billion range.
There was detailed discussion on the 'DRAM cost headwind,' with analysts asking about the ability to pass costs to customers. Management emphasized securing supply as the priority and viewed the inflation as transitory.
Supply constraints were a major topic, with management confirming they are 'virtually sold out' in the first half due to long lead times on optics, but expressed confidence in ramping in the second half.
KLA Corporation is executing at a high level, leveraging its industry-leading position in process control to capitalize on the massive structural growth of AI and advanced packaging. The company is gaining share in high-value segments like HBM and advanced packaging, which drives higher process control intensity. While near-term gross margins face a 75-100 basis point headwind from DRAM costs and supply constraints are limiting first-half upside, these appear to be transitory issues. The long-term thesis remains robust: KLA is a critical enabler of semiconductor innovation with a resilient business model generating strong free cash flow and high returns on capital. The valuation is supported by the company's consistent outperformance and the essential nature of its products in the AI era.
Management forecasts the total WFE market (Core + Advanced Packaging) to reach the mid-$130 billion range in 2026, representing low double-digit growth. Core WFE is expected to be in the low $120 billion range.
China WFE is expected to be 'flattish, maybe slightly positive' in 2026, following a modestly negative 2025. KLA expects China to represent mid-20s to high-20s percent of its revenue.
AI remains the primary driver for semiconductor equipment spending, fueling demand for leading-edge logic, HBM, and advanced packaging. Management noted that 'AI remains a core driver of KLA's performance.'
The industry is facing supply constraints, particularly in optical components and facility readiness (cleanroom space), which are limiting the ability to ramp production as quickly as customer demand would allow.