KLA Corporation (KLAC) | The Buildout — AI Infrastructure
The Verdict
KLA does not make chips, and it does not make the lithography machines that print them. It makes the inspection, metrology and yield-learning equipment a fab runs to find out whether what it just built is correct and to make the next pass better, plus the services that keep that equipment running. That places it on the critical path of the AI build-out indirectly: AI accelerators and HBM are built on the most advanced nodes and the most complex packaging flows, and complexity is what drives the need for process control. Management argues intensity is broadening beyond lithography scaling, so the demand story is wider than AI alone. The counterweight is that KLA's revenue is gated by how many fabs exist and how fast its suppliers can deliver long-lead components, not by how much customers want.
| Market Cap | — |
| Revenue (TTM) | $13.6B |
| Revenue Growth | +11.7% |
| EBITDA Margin (TTM) | 44.6% |
| Net Debt | $1.2B |
| Earnings Beats | 7 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- Advanced packaging process control was raised twice in two quarters, from $635M in 2025 to ~$1B and then ~$1.1B for calendar 2026 — more than 70% growth, almost 2x the market's mid-to-high-30s rate.
- The wafer-fab equipment outlook has been raised four times in a year, to approximately the low $150B range for calendar 2026 — mid-20% growth over roughly $120B in calendar 2025 — with a ~$190B 2027 consensus management says implies similar growth.
- Lead times run about 12 months company-wide and 18 to 24 months on certain products, and management says customer conversations today are about deliveries in the second half of 2027.
- KLA Services delivered $820M in the June quarter, up 17% Y/Y, with 80% of service revenue contract-based — a recurring base that grows with the installed tool count.
- Capital returns are funded and long-dated: over 90% of free cash flow targeted, $3.35B returned in fiscal 2026, a $7B incremental repurchase authorization, a 17th consecutive dividend increase, $4.9B of cash and short-term investments, and no debt maturity before March 2029.
What We’re Watching
- The memory-pricing headwind moved from 75-100 basis points to 100 basis points to 'probably a little bit more than that,' with its expected duration extended from at least calendar 2026 to 2027. September gross margin is guided roughly flat while revenue is guided up by low-double-digit sequential growth.
- Customer concentration: two customers accounted for approximately 19% and 11% of March-quarter revenue, and TSMC exceeded 10% of revenues in each of fiscal 2023, 2024 and 2025.
- Supply gating: adding optical-component capacity takes 12 to 24 months, supplier capacity agreements are being struck for 2029 and beyond, and the 10-K flags parts available only from a single supplier or a limited group.
- China: KLA cannot ship into certain China fabs competitors can, which management says understates its reported share. China was 24.3% of March-quarter revenue and 31.2% of the nine months.
The demand side of the thesis is strengthening — four wafer-fab equipment raises in a year, two advanced-packaging raises in two quarters, lead times extending into the second half of 2027, and every recent near-term guide met at or above its midpoint. The margin side is weakening, and management has said so itself. The open question is whether gross margin stays roughly flat around 62% because mix, memory and tariffs absorb the leverage, or re-rates when management's expected pricing normalization from a headwind to a tailwind arrives.
Earnings Beat
June-quarter revenue was $3.66B, up 7% sequentially and 15% year over year and above the $3.575B guidance midpoint. Gross margin came in at 62.4% on a non-GAAP basis, the upper end of guidance, with favorable services mix and manufacturing scale offsetting what management called a challenging memory pricing environment and tariff headwinds. Operating margin was 43.7%, and incremental operating margin was 59% — above the stated long-run 40%-50% model. Non-GAAP diluted EPS was $1.05 and GAAP diluted EPS was $1.04, both at the upper end of guidance.
| Metric | Q4 FY2026 | Q3 FY2026 | Q4 FY2025 | YoY |
|---|---|---|---|---|
| Revenue | $3.7B | $3.4B | $3.2B | +15.2% |
| Gross margin | 61.4% | 61.1% | 62.0% | -60bps |
| EBITDA | $1.7B | $1.5B | $1.4B | +14.1% |
| EPS | $1.03 | $0.91 | $0.91 | +14.0% |
| KLA Services revenue | $820M | $775M (Mar-2026) | n/a | +17% |
I have very few concerns about what's going to happen in '27. It's pretty clear that the build-out continues.— Richard "Rick" Wallace, CEO, 2026-07-28
Management tone: Tone on the June call was confident and quantitatively specific — more specific and more bullish on the demand denominator than the March call, and candid on the margin denominator. Management quantified the second-half step-up, raised the wafer-fab equipment market again, raised advanced packaging again, and volunteered a backlog figure it does not formally guide. The one place tone got worse was gross margin, where the memory headwind went from 100 basis points through at least calendar 2026 to 'probably a little bit more than that,' continuing through 2027. Management also declined to confirm or deny a named customer engagement and declined to reset its 2030 model.
Management Guidance
Management guided the September quarter to revenue of $4B ± $200M — roughly low-double-digit sequential growth off $3.66B — with gross margin of 62.5% ± 1 percentage point, described as up 75 basis points from the prior quarter's gross-margin guide. Operating expenses were guided to ~$690M, and to grow roughly $15M to $20M sequentially over the next several quarters. Non-GAAP diluted EPS was guided to $1.16 ± $0.10 and GAAP to $1.14 ± $0.10, on a fully diluted share count of ~1.312B, a planning tax rate of 14.5%, and other income/expense of ~$25M of expense per quarter for the calendar year. Mix was guided at approximately 73% foundry/logic and 27% memory within Semiconductor Process Control systems revenue to semiconductor customers, of which DRAM was ~90% and NAND ~10%.
Trajectory
Revenue has accelerated for four straight quarters: $3,210M, $3,297M, $3,415M, then $3,658M, with sequential growth stepping from 1.1% to 2.7% to 3.6% to 7.1%. Management attributes the step-up to supply coming online in the second half — long-lead materials constrained the first half — and to advanced packaging, a shorter-lead-time business that converts into revenue faster. Margins have held roughly flat through the ramp: the audited series labels gross, operating and EBITDA margins stable, with gross margin at 61.4% in the June quarter on that basis. That gap between revenue growth and margin expansion is the memory and tariff cost base absorbing the volume leverage.
The Model
The model projects FY+1 revenue of $18,000M and EBITDA of $8,604M, a 47.8% margin, then FY+2 revenue of $21,000M and EBITDA of $10,248M, a 48.8% margin. The near-term anchor is management's own framing: a wafer-fab equipment market around the low $150B range in calendar 2026, second-half calendar 2026 revenue roughly 20% above the first half, and continued sequential growth into calendar 2027. The FY+2 step rests on that ramp carrying through the fab-count and long-lead-supplier constraints management describes, and on the margin structure improving modestly as revenue scales.
| Metric | FY2026 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $13.6B | $18.0B | $21.0B |
| YoY Growth | — | +32.6% | +16.7% |
| EBITDA | $6.1B | $8.6B | $10.2B |
| EBITDA Margin | 44.6% | 47.8% | 48.8% |
Projections are the median of 5 independent model runs. The model’s revenue sits 2.0% above analyst consensus.
Management guided the September quarter to revenue of $4B ± $200M — roughly low-double-digit sequential growth off $3.66B — with gross margin of 62.5% ± 1 percentage point, described as up 75 basis points from the prior quarter's gross-margin guide. Operating expenses were guided to ~$690M, and to grow roughly $15M to $20M sequentially over the next several quarters. Non-GAAP diluted EPS was guided to $1.16 ± $0.10 and GAAP to $1.14 ± $0.10, on a fully diluted share count of ~1.312B, a planning tax rate of 14.5%, and other income/expense of ~$25M of expense per quarter for the calendar year. Mix was guided at approximately 73% foundry/logic and 27% memory within Semiconductor Process Control systems revenue to semiconductor customers, of which DRAM was ~90% and NAND ~10%.
What Could Go Right — and Wrong
- The fiscal 2026 10-Q prints RPO at or above the ~$12.5B management expected, confirming both the level and the growth trend it says has been consistent over recent quarters.
- Gross margin re-rates above 62.5% as memory pricing normalizes from a headwind to a tailwind and new product generations reset prices.
- Memory mix skews toward HBM rather than conventional DRAM; management says HBM intensity in some products is rivaling advanced logic.
- The broadening of leading-edge foundry/logic investment delivers more than one winner, widening the customer set as process-control intensity rises.
- China restrictions ease, adding share against competitors that have been serving fabs KLA cannot ship into.
- Two consecutive quarters of flat-or-lower gross margin on rising revenue, which would convert the memory headwind from a timing item into a structural one.
- The second half of calendar 2026 does not deliver ~20% growth over the first half — the number the calendar 2026 and 2027 construct rests on.
- Advanced packaging decelerates; it is the fastest-growing line and, by management's own account, the least backlog-protected, with shorter lead times.
- The memory-cost headwind runs beyond 2027 or exceeds 'a little bit more than' 100 basis points, pressuring the 60%-65% long-term gross margin band.
- A single large customer's capex decelerates; one customer was approximately 19% of March-quarter revenue.
Looking Ahead
The next 12 months turn on whether the second-half acceleration is real. Management guided the September quarter to $4B and expects second-half calendar 2026 growth of roughly 20% over the first half, with supply that was tight in the first half arriving. It expects momentum to accelerate through the second half and significant growth to continue in calendar 2027, underpinned by a ~$190B 2027 wafer-fab equipment consensus it says implies mid-20s growth similar to 2026. The tests are the filed backlog number, the September and December gross margin prints, and whether the memory mix rotates toward HBM.
- ~1 week after the July 28 callFiscal 2026 10-Q filed — Carries the ~$12.5B RPO/backlog figure management expected.
- September quarterSeptember quarter results — Tests the $4B revenue guide and the 62.5% gross margin guide.
- December quarterDecember quarter memory mix — Management expects memory to be a bigger percentage of the mix.
- Calendar 2026Advanced packaging ~$1.1B — Tests the twice-raised >70% growth target for the year.
- Calendar 20272027 WFE growth test — Management expects growth similar to or above 2026 on ~$190B.
- Calendar 2027Service growth to upper end — Service growth expected toward the higher end of 13%-15%.
Financials
Annual Summary
| Metric | FY2025 | FY2026 | TTM | YoY |
|---|---|---|---|---|
| Revenue | $12.2B | $13.6B | $13.6B | +11.7% |
| Gross Margin | 60.9% | 61.3% | 61.3% | +42bps |
| EBITDA | $5.4B | $6.1B | $6.1B | +12.0% |
| EBITDA Margin | 44.5% | 44.6% | 44.6% | +10bps |
| Net Income | $4.1B | $4.8B | $4.8B | +18.9% |
| Free Cash Flow | $3.7B | $3.8B | $3.8B | — |
| Net Cash | — | — | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)61.3%
- EBITDA Margin (TTM)44.6%
- Net Margin (TTM)35.6%
- ROIC58.8%
- FCF Conversion62.2%
- SBC / Revenue2.3%
The Company
KLA supplies the process-control layer of chip manufacturing. Its tools inspect wafers, reticles and masks, measure films and dimensions, and run the software that turns those measurements into yield improvements; the same portfolio extends into IC substrates, packaged chips and printed circuit boards. The FY2025 10-K describes the company as 'a supplier of industry-leading equipment and services that enables innovation throughout the electronics industry.' In plain terms, a fab uses KLA equipment to find out whether what it just built is correct and to make the next pass better — which is why process control scales with chip complexity rather than simply with wafer volume.
KLA reports in three segments: Semiconductor Process Control, the largest; Specialty Semiconductor Process, built around SPTS-derived deposition and etch tools for MEMS, RF and power devices; and PCB and Component Inspection, largely the Orbotech-derived tools. Operations are headquartered in Milpitas, California, with 7.1 million square feet owned or leased worldwide as of June 30, 2025, primarily in the U.S., Germany, the U.K., Singapore, Israel and India. Management says its own buildings and head count are not the binding constraint on output — the gate is long-lead-time components, chiefly optics — and that the service arm, 80% contract-based, grows with the installed base.
Business Segments
Competitive Landscape
KLA's FY2025 10-K says that in each of its product markets it has many competitors 'including companies such as Applied Materials, Inc., ASML Holding N.V., Hitachi High-Technologies Corporation, Onto Innovation, Inc. and Lasertec, Inc.' Management's own framing is that process control is 'a very high mix, low volume market,' which is 'tricky to get into,' supported by 1,600 to 1,700 applications engineers worldwide. On the March call management put its process-control position at approximately 7x the nearest competitor; on the June call the figure was 6x, a shift the source material does not resolve. Competitors across adjacent process-control niches are growing fast, and none is retreating by the evidence available.
- Applied MaterialsNamed in the 10-K as a competitor; the supply-chain read-through says it expects process diagnostics and control to grow more than 50% in CY2026 and packaging more than 70%.
- ASMLNamed in the 10-K as a competitor; the read-through says memory-related system sales grow more than 75% in 2026 and that the environment gives it more pricing flexibility.
- Hitachi High-TechnologiesNamed in filings; not discussed. Carried as unresolved in the wiring map.
- Onto InnovationNamed in the 10-K as a competitor; the read-through says it raised advanced packaging growth to more than 50% and took a 27% stake in Rigaku.
- LasertecNamed in filings; not discussed.
Supply Chain
KLA sits upstream of the fabs: it buys optics, power, gas and fluid components, sensors and contract-manufactured assemblies, builds inspection and metrology systems, and sells them to leading-edge foundry, memory and packaging customers. The 10-K flags single-source parts.
More on KLAC: Earnings recap