KLA-Tencor Aktie

Good morning, everyone. Welcome to day 2 of the Bank of America Tech Conference. I'm Vivek Arya from BofA's semiconductor and semi-cap equipment research team and really delighted and honored to have the team from KLA join us this morning. We have Bren Higgins, Chief Financial Officer. As usual, we'll start with a few kind of opening comments from Bren. I'll get to my questions. But if you have any specific questions, please feel free to raise your hands, and I'll be sure to get you in.

So with that, a very warm welcome to you, Bren. Really happy to have you here. If you could perhaps give a state of the union and help us understand how KLA can be the next $1 trillion market cap that would get the day started.

It's nice to have aspirations. Hi. So thank you very much for having us. Excited to be here. Yes, maybe I'll just frame things up a little bit here as we approach the midpoint of 2026. The year is shaping up to be a very good one for the company and for the industry on top of a couple of good years, right? So we have a nice sustainable period of growth. 2026, we expect the overall industry investment to be up somewhere in the high teens, maybe 20-ish percent.

And I think that's been -- we've been incrementing that up as we've not only gotten better visibility, we've seen customer behavior and certainly some urgency around that, more exposure to sort of packaging that tends to be shorter lead time in terms of strength in the second half. And I think some firming up of schedules, particularly in the second half that are tied to some of the construction projects that are out there.

So I think when all's said and done, we likely end up -- we said at earnings, we thought the wafer equipment market would be about $140 billion plus kind of market. I think when all is said and done, it might be a little bit stronger than that, right? I think there's certainly some upside to that. One of the other things that's great right now is that as we look at 2027, the visibility is really remarkable to be midway through '26 and be talking about '27 and talking about '27 with meaningful growth expectations.

But as we've heard from our customers with lots of expansion and new fabs coming online that it's setting up to be an additional very strong year for the industry across all segments with broad-based participation at the leading edge in logic and foundry, but also strength in -- continued strength in DRAM. And I think we'll even see some expansion in the flash part of the market. So overall, very constructive environment. We're pretty excited about it.

And most of our focus inside the company is how can we ramp up our supply chain and make sure the execution model is positioned to support what we think will be a number of years of strong growth here moving forward. Back on March 12, we had an Investor Day in New York, and we outlined a 2026 plan or 2030 plan for KLA and stepped up our -- talked about how we had beaten our 2026 plan that we laid out in 2022, but a new 2030 plan for KLA that translated into a top line industry model of 11% growth for semiconductor revenue, 12% on slightly rising capital intensity for wafer equipment and rising KLA share of the overall wafer equipment market, consistent with the growth in share of market that we've seen over the last 5 years or so.

So that translates into KLA moving from 7.5% of the market to 9% of the market, which translates into a 4.5% CAGR over the market baseline for our semiconductor process control business. We stepped up our growth in service, our expectations for service moving from 13% to 15%.

I'm sure we'll talk about service in a moment. Real unique opportunity for the company and a unique business that drives predictable and sustainable accretive cash flow and profit for the company, which gets you to $26 billion, plus or minus $2.5 billion and $84 plus or minus $8 in earnings.

Finally, market share results were announced by a third party in early April, and we saw a year -- another year of share gain, gained 80 points -- 80 basis points of share in overall process control, I think, which supports not only the differentiation that drives KLA's business model, the portfolio approach that we can offer a lot of capability to the customer depending on where they are in their maturity process, either highly technical solutions or more more economic solutions to meet their needs as they ramp process nodes.

So another validation point, 7.5x our nearest competitor in the space. So we think we're positioned very well, very well across the products. Growth drivers are intact. We're excited about what high-performance compute brings to process control, a lot of unique opportunities, both in terms of the design environment that we're facing and how that benefits process control, die size and how that affects defect density, value of die.

And then also what's happening in the memory with high performance or with high-bandwidth memory, but also improvements in overall intensity as it relates to conventional memory because of the introduction and scaling of EUV layers in DRAM. So we think that the overall market sets up what was a good sort of gain in performance relative to the overall market. And as we look forward, we feel like that we will see a continuation of that, so pretty excited about it. So why don't I stop there, and I'm happy to take your questions.

So we'll talk about the near to medium term. But Bren, I really first want to start with the longer term, right? You outlined at your Analyst Day, the 26% to 30% growth and strategic framework. When investors look at the semi-cap space, they see something that is exceptionally high quality, right? There's no lack of investment. One can go into lithography, right, etch deposition, right, or process control. What is the case for process control and metrology to outperform those other parts of the WFE share of wallet?

Yes. No, it's an interesting question from shareholders because if you look back from 2019 or 2020, 2021, pick your starting point, I showed a slide at Investor Day that really 2 markets have gained in share of overall market over that time frame. It was lithography, of course, with the introduction of new lithography capability that's understandable and process control.

So the last 5 or 6 years has been very good for the company and has translated into a 6.5 point delta on overall compound annual growth rate. So the question I get from investors, yes, it's been a nice run. What changes from here? But if you look at the drivers, as I mentioned earlier, if you look at has high-performance compute drive semiconductor revenue and moves from 20% to 25% to 50% of semiconductor revenue that the attributes that I talked about earlier are more compelling for process control than what we've experienced.

If you just go back and look at, okay, so you had a leading-edge road map that was finally available starting in 2020, 2019, 2020 time frame with the introduction of EUV that drove a design environment that drove higher intensity because you're managing a lot of different designs. Our customers have to manage a much more robust environment with different process flows.

A design environment consumes the previous nodes. And so as a result of that, the reuse of capability from a previous node to the next node is limited. In the middle of that time frame, we saw the start, the beginnings of what was happening with high-performance compute. And then you had -- as I said, you had the introduction of EUV in memory, which was changing process control intensity.

And then high bandwidth memory added an accelerant to that. There's a lot of logic. There's less redundancy, the die are bigger. The performance specs are more rigorous. You can't bin with high-performance compute in memory or in logic. You can't sell down market into a down product. So hitting performance specs matters a lot. And then you -- I mentioned defect density, right? So you have big die.

And so you have the same number of particles that fall onto a wafer, the bigger the die are, the more of an impact on yield. And when things are worth more, you inspect more. You want to make sure that it functions. So these are all good drivers that are accelerating moving forward. Then you have packaging, which is augmenting that growth. Packaging was an afterthought for KLA because the technology in packaging was more cost-competitive, less advanced.

But as packaging, particularly in logic/foundry, has moved more towards front-end like processing, it has pulled forward the need for front-end tools. And so we did engineering in parts of the portfolio to serve that part of the market that we can now leverage across other products, but the packaging requirements are only becoming more stringent.

One of the things we're seeing this year is that we're actually now seeing a higher mix of more advanced front-end capability being sold in the packaging market, particularly as customers move towards hybrid bonding technologies for die-to-wafer and die-to-die type die stacking.

So we think that's a part of the market that will augment the growth moving forward. So you have a lot of good drivers in traditional WFE, but then also augmented by what's happening in wafer or in advanced packaging. We were -- I never talked about it because we were 1% of the advanced packaging market or less just a few years ago. We -- last year, we were over 6%. This year, I think it will be somewhere in the mid-7s, maybe higher. We'll see how big the market is. So it's materially changed. We're going to be $1 billion in packaging, up from $635 million last year and $300-ish million the year before.

So it's been quite a run. And I think that there's more opportunity that will avail itself there. So we feel very good about -- we gained 150 basis points plus over the last 5 years, and we think we're going to gain another 150 basis points of the overall market over the next 5. The structural growth opportunity as it relates to process control over the extended period of time.

It doesn't mean in every year that you're going to have performance that's going to be stronger. Some performance will be even less depending on the mix and how customers are investing. But at the end of the day, we think that there's an opportunity to grow our relevance, and that's what we're driving the company towards. And that's implicit in that $26 billion target model for '30.

Got it. One other pushback that investors -- not pushback, I would say the framing that investors often have is that if you look over the last 6 years, right, the 2019 to '25 cycle, KLA did extremely well. Lithography did extremely well. It was a very logic-driven cycle. If we go back in time, '12 to '19 was a memory-driven cycle where some of your etch and deposition peers did well.

And now there is a perception that over the next 3 to 4 years, memory again comes back and it will be a more memory-driven cycle. So what helps KLA outperform if the mix moves more to memory, right, versus logic on a relative basis?

Well, it's interesting. If you go 2012 to 2018, logic WFE was negative, right? So the market was really being driven by what was happening in memory. There was also a period of time in there where you had the retooling moving from planar to 3D NAND, which was unique retooling of fabs to a fundamentally new technology in that part of the market.

Our model is based on 60% logic. We think the market overall will be roughly 60%. And if you go back over the last few years, it's been near 70%. And so memory will have inflections. Memory has always been kind of the sort of cyclical dynamic in the industry, more commodity like, although a little less of that today than the way it used to be.

But it's also driven some of the sort of the momentum and kind of works both ways in the overall industry. So I think a few points. First of all, logic intensity for the reasons I talked about will grow. And we think that the leading edge of logic has been very efficient over the last 5 years with effectively one player investing.

Going forward, we expect broader-based participation at leading edge. And so that will drive more strategic investment, maybe a little more inefficiency at the leading edge. So we feel very good about that. We're going to continue to gain share. We feel pretty comfortable about a trajectory of modest share gain over the next few years. Our internal target is to gain 50 basis points a year and it doesn't sound like much, but when you start aggregating it over time from a very strong position.

We know if we can deliver the right solutions to our customers, particularly the ones that are the most compelling to their long-term road maps that we can win more share. So that's an assumption that's implicit in that. Packaging, I talked about that. I think that road map not only continues, but continues to drive more advanced capability.

High-bandwidth memory is as intense in certain product lines as high mix logic. It's a very different kind of device. And so that's going to drive that, coupled with more EUV and DRAM will drive higher memory intensity. So I think going forward, memory intensity will be higher.

So even though, and even last year, the percent of the industry that was memory last year was higher than it was the year before, but our performance against the overall market was slightly -- was better. So I think all the drivers we talked about related to high-performance compute plus packaging plus improving intensity in DRAM, I think sets up the company pretty well that in an environment of 60% plus, we feel like we can maintain that outperformance and continue to grow our share of the overall market.

Got it. Memory, is it different this time? Is it going to be less cyclical, more secular or one always hesitates to make that point, what are you hearing from your memory customers, right? Of course, they see pricing going up, supply being very constrained. That's a great environment for them. But as they are signing long-term agreements, do you think they now have to provide supply assurance so then they need to align with their supply chain, including with KLA?

So you're going to ask me that question. Look, you have multiple players investing in memory. And memory is more commodity-like than logic, although high-bandwidth memory does change things in that way. Right now, our engagement with customers is all focused on how do we drive more capacity, how do we deliver sooner? How do we support these fab greenfield projects that are upcoming.

So I understand the pricing opportunity. I feel it in my own business for our own image computing requirements as we're procuring our own memory. So right now, the focus is all on supporting what is a very strong market. And I think that, that continues for a while, right? I think given the expectations around some of this greenfield activity that's coming.

So we'll see. I mean I've been in the industry a long time. As I said earlier, memory has driven some of the cyclicality in the industry, and you've had multiple players investing. As I said earlier, the leading edge was driven mostly by one player on the logic side and logic is more custom, if you will.

And so where we have seen that, it's come from -- some of these cyclical dynamics have come from memory. So we'll have to see. But right now, the environment looks very constructive over the next several quarters, and our efforts are all focused on how do we support our customers through this.

Got it. Given your long lead times, what indications are you getting from just memory customers broadly about more greenfield, right, more clean room availability in the second half of next year? Like when is your kind of memory-related inflection? Does it happen like 6 months before clean rooms? Is it when clean rooms come? Or is it a '28 inflection? Like when -- what is the right way to think about clean room availability and your inflection in the memory market?

Well, I think as you open up these facilities, process control tends to be a little bit more on the front end as they start to scale. There's also the customer has to bring in all the tools they need, right? So there's a cadencing process that typically happens as they come in. I mean you typically see bare wafer tools because you have to monitor tools. You have metrology tools because you have to measure the films that get deposited by process tools.

So I think that given it's greenfield and retooling, I don't think it's going to be that different in terms of a timing issue because you're going to be adding a whole new set of new capacity into the fab. So I don't think that there's a we see it way in advance than others. I think it's all going to be more or less across the same time frame and be driven partly by just the ability to procure the entire tool sets to support the wafer start ramp.

Got it. Do you think that given the expectation of clean rooms coming out that it is still reasonable for people to assume that WFE growth in '27 could be faster than WFE growth in '26?

We'll have to see where '26 ends up. I have said that I think it's at least as fast. I still think that, that's the case in 2027. But the 2026 is also a little bit stronger now than we thought when I first made the statement. But I still, as I look forward, I think we are looking at a pretty robust environment into next year with growth rates that are similar or better than what we're seeing in 2026.

Got it. So if, let's say, next year is at or above, I mean, we could be looking at a 170, 180 WFE next year conceptually and 200 is not that far from there, and that is your 2030 WFE assumption. So should we be rethinking what 2030 WFE?

Well, 215.

215. Okay. More to go.

Yes, more to go. Look, we'll have to see where -- I can't -- I don't want to speak for what our peers are able to do and how that lines up with our customers' capacity planning. We do contemplate the scenarios and have been spending a lot of time over the last few months out in our factories because I oversee our manufacturing and supply chain operations with suppliers over the last couple of weeks, positioning the company and contemplating the different scenarios that are being discussed in terms of growth.

Never want to be the bottleneck. I don't want to be the bottleneck. Part of the, I would say, slower sequential growth that we're seeing here in the first half is really being driven by some of the constraints we have in supply chain. The ability to procure certain components, particularly around optics, just takes a longer period of time.

Process tools come together easier. And so that's been a challenge for us. But as we move into the second half of the year, more capacity comes online, I think the acceleration of half-to-half growth is pretty meaningful. So as we contemplate what we need to do next year and is working with customers, we're certainly considering some of these scenarios and our ability to support it.

And I feel that based on what our customers are saying that we're in a position to be able to support their requirements. And I lean in, right? I mean we'll lean in with our suppliers. We'll make investments to our suppliers for capacity. We have the lead time element. We've been -- I talked at Investor Day about how we manage our supply chain, how it's a much more strategic, less transactional.

I give suppliers multiple years of visibility. I don't cancel orders. We make investments in those suppliers that it's required to ensure that we get dedicated capacity. I don't share the critical capacity necessarily with our competitors. I sometimes share it across the company. So lining up the right mix of KLA products is always sometimes a bit of a challenge.

But it proves, I think, once we get to the volume levels that meet the industry requirements that it actually proves to be a pretty resilient supply chain because I don't have to worry about my components going to -- or my needs being shared with another player.

So I think that as we get positioned into next year and as we think about what's required for 2030, I think we're in a good position to support what the industry is contemplating in terms of growth here moving forward. There was an upside case to our plan, right? We said plus or minus $20 billion on wafer equipment and how that translates.

I think at the time for Investor Day, I had some investors saying, wow, $215 billion seems like too much. I had other investors, "Not enough." So maybe it was right. I would say that as we sit today, certainly, the momentum is higher, right? So I think that had I done it today, would I consider upticking it a bit, perhaps. But I think the point of that was to have some pretty clear assumptions and then the ability to execute and what those -- how those assumptions then translate both into a share of market and the financial model underneath.

And our track record against public commitments is very strong, both if you look at the plan we had for 2023, the plan we had for 2026. So I think that against that backdrop, we can execute and deliver on the commitments we've made. I think our track record of performance is reflective of that.

Absolutely. One question on gross margins kind of on a more near-term basis, Bren, which is that KLA's gross margins, right, 62%, best-in-class, right? So nothing to complain about. But you had still outlined about 100 basis point headwind from some of the input cost inflation. Why doesn't KLA have enough pricing power to kind of pass that through?

So we do have some pressure from memory, as I mentioned earlier, and there's some tariff headwind as well. Our pricing is really based off of -- it's a value pricing sale for our customers. And we have a limited set of customers and how practical it is when you have a negotiated price with a customer and you go and say, okay, now I'm going to raise the price off of the already previously negotiated price.

So the way we look at it at KLA is -- and why I spent time on this at Investor Day is it's very important for us to maintain a product introduction cadence of new capability. Because when you introduce new capability, you're a moving target, your salespeople have something to sell, but you also get an opportunity to look at against a baseline of cost of ownership for our customers, you get an opportunity to look at price, consider cost changes and so on.

So it matters a lot for us to maintain this cadence. And that's where we get an opportunity to make the adjustments. We still have to hit our customer expectations for cost of ownership. But if we do our product development right, it does create opportunities for us to manage our way through that.

So I think in a value-sell or return-based transaction, if the cost goes up, it affects how the customer sees the return, right? Because if you think about just the elasticity of the market. And we have to have long-term relationships. We have these, I think, sort of partnership type engagements in terms of how we work with our customers. I think it translates into market share, which then translates into share of market.

So there's a number of vectors that we consider as we work our way through it. But I think the thing for us that matters is to maintain that cadence, which allows us to do that resetting to take into consideration what could be structural cost dynamics that are affecting our business. And they need to be structural.

Our customers would want symmetry. If I start doing an upcharge related to memory, then memory goes down and then they want a reduction in price. I don't want to go down that path. It's how do we deliver against their cost of ownership expectations over time by product across the road map.

And if we can deliver to that, I feel pretty comfortable that we can maintain what is a meaningfully better sort of financial model relative to the rest of the industry. And I think it's reflective of the differentiation of our products and that strategy.

Got it. Over time, do you see further upside to margins? Because we have seen with several of the other WFE peers, margins used to be in the mid-40s, right? Now they have moved to over 50%. Obviously, they are still not like 60% plus. Every one of your customers and their customers is expanding margins. So why is KLA more measured in talking about margin expansion?

Well, like I said, I think there's -- we're optimizing around a number of vectors, and so we have to be thoughtful about that. And when you sell a portfolio, the competitive position across the portfolio is not consistent necessarily across all of them. So you have to be thoughtful about that as well. We segment report, right? So you can see our system and service for semiconductor process control margins and they're in the mid-60s, right?

And so our service business is dilutive to the gross margins, accretive to the operating margin, but dilutive to the gross margin of the company. So that gives you a sense of where systems gross margins are since service is about 25% of the overall revenue stream. So I think, like I said, we're optimizing on a number of vectors and our long-term plan contemplates steady improvement in gross margin.

And so we're operating today at 62%, and we think that we can get it somewhere between 63% and 64% over the next several years. We're going to drive incremental operating margins, which is how we sort of size the company, but also contemplate the contributions in our gross margins to drive towards the higher end of our target 40% to 50% sort of structural model.

And so we'll be the higher end of that range. And so we think we can deliver that over time. And that will translate against the 26% model to 3 points of operating margin improvement. So the best model in the industry gets marginally better here moving forward as our overall relative performance at the top line improves. That's the model for the company.

Got it. Maybe one question on the competitive landscape. What I find fascinating is I think your R&D expenses are more than the process control sales of your nearest competitor, right? So there is such a wide gap. But there's still a 40-plus percent of the market that remains very fragmented, right, beyond KLA. So do you see competition becoming more intense in any specific application, any specific end market?

Well, we're continuing to gain share, which I think is validation of the differentiation in our offerings. And in particularly in the last year, we have the markets that are growing fastest, we have a strong share position, and so that's certainly influencing share. There's some electron beam products. We gained share there, reticle inspection, another opportunity where we saw some share improvement.

I talked about this at Investor Day that we have big programs that what I worry more about, and I think I can speak for Rick, my boss also on this is we worry a lot more about relevance and solving problems uniquely to our customers and less about competition because you can deliver capability, but if it doesn't solve a problem that has a strong financial return, then they just won't buy it, they'll sample less. It isn't necessarily a buy competitor, they just don't need it.

So our focus inside the company is ensuring that we are delivering capabilities, solving unique problems, solving problems at scale in production that drive revenue. So we have big investments we're making. We're making big bets to ensure we support the road map. We also are supporting a cadence in the industry of new development that drives the design start environment from a process point of view, but also allows us to really extend the platforms we have and optimize the R&D that we're spending.

And then there's higher levels of growth. So our percent of revenue on R&D, there is some scale benefit to that. But because we're supporting a cadence that is, I'll call it kind of -- it's not exactly Moore's Law. It's certainly slower than that. It's almost perfect in that if you run a much faster cadence, you'd have to spend more. You'd have to introduce more advanced capability in the form of new platforms, which you spend a lot more on, you'd have to introduce those at a much faster cadence.

So by having this progression in the process road map allows us to achieve, I think, higher levels of efficiency, and it ultimately translates, I think, to better overall financial performance on R&D. We're investing in all the things we need to invest in, in terms of market opportunities. So I think we're pretty well positioned, and we're making the bets we need to bet to make.

A very final question, Bren, which is I think the services business at KLA is fascinating, right, because it is not as cyclical as that of your peers, which is more exposed to spares and things of that nature. So maybe just give us a quick view on how you see your services. I think you raised the growth rate to 13% to 15%. Should we just think of it as kind of this corner of your business that is kind of counter-cyclical, right? Or it has no cyclical sensitivity for the...

Well, one down year in '25, right? And that was in 2009 and even then it was in the 10% range or so. It's pure service. So there's no systems that are in there. And look, what we sell is we sell this very advanced or complex high mix, low redundancy products. And so our customers have high uptime expectations. And so they buy the process control they need and then they run the tools at very high uptime.

And so it tends to be higher than how they run process tools. And one, leveraging the installed base to drive yield is efficient in terms of managing the overall capacity. The lifetime of the tools is extending. One thing that's been great about the extending or stratification of demand in semiconductors has driven a lifetime of our tools up. When I first became CFO, I've said this before, lifetime was about 10 years of a tool in the field. Now it's over 20.

The percent that we get as a percent of ASP in a contract, first of all, 80% of the revenue is contract back to the predictability of it. But the percent we get is 1 point to 2 points higher than it was 10 years ago. There are opportunities for additional growth in memory because of the demands in the memory market, the requirements for high-bandwidth memory to drive more of a contract stream. Packaging is an area where service was underpenetrated.

So we've got a number of good drivers, I think, that not only enable the top line but allow us to drive that predictability. We sell parts, but what we really sell to our customers is high uptime and performance and performance across the fleet. And it's very hard for third parties or our customers to maintain and deliver those kinds of results.

The supply, because of the complexity of what we do, the parts are fairly custom, and so we're the source of that. So because it's low -- it's high mix and it's relatively low volume by comparison, really hard for our customers to pursue other alternatives for service. And so they rely on us to ensure that the fleet performs at expected and delivers the kind of performance that meets their requirements.

And I think it's unique in the industry, and it continues to scale despite some of the headwinds we've had related to export controls and so on. So I never thought I'd say that service would be dilutive to our growth rate at 13% to 15% with its growth.

But given our expectations here of 16.5% growth for our semi PC business, service brings that element, but it brings an element of predictability that's always given us comfort around how we finance the business, the capital structure, how we think about how we allocate capital, dividends and buybacks that we have this very predictable stream of profitability, cash flow and revenue that we can rely on.

Wonderful. With that, Bren, thank you so much. Really appreciate it. Thank you.

Thank you. Thanks for having us.

Good morning, and welcome to the second day of JPMorgan's 54th Annual Technology, Media and Communications Conference. My name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have Bren Higgins, Executive Vice President and Chief Financial Officer of KLA here with us today.

I've asked Bren to start us off with KLA's view of the wafer equipment, process control, advanced packaging equipment spending environment this year and next year, KLA's growth outlook within that, and then we'll go ahead and kick off the Q&A. So Bren, thank you very much for joining us this morning.

Harlan, thank you for having me. Good to be here. So maybe I'll just level set a little bit from some of the themes coming out of earnings and our recent Investor Day that we had on March 12. Certainly, it feels like that was a long time ago given some of the momentum that we continue to experience in the industry, even though it was only several weeks ago.

But certainly, 2026 is setting up to be a very constructive year with increasing momentum in the industry and in our business. We talked about an environment of spending for wafer equipment that was roughly $140 billion plus for this year. And as we come out of the reporting cycle and also just fueled by some of the engagement we've had with customers as we look to the second half of the year, it feels like there's additional momentum there. There's likely upside to that level of spending.

And that's really across all segments. If you look at what's happening in the leading edge, there's nice broad-based participation at the leading edge. We're really encouraged by that. Process control intensity is higher there. And given the nature of what's happening with high-performance computing, it does drive some unique benefits, we think, to process control and the value of it.

On the memory side, of course, we've seen the pricing environment. I'm feeling a little bit of that as a headwind in our business as it relates to my own computing requirements, but additional spending that's happening there. And then advanced packaging feels that it's accelerating. And if you go back to maybe January time frame, we thought the packaging market might have been somewhere in the sort of plus 20% overall. Now I think it's in excess of 30%.

And in our business, we see that growing even faster in semi process control. We talked about an environment that gets us to $1 billion, which translates into a high 50% kind of growth rate. So really strength across all 3 segments. Service business underneath all that continues to move forward. And 2027 visibility is very good.

I've been with the company a long time. I've been the CFO here since 2013. And I can't recall this level of visibility into the next year in the early May time frame. There are a number of new fabs that are in process from a construction point of view, and those will open up next year.

And so customers are very focused on making sure that they have equipment deliveries that line up with those construction schedules. So I think that's translating not only into this visibility, but also into orders and backlog and also putting pressure on lead times. So we're spending a lot of time working on our own capacity, our supply chain capacity to support what looks like not only what's happening this year, which we think accelerates in the second half for us, but also what's coming in 2027.

Also this quarter, results for market share were published by a third party. It happens every year in the April, May time frame within process control. KLA gained about 80 basis points of market share this year. We have a portfolio approach to this market that I think favors us. I'm sure we'll talk a little bit about that where we're able to meet our customers' technical needs, but also their economic needs, which vary as they move through the maturity and learning cycles on a new node.

So we're pretty excited about that, 7.5x our nearest competitor, about 360 basis points over the last month since 2021 or so. So I'm pretty encouraged by what we're seeing in the market, the momentum there around some specific products. At Investor Day, we outlined a 2030 target model with $26 billion in revenue for the company and $84 in earnings. That was $26 plus or minus $2.5 billion at the top line and earnings of $84, plus or minus $8.

And a path to that with growing KLA wafer equipment intensity, a continuation of what we've seen over the last 5 to 7 years, which we're excited about. But if you look at the conditions of high-performance compute, it's a greater percentage of the total we feel very good about those dynamics driving more relevancy of process control.

Our service business, we also upticked that in terms of our long-term growth rate of 13% to 15%. So you end up with a 15-ish percent growth rate for the company against an industry backdrop of 12%. So we think we'll outperform the market baseline for our equipment business, for systems business by 4% to 5% here over the next several years.

And the financial model continues to hum, and we outlined an environment of opportunity, both in terms of incremental gross margin improvement, a spending profile that's being driven by some dynamics in the industry that allows us to continue to drive scale across our business and also the leveraging of AI capabilities in terms of how we drive our overall productivity. So I'd like to say one of the best business models in the industry gets better on that trajectory between now and 2030. So maybe I'll just stop there, and we'll go into your questions.

Absolutely. No, I appreciate the opening commentary. And why don't we continue from where you left off, which is the Analyst Day, 15% top-line growth CAGR. We'll also talk about the strong share gains and WFE and process control growth outperformance in a minute. But at the Analyst Day, I think part of the -- what was clear at the Analyst Day was that part of the share gain and absolute market leadership is your R&D scale and aggressive cadence of new product introductions, right?

Between 2021 to 2025, you introduced 4.5x more platforms and programs versus the same period 10 years ago. And average platform or program spend is 70% higher, right? This year, team is set to introduce platforms across all 13 of your product segments, that's the most in 10 years, right? So give us some examples of the platforms, the teams we'll be bringing to the market across process control, across advanced packaging and even software and analytics.

Yes. No, it's interesting. And 2 things are true. The first is we're spending a lot more on development, right? And if you look at our programs, we have -- we've said before, we have over 10 major programs over $100 million in the company. So it takes time to develop the capabilities that we bring to the market.

But at the same time, we have a pace of innovation that's happening in the industry that's allowing us to leverage and optimize the existing platforms that we have. And historically, if you were on a much faster technology cadence, you'd have to spend more to keep up and you'd have to transition faster.

But we have a pace in the industry is not exactly the 2-year historical Moore's Law cadence, but a pace of new innovation that drives the design environment, but also allows us to optimize the capabilities we have. Also, innovation isn't just scaling. Scaling is a factor, smaller feature sizes, but also transistor architectures and other things like that, that are driving new capabilities that drive those designs.

So we're able to drive, I think, scale on what we do, and we're really able to optimize the platforms we have. And so that's, I think, part of it, and I think it's pretty important part to our view of R&D scale, R&D as a percent of revenue likely trends down, part of it being growth, but part of it is this dynamic that we talked about.

Product introduction is an important aspect of KLA. It's something that Rick and I spend a lot of time on because we want to have a prolific sort of product introduction cadence because it allows us to do a few things. I mean the first thing is that we stay a moving target to our competitors. The second thing is that it allows our salespeople to have more to sell, right? So there's always something new that we're actually selling in terms of new capability.

And sometimes these introductions are a variant. Sometimes it's a new platform. So it does vary a little bit in terms of a significant architecture change versus just new capability. But the other thing, particularly in this environment and the environment that we've lived in over the last several years, is it allows us to take a look at cost versus price.

And as we work with our customers and we deliver a new capability that introduces a cost of ownership improvement over an established baseline, that how much of that improvement do we take and how much of that improvement in the form of higher prices that we transfer to customers is something that we spend some time on. When you're in an environment where you're seeing cost pressure, that introduction allows you to then make those changes. Really hard to go to a customer and say, I know we've already negotiated on this product, but now I'm going to go raise the price, right? It just doesn't work. And in a somewhat consolidated industry, it's very hard to do.

So it matters a lot for us to introduce this new capability for those reasons, but pricing, but also competitive dynamics. And it's worked for KLA for a long time, and it's something that we think is an important part of this -- the R&D model, but also the execution to be able to deliver it and ramp it and execute against that new capability and those commitments we're making with our customers.

And if we step back for a moment and look at the current industry dynamics, and it's a topic that we've been writing on for the last several years, which is the whole emergence by our semiconductor companies and their customers to focus on bringing more custom silicon ASIC, we call them ASIC solutions to the market. We have seen a resurgence in advanced ASIC XPU chip designs by all of the cloud and hyperscalers and AI frontier model developers, more than 100 designs and design starts at the 3-nanometer, 2-nanometer node.

These are some of the most advanced, most complex chip designs in the world. And given the large chip sizes of these custom XPUs, different circuit topographies, your foundry customers, I think, have to custom develop special inspection, metrology recipes for all of these new ASICs, right? How significant of a driver is this dynamic to overall sort of foundry process control intensity?

Yes, you covered a lot there. I think, first of all, the design environment is always good because it introduces change, right? And change is hard for our customers to manage. It's also introducing change of very high-value parts. And so the predictability of the yield, but also the performance specifications are very important. And then the fact that you want to be able to deliver to a very tight market window, obviously, demand is very strong. And you don't want to start too many wafers, you don't want to start too few.

So there's a fab efficiency element that comes from trying to manage all those dynamics and process control plays a pretty significant factor in that. The other thing is it occupies the nodes. It drives up the commitment to those designs. And so as the next node starts to ramp, the previous node is generally very well utilized.

And as a result of that, the purchasing for the next node tends to not be able to reuse any of the capacity or very little of the capacity from the previous node. So that tends to be a factor too. Customers are always trying to optimize their capital efficiency. So if they have some utilization rates come down a previous node, they'll try to use some of that capacity. A little harder when you've got a road map that's moving. It was easier when the road map was fairly stagnant back in the last decade. But that's certainly a factor.

Now if you look at these particular designs, as I said, they have some of the challenges of production, right? Defect density is a challenge, right, where yield, if you have the same number of particles falling the defect, if you have a lot of chips or great defects, you have a lot of chips on a wafer versus a few, it has a significant impact on yield.

And so you have that issue, but you also have the value of it. So you're willing, as a customer, in some ways, it's kind of like insurance, to spend more on insurance if you're ensuring something that is higher value. And so if you're producing something, you're going to spend a lot -- that has a lot of value, you're going to spend a lot more time ensuring that, that device not only yields, but also functions as designed.

So large die benefits KLA in a unique way and in a way that I don't think really benefits process companies all that much, the size of the chip doesn't matter. Capacity matters. So big die that drives more capacity matters. But the dynamics of large die and how it affects process control and large valuable die is a unique benefit for the company.

So designs uniquely challenge us. I don't think really -- the fact that you're running a lot of designs, a high mix environment doesn't really change a process opportunity when you're exposing the wafer, but matters a lot to process control. So these dynamics are, I think, unique and part of the reason why we see our relevance over the next 5 years continuing to increase.

Yes. Makes a lot of sense. Let's talk about the WFE spending environment. As you mentioned in your prepared remarks, your WFE outlook for '26 started off the year at sort of low, mid $130 billion that was ratcheted up to $135 billion, $140 billion at Investor Day and now to over $140 billion on the recent earnings call. That's 3 upward revisions in roughly 6 months.

And you even mentioned in your opening remarks, since earnings, you've seen further sort of momentum. When you decompose what's driving each of these upward revisions over the past 6 months, how would you separate the contribution of the incremental demand? In other words, is it new fab project visibility being solidified? Is it customer pull forward to secure capacity slots ahead of an oversubscribed environment? Or is a lot of it just existing capacity footprints where customers just want to squeeze more yields and output in a supply-constrained environment?

I think it's more the former of some of the things you said. I think it's more clarity around what's coming in the second half. And as you get, I think, firming of schedules, certainly, our customers feel demand pressure. They're building below the demand levels that they have. And so I think as plans are solidifying, we're seeing the pressure to not only the clarity around some of these schedules, but also pressures to kind of pull in. And customers are trying to cadence all the tools that they're getting to be able to ramp the facility. And so you always have those dynamics.

But the momentum is clearly strengthening, right? I mean I think '26 at some point, we probably bump up against a limit of what can be done because of fab space. And then that's one of the reasons why '27 conversations are -- and visibility is so high. But I think it's really a number of those types of factors. But the urgency is certainly higher. Everybody wants their tools sooner. And I'm feeling more and more of that momentum.

The other thing is in the packaging world, we're also seeing that accelerate to the point I made earlier, where that tends to be a shorter lead time business, but you're seeing more investment in those plans as well. So I'd say it's, in some ways, across the board. But certainly, the urgency is higher, and we're spending a lot of time working with our customers to try to say, okay, we thought we were good in terms of aligning on their needs and our ability to deliver. And then we have conversations, they come back and say, now you're late because we changed the plan.

So that's the nature of this industry, but it definitely feels like there's more momentum. It is growing, not stagnating at this point. It's very strong.

And we'll get into the mix in terms of -- that will be the next question, first half versus second half. But again, you mentioned sort of just even since earnings, you've seen a bit more momentum -- continued momentum in the business and it sounds like an incrementally sort of better outlook, as you pointed out, for the second half of the year. When we think about sort of end market sort of foundry logic versus memory, is more of the more near-term momentum that you've seen biased one way or the other?

I'd say it's across the board. I mean one of the challenges we had early on is that it was a pretty quick turn in terms of customer demand starting to accelerate. If I go back to just the fourth quarter of calendar 2025, we weren't anticipating to see the kind of growth that we have in 2026.

And so in about the November time frame or so, we saw that start to change. And for our equipment, right, our lead times, the intrinsic lead times tend to be pretty long and generally around optical components because we're effectively building these high-performance microscopes. And so we have to go procure that supply, and it generally takes longer.

Now we do a lot of things to try to hedge it and to reduce our lead time to customers. But there's only so much of that you can do. And so when you have that quick turn, it does take some time for our business to change. So the sequential performance in the first half of the year has been below, I think, what our customers ideally would want, but we see that starting to improve into the second half, and we've been pretty public about that.

So I think from a momentum point of view, as we move in the second half, I think the second half is we'll call it, sort of mid-to-high teens, maybe 20% over the first half, somewhere in that ballpark, high teens to 20% in that. So we think that we'll see some of that catching up happen. And if you go back and look at the last time in 2020, 2021 time frame and the last sort of significant ramp in the industry during the COVID time frame, you saw a similar dynamic play out.

Now we think our supply chain is pretty resilient because it tends to be pretty captive to KLA. We sometimes compete within our own product lines for capacity. But our supply relationships, particularly around critical components with long lead times, we tend to have relationships with those customers where they're supplying just us in our space.

And so as we make those commitments and we're investing in them, we feel pretty good about their ability to deliver as you start to move through an environment where you start to feel the strain and all those hedges and things like that you have built into your system start to -- the longer it goes, start to feel pressure.

So I think in the long run, we feel very good about our ability to sustain what looks like a pretty strong 12 to 24 months at a minimum. And we'll start to see some of that momentum pick up in a more meaningful way as we move into the second half of the year.

And on KLA's mix, high-60% foundry/logic, low-30% memory mix, you anticipated for this year. Help us understand sort of first half versus second half foundry versus memory mix and capacity versus technology migration mix within that view?

Yes. So I think if I look at it and it can move around a little bit from a revenue recognition point of view, I think the second half has a little bit more memory. I think there's some timing around certain projects opening in the second half of the year that's influencing some of that. If you look at it overall for the year, though, memory is growing faster, but logic is still is -- I think you're seeing this growth in leading-edge logic, but if you look at other parts of logic, particularly like in China, legacy markets are slower. But the inflection is really in the industry is happening in DRAM.

So I think in the second half, you'll see probably DRAM will be a little bit higher than logic, but you're seeing strong momentum across all of it. So I think that's probably the biggest issue in it. I mean, certainly, memory is a slightly higher percent this year, and we have a lot of technology migration that's happening in memory. And so -- particularly around conventional memory.

So that does put a little bit of pressure on process control intensity in that environment, offset by what's happening in high-bandwidth memory, which is a different animal, if you will, in terms of how customers are investing in given some of the unique characteristics of high-bandwidth memory versus conventional memory. But for conventional memory in an upgrade environment, the opportunities for us are more limited.

Now when you move into a more greenfield environment as you're retooling and equipping a new fab of new capacity, then I start -- that starts to change. And we're seeing with the progression of advanced design rules in conventional memory, but also the growth rates of high-bandwidth memory that, that creates a higher intensity environment as we move into next year.

On the April earnings call, speaking about next year, you articulated a view that the 2027 WFE growth rate should be higher than the growth rate expectations for 2026. To my mind, that's a fairly meaningful statement given the team typically has been a bit more measured on sort of forward period sort of color sort of giving it to us historically, right?

So what specifically gives you the confidence to commit to 2027 growth faster than 2026? Is it specific customer slot commitments? Is it the visibility on the bookings and backlog, greenfield construction program visibility, the breadth of customer engagements or just a combination of all of the above?

Yes. So new fabs in logic, new fabs in memory, new fabs in DRAM, but also in flash. So greenfield is part of it and particularly given the nature of the conversations around aligning those schedules with when these facilities come online. I think that's the biggest factor for us.

Our customers certainly feel the pressure of the demand environment. And I think even after all that the capacity that's planned in '27, they're still shipping short of where their demand signals are. So that's probably the biggest factor overall. I think there's a -- I have a higher confidence level in the sustainability of some of the broad-based investment that's happening also at the leading edge as we move into next year.

So I'm encouraged by that as well. You're right, it's unusual. We tend to have, I think, longer lead times. So I'd say, around certain product types, perhaps more visibility. But that engagement with customers is pretty high. And so that gives us the confidence that we'll see that. And our customers are translating their views of growth that are consistent with that.

You talked about the market share gains in 2025 and market share statistics were just released by Gartner about a month ago. You gave us a preview of that at Analyst Day, some at earnings, some today. In 2025, another strong showing strong dominant #1 position in process control. You outgrew the market by 170 basis points, 7.5x larger versus your #2 competitor.

According to the statistics, #1 market share position in 7 out of the 10 subsegments in process control. And as you outlined at Analyst Day, the team leverages its R&D scale. We talked about the 13 new programs this year, highest in 10 years. As you outgrow WFE and process control this year, I mean, what are the areas you're anticipating to drive another year of share gains?

Well, certainly, in the electron beam world, particularly around e-beam inspection, we've seen nice share improvement, and we've seen good customer adoption around single-beam solutions and multi-beam solutions. We're able to leverage what we call co-intelligence, where we're able to leverage some of that capability to increase the relevancy of our optical inspectors, particularly in production, where you can use -- these are some of our most advanced systems from an AI point of view, and you can use AI to identify hotspots or care areas, some of the terminology we use inside the company that you can point your inspectors more effectively, look for certain defect signatures and so on.

So not only does it drive the point product competitive dynamic, but it also allows us to drive more relevancy across the portfolio. Reticle inspection is an area of opportunity, and we saw some gain there as well. That market gets served both in the fab where you have requalification of reticles that are reticles that are in use.

Reticles are -- have defect challenges where you -- because you're scanning across the reticles, you're printing devices that if you have a defect, you print on everyone. And so it's important that either whether it's in the fab that there's a contamination dynamic or in the mask shop when you're writing the reticle or process control intensity is very high.

There's a number of platforms that serve different parts of that market. And so when you look at that overall, we saw an increase in overall share driven mostly by the recall market in terms of where the growth came from. Packaging was another area of share gain. We moved into the #1 position in packaging. One of the things that's happening in packaging is that market is moving towards the need for higher-end front-end like solutions. If you look at the integration of packages, particularly for high-performance compute.

And so we've been able to gain traction, leveraging our front-end tools. We did a lot of development around the macro inspection products that we're now from a handling and environmental point of view that we've now been able to leverage across the other -- rest of the portfolio. And so that engagement, particularly on the logic side and share improvement has been very high.

Memory, I think there's improving momentum. Some of the memory requirements are not as advanced from a technology point of view. And so I think that there's opportunities in memory. We're seeing it improve, but it will take longer. But certainly, on the logic side, it's starting to inflect. And as we move into this year, we're starting to see a higher mix of more advanced systems that as you start to shrink the design rules and you move into like hybrid bonding type techniques, that, that drives the need for more advanced capabilities. So I think that there's continued momentum there.

And even on the base product that you compete in the market, the tool we won with is down rev to the current tool we're competing with today. So we think that the road map is very strong, both in terms of the products that are serving the capacity part of the market, but also those that are optimizing the sampling strategy, leveraging the front-end capability that we've had for some time.

Finally, optical inspection continues to be a huge driver in the industry, both Gen 4 and Gen 5, Gen 5 on more advanced small defect issue and challenges and then using Gen 4 for gate-all-around because of the broadband nature of the architecture allows us to do a lot of buried defect type analysis, which is a challenge when you start to move into more of a 3D structure environment, and we're seeing that in memory, but we're also seeing it in logic as well.

So lots of momentum across a number of products. I'd say the only areas where we're challenged is typically where we have competitors that can serve certain customers where there's a market access issue, particularly in China as it relates to the geopolitical dynamics and export controls and our ability to compete. But where we compete, we can compete, we feel very good about the position and the momentum moving forward.

Yes. Let's talk a little bit more about advanced packaging because this is a new, I would say, SAM expansion opportunity for WFE, given on the memory side, you've got high-bandwidth memory on the logic and foundry side, you've got the move to these very advanced 2.5D moving to 3.5D, what we call 3D SoIC chip stacking type of technologies.

As you mentioned, your total advanced packaging business, process control plus tools, $950 million last year, up 70% year-over-year. This year, you actually broke out the process control systems portion of the advanced packaging growing to $1 billion, like you said, high 50s, 57% year-over-year is the target versus your prior view of 30% growth.

So what drove the upside in the growth outlook for this year? And where is KLA -- so we get this question a lot, where is KLA over-indexed? Are you over-indexed to HBM? Are you over-indexed to the 2.5D to 3D transition as that happens starting now and for the next kind of few years?

So the thing in packaging is that the market has, as I said, has moved in both in terms of some of the processing requirements, but also the lines in space shrink, the density of the design rules as they shrink. It's driven the need for more front-end solutions.

And if you look at the base macro inspection product that was used in packaging, and that market generally segmented around front end with KLA, and then we have some competitors that address more of the back-end opportunities. And so as that market has moved towards front end, naturally, it pulled the front-end product.

So we've seen, particularly in the logic area has been where most of the share gain has happened. You mentioned some of the new kind of evolving opportunities that are also coming with die stack. And so that will create further opportunities because the sensitivity road map is increasing. And so we'll leverage those other tools.

What's happening in memory is traditional bump inspection type opportunities, which is a less advanced or less complex application. You also have part of the market that's been running really at really high utilization. So there's the opportunity to compete. That's also a challenge, too, that making a change in a high demand environment is not something our customers like to do.

So we've seen some momentum there. And I think that, that continues as you start to see the bump dimension shrink, driving more need for more sensitivity or eventually moving to other bonding techniques to stack those die. I never talked about packaging back in like '21 or '22. We were like 50 basis points of market, 100 basis points.

And now if you look at our share of the overall market, we're -- in 2025, I think it was, what, over 6%, 2026, given the growth rates that we were talking about earlier that probably gets us up into the above 7%. So our relevancy in that part of the market has changed in a pretty meaningful way.

And I think you have -- it's one of the factors as we think about the long term, you still have all these, I think, really good drivers in core WFE both in memory, but in logic and in memory, but also you're able to augment this growth with what's happening in the packaging environment. The sampling rates are very high. The last thing a customer wants to do is go through all the integration that goes into integrating one of these very valuable devices and it doesn't function or it doesn't work and you have to do rework or you have a performance spec question.

So sampling rates, I think, continue to be high, and I don't see that changing all that much moving forward. And you'll start to see, as I said, the introduction to drive more optimized sampling strategy of more advanced systems. This year, we're going to see even BBP tools adopted in packaging lines, right?

To just give you a sense of some of the complexity challenges our customers are facing. Certainly, you're going to see laser scanning tools adopted in a more meaningful way. So it's one where the portfolio is hard to compete against, established tools, established relationships with customers, establish performance over time.

Your services business grew 15% last year with an exit run rate of about 18% year-over-year. You carried that momentum into this year, right, 16% year-over-year growth in the March quarter. As you pointed out at Analyst Day, the team's target is a forward CAGR of sort of 13% to 15% growth. But looking at this year, very, very high customer utilizations.

KLA is offering more advanced services, lots of focus on driving as much output per fab as possible through yield improvement, right? So coming into this year, driving above that 13% to 15% CAGR, I mean, does that momentum continue? How should we think about services growth profile for this year?

So I think this year, we'll be in line with the target. It was slightly above the target last year, and I think it was impacted by some billable activity that closed at the end of '25 that caused the number to spike a bit. But in line with -- we think this 13% to 15% that we were able to -- that we uptick, and that's despite some of the export control pressure that we have where we lost fab access is a testament to what's happening within service.

Our service business is very unique. There's no systems business in it. 80% of the revenue stream is contract. Contract renewal rates are very, very high, in excess of 90%, 95%. The lifetime of tools because they're serving a lot of these markets for long periods of time, we're up in the 20-year plus now lifetime.

If you would ask me that question back when I was first became CFO of KLA, what I would have said 10 years. You would have said how much revenue over the lifetime of a tool and service do we drive in the service stream compared to the ASP, we said 40% to 50% back then. Today, it's in excess of 100%. So we drive more service revenue over the lifetime of the tool than the ASP value of the tool.

What's happening in the market today is driving higher service requirements. Availability -- one thing about process control is that there's not a lot of redundancy. There's a ton of complexity. Customers can't really service themselves. And so they run our tools in a much higher uptime generally than most process tools, most of the time greater than 90%.

So we will commit in our service. What we sell to our customers really is availability and performance of the system. Yes, we will change parts, but there's a ton of preventative maintenance work that we do. We're spending a lot of time trying to leverage AI to get more predictive about how we do that because we know we can monetize availability and drive and get consistent performance across the fleet.

And so if you look at what's happening in high-bandwidth memory and how memory customers are looking at service, which is starting to change what's happening in packaging, those are opportunities for growth in addition to the things I mentioned earlier. And then in acquired companies that we have, right, how do we leverage the infrastructure of the company to drive more service opportunity.

Small companies struggle. They get pushed a little bit by customers. They don't have a global infrastructure. They struggle to monetize service. So as we acquire companies, put them into our system, that creates an extra element of growth over time. So for all these reasons, we think that not only does the growth rate move at 13% to 15%, but we also think that the incremental gross margins move above 55%, given all the infrastructure investments we've made to support this broadening geo environment that now exists in our industry.

So it's a nice -- if you look at the growth rate at 13% to 15%, the fact that it dilutes our growth rate relative to the systems growth rate between now and 2030 at 16.5%. I never thought I would say that. But it's certainly something that gives us a predictability, works in upturns and downturns and gives us a lot of confidence around dividends and capital structure decisions and so on.

Appreciate it. Well, thank you, Ben, for participating, and looking forward to a strong growth year for the KLA team. Thank you very much.

Thank you for having us.

Good afternoon. My name is Leo, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation March Quarter 2026 Earnings Conference Call.

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

Welcome to the March 2026 quarterly earnings call for KLA. I'm joined by our CEO, Rick Wallace; and CFO, Brent Higgins. We will discuss today's results as well as our outlook, which we released after the market closed and is available on our website along with supplemental materials.

We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified. We will not reference fiscal years in our discussion, all full year references we may refer to calendar years.

The earnings material contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future events presentations, corporate governance information and links to our SEC filings.

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 make on the call today, 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. We will begin the call with Rick providing commentary on the business environment in our quarter, followed by Brent with financial highlights on our outlook.

Now over to Rick.

Thanks, Kevin. KLA delivered strong results across the board for the March quarter with revenue of $3.415 billion, up 4% sequentially and 11% year-over-year driven by increased investment in leading-edge foundry logic and high bandwidth memory. Non-GAAP diluted EPS was $9.40 and GAAP diluted EPS was $9.12. We continue to see AI as a core driver of KLA's performance and an enabler for our growing momentum. Highlights in the quarter include KLA achieving the #1 position in process control for advanced wafer level packaging for 2025 due to continued customer adoption KLA's packaging portfolio.

We continue to see improving momentum and advanced packaging revenue growth and market share, and we now expect semiconductor process control product portfolio revenue for advanced packaging will grow from approximately $635 million in 2025 to approximately $1 billion in 2026, well above our prior estimates. CLA service business was $775 million in the March quarter, up 16% year-over-year but down 1% sequentially due to the timing of revenue recognition.

Consistent long-term growth in service is a key aspect of KLA's business model and delivers predictable cash flow to anchor our capital return strategy. Quarterly free cash flow was $622 million, over the past 12 months, free cash flow was $4 million, producing a free cash flow margin of 31%. Total capital returned in the March quarter was $875 million comprised of $626 million in share repurchases and $249 million in dividends.

Total capital return over the past 12 months was $3.2 billion. Additionally, recently published industry research shows KLA increased its global share of both the overall wafer equipment and the process control market in 2025.

This growing market leadership was highlighted by significant gains in advanced wafer-level packaging, where KLA increased its market share by 14 percentage points and achieved approximately 70% year-over-year revenue growth. KLA's market share also improved across basket inspection, optical pattern wafer inspection and electron beam inspection. Since 2021, KLA shared process control has grown by 360 basis points and is approximately 7x greater than the nearest competitor.

Looking ahead to 2026 and 2027, our expectations for growth in the wafer equipment industry are accelerating. KLA's relevance has increased across all vectors of semiconductor manufacturing as process control enables a growing volume of design starts at the leading edge and supports the needs for increased performance and reliability in the production of high-bandwidth memory.

It's important to distinguish that design activity and rising memory complexity are not the only catalyst driving benefits for KLA and process control, faster product cycles, higher-value wafers and mask, rising design complexity and variability and the growing demand and complexity of advanced packaging all require significantly more process control solutions. These solutions shorten time to results by addressing process integration challenges in R&D and early fab ramp phases, while continuing to manage yield with strong design mix and high-volume manufacturing.

Turning to services. As KLA systems become more technologically advanced and have longer service lifetimes in fabs, our service business continues to gain strategic importance, driven by rising customer expectations for tool performance and availability across all customer segments, creating a strong, predictable long-term tailwind for overall KLA revenue growth.

KLA also recently held an Investor Day in March, detailing our position in the semi-sector market and our unique portfolio approach to solving customer process challenges and enhancing yield learning cycles within process control. We introduced new long-term revenue growth targets along with a 2030 financial model and increased our capital allocation to target over 90% of free cash flow.

We also announced the 17th consecutive increase in our quarterly dividend level and an incremental $7 billion share repurchase authorization. KLA revised up 13% to 17% revenue CAGR objective through 2030 reflects strong growth across our key business segments and includes an increased long-term services revenue CAGR growth model of approximately 13% to 15%.

Our long-term model assumes a baseline semiconductor industry growth CAGR of 11% from 2025 to 2030 and wafer equipment market growing 1% faster than the semiconductor industry to $215 billion, plus or minus $20 billion by 2030. Given the growing relevance of process control across all customer segments, we expect KLA to continue to outperform the wafer equipment market on the top line, driving operating leverage and continuing to deliver our best-in-class financial model.

I'll close my remarks by saying that KLA's sustainable outperformance reinforces the strength of our leadership and process control. It also underscores the critical role KLA's suite of products and services play and enabling AI field growth in the semiconductor industry. Our consistent execution reflects the resilience of the KLA operating model, the talent of our global team and our disciplined approach to capital allocation focused on long-term investment and maximizing total shareholder value.

With that, I'll turn the call over to Bren to discuss the quarter's financial highlights.

Thanks, Rick. KLA's March quarter results reflect strong year-over-year growth with an industry-leading margin profile, highlighting our market leadership, consistent execution and the dedication of our global teams and meeting customer commitments. Revenue was $3.415 billion, above the guidance midpoint of $3.35 billion. Non-GAAP diluted EPS was $9.40 and GAAP diluted EPS was $9.12 each above the midpoint of the respective guidance ranges.

Gross margin was 62.2%, 45 basis points above the midpoint of guidance, driven by better-than-modeled service business mix and manufacturing scale due to higher business volume. Operating expenses were $670 million and included $389 million in R&D and $281 million in SG&A. Operating expenses were higher than expected, principally due to [indiscernible] materials timing and other reserve adjustments. Operating margin was 42.6%. Other income expense net was $9 million in income. The variance relative to guidance was due to a significant mark-to-market gain of a strategic supply investment. The quarterly effective tax rate was 15.4% at the guided tax rate of 14.5% and non-GAAP earnings per share would have been $0.10 higher or $9.50.

Breakdown of revenue by reportable segments and 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 $5 billion in total cash, cash equivalents and marketable securities and debt of $5.95 billion. The company has a flexible and attractive bond maturity profile supported by investment-grade ratings from all 3 major rating agencies.

KLA generates consistent strong free cash flow, driven by our high-performing operating model. Over the past 5 calendar years, Free cash flow has grown at approximately 20% CAGR, above the revenue CAGR of 16% over the same period. This growth, coupled with resilience across business cycles, enables a comprehensive capital return strategy, featuring double-digit dividend growth and share repurchases to support long-term shareholder value creation. This strategy prioritizes predictable, assertive capital deployment and remains an important differentiator of the KLA investment thesis.

Now turning to the industry outlook for 2026, which continues to strengthen across all segments. We expect the wafer equipment market which includes advanced packaging to exceed $140 billion in 2026. The strength of demand and customer engagement and ensuring KLA has the capacity to support numerous new fab projects currently under construction, has led to unprecedented demand visibility from our customers.

While normally, we would not comment on 2027 growth rates at April of 2026. This demand environment gives us confidence in 2027 visibility for the wafer equipment market. Today, we expect the 2027 year-over-year growth rate to be higher than our growth rate expectations for 2026. KLA has strong business momentum, expanding market share and higher process control intensity at the leading edge across all segments.

Given all this, we are well positioned to continue to increase our share of the overall market in 2026 and 2027. The strong customer momentum that we are experiencing is reflected in our growing systems backlog and sales funnel. We continue to expect quarter-to-quarter revenue growth throughout 2026 and strong business momentum leading into 2027. For 2026, we expect sequential revenue growth for the company to accelerate, leading to high teen revenue growth year-over-year in the semiconductor process control systems business to grow over 20%.

KLA's June quarter guidance is for revenue of $3.575 billion, plus or minus $200 million. Foundry logic revenue from semiconductor customers is forecasted to increase to approximately 82% and and memory is expected to be approximately 18% of semi process control systems revenue to semiconductor customers.

In memory, DRAM is expected to account for roughly 84% with NAND accounting for the remaining 16%. As always, these business mix approximations pertains solely to our semiconductor customers and do not fully reflect our total semiconductor process control systems revenue. Gross margin for the quarter is forecasted to be 61.75% plus or minus 1 percentage point. Although volume levels are up quarter-to-quarter, product mix is modestly weaker than in the March quarter.

As discussed last quarter, the guidance also includes the persistent impact of elevated DRAM ship costs for the company's image processing computers that ship with our systems, creating a headwind to the company's gross margins. While the memory pricing environment remains challenging in the near term, we have secured the required supply to meet our build plan requirements.

Our view of elevated memory pricing persisting through at least calendar 2026 is unchanged. And we continue to see a roughly 100 basis point negative impact on our gross margin over the next several quarters. Considering this impact, the tariff environment, along with product mix and volume expectations, our view of gross margins remains unchanged at approximately 62%, plus or minus 50 basis points in calendar '26.

Operating expenses are forecasted to be approximately $665 million in the June quarter. For 2026, we will continue to prioritize next-generation product development and company infrastructure investments to support expected revenue growth over the next several years, and we anticipate these expenses to grow by roughly $15 million sequentially throughout the calendar year.

Our business model is designed to deliver 40% to 50% incremental operating margin leverage on revenue growth over the long run. Other model assumptions include other income and expense net of an approximately $25 million expense for the June quarter, and we expect it to remain at approximately this quarterly level for the calendar year.

The planning tax rate is 14.5%. As always, we expect some quarter-to-quarter tax rate variance due to discrete items as we move throughout the year. In the June quarter, non-GAAP diluted EPS is expected to be $9.87, plus or minus $1, and GAAP diluted EPS is expected to be $9.66, plus or minus $1. EPS guidance is based on a fully diluted share count of approximately 131.4 million shares.

In conclusion, our near-term revenue guidance reflects consistent growth and strong profitability. We expect our semiconductor process control systems business to outperform the wafer equipment market in 2026 driven by rising process control intensity and growth in advanced packaging. KLA continues to focus on delivering a differentiated product portfolio that supports customer technology road maps and production efficiency, driving our long-term relevance and growth expectations.

Daily operating model drives our best-in-class execution. Our focus on customer success, innovative solutions and operational excellence enables industry-leading financial performance and consistent predictable capital returns. As we detailed at our March Investor Day, KLA's business is uniquely positioned to capitalize on today's technology inflection points and growth drivers.

We are encouraged by strengthening customer confidence and engagement, which informs our business forecast. The long-term secular trends driving semiconductor industry demand and investments in wafer equipment are compelling and represent a relative performance opportunity for KLA over the next several years. KLA's business has gone from being primarily indexed to leading edge R&D investment and fab capacity ramps to now addressing all row phases in wafer equipment enabling leading-edge process development, time to results in fab capacity ramps and optimizing yield in a high-volume manufacturing environment.

In addition, the growing investment in custom silicon particularly among hyperscalers developing their own custom chips has led to a proliferation of new higher-value design starts and increased demand on our customers to deliver performance, volume and time to market. Design mix and complexity grows, so does the need for process control. As a result, KLA has seen consistent growth in process control intensity as each new chip design requires rigorous inspection metrology and yield optimization solutions. KLA is uniquely positioned to benefit from these trends as we expand our market leadership and deliver differentiated value to our customers.

That concludes our prepared remarks. Kevin, please begin the Q&A.

Thank you, Bren. Operator, can you please provide instructions and then begin the Q&A session.

[Operator Instructions] We'll now take our first question from C.J. Muse with Cantor Fitzgerald.

I guess first question I would love to dig a little bit deeper in terms of your extended lead times and visibility into '27. Can you kind of speak to we're in the portfolio, kind of what in the end markets and how you kind of see that progressing into perhaps soon having visibility into 2028.

Yes, CJ, thanks for the question. It's really broad-based. Certainly, we're seeing backlogs build. And so order flow is very high. customer engagement as we talk about slot planning into next year is also very strong. So I think when you take that, couple it with now we're working really hard here to make sure that we can enable the capacity to meet our customer time lines. But most of our focus and discussion is on how do we address the opportunities in '27, lots of new greenfield opportunities. So I think customers want to make sure that they're in the queue is to align with their construction schedules. And I think it's pretty broad-based across our product portfolio.

Certainly, most of it is more leading edge centric. So it's the most advanced products in the product families.

Yes. Just to build on that, CJ, the conversations I've had with customers in the last few months, there's there's a higher level of urgency around securing capacity for our customers that I remember seeing. And I think it's indicative and speaks to the demand that they're feeling from their customers. And so there's a huge amount of interest and push to make sure that they can get slots assigned. And I think the other realization they all have is that they're not alone in doing this. So the whole industry is trying to support that growth as we go forward. So there's no question '27 is going to be a massive buildup.

Perfect. And maybe as a quick follow-up. I guess as you think about the sequential going to the high teens in the second half, should we be thinking about kind of $49 billion, $15 billion as the right framework for calendar 2016 revenues? .

Yes, I think so. If you just take the commentary, getting the high teens, it gets you into the 15-ish range -- and I think when you look at the second half and we'll call it 15% to 20% type second half sequential growth or growth over the first half. It puts you up into that ballpark. I think you're thinking about it the right way.

We'll move on now to Stacy Rasgon with Bernstein Research. .

At the Analyst Day, you talked about a 2030 model, which had a $250 million WC and like $1.4 billion in semis and I mean it's looking increasingly likely that we might get to those kinds of levels like this year or next year. I guess maybe you could talk a little bit more about the underlying assumptions for that long-term model? And maybe it's a little craft asset, like why isn't it higher, given where we're sitting right now and what you guys are seeing? .

Say, great question. I think a couple of things are driving the increased revenue. And I think the number you're referring to that might be closer to what we talked about for 2030 is the semi revenue number, not the equipment number. And the reason the semi revenue is going higher, faster is pricing. And so there's been more elasticity, especially around memory and that pricing that's driven that number up. So when we talk about 2030, we talk about a normalized level of capital intensity associated with the revenue that we said would be in the range of $1.3 billion to $1.5 billion. If we had to redo that today, there are a lot of reasons why you'd push that up from that -- as you know, that was 6 weeks ago. So things have changed. But I think the numbers around equipment haven't moved nearly as fast as the numbers around semi revenue associated with pricing. Does that help?

Yes, that actually does help. And I guess just for a quick follow-up. There's been some news flow apologize if you maybe mentioned this on the call or not, but there's a new law about bands for a Huahong. And I guess, is there any implication of that on you? And just, I guess, how are you thinking overall about the kind of trajectory as you go forward from yours, has your thinking there changed at all?

So we got the letter. I'm not going to say too much about it other than we're still looking at it. The impact on the company in terms of our Q2 guidance and the commentary around 26%, I would say, is fairly immaterial. It's focused on not all affiliated fabs. So the impact, I would say, is fairly immaterial and contemplated in the guidance we provided.

Broader thoughts on China?

Broader thoughts broader thoughts. I think when you look at China overall, it's playing out more or less consistent with the way we've talked about it. I think if you look at overall spending in China, it's more or less flat, maybe a little bit up has been fairly flat in terms of spending levels over the last few years. And so what's driving our business is what's happening at the leading edge. I would expect that the China growth rate is probably lower than where the overall WFE growth rate is projected to be here moving forward.

We'll move next to Harlan Sur with JPMorgan.

On your 2026 WSE better outlook now $140 billion plus of kind of high-teens percentage type of growth outlook. On the incremental upside this year, is it being driven by new brick-and-mortar sort of greenfield programs being pulled forward or are customers just accelerating technology migrations on existing capacity or maybe focusing on improving yields on existing capacity? Any color there? And then for on the '27, now you are saying WLC will go faster than '26 versus your prior view of in line or better. Looking at your order book, is that a continuation of the broad-based spending growth across segments, foundry, logic, memory advanced packaging? Or is there a particular segment that is driving the strong growth? Any color there would be helpful as well. .

Yes. So I think around the [indiscernible] view, just the urgency from customers to take slots or take deliveries. As we have moved here into better visibility into the second half, we're seeing nothing more than just general urgency across different segments with our customer base. And that caused us to increment the views of industry growth upwards. If you look at 2027, obviously, you've got a lot of new fab projects out of greenfield activity, both on the logic side and memory. I think you'll also see some greenfield activity in flash. So -- and packaging of role also. So I think it's really pretty broad-based across the -- all our different customer segments.

I appreciate that. And then your serves business grew 15% last year with an exit run rate of about 18%. That strong growth carried into the March quarter with 16% year-over-year growth. you guys just outlined the 4 CAGR Analyst Day of 13% to 15% growth rate. In the current environment, just given the very high customer utilization for advanced services offerings obviously, lots of focus on driving as much output and yield per fab as possible. How should we think about the services growth profile this year? .

I think the service will be in the range as we move across this year. Obviously, a lot of the shipments that we're shipping this year will start to flow into service as you move into next year and beyond. So I think that's an accelerant to we'll call higher end of the range growth opportunities as we move over the next couple of years. But more or less, we're trending in service in line with the target range. We would expect to to be within it.

We'll move on to Krish Sanker with TD Cowen.

The first one, I think, Rick or Bren, I think the visibility angle was pretty interesting. How much of that is really driven by true demand? Like the customers doing [indiscernible] maybe in '28 versus trying to ensure that you have enough capacity or even personnel who needs to be trained and service the tools. So how much do you think -- how much of that do you think is actually true demand versus setting you up for what could be potential demand? Then I have a follow-up. .

I'm sorry, it's a little hard to hear. So the question is -- is the demand real? Is that the question? Or do we think we're getting orders in anticipation of shortages? Is that your question?

No, no, I was just wondering how much of it is actually true demand versus customers making sure that there's enough capacity and service personnel, et cetera, people looking like [indiscernible], et cetera.

Well look, I think our customers, given they're going to -- these are significant investments they're going to open these fabs. I mean part of the discussions are not only around tools and tool delivery timing, but also in our support resources, our installation resources, applications, which are people that are out there working with our customers to drive value out of the tools, that the service teams are there to support. So it's really across the company that we're in position to support what they expect to be a pretty significant ramp in terms of business activities as those fabs come up to higher levels of productivity.

Got it. And then a quick follow-up. It seems like some of the incremental WFE demand this year is coming from the CPU titles. But like inter last week spoke about incremental CP capacity coming from Intel 3 and Intel 7, which are prior nodes where I believe the initiatives are already being solved. So will the incremental CPU demand actually benefit KLA or not as much.

Certainly, it's something we've talked about over the last year is that we're encouraged by is the broadening of investment at the leading edge in our lease edge. And so that has been, I think, good for KLA. Our collaboration levels are very high with our customers. And so if you look at what we're -- the easiest way to drive efficiency out of the existing installed bases to drive yield. And so that plays to KLA ability to help drive learning cycles and drive yield in a high-volume manufacturing environment. So I think we're well positioned. We're encouraged by the engagement levels really across the installed base and the broader participation I think lends itself to a pretty robust leading-edge environment as we go forward.

We'll move on now to Joe Quatrochi with Wells Fargo.

Yes. Maybe just a follow up on that. I guess, like when we think about your customers trying to obviously drive higher yield to drive higher output, is that a bigger driver for potential incremental like process control system sales for you? Or is it largely flowing through the service line?

Well, it absolutely drives process control sales. It drives both, but the process control, especially if they're dealing with fabs that are already up, but don't have a particularly high yield and if they've changed die size. So that's the challenge, I think, that they're dealing with when they're trying to put out more capability to support AI. And I think that's a different fact that's driving a lot of the activity around process control.

And you even heard -- I mean, Intel was public about increasing their metrology usage as you heard on their call. So we're definitely seeing, in general, because there's a shortage in the industry, the easiest lever anyone can use is to get more yield out of the existing capacity that they have. even the leaders have gone back to prior nodes and added process control because they recognize that's a faster way to get more that's far less true in historical cycles when they're meeting demand.

So once you see utilizations go way up on leading edge, the only lever you have left, you can build new fabs. But the thing you can do before that is try to squeeze out more yield. I think one of the other benefits we see is just the product types change that our customers are shipping serving different parts of the market that the need for different capability arises -- it might be different than how they originally set up the fab to run a different type of parts or different mix of parts. So that tends to create opportunities for us because new and different capabilities required to support different like higher performance compute markets, for example.

That's very helpful. Maybe as a follow-up, I was wondering if you could maybe talk about your own lead times and just kind of thinking about your own supply chain and kind of I think last quarter, you talked about maybe things being tight from a component standpoint in the first half of this year. I mean the really opening up in the second half. And obviously, you've increased your WSE guidance now a couple of times. Just how do we think about KLA's capacity to support this ramp as we continue to increase into 2027?

Yes. So thanks, Joe. So look, I think the thing that surprised us was the slope and duration of how quickly the business started to ramp into the first half. And so that did put some constraints on our ability to to scale from an overall supply chain capacity point of view in the first half of 2016. As we move into '27 and some of the context we provided and some of my comments earlier around growth rate in the second half. I think we're much better positioned to support this ramp and support customer requirements.

And as we look at '27, as I said earlier, our focus has been really to ensure that we we have the capacity to support the different forecasts that are out there. So we feel pretty comfortable about the guidance we gave today and our ability to support that and then some. We always try to to think about all the conceivable opportunities as we plan along our supply chain. And so there's a tremendous amount of focus across the company to ensure that we have that capacity to support what looks to be a very strong environment next year.

And then as we said earlier, we've got to do -- we're hiring a lot too. We need to make sure we've got our installed resources or service resources to be able to support the tools after we ship them.

Yes. Joe, and the folks in our operations service know that we're matching the urgency in providing capability to our customers that our customers are sharing with us. So this is a time, like I said, I've not seen this before, but there's such broad demand, such capacity at [indiscernible] speed. So we're working very hard to support that. And historically, we've always done it, but it's going to take a lot of work.

We'll move on now to Timothy Arcuri with UBS.

Bren, I just wanted to come back to this idea that you're outgrowing WFE this year. You're guiding up sort of high teens. I think the general consensus among all the other companies is that WFE is growing like mid-20s. So is it that you just think that, that WFE growth is too high, maybe your baseline for WFE last year is more like 120 or something. So actually, you don't think there'll be even high teens. Is that -- is that how you get to the concept that you're going to outgrow this year? .

Well, yes, I think you're right. I think the baseline is about 120, and that aligns with where the various third parties. And if you do kind of a consensus view of all the different forecasts that are out there, you end up somewhere more or less in that ballpark in terms of where 2025 growth rates were. And if you look at the different relative performance of the different players, it does imply that that '25 was a pretty good year, greater than 10% growth. So from a baseline point of view, we see it at about 120, growing to about 140 plus, as we said, which translates into this call it, mid- to high-teen growth rate.

If you look at the semi PC business, as I said in the prepared remarks, we expected it to grow our systems business to grow in excess of 20%. So that's aligns with our view of growth. As we talked about at Investor Day, we spent a lot of time trying to explain how we're defining the. Everybody, of course, defines it in different ways. But we believe that the approach that we've taken, as I said, it lines up with third parties. I think there's a lot of opportunity out there that starts to span not just traditional WFE, but also in the advanced packaging parts of the market. And as we've seen our revenue inflect in that part of the market, we think it's appropriate if you're going to measure yourself on share of market that you got the numerator, but you also get the denominator, right? So that's how we see it, and that's that kind of informs the forecast that we have here.

Okay. Got it. And then I guess just, Rick, I wanted to ask you about the pushout of High-NA. And just like what the puts and takes are for you? I mean, I can see on one hand, you've got like 25%, 30% direct attached to litho. So maybe that's a bad thing that is pushing up. But on the other hand, there's going to be some other process things that get more complex and things like that, which obviously would actually help you. So how do you weigh those puts and takes.

Yes. Thanks, Jim. There's no change in the high NA forecast from everything that we've modeled. It's exactly what we've modeled and started talking about a couple of years ago. So in that sense, this is what we're talking about when we put out the 2030 plan. However, INA has puts and takes, as you say. So ultimately, it's going to be better if people are printing smaller geometries and the defectivity challenges are going to be greater. But it's also the case that, that's not going to happen until the economics support it. So I'd say for us, it's a push. It's going to happen, it's going to extend the time line for which people could keep getting benefit out of process. That's good for the industry.

But it is in our -- what's happening is in our model. So that there was no change from our expectations.

Yes, Tim, and I think this attach rate to litho historically when scaling was driving the innovation in the process road map, that was more true than it is today. Today, you have architecture changes, you have the nature of a high mix design environment. We talked a lot about larger die and what that means in terms of defect density the value of that die and how that translates to how much you're willing to invest to ensure that those die are good and are performing at spec process and performance requirements are much more significant. So there's a lot of drivers there for process control that's beyond just traditional lympho scaling.

If you look -- we need a lot to scaling road map, as Rick said, it's important. It's good for the industry, but it's not the only factor that drives process control intensity. The 2-nanometer node has higher intensity than 3-nanometer node and the amount of EUV layers hasn't changed all that much from node to node. So I think that gives you an indication that that it's not the only factor that influences how customers invest in our products.

We'll move on now to Jim Schneider with Goldman Sachs.

I was wondering if you could maybe address your expectation for the advanced packaging market and your revenue growth there in calendar '26. And maybe just kind of talk about how that's likely to kind of filter as we go throughout the year.

Yes. And so it's a pretty exciting part of our story. Of course, we spent a lot of time talking about how it's how that market has moved to the need for more front-end like requirements and how well the KLA portfolio is positioned here. We talked about exceeding being somewhere in the range of $1 billion in business and advanced packaging for our process control business this year, growing from about $635 million in 2025.

One of the great things that we're starting to see also is as the packaging market has evolved and more nanometer level inspection is required, but the need for more precision and more capability from the tool set. So as we look at 2026, we're actually seeing meaningful revenue increases across some of our more advanced systems as we talked about that, that was going to come, and we're starting to see that both in terms of of [indiscernible] packaging, but also emerging SOIC packaging as dista is happening, driving hybrid volume requirements and so on.

So we're pretty excited about the growth in that part of the market for us. It's likely one of the top growing markets certainly in overall packaging, and we expect it to continue to grow into next year.

And I was wondering if you could maybe provide a little bit of color kind of given your extended sort of order book and higher visibility, can you see your way clear to a point in time in the future where you would expect the process control intensity to really step up and start to really materially outgrow the overall WFE envelope you're forecasting?

Well, the last 5 years, we gained 160-ish basis points of share, and that translated into about a 6.5% growth rate for KLA above the market baseline. If you go back to what we talked about at Investor Day, we thought that we could gain another 150 basis points plus share of the overall wafer equipment market, and that translates into a 4.5% growth for the company over the market baseline of WFE growth of 12%. So it's -- these are small increases, but on a pretty big base, and it translates into meaningful CAGR upside relative to the overall market. And that's our plan that then feeds into our $26 billion target for 2030.

We'll move on next to Charles Shi with Needham.

I have a question around some technology in metrology. There is a lot of discussion around x-ray versus optical for CD measurement in the front end, let's say, in [indiscernible] detection, those kind of other stuff in hybrid bonding type of advanced packaging. And Rick, I'm sure you're familiar with all of this discussion around the debate around optical versus e-beam DUV versus actinic. I think you've said that when you can use optical, customers will stay with the optical, but -- is this new debate around metrology, x-ray versus optical, you would have the same view, maybe optical eventually win or you have some other starts? I understand you do have XTD tool, but I want to get your thoughts.

Yes. I think that the history of inspection and measurement and really the industry is you move to the highest capability tool that can do the job additionally to debug it and then you go to the cost of ownership play. So whatever can do the job and most efficient. And we talked about the roll off, for example, in our wafer inspection portfolio where you might under process at a very high level of, say, e-beam during characterization along with high and optical. But then if you can possibly go to higher throughput, lower cost, you do.

The case of X-ray is interesting because in some ways, when we introduced Axion a few years ago, that was a product that was really solving a problem that could only be solved in failure analysis. And the challenge with that was getting the tech to work, getting adoption and getting proof of concept with enough players that they would make the change. And we've done that, but it took quite a while because the industry it's remarkably aggressive in new technology development, but slow in making changes in manufacturing except for when it has to.

So I think the question is, is there a capability that you can use and you can drive more with x-ray and can you do it? And the answer is you might be able to do it, but the question is, is it something you can do in production? You can do it to debug the process. But if even in e-beam, what we're seeing now with our portfolio is we might use our eBay system, coupled with our inspection system to tune that inspection system, but offload as much as we can to higher throughput.

So I think there's a scenario in which you see that that's what happens with X-ray as well. You want to have the capability, but the problem is always eventually is the cost. And if it's something that is so out of control that the only way you can do it is with massive amounts of very inspection metrology and it's very expensive, you are not going to do it, and you're going to figure out another process.

So I think the answer is yes, there's a lot of work going on, and there's people that are really focused on getting something to work, but that's different than what they'll use in volume production. As a company, we've always focused on the difference between the characterization, development phase and what you can pan out. So when we laid out our 2030 plan, we obviously work very closely with our customers on their packaging road maps and what we anticipated was having capability across our portfolio to solve all the tool, the needs they have, including in their development phase.

So I don't think you're going to see a quick adoption of X-ray anytime soon. And those of us who have been around a while, there was an x-ray lithography company 30 years ago. So it's not like it's a new idea to leverage x-rays, just the cost and throughput is really challenging. I hope that helps.

And just to build on that, the market size, most of the adoption has been in memory. And so the market size has been roughly, I'll call it, today, it's about $75 million to $100 million. And I'd say we have probably about, call it, 60-ish percent share of the overall market. I think as adoption starts to increase as maybe more production opportunities become available, you could see that moving up into the $150 million range over the next few years. But the challenges of the productivity of the tool and how that then translates into volume production as Rick said, has been the biggest challenge, and I think has affected how the pace of adoption for that technology.

Maybe a quicker one as a second question. You gave that advanced packaging revenue outlook from $635 million to $1 billion. But if I recall correctly, one quarter ago, you were basically calling advanced packaging. I mean, probably gets like a much lower growth -- it feels like that was a Abrevision to advanced packaging revenue outlook. So may I ask what was the big upward revision about? I mean, it happened like a just over 60, 90 days? And what's changed? -- from maybe a quarter ago.

Yes. So we thought in a quarter ago, we thought that the overall growth rate in Process Control Advanced packaging was somewhere in excess of 30%. Obviously, if you do the math on the numbers we've talked about, we're now in the upper 50% range in terms of growth. There's clearly been -- and one thing about packaging is it's shorter lead time business generally. And there's clearly been momentum from a number of customers for additional capacity this year. We didn't have the visibility to it going into this calendar year. And we see it growing more, and it's I think it's going to be a little bit more of a second half dynamic in terms of of half to half of that growth. But it has absolutely picked up over the last 90 days or so.

And I think the competitive positioning, the need for more capability, as I talked about earlier, are big drivers in it. So semiconductor process control, growing in the range of $1 billion, up from about $635 million, which translates, as I said, into the high 50% range.

We'll move on now to Srini Pajjuri with RBC Capital Markets.

I have a clarification -- sorry, I've been jumping between calls here. It looks like you're raising the WFE number to about 140 versus 135 to 140 at the Analyst Day. But at the same time, your annual guidance, revenue guidance is still for high teens. I understand high teens can mean a lot of things. Just trying to see if I'm reading that correctly, if you can kind of give me some additional color on that number.

Yes. I think that we're talking about a pretty small adjustment from where we were about 6 weeks ago, but we think it's 140 plus and I think that, as I said, I'm pretty comfortable with the guidance that we provided, I would say, it probably translates into consistent with the stronger view of the industry that translates into probably a little bit stronger view of of 2026 for KLA than we thought 6 weeks ago. But look, we've got 9 months to go here, and we have a number of opportunities to provide an update to that forecast. So we're pretty excited, and we'll see how the second half plays out in terms of opportunities to to reduce the risk and increase the -- our views of performance here for the year. But I think that's as good as we can do for now.

Yes, that's fair enough. And then on the 2027, just a few clarifications, Bren. So you're obviously guiding for high teens or better. It seems like I'm assuming WFE is at least growing in one or maybe you continue to outperform WFE as you've been doing over the past few years. Just trying to understand the moving pieces there. I know you said it's fairly broad-based, but can you maybe parse it out by end market, memory versus logic, what you're seeing it also. What's your base case assumption for China WFE from next year?

Yes. So I think that if you look at the greenfield opportunities, which I think is for DRAM but also in the flash market is that memory is probably a few percent higher than this year. So this year, memory is about, we'll call it, 60 -- logic [indiscernible] about 62% of the overall spend. I think it's probably closer to 60% more memory focused versus logic into next year.

I don't think it's hard to say about China, we're a little ways away, but at least in terms of how we're modeling it, our general view on China is that it grows at a slower rate than overall WFE. And we haven't seen it change much at least in terms of KLA's business levels over the last couple of years. So I would say that you'll see us more along those lines.

Now it's more greenfield, less around technology upgrades. And so that drives a different dynamic. And with the rising process control intensity that we're seeing in memory, we feel very good about how well we're positioned for that activity into next year.

Logic foundry continues to be very broad-based. And legacy is pretty weak this year. So I would think that legacy probably has some upside into next year. I don't want to quantify it yet though.

We'll move next to Shane Brett with Morgan Stanley.

My first question is on margin. I want to assume that your customers are likely fighting for KLA shipment slots at the moment. Just how should we think about your ability to take advantage of this demand via margin I'm especially curious in the context of your memory customers, given you have seen a gross margin headwind due to higher DRAM pricing, but shouldn't we be able to pass this cost on earlier than the historical 1-year pricing pass-through cycle? .

Yes, Shane, we don't price based on scarcity at KLA, our pricing is based on cost of ownership improvements from one generation to the next. We're pretty disciplined about about that, and that translates into terms of meeting our customers' view of incremental performance and incremental cost of ownership improvement. If you start to price based on different price changes and components, I would expect that your customers would want symmetry with that. And so that's not how we think about it. At KLA, it's much more about the value that we offer, the value-based pricing and how we're able from product type to product type to deliver new capability at better cost of ownership to our customers.

So I think we do a pretty good job around that at KLA. And this is a headwind around memory that we think ultimately will normalize out in the future. I don't think it's going to I think it's going to be with us for a little while, but we feel pretty good about the supply that we have to be able to support the growth outlook we've talked about.

And as I talked about at Investor Day, I think it's highlights why our new product introduction cadence is so important for KLA because it allows us to introduce new products, rethink how we're pricing that incremental value, how do we share it with customers as we move forward. So I think we feel pretty good about how we're positioned.

And the last thing you're going to do is go to a customer in the middle of a transaction or middle of a buy and change pricing. So that just -- it doesn't work that way. So I think we're pretty good and feel pretty good about what we do.

Got it. That's very clear. And for my follow-up, this is more of a clarification on advanced packaging. So I understand you see your business growing 30% in packaging. But your process peers are now also talking about 50% plus growth. Correct me if I'm wrong, but does that mean that relative to your initial packaging guide of approximately $12 billion that you disclosed in late January, we should be looking at closer to $13 billion or $14 billion for this year. .

Yes, Shane, so we're growing greater than in the high 50%, as we said in the prepared remarks, the shareholder letter and the question I answered earlier. The overall market is somewhere growing up in the range of about $13 billion, we think. And so that's approximately 30% growth in the overall market from 2025.

We'll move on now to Edward Yang with Oppenheimer.

Just following up on DRAM and the gross margin headwind. You mentioned having procured enough hits now. Is that through calendar year '26 or possibly longer?

Longer. I feel very good about our supply situation going into to support our bill plans through next year.

Great. And second question is on AI CapEx assumptions. A couple of hyperscalers reported tonight as well, not a couple of few, a couple have appeared to have come in a little light on CapEx tonight. Microsoft and Google for the quarter, Meta and Amazon were a bit higher. But we all appreciate those numbers can be lumpy quarter-to-quarter. But given sporadic market concerns around data center CapEx durability, can you bridge your updated '26 WFE view of greater than $140 billion and your expectation of growth in 2027 to the underlying AI infrastructure assumptions. Put differently, what level of hyperscaler end customer AI CapEx due to WFE forecast effectively require?

Yes. So when we talk -- and like I said, we've had all these conversations with customers recently about what is their expected demand and what kind of capacity are they bringing online recently, within the last 2 weeks, I've had those conversations, both on the foundry live side and on the memory side, there's still -- with all these very aggressive plans through '26 and '27 they're not going to close the gap. And in some cases, the gap is even expanded from where it was a few months ago because of the demand.

So this equilibrium between what the CapEx hyperscaler you guys say and the notion that you can draw a straight line to WFE, you can't because they're -- we're way under serving those demands. So our contention has been for quite a while that there's not enough silicon to be able to support the plans that people have. And so the WFE is literally just as fast as we can go as an industry. That's kind of what we're seeing when we talk to our customers and we talk to their plans for build-out in '27. And the reason '26 isn't bigger is because they can't build enough fast enough.

And take the extreme of this because he said it on his call, if you say what Elon Musk was saying about SpaceX and the demand and why he talked about building Parapat because it was going to be a massive shortage of semiconductor capacity through 2030. So nothing about the short term, and I think that's -- that confuses a lot of people. What is talked about short term in terms of the hyperscaler CapEx and the buffer between that and what's happening in terms of the ability of the industry to bring on all that capacity. So I understand people are trying to correlate it, but there's a massive assumption in there that this thing is even close to filling that capacity and it's not.

We'll take our last question from Chris Caso with Wolfe Search.

Just as a follow-on to the prior question. And it does certainly sound like demand is well ahead of the industry's ability of supply. Does that cap the amount that [indiscernible] ship to customers and that the customers have clean room space to be able to put tools right now. I mean you talked about perhaps the opportunity to increase the view as the year goes on, but are we sort of towards the upper limits of what can be supplied in '26 and we're just going to have to supply it in '27, '28? .

Well, yes, I think so. And the way to think about this, and I think this is we are an ecosystem. So it kind of takes all the parts of the ecosystem to make it happen. And so when you look at what are the constraints or one of the limits, I know when we talk in the AI world about power constraints or other constraints. But in the semiconductor industry, the first constraint is how many fabs do you have? Like how many shelves can you fill?

And then you got to have enough equipment from all the different suppliers to be able to make functioning line. So in many ways, this is why we talk about the overall investment in the industry, you kind of have to think about it in aggregate because let's say, we could infinitely ship. -- there'd be nowhere to send it because you'd be sending it in a fab that haven't been built yet. So that's why we look very closely at what the overall industry is doing, what our customers are doing. And that's why when we say you can get a marginal increase in 2026 to the numbers we're talking about, you can't go from 140 to 200 in 2026.

And there's only so much you can add in 2027 and those fabs have to be built now. So when our customers say, it's just not easy, it's because it takes a long time to get through even in places where they build fabs very quickly takes a long time to build them and then to get the equipment and the fastest in the world, places to build fabs have big plans for expansion next year, and they're still going to be short by the end of next year. And so that's how the whole system is working. So when we give our guidance for the year, it's -- yes, it's what we can do, but it's also collectively what we as an industry can do. Does that make sense?

Yes, it does. That's clear. So the last question, I have something more mundane on gross margins for the year. And I think you indicated you're kind of sticking with a view of 62% for the year. Can you talk about the pluses and minus on that? I know you had some mix headwinds earlier, and there's some cost increases. So what should we be watching for on the gross margins this year?

Pretty consistent guidance with what we had last quarter, I would say the memory pricing environment is on the margin worse. I thought that the headwind was 75 to 100 basis points. I think it's 100 basis points now. And part of that has been the relative pricing on DDR4 versus DDR5, where they're generally, and it depends on what type of memory level. But but more or less the same prices. You still have tariff dynamics. I would expect as we move through the year, the tariff headwind that we have at KLA will become less, but it's still meaningful, I'll call it. I talked about 50 to 100 basis points of overall impact. I said we're operating at the middle of the higher end of that range today, but would expect that to come down to the lower end of the range as we go through the year with some of the things we're doing here operationally.

Overall mix generally is pretty consistent with how we thought about it. So like anything else, there's always puts and takes. But in general, we said 62%, plus or minus 50 basis points, and we still feel that that's an appropriate way to think about the company at the revenue guidance that we provided for the year.

Thank you, Chris, and thank you, everybody, for tuning in. We appreciate your support. Apologies for those that weren't able to get a question on this call. We will catch up [indiscernible]. And with that, I'll turn the call back to the operator to provide any closing remarks.

Thank you. This concludes the KLA Corporation March Quarter 2026 Earnings Call and Webcast. Please disconnect your line at this time, and have a wonderful day.

Please welcome KLA EVP, CFO and Global Operations, Bren Higgins.

Good morning. Thank you for being here for our 2026 KLA Investor Day. It's great to be back in New York. I'm going to make a few comments. First, I'm going to walk through the agenda overall. So I'll make a few comments, and then I'll transition to our President and CEO, Rick Wallace, who will talk about compounding sustainable outperformance of the company, where we've been and where we're going, some of the dynamics that are driving the ecosystem and how that plays through to opportunities for KLA relevance.

Ahmad Khan, who's the President of our Semiconductor Products and Customers business, will then stand up and talk about process control in the AI era, some of the dynamics that are driving our business, how we're collaborating and engaging with customers that drives our innovation model and ultimately, how we execute and our strategy is to take advantage of what looks like a very exciting business environment moving forward.

We'll take a break. And then Brian Lorig, who runs our service business, will talk about service. And we're excited with some of the dynamics despite some of the export control effects on service about what's happening in service in terms of how our service business and how our customers are relying on it to drive higher performance out of the installed base and higher levels of availability.

After Brian, I will talk -- I'll come back up on stage and talk about our path to 2030. What's happening, what we've done over the last several years and what's happening in the market that then translates into how we're operating the company, what that means in terms of financial performance as we move forward. And then I'll walk through a 2030 model based on the various assumptions that get us there.

At the end of the day, there's always those unknowns and questions. We're drawing some lines over time. But I think what matters is the story that we have around the ability for KLA to drive our relevancy and execute the business model over time. We have a credible history of execution. And so as we talk about that, I think our history is indicative of how we're going to run the company moving forward. We'll then transition to a Q&A session, roughly 45 minutes. And then after that, we'll go to lunch, and we'll do some round-robin with the executive team rotating around the various tables to answer some additional questions.

So pretty big program here, 9:00 to roughly 2:00 today, and we hope you can all stay with us. You see the mention of the AR/VR demos. If you haven't had a chance to do those already, we also have some things we brought in terms of show and tell. So as you go through the day, if you haven't had a chance, I'd encourage you to take a look at some of what we have here. The AR/VR demos you get to get up close and personal with a couple of our very high-end systems, a Gen 5 wafer inspector and our new [ Terabeeam 8XX multi-column electron beam inspector ] for [ reticle ] inspection. Get a sense for the complexity, scale of what we do at KLA.

I'm going to let everyone read this, so I'll take 10 minutes maybe. Look, we're going to make forward-looking statements today. Those statements are subject to risk. We have an exhausted list of risk factors that are in our SEC filings. I would encourage you to take a look at them. You can find them at our website at kla.com. So as it relates to the March quarter, we did a press release this morning, we affirmed our guidance for the March quarter. Revenue at $3.35 billion, non-GAAP diluted EPS of $9.08. We got 3 weeks to go, more or less, quarter is going as expected. So no real update to the March quarter, and we're comfortable with the guidance that we provided at earnings last January.

So a couple of comments about the industry. So if you look at where the industry is today, we continue to see very strong momentum across all segments, foundry/logic, memory and advanced packaging, that the wafer equipment market, including advanced packaging, is now expected to be in the range of $135 billion to $140 billion. We talked about a mid-30s profile. We think that the momentum that we're seeing, particularly as it relates to what's happening in the second half is driving incrementally up that view.

Now the other thing that's pretty clear today as we engage with customers is that the visibility for 2027 is very high. Our customers are building new facilities. And so there's new equipment demand that is tied to those facilities and the schedules for that construction. And so our visibility into '27, to have this level of visibility 12 to 24 months out is really uncommon, but gives us a lot of comfort to be able to stand up here in March of '26 and talk about '27 and having a growth rate in 2027 that we think is at the similar level or perhaps even higher than what we're seeing in 2026. So that's the growth rate -- year-over-year growth rate of the industry investment in wafer equipment in '27 versus '26.

So as it relates to KLA, we expect to continue to see quarter-to-quarter sequential growth as we have for the last several quarters. Our views on 2026 are strengthening based on our visibility into the second half for semi PC systems. Our view for 2026 now is that we expect the total company to be up somewhere in the high teens in terms of year-over-year growth versus 2025. And given that's the total company, our semi process control systems growth should be faster than that.

So we'll look at a couple of points more or less faster than that. We'll see how the year plays out. Half-to-half dynamics, I'm sure we'll talk about more of this in the Q&A, half-to-half dynamics. I don't really want to get into it at this point. Let's finish the March quarter. We'll talk about June, and then we'll give you some sense on what that looks like.

But at least in terms of the overall year, we think the year translates into high teens growth today. We made 2 announcements around capital allocation today, very consistent with our history at KLA, our 17th consecutive annual dividend increase, which was a 21% increase to $2.30 per quarter from $1.90 and additional share repurchase authorization of $7 billion on top of the $3.9 billion that was on our remaining authorization as of the end of December.

So roughly $11 billion in authorization to support what we expect to be a pretty robust environment over the next couple of years in terms of cash flow generation. And so we'll generate the cash. As everyone generally knows about KLA, we are big believers in assertive capital allocation and allocating every dollar of cash. So our share repurchase programs are consistent over time, and this is in support of that and our outlook moving forward. Let me stop. Thank you for being here today, and welcome to the KLA Investor Day.

[Presentation]

Please welcome President and CEO, Rick Wallace.

November 30, 2022. Do you guys remember what happened on November 30, 2022? I was in a review at KLA with our Chief AI Officer, [ Chris Baskar]. And he said, that week, something had happened that only happened twice in his 40-year career that was as profound. That was the week ChatGPT dropped. And his view was that was going to change the industry in ways that we couldn't imagine. And he was right, we couldn't imagine at that time. I had not heard of ChatGPT, but I called my kids at the end of the week, college kids and said, have you guys used it, all 3 had. It got 1 million downloads in the first week.

So let me ask, how many of you use chat or some other chat bot on a routine basis, okay? How many of you have created an agent? How many? Only a couple, 3. So my prediction is that by the end of the year, you all will have created an agent. It's not very hard. You can do it in half an hour. You can create an agent. What will the agent do? It will do 2 major things. It will do a lot more work for you, and it will also drive a ton of demand for compute. ChatGPT drives 10x what an Internet search does and reasoning and agents drive another 10x.

So part of the build-out that we're seeing around AI is the fact that so many people are starting to leverage these tools, and that's what's driving consumption. What we didn't understand at the time, it was this interface to chat that was going to drive the demand. So what you're going to hear today is how well positioned KLA is for this inflection. We said in the video, Bren said, if we had to design a market, this would be it.

We're going to talk about our customer relationships and how that positions us, and we'll talk about our technology and the investments that we've made, some of which you can see in the room. And we thought we'd bring these to you because the times where we've had investors come on site and see the hardware, it's made quite an impression. And one example over here is that's a lens in a BBP of the system right there. That's a lens. When I started in the industry, it was an off-the-shelf lens. That's not off-the-shelf.

Who are we? We were founded 50 years ago, this is our 50th anniversary and the original idea for the company was to automate what was done manually. Can we be automated mask -- photomask inspection because it was being done by microscopes. And so we started in the industry doing that, but we've expanded, of course, to a large portfolio, and we're now the leaders in process control, and we'll talk about what that means and why that's important in the age of AI.

The leadership team, what you really need to know, you're going to hear from Ahmad and Brian, as you heard and Bren will come back. What you need to know as an investor about this leadership team is this is the leadership team that committed to our 2019 Investor Day and hit it. This is the leadership that committed to the 2022 Investor Day and hit it. And this is the leadership team that's committing to the 2030 plan we're going to share with you today.

So we've been through it. We're very excited about the prospects that we have, and we're going to show our work today on why that's the case. I know you know this, but I want to add a little context to this hierarchy. Semiconductors is in service of overall electronics. Historically, electronics have grown GDP-ish, not now, not with these data centers, it's significantly above that.

A lot of customers or investors will ask what's the bottleneck now? And I'll show and we'll share -- ask me in 3 months, asked me 3 months ago, it's moving. The bottleneck is moving. But one thing that is clear is there aren't enough fabs. When we talk to our customers, there are definitely not enough fabs. And there's not even enough fabs contemplated in what we'll share for 2030 to meet all the stated demand out there. And if more of you start doing agents, that's going to drive up the demand for compute radically and we know that's going to happen. It's already happening. And the agent is probably 100x the compute demand of the original search.

So we're pretty excited about this. And we're going to make the case that none of this happens without process control. Without process control, ChatGPT would not have dropped. And certainly, we wouldn't be where we are today. So I'll talk a little bit -- of course, you know the landscape, but I want to give you a specific perspective on this landscape. And it is more about who designed the chips than the overall revenue and why that's so profound for KLA and for the industry. Up until we started seeing mobile and smartphone, there are a couple of companies that designed it, they needed their own silicon, right, one in Cupertino, one in Korea, that they wanted their own silicon for their phones because they could better optimize.

That happened mid, early 2004, '05, '06, '07 in there, and they started doing design for silicon. And we thought that was interesting, but it wasn't really a profound difference. It just shifted who was doing it and who was making it. There weren't that many more designs. The real inflection for our business and for this business, if I go back, it's really what happened when things went to the cloud. More so, that was the beginning of what we're seeing now when it went to the cloud because it changed the economics of who wanted to drive the design of semiconductors.

We saw the first company in AWS was one of the first ones to acquire design capability to build their own chips. And we're like, why are they doing that? And if you fast forward it today, there's so many more players designing their own silicon. So it went from everybody buys the same microprocessor to people start designing their own. So that flipped the dynamic, and we'll show you the design starts go up.

There's more players in it because the economic advantage for these players, it's now viewed as their differentiation. Yesterday, there was another hyperscaler that announced 4 new designs. Yesterday, that was on 3-nanometer. There's over 100 designs on 3-nanometer now. So this dynamic has changed significantly because it's in the economic interest of the cloud provider and the hyperscalers to have an advantage in their own compute stack. And so originally, they're buying from the same players, and we'll show you some data about how it impacted KLA and the transition we made.

At the same time, comes along new ways to do compute. We've been locked in the CPU construct for a long time of how to do compute, right? And there were a lot of people that said that was not the most efficient way to do compute, but there are so many barriers to make that transition. And I'll share our example. This KLA system and what we really ship is a very high-end microscope with lenses like that and sensors like that attached to a very high-performance compute network or a compute data center, if you will, that sits.

Now this is an example of one of our products, an edge server or it's really high performance. And we say cost was one. And in this case, there are many examples like this in the company. It was literally $1 million of cost to us. So as we're going to -- that's the COGS of our compute inside of the system. So we're going to the next generation trying to figure out do we stay on CPU architecture or do we transition to GPU.

We had already been experienced with GPUs and programming them. In fact, we had AI algorithms as early as 2018 in our products, but they were CPU-based. We hadn't made the transition. We wanted to, but what was the big barrier was the massive amount of rewrite of code. But when we looked at staying on CPUs, we knew, yes, we'd have minimal code change, but the cost curve was going to go up pretty dramatically and the power consumption. Once we bit the bullet, and decided to go to the CPU-based architecture, and we did it for the algorithms. We did it for the algorithms, but look what's happened. The cost only goes up from 1 to 1.2 and the power consumption actually goes down. Power goes down.

So if you're a hyperscaler and you're paying your own power bill, that going down, that's enough just to do that. But if you're now also hosting models to run, so our view of this was like there's no going back. It's way more efficient. And by the way, GPUs because they're parallel process and Ahmad will talk to this in detail, they're a better way to do compute, but they're not the most efficient way to do compute. There's custom silicon being designed for specific tasks that's even more efficient than GPUs, which is why there's so many more designs happening. GPU is better, custom better yet.

So what's interesting about this transition is once we make this transition as a company, we're never going back. And we leverage this across every one of our product platforms, the savings, and now we're on a different cost curve and a different performance curve. So huge implications for us. Now the challenge is, you all know, first of all, one of the challenges is these GPUs are very large die. Why does that matter? It really matters to our customers because the yield challenges are much higher on large die. And the process control requirements are much higher, and we'll share the intensity that goes with that.

But the other thing is if you've got one of these very high-powered processors, you've got to feed data. So suddenly, the memory out of nowhere becomes a critical component. I mentioned the shortages. Right now, it's a memory shortage. High-bandwidth memory is a shortage, right? That is the thing that's a shortage because you got to feed all of these processors to keep them active because you paid so much for the processor, you got to feed it data. That's changed the device of a memory device significantly.

The first change in years, high-bandwidth memory. And it all favors the need for more process control because of the size of the memory that's going up, the complexity, the lack of redundancy. And so for those of you that think KLA is not a memory player, it's not true. That was true. Actually, if you go back far enough, it wasn't true. We grew up on memory. And then it got less true as the memory guys figured out how to do redundancy and now it's back in a big way. And we'll share why the intensity in memory manufacturers has gone up so much.

The other thing that's amazing about packaging is we got into the packaging business and model show our road map years ago, thinking more than more. Remember that. We were like -- we did our first acquisition in this in 2008. So yes, we were early. But boy, we're glad we're there now because this advanced packaging looks like a semiconductor process, which is why there's some confusion about capital investment, capital spend as it pertains to front end and packaging, and we'll try to clear up some of that. I mentioned this, this is crazy. This number of people doing advanced designs at the, this has flipped on its head.

So many of you, if we've done this Investor Day 10 years ago, you would have said that every node, there's going to be fewer players at the leading edge and only a few people can afford it, and therefore, the number of designs was going to go down. So a couple of things happened. One, scaling resumed and then the hyperscalers enter. So those 2 factors, you get scaling and you get more players who determine that silicon is strategic for them. So now we see -- and this is just within the first year.

I just mentioned there are a bunch of new designs announced yesterday for 3-nanometer yesterday. And so you see the demand for 2-nanometers going up because 2-nanometer is a more efficient node. So what does this mean for process control? Well, if you have a lot of designs going through a factory, and you have a lot of process flows because if I'm a hyperscaler and I want my custom silicon, I want my custom process flow, too. I don't want to buy what everybody else buys. I want the thing that I think is best. Well, if I'm providing that capability, I got to make sure the variations are low.

So that's what's driven up process control. Look, this industry is all about economics. Nobody does anything if there's an economic return. And the economic return on managing these complex fabs are now enormous, especially when there are shortages, especially when there are shortages. So what's the role of process control? Well, process control is a funny term actually because confession, I started as a controls engineer in the paper industry, okay? There's nothing like this industry. I mean it's super exciting and all, but nothing like this industry.

But it was just a simple closed-loop control. Why is the semiconductor industry so different? Because of constant change. You can't get something under control because it's constantly changing. So we talk about what do you do in process control. We originally, as a company, thought it was about finding defects and assuring quality. It is, but it's far more than that. And we learned this, it was probably in the '90s.

We learned this when there was a big study on competitiveness in semiconductor manufacturing. And the conclusion was because every semicon -- every semiconductor manufacturer essentially buys the same equipment, the competitive advantage is a learning rate, how fast they learn and their ability to learn and improve the process. Think about this, you're building a $15 billion, $20 billion fab and you start at 0 yield.

So KLA is about learning faster. And learning faster is the only sustainable advantage in semiconductor manufacturing. It's the only one. I could argue it's the only one in tech is the ability to learn faster. And so what our systems are used for -- and years ago, we had people think it was just for quality control or final check or whether we're a measurement company. No, it's about learning. And we'll show you the challenges of when people bring out this new process. So they adopt more capability and they ask for our expertise because they've got to learn how to ramp that new process up because the stakes are so high.

What can go wrong in the semiconductor manufacturing process? There are defects everywhere, and they're not stable, and they change all the time. And so the beauty for us is nothing is stable in a fab. You could run along with a process that seems to be working and there's a hiccup because some of the material -- starting material comes in and it's not what it's supposed to be. We've had customers that have suddenly had an experience because something changed in all these processes. And then you've got to make all these measurements.

So the history of process control is you put a process in statistical control and you let it run into control. I can tell you this industry is never in control. It just isn't. Well, that's not true. If you make analog wafers, you can be in control. Truly, they don't change that much. So the other thing that's interesting, there's a couple of areas we inspect everything in. And one of them is a reticle, and I'll show you what a reticle is.

This is a mask. This is a template to print and Ahmad is going to talk about this more, to print one of the many layers in a semiconductor process. They call it lithography because you're doing a lithograph, right? When I started in the industry, I know a long time ago, $2,000 for a mask. And this little thing, this was a Saran wrap on top of it, that was a pellicle. What did that exist is because if a particle fell, it would be out of focus. That's what a [ pellicle ] was about. And I used to accidentally break them all the time.

So my first job in a fab was doing inspection on these reticles that were $2,000. This reticle today for EUV, $200,000 and I need sets of them. So that gets inspected a lot because if there's a defect on this -- and by the way, this is what we'll call a single [indiscernible] because it's -- that means there's only one of these, and it's printing. It reduces when it prints, but it's printing and if there's a defect on there, it prints on everything. You can't have that. So that gets inspected 100%. Almost nothing else does. Everything else, when we talk about process control intensity, everything else is sampling.

So we have 1,600 apps engineers that work with our customers determining their strategy for sampling for sampling and inspection. I was apps #7 at KLA. So we've ramped a bit. And the reason is because we've got to help customers figure out where to inspect and where to measure and it's dynamic. We get a lot of questions about process control intensity and how it's changed. and it has changed. And I gave you my example of analog. So the way to interpret this graph is from the left to the right is the relative percent of process control intensity in those different markets. And you can see analog is very low.

Now the line is the amount that was spent last year on equipment. So it's low process control intensity, but they didn't spend much because not much changes. Far right, almost half of the spend for [indiscernible] is process control, almost half. And the reason -- and it's gone up since 2018 because the cost of the mask, the number of single buy, everything has driven that number up. The 3 things that are in the middle of this, DRAM, WLP, advanced foundry, that's all about AI.

The reason those have all gone up of process control intensity is because of the challenges, and we'll share more about those with AI and Ahmad is going to go into more detail. But I think it's important to understand what drives process control intensity. It's a combination of the economics associated with failure as in a mask and the economics associated with the managing the complexity. So we have multiple offerings. One of our strengths as a company is we have a portfolio. And the reason this matters to our customers is because we don't go in with a single solution and say, this is what you need.

So this graphic of e-beam to BBP laser scanning, look, the throughput different between BBP and e-beam is like 1,000x. So it's not a linear graph. But there are specific things that you can only find with e-beam, and there are specific things that you can use laser scanning for. And our customers are always going to look for the most cost-effective portfolio answer. And on top of all these inspections, there's the measurement. The benefit that we get as a company from having all these things is we can invest in common core technologies that get reused.

Ahmad is going to show an example of why we've been able to make such an impact in e-beam, leveraging a lot of technology we already have in the company. The other competitive advantage we have in addition to our portfolio is our huge installed base. I'm saying that because we learn a lot about what to do for our customers. And it turns out now customers buy our equipment, and Brian is going to share our installed base support for customers. It's a great revenue stream, but it's a competitive advantage and it creates a lot of value for our customers.

The other thing that's happened, and this is kind of fascinating is the life of an average tool has gone up dramatically. And again, Brian is going to share that with you. So we're a measurement inspection company, how do we measure success? We have an operating model. We talked about in the video. You'll hear more about it of how we run the place.

But for your purposes as investors, what do we focus our team on? What do the 4 of us when we're in reviews look at? We spend a lot of time on intensity. What is our relevance? What is our share of wallet? And we do that because we know if we create more value for our customers, they're going to buy more of our equipment. It's straight economics for our customers. If they get leverage out of buying KLA, they're going to buy KLA.

The other thing we look at and focus on heavily is market share, but we constrain market share by gross margin. So you can have a high market share, but if you're buying the market, that's not great for -- as an investment. So we spend a lot of time looking at what's our gross margin and how efficient are we and what's our operating margin. And then do we have the talent? Can we find the people to continue to turn this crank? We have many product divisions, and so we need to hire a lot of people and get them into the KLA system.

So how have we done on intensity? Well, since -- and Bren will show some other cuts because I know of you like to pick your end date, pick your start date and you can get a different story. But 2019 until now, process control has grown about 16%. Lithography has grown similar, and we've outgrown it because we've gained share. So we'll talk more about our share and our approach to share gain, and we look at the overall totality of process control, but every one of our divisions, we look at what are they doing in terms of driving their position competitively to drive process control.

This isn't -- it required an investment, big R&D investment. And if you think about what we invest as a company relative to our closest peers, typically, we're investing more than their revenue, just in R&D. And we're investing in new platforms, new capabilities and then common things that we share across. And we view this as going -- this pretty much goes up every year. This is not -- and this isn't counting the 1,600 apps engineers that we have. This is just the R&D.

So what are the areas of focus that we have? We look at all these areas -- just think about a microscope, remember, high school physics. You have a microscope, you got an illumination source, you have a stage that moves things around, you have an objective, you have your eyes. Every one of those things is a subsystem.

When I joined the company, one of those things was custom for KLA. The only thing that was custom for KLA back then was the image processing. Everything else was off the shelf. Everything now is custom. We have custom development in every single area. Our competitors do not. They can't afford it. So we get the leverage out of those investments across here, which allows us to provide -- we don't do it to win competitively. We do it to serve the market, but it sure does help competitively.

So this is one of our show and tell. [indiscernible] thing over there, as I mentioned, is a lens that's used in the [ 39XX]. It weighs 300 kilos, which I'm told is a lot for a lens. The lens on the 2020, as I said, would have fit in my pocket, right? One of the biggest changes we made was when we started doing custom lenses was about 1999, was the [ 23XX]. And this was -- we realized and the model show why we need the spectrum of capabilities to provide it. But every one of these generations, we provide more capability. There are those -- I know none of you who years ago said optics was going to run out of gas and e-beam was going to take over.

This is Gen 5. Last year, we sold more Gen 4 than Gen 5. So optical is not out of gas. And the reason is because we keep innovating. We keep driving new capabilities and our customers want the most cost-effective way to solve their problem. So that's -- you'll get to look at that closely. It's an engineering marvel. We own the design. There's one place in the world that can make those things, and we're pretty proud of what it allows us to do.

So how have we done in share? We're up 2 points from 2021, and we're now 6.5x our nearest competitor in process control. People look at the ability to defend markets back to my R&D, it's a pretty big spread. It was 4x 7 years ago. So we invest heavily. We focus heavily on market share, and we also focus on growth of service. So Brian is going to share his story, but that's a pretty good start for service revenue. And we'll talk about why that's the case and why it's even going to grow at a faster rate going forward.

But our installed base is also a massive competitive advantage. not just the revenue from service, but the fact that we have that to leverage. We spend a lot of time on gross margin. Bren and I and Ahmad and Brian will ask if general managers come in and say they're differentiated, we'll say, show us your gross margin. If you are differentiated, you'll have a better gross margin. And we'll do acquisitions and somebody will say, we have a really great product, and we go, well, because your margin is not that good.

So is it your cost too high? Are you not pricing? What is it? And we'll drive those up over time. And Bren will show we absorbed a company with lower margins, both gross margin and operational, and we've been able to improve it using the KLA operating model. We're proud of our operational excellence. Bren talked about our cash generation. Those are things we're measured on. You look at management incentive, it's on relative free cash flow. We focus pretty heavily on operating performance. And of course, we got to get the talent to make this happen.

Our job got easier in the last few years, I'll be honest, because for a while, nobody cared much about the semiconductor industry. We're back. So we're able to hire great people. And when we ask them how they feel about being part of KLA, they're proud. They can't explain to their family what they do, but they're proud. So where are we now? AI is clearly driving the industry. The outsized growth that we're seeing is because of AI.

There's no way to do it without process control. You're going to hear more about this. And here's a point to take away. KLA wins no matter who wins. It doesn't matter which hyperscaler wins, it doesn't matter which semiconductor company wins, doesn't matter which processor wins. doesn't happen without process control. And process control is going to outgrow the market, and we're going to outgrow process control.

So here it is. The assumption for 2030. We see semi growth, and Bren is going to double-click or triple click on this, 11% because, look, there -- if the semi industry grows at that rate, it will still massively underserve all the data centers that have been announced as well. Capital intensity is going to grow faster. We're showing $215 billion. And this includes what you think of as WFE and WLP packaging and semi, plus or minus $20 billion, big range.

Process control is going to outgrow it, and we're going to gain share. In service, we're upping our growth expectations of service based on what we've seen and what's in the pipeline. So what does that get us to? $26 billion in 2030 revenue, plus or minus $2.5 billion, $84 a share, plus or minus $8. We've done this before. We've signed up to what looked like really big goals before. We're generally pretty conservative. But if the spend -- like people will say this -- don't ever say this time is different.

I'm not saying this time is different. This time is just much bigger. This build-out is much bigger than anything we've seen before, this data center build. There's just so many reasons to drive this build-out, and that's what drives our model. So the rest of the day, we're going to spend more time going through and explaining, showing our work on how we get to this. And the first person that gets to do that is Ahmad Khan, who's done an outstanding job running our product divisions and who's going to share deep dive on his businesses. Ahmad

Good morning, everyone. My name is Ahmad Khan. I run the systems business for KLA and also represent the customer, meaning that I engineer the products and then I have to make sure that our customers take them. So it is a humbling process if the customer doesn't take them, I have nobody else to blame. So it's a good org design.

Today, I'm going to talk about how the compute is changing process control intensity at our customers. That's the bulk of my presentation. I'll give you several examples of what is changing in the industry on chip design and how our customers are yielding them and why they are using more process control. To set the goals earlier, as early as possible, inflections, share gains, and portfolio expansions. All 3 of them are going to drive share of WFE for KLA higher than it was today.

Today, it is around 7.4%. And by 2030, we're assuming that it's going to get to around 9%. So the share of WFE is going up. We work very closely with our customers, very strong customer collaborations. Why is that important? It is best for your customer to vote what we should develop, and therefore, they are bought into buying that system to solve their problems.

So that collaboration is very critical to us, and we work very hard to maintain that customer trust. We're focusing on innovations in hardware and also in AI. I bring that topic up because in AI, you can create models easily and replicate somebody else's performance. That is not the case for KLA Systems. We build very complex systems to reach to very pure signals that pure signal coupled with complex models leads to defect detection and measurements that solves our customers' problems.

All of this will drive growth. Calendar '25 to '30, wafer equipment is going to grow between 11% to 13% and the systems business would be around 15% to 17%. So what do we do? Rick said, it's really about learning rate. It is correct. We do, do detection of defects and measurements of parameters, critical parameters. We collect lots of data at the customer fab, but our customers have insatiable demand for data because the output of process systems is [indiscernible] or tungsten or something else.

The output of KLA systems is 1s and 0s. It's just information. And that information, coupled with the right people, helps solve customer problems. That enables customers to yield and make more profit. Now we participate in all segments of semiconductor manufacturing from infrastructure, which is reticle manufacturing, wafer manufacturing to logic, DRAM, specialty and now advanced wafer-level packaging and also component inspection. And finally, when the chip goes on to the PCB board, we also inspect and write the PCB board.

So we are in the entire supply chain of semiconductor gives us a lot of insight on what is happening in the market because we look at each of the segments and how they're doing. We are a portfolio company. When we go to a customer, we don't have a single product that we are positioning with the customer to solve their mission-critical problems. We are a portfolio company. We go in, and Rick mentioned the 1,500 applications engineers. We send those applications engineers to the customers to determine what is the problem in the line.

Then we use the right system with the best cost of ownership and performance to solve the customer problems. It's a full portfolio company, inspection, metrology, data analytics. These boxes are only a subset of what we make. It's much larger, but the font would be very small. We use the collaboration, innovation and execution method as our flywheel to drive performance with our customers. Collaboration is very critical because, as I said earlier, it is best for the customer to tell us what they want us to work on. Then we innovate and execution delivers the revenue. You will see this being used across my presentation.

So now let's look at the systems business in numbers. Calendar 2025, $9.8 billion in revenue. $9 billion of the $9.8 billion came from the Process Control segment, $0.8 billion from the rest. 19% outperformance from calendar '19 to '25. The market grew 14% in the same period. So outperformance is a general thing that we work on. Every product group, every product division is focused on how to drive intensity and outperformance in the market. 62.8% overall KLA gross margin.

Gross margin is an indicator that we have a differentiated product. R&D is very important. We really focus on reinvestment back in the business to ensure the problems of 5 to 7 years from now will be solved. The one thing to remember is when a customer wants to develop a new method, let's say, a vertical channel transistor, they have a pretty good understanding of what [ dopen ]materials you're going to use.

They can go to other customers and say -- other suppliers and say, I need this [ dopen ] material and I need this etch capability well before it comes out to the -- goes into the production. But our customers do not design defects. They have no plan to design defects. Their plan is to have a defect-free process. But it isn't. So we have to think and develop systems that have wide enough capability that when the process comes to high-volume manufacturing that we are able to do that detection and solve the customer problem.

We don't have 4 years after the process shows up in HVM. So that goes into our design philosophy. How do we predict what will the customer do and how it will lead to a failure that we need to be able to detect and design today, which will take about 4 years and come out in the marketplace. This is why we are a portfolio company. We have many, many instruments and each instrument has thousands of modes to go fine-tune the system to find that defect. This is why reinvestment back into the business is a very critical aspect of our methods.

There are 2 numbers that I look at constantly and all of my product general managers look at very closely. One of them is market share and the second one is process control intensity, which is the amount of process control that our customer is going to use to yield the device. So let's double-click on those 2 numbers.

So this slide has 2 lines. One of them is the annualized process control intensity. On the top, you have WFE or wafer equipment market. And at the bottom, you have 2 lines. One is the annualized and the second is the 3-year rolling average. So you can see that process control intensity was around about 5.3% back when WFE was around $60 billion and fairly flat, but something happened in calendar '21 onwards.

And generally, if you back up the main inflection that changed is customers started to print smaller and smaller devices because of EUV, high EUV, many of other things. And this drives large variability in the fab, and I'm going to describe that in detail later. And therefore, the amount of process control customers needed to yield the devices started to go up. And you can see a clear trend, 5.8%, 6.4%, 6.7%, 7.1%, absolute number, 7.4% intensity. And we think the trend continues because I think we can all agree that complexity of semiconductor devices will go up, not down in the next 5 to 10 years.

Large dies, high variability, all of those factors are driving process control intensity to go up. This is why we feel that now in the 2030 period, this number goes from 7.4% to 9%. The second thing is in a growing market, we want to continue to grow share. We made a commitment in the 2019 Investor Day that we would grow share by 0.5% year-over-year, and I'm happy to say that we've been doing that.

We are now at 56.5% share, up 2% since 2021. When I was here last time, I said we were 4.5x versus the nearest competitor. We are now 6.5x versus the nearest competitor, meaning the next competitor is below 10% in share. In the recent past, we have gained share in optical, in electron beam. Electron beam is a new segment for KLA. The last time I was presenting to you, the e-beam market for KLA was between $75 million to $100 million revenue.

Today, we are at $400 million. And I'm going to describe why we got into e-beam and why it's very important for future and why -- how we are leveraging it for our entire portfolio. We gained in advanced packaging. About 4 years ago, we were less than 10% share in advanced packaging. We are now in #1 position in advanced packaging. And mask inspection, Rick spoke about reticle inspection a few minutes ago, and we are gaining share in that segment as well.

So those 2 numbers are very critical. But it's not just me and the senior staff that look at this number. Every product group in my organization is driving those metrics. So I'll give you a few examples. Reticle inspection. So one unique thing about reticle inspection different from wafer inspection. In wafer inspection, you're generally looking for signature of the defects. There are some defects here and some defects there.

If you catch 25% to 30% of the defects, it is good enough for a process engineer to now make changes to improve the defectivity level. That is not the case for mask inspection. We have to detect 100% of the defects. 99% is not good enough because that 1 killer defect will print on 100% of the dies and your yield would be low 0 if it's a killer defect.

So it's very critical that you detect 100% of the defects. Our method to detect 100% of the defects is to use a suite of systems for best cost of ownership and performance. If you bring a single system to do this, the chances you detect 100% is low. So that drives intensity up. Unpatterned inspection, very important. So as you know, about 4, 5 years ago, a semiconductor wafer fab with equal real estate was producing about 50,000 wafer starts per month in logic. That same real estate now only produces about 25,000 wafer starts per month.

What happened? The number of process steps to make the advanced nodes has gone up significantly. In order to have more process steps, you need more process tools. Those process tools now generate just as much defects. And therefore, unpatterned inspection qualifies all those process tools to ensure they are clean before you use them for high-volume manufacturing.

So unpatterned has grown significantly for us. Optical inspection, we used to use a single system for a single layer. That is no longer the case. We have many layers where the types of defects on a particular layer is 3 to 4 types. And therefore, our customers will use Gen 4, then they will use Gen 5, then you'll use Gen 5 again, and then they'll use electron beam system, all on that same wafer to detect all the different types of defects. This is driving intensity.

E-beam. E-beam, we got into for 2 reasons. One, for berry defects. We were not in beamprior because most of the architectures were planer. Now you have a 3D architecture. So you have subtle defects buried in. We're able to detect most of them with Gen 4 because it is a longer wavelength and we can penetrate, but electron beam helps as well. At the same time, because we have so many Gen 4 and Gen 5 systems, an electron beam system provides intelligence for the setup of our Gen 4 and Gen 5 system, and I'm going to go through that in detail. This enabled us to grow from $75 million to $100 million in revenue to now $400 million in revenue, all driving intensity and share. I'll pick on one other example, which is data analytics. All of these systems systems are generating petabytes of data every single day. And our customers can use that petabytes of data for an instant or do analysis when their customers come back with reliability failures.

We now have a suite of software and data analytics systems that we provide to almost all customers for advanced packaging and for front-end manufacturing where customers can do overlay analysis and CD analysis across the board. So this suite of -- this business now is $250 million software business that is doing quite well. So all of this is driving intensity and share.

Okay. So going back to collaboration, innovation, execution, I'm going to talk about, first, the collaboration and what is happening in logic. AI-based inflections are really driving a lot of change in logic. The logic from 5 years ago is very different than in logic of today. So what is changing in the logic segment. So prior to going into the technical details, I will quickly explain what is happening in the market. The first initial build-out for AI was in training. That is in its late stage now fully implemented. The second phase is inference. And I think we -- most of are experiencing the inference world now as token usage continues to go up on a weekly basis, and our customers are able to generate revenue from that. After that, there is deep reasoning. And as Rick talked in elaborate detail about Agentic AI and autonomous work, each of these phases has multiplicative effect in growth of semiconductors. We see it in our own systems, and we see it in the marketplace. This is going to continue to drive growth.

Now this growth is affecting all chip designs across the semiconductors. It is affecting logic, in CPU, GPUs are primarily now used for complex compute and data orchestration, GPU, which is very, very good at single-mode processing, and we use it across the board in our systems. -- high bandwidth memory, HBM is very critical because you have to feed these GPUs with millions and billions of transistors data. And if you don't feed the GPUs billions of transistors, the data you will slow down the processing. So memory went from traditional DRAM to high-bandwidth memory so that you are able to load that data as fast as possible. DRAM growth for reliability reasons and also for conversations, and we now see growth in eSSDs for conversational history reasons. All segments of semiconductor devices are growing at massive rates.

So if we look at -- and we have examples later on, you can see here is a full board of black well and mixed with other devices. In order to make full system, you need a couple of large GPUs surrounded by several HBM dies and then you take all of that and integrated on an interposer and then on a PCB board. So this is advanced packaging and then PCB versus logic, this is memory. All of that comes together to make the device. So let's talk about leading-edge logic, then leading-edge memory, and then I'll talk about advanced packaging and how KLA plays in each of these areas.

So what is happening in logic? The first thing is, there is a term that I'm trying to introduce, which is called variability. Most fabs deeply understand what variability is, and I'll give you a very detailed description a bit later. But variability is inversely proportional to the printed feature size. And this is why I brought up that 5.6% intensity going to 9% intensity as people started to print smaller and smaller lines and spaces with EUV, the variability in the fab goes up. If their ability in the fab goes up, you need more process control to bring that variability down or detect those defects. The details of this is going to come later on in my presentation.

The second biggest inflection is chip size. If you have 600 chips on a wafer and a 1% yield loss, and you do nothing else but increase the chip size and you have 60 chips per wafer, that equivalent process will have a 10% yield loss. So chip size and process companies are governed by the size of the wafer and the size of the wafer fixed, you deposit the same amount of material on a large chip and a small chip but process control is governed by the size of the chip. If you print very, very, very small ships, 1 killer defect will kill 1 chip. But if you print only 2 chips on a wafer and you have 1 killer defect, your yield is 50%. So as chip size goes up, process control intensity goes up. And this is true for logic and also for DRAM.

So what is happening in the 3D architecture. This is a 3D channel transistor, and the key thing to remember is the channel -- the worst channel is going to determine the performance of the transistor. And foundry customers are not allowed to bend their devices, meaning you have a high-performing transistor and you can sell it to customer A and low performing, it doesn't work. You have to have the same performance. So KLA comes in to look for subtle defects with our Gen 4 systems, and these are many different types of defects like city residue and our electron beam systems to ensure that this is defect-free, and it will perform well. And at the same time, we have metrology solutions, ensuring that the dipole engineering that is done on these channel transistors is done really well. Because if you're a type of engineering is not doing well, you're not able to provide multiple BTs to your customer, and therefore, the value of that product is far less. So we have a suite of tools that are doing this.

So if you summarize all the things that are happening in logic, which is variability, large die berry defects, we see significant growth in KLA process control a 30% increase in total inspection steps and logic. If you look at this color, the first one is the surface defects. The bread and butter of Q&A, we are very, very good at doing that, and we've been doing it for years. barrier defects were introduced, followed by electrical defects and followed by new applications like print check. If you add EUV, you need to detect repeater defects, and we have new systems that do that. So M minus 2 to N minus 1, we see a 30% increase in intensity and then in minus [indiscernible] another 30% increase, incremental value versus N-minus-2 for KLA is 1 billion in logic.

I will now switch to DRAM and HBM. So what is happening in memory. The first thing that is happening is you are -- the customers are trying to increase overall density inside DRAM. Why? Because they need more DRAM transistors. There's a couple of things you can do. You can add EUV. And the other thing you can do is reduce the capacitor size, which takes a lot of space. So as you reduce the capacitor size, the amount of electrons that are available to you to detect if a transistor is on or off, is very low. If you have less electrons, you have to make very, very good logic circuitry inside DRAM to detect if the transistor is on or off. So the main thing that is happening in DRAM as it pertains to KLA that it is more or less now becoming like a logic device. It is not like a traditional DRAM device. That is what's driving process control intensity reset, stop thinking that DRAM intensity is low, that's exactly the point why because it's becoming more like logic. So as the capacitor sizes go up, customers have to design better logic to ensure that they're able to detect it when a transistor is on and off.

To drive packing density, you're introducing EUV. Some customers are now to 5 to 7 layers. Others are 1 to 2 layers. But the trend is in that direction. With EUV, the great advantage of EUV is that it prints smaller lines and spaces, but it also prints smaller defects because the wavelength is short. So if the wavelength is short, it will print smaller wavelengths, but it will also print smaller defects. And therefore, high-sensitivity systems from KLA are needed to detect those defects. Also new applications like EUV print track and mask equal, all of those things happen because more EUV is happening. Large chips, DRAM and HBM chip sizes are increasing on a regular basis. And the reason they're increasing is because you have to add more transistors and because in order to do high bandwidth, you add TSVs from top all the way to the bottom, that take a lot of space. They're not very small. They are large. So that is driving chip size. And then eventually, less circuit redundancy. Customers used to have immense amount of redundancy in DRAM.

One of the reasons is that the iPhone generally, I mean, we're all sitting here, most of the iPhones are idle. And when you sleep there idle, so the DRAM performance requirements are very different than a server class DRAM, which is performing 24/7. So all of those redundancy things also have reduced pretty significantly. So now the details I explained everything already. EUV, prince, repeater defects and also print smaller defects and therefore, KLA needs to come in and detect those defects. The chip sizes in DRAM are going up pretty significantly. This is a DDR ship in HBM 3, not 4, even bigger, it's 3x the size. And then this part, this is the non-memory content and the memory content, the memory content from DDR to HBM reduces pretty significantly and the logic portion increases pretty significantly. And therefore, you have to ensure that this part of the chip, which is the same place where this is in the same place where this is yields very well. This drives higher process control intensity because now you're essentially making a logic chip and you're calling it a memory chip.

Therefore, overall, intensity in memory has gone up significantly. Clearly, incremental intensity gain incremental intensity gain is $450 million in calendar '25. That does not include the fact that market went up. So if you look at the same point differently, DRAM wafer equipment market went up by 2x, KLA DRAM revenue went up by 3x. And the reason for that is all the things that I just said. Okay. So now we have a logic wafer. We've spent a bunch of money making sure that, that wafer yields. We have a DRAM wafer and we have spent a bunch of money making sure that, that yields. And now you need to package it. And in packaging, you will have lots of losses because of cutting the wafers and then doing 2.5D or 3D packaging. In HBM case, you are packaging 12 dies one after the other. And then in CoWoS, you're doing the rest. The total number of chips for an advanced AI chip is greater than 100 chips before a system is available, right? So you can just quickly do the math, 12 DRAM chips times 6 and then you have a couple of logic chips, all of that go well above 100 chips before a first system is available. And these are very, very valuable dies.

This is why advanced packaging became very important, very important for KLA and very important for industry. This is not wire bonding packaging, right? That is panel packaging that is low end. This is very high end and the intensity is high because you're going to lose good die. And in some cases, your logic customer who is doing the HBM integration will have to buy new HBM if they lose the HBM, right? Because the HB manufacturer is not going to say that you lost some dies,so here's some free ones. So it is a complex problem, and KLA is all over this area, and let me explain how.

So as Rick said, we did an acquisition in 2008 for IQOS systems, which is a component sector. And then we also built -- did a second acquisition and we bought another system called Circle details, not important. But what these 2 systems enabled us to do is to get into the specialty and packaging market, and we started to learn about everything to do with how do you handle packaging substrates. Our problem is never that can -- do we have the next 10 systems with resolution. We have all of that. Our PLS packaging problem is not that some of the competitors may have that problem. We don't have that problem. We're doing 10-nanometer detection in the front end. Packaging defects are not that big. So that is not an issue for us. The only issue is can we handle all these different types of substrates. So our teams started working from 2008 in 2015 on all substrate handling, glass, silicon other materials, ABF, all of those types of things. So we can handle them and are able to detect the defects and measure the curvature and all of those things.

When advanced packaging became important, our core customers, the top 4, 5, you can guess who they are, said, please take all your front-end systems and make them packaging compatible. We were able to use that $1.4 billion that I talked about earlier and divert a large portion of it to doing full integration of packaging as fast as possible for all of our front-end systems. And today, even though [ Kronos ] is the high sensitivity, high troubled system and the workhorse of packaging, we have the next 3 systems already ready Puma and there's a bunch of versions of Puma, then Voyager, a bunch of versions of Voyager and our Gen 4 system, all ready for packaging because we have deployed that handling capability.

At the same time, we are not just dealing with round things, wafers. We are now deploying panel capability on all of our systems. So we'll be able to handle panels. Why panels, I think you all know because the chip sizes are going up, even though everything is full field reticle, right, it's one field radical, but it's a 4x reduction after that. But in black wells case or Ruben's case, then we take 4 of those and tie them together. That's how you get scale because EUV systems cannot today, going to handle bigger reticles. So all of that is driving panels. So we have a full suite of systems to do that.

Now results. I'll talk about results in a minute. There's also inflections in packaging. Today, in DRAM, almost everything is micro bumps, and we are able to do micro bump inspections. And in the future, near future, for logic, SOIC, is going to go to hybrid bonding. And for that reason, we have a whole suite of systems for hybrid bonding. And into the future, DRAM goes to hybrid bonding, and we don't have -- we don't care if they do or not because it doesn't affect us significantly, we are able to sell micro bond systems or hybrid bonding systems, we will have those systems. Now the one difference is that the specifications are significantly tighter. In many cases, 10x tighter, and this is why the next 4 systems I've already developed to ensure that if customers go to hybrid bonding, we will be able to detect very, very small defects for them with no issues. So we're watching this inflection very closely, and our customers, as I said, collaboration, innovation, execution, collaboration, customers constantly telling us when they're going to do this switch and -- but we're ready for that.

Okay, results. We had a 10% share in packaging in 2020. So we were #4 in a 3-player market. And then 4x increase in share since 2021, $950 million in advanced packaging revenue in 2025 and #1 share position in packaging for process control. Okay. So I talked about technology inflections. I would now want to speak about high-volume manufacturing. I get this question from time to time from investors, with a slight doubt that KLA does really well during the initial stages of R&D. But as customers ramp up wafer starts, they slow down purchasing process control. This used to be the case. It is not the case anymore, but I will give you some data as to why that is the case.

So now let's first talk about variability, day in the life of high-volume manufacturing fab manager. What is this person dealing with? First, feature sizes are becoming smaller. Second, 3D architectures are going up. Third, a number of process steps are significantly increasing. I talked about the size of the fab and what the same real estate producers today. Fourth, Rick spoke about it, number of designs going significantly up. We see -- this is process steps, 1.2x, 1.4x, and the number of designs going up pretty significantly. Chip sizes going up. In-line process control specs coming down, right, because you need to detect smaller defects, EUV, all of this. All of this leads to high variability in the fab, all of this. The next thing is what do you do with this variability? Should you do inspection everywhere? That is a difficult thing to do because the cost will be very high. So how do you go about determining what is sampling, right? You have 1,500 steps to make a semiconductor device. In the 1,500 steps, each step has a lot, right? It has 25 wafers going through each of those steps, each one of those steps. Inside the lot, there's 25 wafers inside the wafer, you can decide to just sample this bit or you can sample the entire wafer.

Inside that wafer, you can decide to do low resolution or very high resolution. How do you do this? How do you determine what you're going to do? So that's where the 1,500 engineers of KLA come in. It's a competitive advantage for us. We understand how yield works. We deploy those 1,500 engineers across all the fabs. And then we try to determine what particular problem this one customer is having. Every customer has a different problem. So we deploy those engineers and we process map out what is happening and then we help solve the problem. But in general, this slide is going up. Sampling in general, is going up. The number of overlay points on a wafer used to be about 250. Today, there's many layers well above 3,000 points to make sure that the alignment between metal 0 and metal 1 is perfect. And if it isn't, you will have to do rework. If you have to do rework, what does rework mean? You just used an EUV scanner to print. Now you strip it and print again. That second EUV print cost you a lot of money. So people don't want to do that. Metrology is far cheaper to do, and that's what they do.

So how do we process MAP? Rick showed a slide about what's happening in the fab, right? There's deposition edge, everything else. So we go through the full loop until a wafer is etched into silicon. The pattern is the etched silicon. We do defect inspection. If it's clean, it's great. If it's not clean, now we need to do source analysis. We then segment the line. We have a number of different systems that segment the line. We look at what happened in CMP. We looked at what happened in etch. We looked at what happened in deposition. We segment the line and then come up with right suite of solutions, you need that many bare wafer systems. You need that many high throughput, lower resolution, dark fuel systems and then you need so many bright field systems to make sure this variability is control. That's how we do it. 1,500, 1,600 employees that are across the world doing this on a regular basis, helping our customers.

Now collaboration is very important. If a customer thinks they can do it, then the chances of success is a but most customers depend on KLA to do this work so that we can help dial the yield down -- yield out. There's many types of defects also, right? There is what we call systematic defects, right, which is you kind of understand why the defect would happen. And those are easier to solve and we help solve those. We don't want customers to have systematic defects. We just don't. They won't yield -- if they don't yield and Rick says every time, all the time this thing that it's about economics. So we want them to resolve the systematic defects as fast as possible. The second is stochastic defects. These are subtle defects, They'll happen and then they don't happen, and then they happen and they don't happen. So you have to determine where they happen, why they happen. They're related to design, they're related to how much dose you're using, what your focus is. And then there is random defectivity which just requires consistent monitoring. Otherwise, you will have a line problem.

And it is about economics. I mean the high-end logic wafers are $25,000 a wafer with 50,000 wafer starts. So you can just do the math if you have a 3,000 wafer excursion. That's a meeting that you don't want to be in. It's a tough situation. So I skip those. So if you looked at process control, buying behavior N minus 2, the slope wasn't 1, N minus 1 and now in customers are buying process control at a fairly linear rate as they add capacity. And we see this now for advanced logic, and we see this for memory as well. So I hope that helps answer the question. I've been asked this question several times. So we thought that we would add this section in the presentation to answer how customers' buying behavior changes as they do high-volume manufacturing. All of this, again, results semi PC relative outperformance from 2018 to 2025 delivered 8.5 billion in outperformance during that period. So this is above market performance. I'm not talking about what the market was because market is -- we are supposed to perform at least at that market. This is the outperformance number, 8.5 billion during that period for process control. So first is that they do this and second is you have the numbers.

Okay. So now let's go into point product differentiation and something that I introduced last time, which was Co-Intelligent Solutions and what does that mean? So as Rick said, what do we do? We make sophisticated microscopes, optical and e-beam. We connect them with supercomputers and then we report results. There was a customer who asked me how come it took you about 6 years, 7 years to be able to do e-beam, I said, well, we didn't do any of this for e-beam. We didn't do any of this for e-beam. We only just needed to change the microscope. And this applies everywhere in the KLA portfolio. When we decided to do advanced packaging, we're using AI for advanced packaging today. Why would we have to use AI or advanced packaging? You can say that the size of the defect is so large, you should be able to easily detect it. The one big difference is advanced packaging uses organic materials. Organic materials play up very differently in optical scans than what we have in silicon wafers.

So now all the learning that we developed on models and detection capability in AI in electron beam systems, we are able to use that and deploy it on advanced packaging. So this story goes across the board constantly all the time. And our collaboration inside the company is very strong. We have engineering conferences that our CTO runs where we share algorithms that were developed in Group 1, algorithms start, were developed in Group 2, and these are very technical conversations that enable us to disseminate our learning across the board. And it's better, we can afford doing it more than once, but it's faster and cheaper to be able to do it this way. So we would make a large investment in algorithm development, let's say, in e-beam, but a very small development cost of deploying that algo on a packaging tool. But if a packaging company has to do that, they have to start from scratch and do it that way. So the portfolio acceleration is quite large, and we really like it. So we do innovations in light source optics sensors.

During the breaks, we have several people here, including our CTO, that can go through these innovations in detail. optics is very important. I don't think AI can help solve that problem. So if you don't have a pure signal, then the chances of you being able to do defect detection is very low. And that's why I think KLA with its systems and its algorithms helps customers solve problems. So like -- so DUV broadband source, 2x brighter than the surface of the sun. It is -- we are right now 1 atmosphere here, which is 760 tour. There's several atmospheres inside this bulb. It's a very tiny thing, but it generates a lot of light. And we are a big light company because we have to do light 4 optical systems, electron beam systems, Gen 4, Gen 5. Now we're working on a new source for Gen 6. So a big light company.

The second is a 300-kilogram catadioptic objective very difficult to make and manufacture, but it has the ability to detect very small defects and that enables us to solve customer problems. And then the third is this custom sensor, right? If you look at this is the chip itself, which is able to take simultaneous 2,000 iPhones every second. That's the image generation capability of this thing. It looks very small, but to run it, you need this big thing. There's a lot of electronics, a lot of cooling, it generates a lot of power, all that stuff. And this is all done custom inside KLA. We make our own sensors online sources. So why do we develop systems that are this capable at the earlier story, I'll just repeat it quickly. Our customers don't design defects. Our customers design logic circuitry and DRAM circuitry and then comes the defects. So we have to build systems with a lot of capability before we know what defect they will generate. This is why we build these broadband systems with lots of resolution and capability so that a customer when generates a defect type, we'll be able to detect it. And every customer is different.

Every customer integration is different. I know people say, get all around that customer A is different than get all their own customer B. So we have to detect all of those defects. I'll just give you one quick example of why broadband, right? This is the spectrum of the wavelength of light. The type of image that we are generating is the same, but you would have low contrast of that image in this wavelength of light. But you will have very good contrast of that image in this wavelength of light. Now if I designed a line tool, otherwise known as a single wavelength system, then when the defect shows up, I may not have the right wavelength. And now a customer is like, okay, KLA, you are supposed to be #1 in the segment, and you cannot find my defect. That's another meeting I would don't want to go to. So we need to make sure that we can predict all of those permutations for our customer. This is why we have several systems with different wavelengths, 21xx, 28, this thing and goes from 240 nanometers to 45 nanometers. This goes from 190 to 240. And then now we started to design our Gen 6 system with even a shorter wavelength. And we continue to increment each of these systems every couple of years to bring additional capability.

Now just to think about how much data is generated, I'm going to make a case of why KLA wants to make their own HBC computers. Why do we make our supercomputers, not because we want to show engineering because it's interesting, but there's a good reason for it. So an average brightfield system takes 78 trillion pixels of images in an hour. This -- we then arrange this into 65 million frames then that leads to 40 giga pixels a second of image data rate. Some more details, 125 terabytes an hour, that's what we generate, 1 petabyte in 8 hours. Total GPT 4, I believe, was 4 petabytes of data, total GPT 4, you asked GPT sometime, it says it was 1 petabyte. I'd like to use 1, but I don't want to be inaccurate. We generate that much data in a shift on a single tool on a single way. That's the amount of data we're generating. And then that data we can outstore, if we try to store this data, we would have fabs of hard drives. We cannot store. So at that data rate, you have to process everything. This is why we have a supercomputer because if we try to store it, it's too much. It's literally drinking from a firehose. I mean, if you can imagine that. That's the amount of water that is coming in. So there's no way you can store this. You have to process at the data rate of the system. This is why we build supercomputers and we designed them to ensure that the system has this.

Now we can build low sensitivity systems like I can reduce the pixel size by half. And now the data rate goes by half, but now you don't have sensitivity. That's the reason we do it. And once we do it for 1 product, we can replicate it, we just need to reduce the amount of computers you need the architecture is done. Clearly also has a 5-layer cake for AI, right? Okay. So you know the reference. I was thinking maybe you'll get it, maybe not? You got the reference. So physical subsystem is very critically important. That thing there thing over there. High Performance Compute. I just talked about the HPC is very critical. software infrastructure to deal with all this data that is coming through. We're not a process company. So this process company software is very low, very low, right, because you're opening actuators and things like that. Software infrastructure is very critical. AI models. We use foundational models. We use all the different types of large language models and detection models. But the most important part is that we have the context of understanding what is inside the optics and what is inside the wafer and I'll describe that in a minute.

And then lastly, the application layer. So our 5 layer ensures that we're able to provide the results to the customer. So let's double-click on a couple of them, right? So this is why do you design your own HPC? Why do you design your own HPC with CPUs and GPUs. As I said earlier, that if we go to a very large pixel inspection, so now the resolution is low, right? Because the pixel size is very large. The data rate goes down, the data rate goes down, but the sensitivity goes down, you will throw away the defect. If the defect is here, you won't be able to detect it. So what we try to do every single every 2 years with Gen 4 and Gen 5, we bring in more light. We make the sensor faster and we improve the optics, why? So we can increase the resolution. We increase the resolution. But at the moment we increase the resolution, what happens, we take more pictures. We take more pictures, we need to scale the data rate. So this is why we custom design everything inside KLA. We don't go out and buy a rack from somebody, right?

The second thing is that we want to make sure the images that we're taking are extremely accurate, right? This is the optical image. We align that optical image to the design. Our customers provide us the design. Most inspection companies don't get designed, we get designed. We align the optical image with the design, then we build an e-beam system, and we coordinate match the e-beam system with the optical system. So now the chances that there's a defect here and you miss it is very low because the design is telling you something, the e-beam inspection image is telling you something, and the optical image is telling you something. All 3 of those come together. And then we can add other information from design from the customer. This area is more important because there is this thing next to that thing, that will cause a defect. All of those enable us to reduce what the customer calls is new since defect. You can always find differences. You can always find differences. It's not the difference that we care about. It is the defect we care about.

So customers tell us, yes, I can see that there's a difference here, but I don't care about this. I only care about that. That's the other part we have to do. We're not in the job of reporting differences. We're in the job of reporting the critical defect that is going to cause the yield loss. And all of this with our systems, we're able to do. So I hope that answers the questions. Now I'm going to talk about a concept of how we bring the full portfolio to do defect detection. Okay. So mask inspection. I'm going to start with that. So what happens in a mask shop and a wafer fab. So first, you take a plate -- this is a glass plate, and you want to print the design onto this. You use an electron beam system to write the design. The customer has the design they write it. Now the design is written, you need to do a pattern inspection to ensure that there is no defects on this plate. Then after you've done that, you take this plate, you put it in an EUV scanner and print. During that print, you can add defects onto the plate because the EUV uses a source that can inherently generate in particles and you can get on that.

So what we have to do is after this play is printed, we have to find all the defects. And after this plate is sent to the wafer fab, if there's new defects added, we have to detect those. So there's 2 places a mask goes through. One is a mask shop and the second is the wafer fab. In the mask shop, you're using the electron beam writer to make the mask and it needs to be defect free. And when you ship it to the wafer fab, you start printing wafers with it, and it needs to be defect-free.

Now how many reticles do you have in a wafer fab? You would think maybe 10, 20, 30, 100, that's a lot of verticals. Now why do you have so many reticles. First, number of designs, you have many designs. Number two, number of lithography layers, right? You have a lot of photography steps and lithography steps are going up. Number three, respins. A customer brings a design. The design doesn't work, you need to print another reticle. And number four, extra reticles because you will have a defect on a radical and you need to send it for repair. All of this causes a number of reticles in the mask shop. We believe it's about 700,000 reticles per year, new reticles per year. And we have to do defect inspection on all of them.

Now in advanced logic, there are 50 193 193i immersion reticles and about 20 EUV reticles, okay? For inspecting those, you would think you would need systems that are 193 and EUV. That's not the case. Our 193 system is able to do all 193 reticles and are able to do most EUV races, not all, but most verticals. What's the difference? It is called printed pitch. If the printed pitch, which is the pitch of the design is larger, even though it's EUV, we will be able to detect the defects of 193. And if the printed pitch is smaller, very small, then we won't be able to do it with a 193 system and you need a high-security system, okay? So that's how it works. So it's about 3 to 5 verticles in advanced logic that are very tight dimensions. Everything else we can do with 193 system. Now in advanced memory, the same thing happens, it's 25 plus 6, 30 of those can be done with a 193 system and maybe 1 or 2 vehicles require very high sensitivity to ensure that we can do defect detection.

So this is the suite of systems that we use to do defect detection. As I said earlier, it depends on printed pitch, right? So relaxed printed bit, 17-nanometer, 30 nanometer to 40-nanometer, we can easily do with our optical system, and then we can easily do with an optical system with EUV capability, most of those. And then in the wafer fab, and I'll go through this in a minute, and in the wafer fab, you are just looking for particles, right? You're not looking for design issues. We have a 193 system that does most of the work. And then we have something called Gen5 EUV print check, which can determine reticle repeater defects. We do that with that with -- sorry, EUV and then with Gen 5. And all of those capture most of the defects. Now we're talking about a few subset of defects with very small pitch, how are you able to detect those. There's 2 ways to do it. One is you can develop an actinic inspection system. It has the same wavelength as the EUV scanner, 13.5 nanometer or you could do something else, which is an e-beam system, which has very high resolution. So we're doing both, and I will show you results for both.

So the first one, [indiscernible] mask inspection system. We just brought it out to the marketplace. We've been developing it for the last 5 years at a customer, very close collaboration. And our customer is TSMC because we have published a paper recently. It's a massive technology. If you get a chance later on, you can see it. This is the 12 by 12 call them, array, and 1212 Colima because we have to cover the mask completely e-beam as slow. But if you had a lot of e-beam outlets, you'll be able to do it fairly fast. So this column array, we have 24 columns, 12 of them are always running. It's 100,000 pounds system if you're buying by weight. And we have an AR/VR model in other room.

So why this system? Because, as I said earlier, the printed pitch matters quite a bit, right? So 36 nanometer, this is TSMC paper, so I'm just going to repeat what they said. So a deep use of EUV system can cover easily 36-nanometer even though it's an EUV print. And an e-beam system has ultimate resolution. So it can go all the way to 20-nanometer printed pitch. This is reticle pitch, right, so [ 4x ] after that on wafer. So this is very, very aggressive. EUV, high an AUV covered both. No issue. Nobody is printing 20-nanometer printed pitch on reticles for wafer. So they've built reticles that are very difficult to test this machine. And you can easily see that with a tenant, you will have a slight resolution problem with e-beam, you can easily do it.

Now why do people do actinic? There's 2 reasons there's types of -- again, there's always a type of defect problem. Currently, we don't have a type of defect problem that DPUV and e-beam cannot capture, but there could be a type of defect problem. And the second is that it is easier to do because you are able to do 24-nanometer pitch, which is in the middle. So for the next couple of years, you could continue using this system before you need this. But our customer decided to develop this system with us because then it has ultimate resolution. And actinic system will always require change in each time you change the any of the scanner, right? So it's that's why 0.33 NA is a 1 system 0.55 is another system 0.77 and will be another system. And then after that, if you change the wavelength from [ 13.5 ] to 6.5, you will change the system again. this system is more longer capability. But regardless, we are developing actinic inspection also, we have taken our first images on our prototype system in our lab, and we have done our first inspection a couple of weeks ago and the results look quite impressive.

So that was the mask shop. And in the wafer fab, you need multiple defenses. Now in every case, you need multiple defenses because as I said earlier, in reticle inspection, you have no choice but to detect 100% of the defects. Defense 1, our EUV 7 to its DPV system. Defense 2, Gen 5. Now you would print you would do this inspection every 250 wafers. Every 250 wafers you shoot under an EV scanner, you're going to do a DPV inspection. So the throughput of an EUV scanner is 250 wafers an hour. After 1 hour, you will do this. Defense 2, Gen 5, every 4 lots. So maybe like 800 wafers, you will do a second inspection. And this one may be around 2,000 to 5,000 wafers, it's really an insurance policy inside the wafer fab because it is -- it's a cost of ownership on a mechanic system for recalls quite bad. So most customers use these 2, you can always add a third defense to catch all the defects.

Okay. So that is a co-intelligence solution for reticle inspection. Now how are we doing on a cointelligence solution for e-beam. So why did we get into e-beam? As I said, there are a class of defects, very subtle defects that you may not be able to detect with optical. We still think the ratio of optical and e-beam is greater than 80/20, 80/20, the actual number is 88 and whatever the other numbers. So it's on the fly mask. So that's what the ratio today is. So it's 80/20 is what we loosely call it. But there's a class of defects that e-beam is very good at. And as 3D became important, those subtle defects can be detected with EUV. So the question is if you can detect with optical, will you use e-beam? No, there's no physics and no economics that will enable you to do that. So 15 nanometers all the way to you, you decide where it stops or where it starts to struggle. The second thing is, if I can do what I showed you earlier, I have the brightfield image. I have the design image and now I'm going to provide it e-beam intelligence the brightfield will be able to extend more. So now we are using e-beam to extend our brightfield systems more.

And thirdly, as I said, in HVM, they're buying a lot of brightfield systems. Well, they're 1,000 mods per brightfield system and multiplied by the number of 1,500 layers. Well, an electron beam system can help our AI model to determine what is the best bright fuel mode for the type of deep defect. So these 3 reasons is why we got into it. Now we thought we would just get into 1 segment of EV, but that was not a good plan. I mean generally, to get in all segment of e-beam from an engineering perspective is very hard, but we decided to do that. We have a single-beam e-beam inspection, ESI multi-beam EVM inspection, 300 e-beam inspection, [ ESV100 ], both of them in HVM today, [ EDRX1 ] for review and [ EM200 ] for metrology. All of these systems are now in HVM. They're not in development, so already move to HVM.

So I showed this slide, which is this is a brightfield test image. And this is the difference image, meaning that you took an image, you substracted the pattern, and this is a different image where is the defect? It's very hard to tell. It could be this. It could be this, it could be this or it could be this. the defect that the customer cares about is only this one. Nothing else they care about. And if I report this and that defect, guess what, you have to do a lot of even review to verify. Now my relevance goes down. So in order to fix that, this is what we're doing. We're connecting our e-beam inspection systems with our brightfield systems and e-beam review systems with our brightfield systems. So this gives the example of what the defect looks like. This does the workhorse a whole wafer inspection and then you can send the results to e-beam review. And then all of this is connected through a computer. A computer is weak work for this. It's a huge machine that is updating the models continuously.

So this is an example of a cointelligent portfolio delivering questions. I mean, they're delivering answers to our customers. Brightfield optical inspection success, 8.5 billion since 2022 to 2025. That's just the Gen 4 and Gen 5 systems that we have sold. It grew greater than 30%, the market in the same period, I believe, was around 14%, 15%, greater than 600 Gen 4 systems, and Rick pointed that out that we're shipping more systems and greater than 180 Gen 5 systems shipped during this period.

Okay. That's the technical part. I will go into the model. So I spoke about logic inflections, memory inflections, advanced packaging inflections, high-volume manufacturing. We participate in high-volume manufacturing at the same curve, brightfield optical inspection, reticle inspection and then e-beam. But as I said in the very beginning, right, 9.5 billion, the systems business came -- the process control was 9 billion. There's a bunch of other things that we do. But if I have to present on that, we'll be here for a longer time. But I'll give you a little bit of flavor, right? Extra metrology. We developed an extra metrology systems for vertical NAND and DRAM capacitor and it's used in high-volume manufacturing today. We purchased a chemical analysis company, and it's tagged with plating systems. This metrology system is scaling as interconnect density is going up, more customers are buying this. Data analytics, this is a $250 million software business now connecting all of our systems together to ensure that we're able to help customers do detection.

Plasma dicing, as customers go to more valuable die instead of doing saw dicing, they're going to start doing plasma dicing we have a suite of systems that are going to help with plasma dicing. Component inspection, I spoke about in PCB inspection, all of this is roughly about $1 billion on top of the second business.

Lastly, to the model, $9.8 billion in 2025. Market baseline growth rate would be $7.6 billion, that is 11% to 13% CAGR growth. outperformance would be $3.1 billion, reaching $20.5 billion overall, semi PC CAGR, overall systems business CAGR would be 4% and MEPC would outgrow the overall business by 4.5% all because of our collaboration, innovation and execution.

That's all I had. Thank you.

Now it's time for a 10-minute break. Please help yourself to refreshments outside the room and join us back here in 10 minutes.

[Break]

Good morning. Welcome back. So as you heard from Rick and Amahd, the market dynamics set up extremely well for KLA. And we've got a strong portfolio of products to support our customers' most difficult challenges. And that's good for our service business as well because one of the bookings of our growth strategy is growing the installed base and the additional value-added services that we provide on those new systems.

The other book end is the enduring value of our systems. I started at KLA 28 years ago, working on products that we now call the class of '95, many of those products are still running in customer fabs around the world today, generating more than $100 million in annual recurring service revenue. So it's this powerful combination of new installed base growth coupled with the enduring value of our systems that makes our service business so durable.

So we have 3 key messages for today's section. First, we are a customer-focused organization. Our service excellence is aligned with customer outcomes to ensure that they succeed. And we manage that through the entire life cycle of the customers' products. Next, as you heard from Rick Ahmad, the KLA operating model is the framework we use to work with our customers. It's rooted deeply in data, and we use that data to improve both customer experience and KLA profitability and productivity. And finally, the headline message for our service section today, we are increasing our service growth rate from 12% to 14% to 13% to 15%, which means that the upper end of that range will double the service revenue by 2030.

So before we get into some of the details about how we're helping our customers solve some of their challenges, I want to give it a little bit of perspective on KLA infrastructure, a little bit about why process control service is different and close with some financial highlights.

So first, from an infrastructure perspective, we have more than 57,000 tools installed worldwide at more than 4,000 customer facilities. Every one of those customer facilities is driving unique requirements. And we have to invest in order to support each one of those. And we invest in the form of people, more than 3,500 service engineers and in parts, more than 260,000 unique assemblies and spare parts. And that all comes together, that infrastructure comes to together in comprehensive service contracts which reduced overall cost of ownership for our customers.

So we've talked about this in the past. We have a unique signature in our installed base. We're high mix, high complexity, lower redundancy and long life. And I'm going to unpack each one of these in the coming slides. Before I do that, I want to touch briefly on this graphic on the right-hand side, the product plus service. So as Imad went through in his presentation, we are the market leader in process control, and that's because we deliver the highest throughput at the highest sensitivity. The only way that our customers can maintain that highest throughput and highest sensitivity is by leveraging KLA service. we deliver our product, our service product is availability out performance. So we have to meet those throughput and sensitivity on a day-to-day basis at very, very high availability rates. This concept of product plus service 1 plus 1 is greater than 2. It's a competitive advantage for KLA.

But let's talk a little bit about some of the characteristics of our business. So first, from a mix perspective. So what do we mean when we say mix? Well, each one of those pluses on the left-hand side is a KLA product division. That in and of itself would suggest a high mix. We are not a single product company. But when you double click on one of these and if you haven't visited the AR, VR, as we've talked about, we've got our BBP system, our latest gen BBP system there. That's one tool model configuration that you see. If you double click on the division, you see there are more than 30 different product models and every 1 of those product models has 5 different configurations. This means 150 different configurations that we're managing just for a single product division. And you can imagine what that looks like when you go back and look at that through each one of these divisions, the mix that we are managing across our installed base.

We also have -- it's also a complex business. More than 1,200 unique parts and assemblies, you get some perspective on that. You see our objective over here, our sensor over here. These are 2 examples of assemblies that we -- that are also field replaceable units. So more than 1,200, we'll talk a little bit more about that and more than 25,000 different specifications. So again, this is for one product division. It's representative of what we deal with across the rest of the installed base.

This is one of our biggest challenges as a service organization is supporting this high mix, high complexity. It's also one of our greatest advantages because we are uniquely positioned to be able to support this. We're also differentiated in a couple of different ways.

So Ahmad outlined, ultimately, we're a portfolio company, and our customers are going to select different KLA products to put in line and use those to drive improved overall yield. So if you go into a customer fab, you're going to see a lot of white panels and purple stripes, lots of KLA tools. But when you double-click on that, back to this high mix, there are lots of different tool types in there which means there's not a lot of redundancy for any one of those given tools.

Because there is low redundancy, our utilization of our systems doesn't correlate very well to overall fab output. It's inelastic means whether you're running 10,000 wafers, 25,000 wafers, you're still going to use your process control tools at very high availability rates. That means we have -- that contributes to the durability of our business. You're not going to idle some of that equipment. You're going to use our equipment, you might change some of your sampling rates, but you're going to use our equipment at very, very high availability rates, which is why, again, we see very little fluctuation in our overall service and why it's so predictable. This is differentiated from others in the semi equipment ecosystem.

Two other important differences is we are -- our park content, as you see, both in the AR/VR demos and as you work through looking at some of these examples that we have, these are very proprietary in nature, these frees. And they take -- we spend a long time developing these with suppliers. Bren will talk about their -- many of them are sole sourced. And so KLA is uniquely positioned to be able to stock those parts and be able to service the equipment. In addition, we have very diverse labor content because of the unique nature of all those parts, the unique nature of the failure mechanisms that we have.

So all this, again, contributes to the durability of our service business. So a little bit about how we've performed over time. If you think about our service business, the way to think about the growth equation is, you've got this existing installed base, are you able to drive greater revenue and how stable is the existing installed base? And then what's happening on the new tools that you're shipping. Are you attaching at a higher rate, higher contract penetration on those? Are you generating more revenue? And if you do all those things, then it should lead to improved overall growth. So good news for our business is we're moving on all of those.

So first, from a tool lifetime, we'll touch on this in a little bit more detail in -- later in the presentation. But median time, the tool retirement for KLA systems has increased from 10 years to more than 24 years from 2010 to 2025, very important for our customers. Next, from attach rate. When I was here in 2019, we talked about service contract -- or excuse me, service revenue from contracts at about 70%. We've increased that 10 points closing in 2025. And that's, of course, driven by even higher contract penetration on the new systems that we're shipping. That's why this is increasing because the complexity is increasing, therefore, the reliance on KLA service is increasing.

And next, we're also generating more service revenue per tool from the class of 2000 to the class of 2020 were up about 3x. So important drivers. This is what's leading us to improve overall projected CAGR. So in 2019, we said we were going to grow the business at 9% to 11%. In 2022, we increased that to 12% to 14% and today, we increased that to 13% to 15%. A very important revenue stream for KLA. Bren talked about 17th consecutive annual increase in our dividend. That dividend is serviced by cash generated from our service business. And so it's that predictability of confidence that allows us to continue to drive increase in the dividend.

But ultimately, it's about serving our customers. Again, we use the KLA operating model framework, collaborate, innovate and execute. We support our customers, whether they're ramping new technologies, new fabs or if they're trying to extend the asset lifetime of their existing tools. So first, from a collaboration perspective, our service engineers are very much part of the fabric of our customers' operations. And we are recognized for it. We see recognition whether we're helping a customer ramp a new technology, ramp a new fab, ramp a new geography. We're recognized for the Best Supplier of the Year award or in the event when our customers experience unexpected events like an earthquake, our engineers are in the fab and hours to help our customers get those tools back recovered so that they don't miss any of their production commitments. And while recognition is important, ultimately, our customers vote with their checkbooks and as we mentioned, our service contract penetration has increased over time.

So back in 2005, we were about 60% coming from revenue on service contract Today, we're more than 80%. And these are long-term service contract agreements. These are more than 3 years. And so this is a lot of trust with our customers. But this long-term commitment allows us to not just solve for today's problem, but also to solve for their road maps, especially in this ever-evolving geographic expansion environment that we're operating in today. Additionally, we talk a lot about the service contract being 80%. But if you look at this pink, this is what we call KLA time and materials. So there's a little bit more variable spend, but it's still spend with KLA. So if you take the purple and the pink, that's basically the revenue that we generate from those 57,000 tools in the installed base. Every one of those individual tools over a 2-year period recurs in revenue 95% of the time.

So again, our predictability on our service revenue, our line of sight on ability to sustain the level of growth that we've talked about and our confidence to continue to deliver that. is very high because of these dynamics. But next, of course, in the semi industry, we've got to continue to innovate and our innovation in our service business. We think about it in 2 distinct buckets. First, how are we trying -- how are we improving customer or tool performance in customer fab. And next, how are we improving every part of the value delivery chain that delivers that performance in the fab. And that usually comes in the form of people parts and knowledge.

These 2 things come together around KLA data systems. And we're a process control company. We've been collecting data for many decades. It's all about sorting signal from noise. We've done a very good job of this. And we mine this data in order to improve both customer experience as well as KLA productivity. So I'm going to spend a little bit of time giving you some examples of some of the things that we're working on in terms of improving in fab performance of our customers' tools.

The way that we do that is we leverage our service applications portfolio. Both Rick and Ahmad talked about our applications engineers. For example, our systems are connected to recipe development servers for accelerated recipe deployment that allows them to store modify and deploy uniformly across the installed base. Some additional examples that I'm going to go through are predictive tool health insights, autonomous synchronization and then on-demand agentic expertise.

So first, in this period where customers demand is significantly outstripping supply, any unscheduled downtime for one of our products has a material impact on our customers' manufacturing. So in the historical model, we would wait for something to break and then this period down here meant that the tool is down, you wouldn't fix it and then you'd come back up. With our predictive tool health insights, we're now able to track assemblies like these 2 off to the side, what's performance of those assemblies against predefined performance specifications to understand when the assembly begins to drift.

Again, KLA is a system of systems. It's a bunch of these complex assemblies that come together to create the performance that we want. If one of those assemblies begins to drift, total tool performance begins to drift. And so because we have predictive tool health insights in place. We're able to track that, and we can now preposition material and labor in order to support that, reducing total unscheduled downtime for our customers. That's also a value unlock for KLA because now it could be much more productive with our deployment of labor as well as inventory.

And we do that again across those 1,200 unique assemblies on that 1 BBP platform. So again, you imagine how this scales when you look across the entire installed base. Similarly, we have an autonomous synchronization application. And the challenge here is you heard again from made high mix environment that our customers are operating in. And in that high mix environment, you want to make sure that the tool that you have in place for whatever application, it's serving inside the customer fab is aligned to the control reference, whatever they want that so that they have 100% of the performance, 100% of the time. And our autonomous synchronization system allows us to do that and ensure that we do -- we catch those issues or deviations before we return the tool to production, which reduces overall variability inside the customer fab and improves our scalable operational infrastructure.

Semi manufacturing, highly automated but still requires skilled engineers. And our customers are hiring a lot of skilled engineers, and we have to hire a lot of skilled engineers. This is important to be able to meet ramp time lines. So one of the biggest challenges accelerating time to proficiency. And the way that we accelerate time to proficiency is in addition to some of the AR/VR tools that you saw today. We also use our automatic managing expertise.

So again, I talked about we'd be collecting data of our systems and our business processes for decades, but correlation does not mean causation. So it's great that we have all this data. We also have the contextual information and the subject matter expertise to understand what's really happening. That allows us to synthesize the data and put it into dynamic knowledge model, and that then converts to on-demand delivery guidance for our customer support engineers to be able to reduce mean time to repair.

So ultimately, what we're trying to do is take the task at knowledge of a master engineer and transfer that as quickly as possible to a new engineer, whether that's a new hire or an engineer that's now learning one of the new products that Aman talked about, we're introducing. But ultimately, we're in execution. Our service business is built for execution. And we execute in many different ways. I'm going to talk about how we're helping customers solve against new technology inflections, how we're helping them ramp in new geos and then also how we help them how we help them extend the lifetime of some of their assets.

So first, Ahmad went through this in great detail. HBM inflections that we're seeing. This is driving increased device complexity, increased advanced product models from KLA and tighter requirements. That is a pull through, a natural pull-through for our service business. And so we're able to align on new and tighter availability at performance requirements with our customers and delivered to that commitment. And because we do that, we see revenue growth increase by about 5x from 2022. This is one of the catalysts for our 2030 plan.

Similarly, advanced packaging. Also a great business as outlined and good for our service business. We've talked about pulling front-end systems, configuring front-end systems for back-end application. Again, that puts tighter requirements on running those tools in the back end. That puts pressure on our service organization. And so we've been able to modernize our back-end support with the same rigor and intensity that we see in the front end -- we've also been able to leverage our global infrastructure to support this significant ramp that we've seen in advanced packaging, again, a competitive advantage for KLA and we've seen strong revenue growth of about 8x from '22 to '25, again, another catalyst for our 2030 plan.

Geo expansion. We know our customers are -- all of our customers, many of our customers are expanding geographically. The last thing they want to worry about is whether or not their equipment suppliers can support them. They've got plenty to deal with on their own. But what our customers want is they want to match the culture, the intensity, the discipline that they see in the home country. So we can partner very closely with our customers to do that. And our scope and scale allows us to move resources from the home country to the new geography ramp up, hire people, get them trained in customer processes to allow faster yield ramp. We've been very successful in doing this over the last couple of years. And as we look at the number of ramps that we've got to support through 2030, we feel very good about our position.

So we've spent the majority of the presentation here talking about the left side of this life cycle. R&D ramp through HVM. So and that's about 70% of our services business. But the other 30% is supporting this legacy HVM. And this is a business -- many of our customers, these are profitable businesses for our customers because they have depreciated their equipment. And so they're able to run a very profitable business, and KLA plays an important role in that. And the way that we play an important role in that is by extending tool lifetime.

So we talked about this increase. If you go back to the year 2000, the median time of tool retirement for KLA system was about 4 years. And that goes back to the 18-month or 2-year tick-tock strategy, we'd introduce a -- technology, a new node. And then 2 years later, we'd retire that equipment. That begin to change as you move into the 2010s and the 2020s as you see some of these super nodes that came into play. And now we see median time to tool retirement up at 24 years. Significantly longer than a customer's depreciation cycle.

Of course, this does not come for free KLA invest heavily in making this 24-year to median time retirement come true. First off, we structurally change the way we design and service tools. So all those products that Ahmad talked about we're developing when we sit in reviews. We're not asking about how to deliver those tools for 2 years or 4 years are supported for 2 or 4 or 6 years. We're talking about supporting them for 25 years. And this is an important value proposition for our customers. It's one of the reasons that they pick us is because they know that we will be there to support them for the long term.

We also have active obsolescence management, hundreds of obsolescence problems we solve and modernizing those systems on a regular basis to ensure that they can continue to get the performance that they need to support the tool. So that all comes together in what we call our class of. So if there's one chart in my deck that I think both shows KLA's 50 years of market leadership, but also the -- how our service business has performed over time at this chart.

So on the y-axis, this is service revenue. on the X-axis is time. And as you see on the legend over here, these are cohorts. So the way that we define a cohort is if you were a product that was introduced in the year 2020, '21, '22, '23, '24, you're part of the 2020 cohort.

So I mentioned at the beginning, I started in the class of '95 and if you squint really hard, you can see a little bit of blue starting to come up for service revenue in the class of '95, and you follow it over and it peaks in about 2008, but then as you followed all the way to 2025, you see it's still there. That's $100 million of service revenue that we're still generating on the class of 1995 products, not dissimilar to the amount of revenue that we're currently generating from the class of 2020.

So this is why we're very confident as you look out into 2030, of course, that 2020 is going to continue to grow. We also expect that the class of '95, 2005, 2000 will continue to deliver value for our customers and continue to deliver revenue for KLA. And again, this is why we're confident in our growth rate projections through 2030.

So in closing, so we use the collaborate, innovate and execute to deliver more value for our customers. We deliver more value for our customers we deliver more value for KLA. I see here in 2019, we were $1 billion. I talked about -- it took us 40 years to get to $1 billion of service revenue. When we came back in 2022, we had added another $1 billion. So we went to $2 billion. 2025, we're now another $1 billion, $3 billion. And again, as I said, at the upper end of our range, we would expect to double that revenue to nearly $6 billion and at the upper end of the 13% to 15% range in 2030. So never a better time to be in a semi industry never a better time to be a part of KLA. Thank you.

As a CFO, I've been the CFO of KLA, since 2013, you love that business, right? It keeps you warm, right? It's a business that has a lot of real positive attributes. It's unique in the industry. And those attributes are getting better. So pretty excited to have it. And it certainly is something that as you think about just how -- what happens in the world, having this anchor that drives growth consistently is a pretty powerful base to have as we think about operations as we think about capital allocation and so on.

So in 2019, I stood up here and said, hey, the world is changing. And it's changing in a real positive way for KLA for the industry and for KLA. For the industry, we were going to move from a period of time where you had significant capital intensity decline, to all those drivers of it sort of played out and that going forward, we would have capital intensity flat to rising. And so that would create structural growth in the industry. So semi equipment will grow at the rate of semi.

The other good thing that was happening is we finally had a scaling road map after years of delay with EUV. And as a result of that, you would have the 7-nanometer node and later on with DRAM, but the 7-nanometer node where you had a lot of design activity. And you saw Rick's chart earlier, first time bigger than 28-nanometer. And so because of that, you had designs, you had a big difference between intensity and logic and foundry versus memory. And so as a result of that was going to drive the relevancy of KLA higher.

2022, we stood up here and said, hey, all those things are true. There's more momentum as we saw the successive nodes driving more designs. And that the industry was broadening in demand. You had a lot of legacy demand. Semiconductor content was rising and all the digitization related to COVID was part of that. Legacy demand is really good for our customers because of their profitability. And so you had what was a GDP plus growth rate for semi revenue start to accelerate.

And then, of course, as we moved into '24 and '25, we saw the high performance drive. And all of that, as you saw in Ahmad's chart, took KLA's process control intensity or share of the overall market up about 200 basis points. and translated from '19 to '25 into best in industry growth levels and a very strong financial model. So of course, over the last 12 months or so, I get lots of questions for investors asked in very different ways. But really, the crux of the question is, can the next 5 years be better than the last 5 because last 5 were pretty good for KLA. Can the next 5 years will be better than the last 5?

And if you look at the conditions that you heard a lot about today that are driving the next 5 years, the next 5 years are going to be better than the last one. So what I'm going to cover today is, as you've heard, we're well positioned to drive sustainable outperformance across all different segments, and that's contributed to increasing process control intensity. We're excited about that.

The second message I'm going to talk a lot about the operating model and how it translates into the financial model and how we run the company, how we make decisions that's underneath the hood, if you will, in terms of our -- how we engage with customers, how we have to invest what's driving the income statement and balance sheet over time. We have to execute, and I'll talk about some of the execution drivers in the business and how that translates to a go-forward view. And then finally, I'll wrap it up with a discussion of the 2030 target model, work through some of those assumptions, and that model is really based on a history of credible execution. We've done, I think, a pretty good job against the public targets that we've established. As Rick said, we define winning inside the company. There's no data between the external plans and the internal plans. This is how we measure ourselves. This is how we evaluate the company. This is how we're incentivized, and this is how we measure our success over time.

The 2030 revenue plan, $26 billion, plus or minus $2.5 billion, and I'll walk through that. non-GAAP EPS of $84 and should continue to drive strong free cash flow generation consistent with our history, and I'll share some of that and a capital returns target that was greater than 85% on a go-forward basis. We expect to be greater than 90% of the free cash flow we'll generate.

So go back to last Investor Day, where were we and where are we today? So we talked about $14 billion and $38. And if you look at where we are today, you can see that particularly given the commentary that I gave you earlier around our expectations for the year, we're in excess of that. we said we wanted to improve our share of market by 100 basis points. We improved it by over 150. We said service would grow 12 to 14. Service grew right in line with the target range. as I said earlier, had some disruption related to access to fabs. So pretty happy about that. Certainly, the strength of the systems and some of the drivers of incremental opportunity or a factor in that.

We said we were going to broaden our portfolio. We're going to invest in reticle inspection. We're going to invest in e-beam. And we were going to expand our market leadership. And as Ahmad showed you, we have done that. And so we feel very good about how we're positioned from that point of view and advanced packaging. We didn't talk about it before, but it is a significant market and a significant market opportunity. And I'll talk a little bit more about why we see it the way we do.

We were going to integrate acquisitions, which we did. We put them on a trajectory. They were dilutive, put them on a trajectory to corporate level incremental margins moving forward. We're going to invest to support our growth. We're going to deliver our incremental operating margin model, which we did. 2025 operating margins were 43.6%. We said our target is 41% to 43%. And that's despite tariffs and some other things that we had contemplated back then.

And then our capital returns was slightly in excess of 85% since 2022, so in line with our target there. So where we're going. This all translates, $26 billion translates into 15% at the midpoint in terms of revenue growth. We're going to gain another 150 basis points of share in terms of share of the overall market.

Service revenue, as Brian just talked about 13 to 15. We're going to continue to optimize our business through technology leadership, how do we leverage the portfolio, it's unique to a competitive advantage for KLA. But we're also driving productivity improvement across the enterprise, certainly have a strong growth environment, but opportunities for us to continue to drive our productivity. And if we do all that, we'll sustain our model at a higher growth rate, we should be in the higher end of the range of our 40% to 50% target model, and we'll drive 45% to 47% operating margins. And I talked about the capital return change.

So it's interesting when you look at the revenue over time and this was that time where there wasn't much happen. And you had cattle intensity that was down. A lot of the growth in -- for the company came from service. And so you had this period, then you have 7-nanometer node, you had EUV into DRAM, EUV into logic. You had a down year in 29. This was a $1 billion increase year-to-year in a down year. And then we saw this path to mid-teens growth. And so 2019, 2025 mid-teens and basically, our plan is a continuation of that.

You can see a lot of the drivers on what are the characteristics of the target revenue and why. But in an environment where we feel like there's -- again, the conditions are strong and that it will sustain our ability to grow in the mid-teens range. Now if you look back to TheStreet Investor Days, what's happened, as Rick mentioned, we were about just acquired a company, integrated the company drove our margins up. Best among the leaders in the semiconductor industry, a lot of focus, the indicator of differentiation and then driving leverage on our infrastructure as we scale over time. And incremental margins at the top end of our 60% to 65%. So incremental gross margins, 60% to 65%.

Operating margins, differentiation, less your profitability drives your operating margins. And we, again, a superior margin profile versus peers. I'm going to talk more about this, but this is a extended build a product platform and what does that mean to the R&D intensity, how much we spend on R&D. The industry has a pace, a cadence of innovation. -- that isn't as fast as it used to be, but it's fast enough that it drives the end markets, and it's really good for structural profitability for our customers because they can amortize cost of development and cost of capacity over a period of time and more volume. But also good for us. So I'll talk more about that in coming slides.

Obviously, focus on productivity and how we drive the business and then our performance on incremental operating margins at 51%, so slightly ahead of the top end of the model. earnings leverage, operating margins, less than our capital structure decisions, taxes, all those sorts of things. We improved share outstanding to drove our share outstanding down about 18%. And we had a target model that we would deliver 1.5x the revenue growth rate in terms of EPS growth. And so revenue grew 16% over this time frame, diluted EPS, 26%. So achieved that as well.

And then free cash flow margin. We have a history of strong free cash flow margin. It's trending above 30%. I'll share some data on that. Our business model is a unique one. Obviously, we have the profitability levels we do. We invest in working capital. spent a lot on inventory, have a lot committed there. If there's a thing that we accept to drive our differentiation that goes to a lot of what we talked about earlier in terms of design and capabilities we accept that -- the asset velocity of inventory turns will be lower, but it positions us to enable the differentiation and to meet the dynamics in the business. And I'll talk a little bit more about that.

And then CapEx, absolute value of CapEx, we've been spending more, but generally between 2% and 4% of revenue. So as a result, a lot of that profitability drops to free cash flow margin. It's not just about semi equipment. You can see on the chart when you compare -- take a long term, different drivers, different regions, other investments, different cycles, different drivers in the end markets consistently against the SOX, average performance over the last 10 years, ranked in the top 5 of all 3. Only 3 companies are in the top 5 of all 3: NVIDIA, KLA and Analog devices.

So it matters a lot in terms of long-term performance, lots of opportunities where things can go a different way and a continuation across the board of we'll call best-in-class performance in overall the overall semiconductor industry. It translates into very strong cash flow. So free cash flow as a percent of revenue and then [ 90% ] of the entire S&P. So it's that model that I talked about, profitability but also an asset-light business that enables very strong free cash flow performance, which has allowed us over the years to be very thoughtful and very explicit about capital allocation. The capital doesn't get valued unless it's deployed productively that businesses need to be financed with a tiered debt.

All the sort of philosophy of KLA and how we thought about it has been really driven by the free cash flow sustainability of the company. And you can see in this trend, first, the dividend, right? Mid-teens growth rate target. 2 targets, the growth rate how do we the growth rate relative to the growth rate in our free cash flow. But also, is it 25% to 30%, so we can maintain a consistent cadence of 25%, 30% of the free cash flow we generate. And so that drives our dividend. And then you can see on the share repurchase side, we have the additional authorization today.

And our strategy has really been consistently been putting the capital to work consistently over time. And using capital structure, we're prudent to augment the returns or accrete the value of KLA to our shareholders, and we have one of those actions back here. So a consistent approach, over time, explicit, so it can be modeled and valued. Brian talked a lot about the dividend and service and the dividend. I take it one step further. It's not just the dividend, it's the after-tax cost of debt for the company. It really services service, services both those.

So if you talk about the market, this is that world when I was talking about were basically a 4% GDP type business, GDP plus to this transition over the last few years that we think as a continuation of approximately low double-digit growth. And you can see a lot of the drivers from that obviously, discipline and pricing has been good. The value of what's happening in high-performance compute is also a factor but lots of good factors that are driving growth and the diversification of demand.

But what's really important for us, as you can see, as you take 2030, and you think about an environment of $1.3 billion to $1.5 trillion, $1.4 trillion is 11%. That's where we put the stake in the ground as we think about growth. Some people think will be higher, some people think will be lower, that's how we thought about it, 11%. But you can see the composition goes from about 25% to about 50% that's high-performance compute, high-end enterprise server market. And so you get growth in these other markets and you need them because they consume a lot of semiconductors.

But what's driving the growth is the area of semiconductor revenue spending that KLA is the most relevant in. And so we think it's a big opportunity as the market moves, which is why we have a comfort that really across the board that we can continue to grow our share of the overall market. Our customers are doing pretty well.

So this is the top 5 customers, the revenue trend. We looked at their semiconductor only businesses and also their EBITDA trend. And so you can see that the customer profitability is at pretty high levels these days. So as I talked in the opening remarks about the outlook, I feel pretty good about our customers' ability to spend more and also that's driving their profitability. The structural profitability in the industry is pretty healthy. And so the trajectory over the next couple of years and what's happening with the underlying dynamics, we feel pretty good about where it extends over the next several years.

I'm not going to go into the details of these. What I tried to do here was just summarize all the reasons why the KLA relevancy increases, why the related process control increases in advanced logic, what's happening of memory that's now bridging sort of the delta in terms of how our customers spend on high bandwidth memory relative to logic as a percent of their equipment spending. And of course what's happening in advanced packaging, high standard rates a lot of processing -- processing that happens in packaging. So in the situation where you have rising complexity on process, lots of opportunities for our customers and very high-value devices to have challenges. And so as that road map scales, we think it creates opportunities for us moving forward.

It's really hard to gain share in a market. What usually drives it is that there's a technology election or there's something that's changed in the underlying economics of the industry. So as we've seen over time, of course, lithography, the introduction of EUV was good for share of market, but also the growth in process control. And because we've gained share overall, the KLA process control grew faster than above.

So over this time frame, and I picked a couple of other points, starting '18, starting '19, starting '20, you generally get the same results. But the 2 markets that are gaining share of WFE or share of the equipment market or lithography and process control. And as you think about the packaging market, you can see back here, we didn't really talk a lot about packaging. And you'll see in the next slide, you can see why.

You can see not a lot of growth in advanced packaging. And this is wafer-level packaging includes dicing, includes film frames. Eventually, we'll include panels, nothing today. But you can see fairly flat, not a very high level. And this is our internal forecast, but also aligns with where tech insights and Gartner forecast the market. And of course, you see this acceleration with high-performance compute over the last few years.

What you have here on the right, and this is not a statement on performance or market share. But you see that as this market has moved to more front-end line, all the traditional front-end players are targeting these opportunities. So as we talk to investors a lot about share of market and how important that is, I think it's important to kind of get the denominator right because everybody is reporting in their earnings or the revenue numbers, they're reporting in their numerator, the opportunities that exist in this part of the market. So we think there was some confusion about how to think about it.

But when you look across all the major markets, front-end players are targeting lots of opportunity and expected growth that's slightly faster than traditional WFE over time. You can see why we don't really think about it to really maybe even fully understand it, right? We were 50 basis points share of that overall market back in this time frame. But of course, that's changed in a very meaningful way. right? So from 2022 forward, almost over 400% increase in our share of the overall packaging market. So a very relevant market. We think we're well positioned. I'll talk a little bit more about why that's the case and how it affects how we've invested in it over the years, but something that we're focused on, and we think it, again, creates opportunities over the next several years.

A version of the operating model, the same sort of framework around collaborate, innovate and execute, but then how does it affect how we drive the business and how that flows through the financial statements of the company. From a collaboration point of view, we have to work closely with our customers in early process development. We have to understand their product. It takes a long time to develop the capabilities to meet their needs. So we have to stay close, so we understand where the problems are going to be so we can pick and to solve the right problem. You can't solve every problem. We need to fix the problems that we can differentiate, solve uniquely and those problems scale, scale to production.

We have to work closely with our key suppliers. The supplier who does this work, this doesn't happen in a short period of time. So we have to make sure that we can engage early enough to make sure our suppliers are ready. It's an important part of our differentiation and we have to make sure that given our structure is a company that we can work across the company reuse applicable technology and I talked about some of the examples there. Then we have to innovate.

We invest heavily, Rick showed the trend. I'll show a little bit more of that and a little bit more context behind it. well ahead of the market requirements. We are investing today in capabilities that drive revenue outside the target revenue window, so beyond 2030. So there's consistent investment that's happening there. N+2 and N+3 investment.

And then of course, we have to invest and GoGet talent. We have investor around the world. We have a worldwide talent strategy. We have engineers in a number of locations. We have to go to where the talent is. It's an important part about how we execute the company. Then we have to execute overall. We have -- we consistently meet against the public financial targets I showed that performance earlier. A cadence of new product introduction, new product introduction matters a lot to KLA, and I'll talk about why that is. It's never over. You can always be more efficient and disciplined in your investments in your operations. And so there's always focus on that.

Critical supply chain. I'm going to talk about supply chain, but we need to make investments to ensure we have the capacity, not only can develop the capability, but also the capacity to meet our needs. And then continue to deliver sustainable performance over time. This is our spend.

And so you see R&D, this is what Rick showed you. We've talked a lot about applications, and it's about 1,600 people. I count these people. So Ahmad, 1,500 it's actually like close to 1,600 or will be this year. But applications, advanced degree people that are out working with our customers to drive value out of KLA tools. a really big differentiator for us. Obviously, a lot of that insight comes back and influences product development.

So 70% of our OpEx is technical investments, it's R&D or apps. So when we talk about improving our SG&A as a percent of revenue over time, you have this in there and it scales with volume, right? More tools in the field, we need more applications people. So when I talk about our plan and what it means, it's offsetting an area of natural growth. Now AI will help us here as these folks start to use that capability more assertively, particularly as they help do recipe creation and so on. But it's, in general, something that scales with volume. So we have to offset that as we think about the long-term growth of the company. We're investing a lot in big programs.

So what this slide shows you is the number of programs in the company that are greater than $100 million. So engineering programs that are great in development that are greater than $100 million. And used to be a fairly small number, and we've seen that increase significantly. It's expensive. It takes a long time to develop the products we have.

Yes, R&D intensity is favorable, but there's a lot of investment that's happening. So this is an area we spend a lot of time as an executive team and program reviews to make sure that we're achieving what we do achieve in product development because these are big bets. And they're important to maintaining and driving the model of KLA. And then, of course, the average spend per program has also increased about 70% bigger over this 10- to 15-year time frame.

Rick showed an example when we talk about what's happened in our investments in AI or GPUs and how long that's taken. And so what I have here are a couple of examples that we certainly are enabling high-performance dispute, but we're a user, and we've been doing it for a long time. So we started over 10 years ago first product, 2018 across the portfolio today and a road map for more capability to optimize over time. If you look at the image computer GPU benefit versus a CPU baseline, so the requirement capability -- data rate in this BBP product, about 60% improvement in the Voyager product here, laser scanning closer to 100%.

So if we had stayed on CPUs, it would be more expensive to use more power because we converted and we did the programming work and moved the portfolio to GPUs, it's changed our cost curve, and you can see in our power usage, right? So you can see savings on power down 30% to 40% savings in cost versus the CPU baseline of about 40% to 50%. So if you think about what's driving customers, customer hyperscalers and how they're thinking about the investments they're making and the robustness and cost effectiveness of this compute and the fact that they have to pay power.

This is a pretty good microcosm given our use cases and what their use cases are. And Ahmad talked a lot about what our use cases are. So we think it's pretty compelling. We're a user of it. We're an enabler of it. but we have to invest and think in the long term to make these things happen, particularly across the entire portfolio.

So what you have here, these are our products, product families, and they're not to scale, right? You've got Gen 4, Gen 5, which is obviously pretty big you have component, which is pretty small, right? But we go down all the way through here. And in a lot of cases, there's multiple products. This is the product introduction cadence across these different product lines. We introduce products quickly. We need to do it. We think it's important. Our customers want it but it also allows us to do some other things, it makes us a moving target for competition. and that matters. Our salespeople always have new capability to sell so that's good in environment.

But the third thing is, and particularly over the last few years where we've dealt with a lot of cost dynamics and so on, is it allows us to reset and we're introducing new capability and improving cost of ownership, take a look at price versus cost and make adjustments. And of course, the last few years, that's been a big focus area, but we are a value cell. It's about returns that our customers get, because my cost went up doesn't necessarily change the return profile of what our customers see. So we have to be thoughtful about that. But the way we do it is we introduce new products. We introduced some faster and it allows us to do 2 things, share introduce improvement in the tool, capability, cost of ownership and sharing some of that -- and so it's an important part of the operating model as we execute.

So when you look at service, a couple of things -- this is -- I'm sorry, you look at any factory and the go forward, and we're going to talk about our gross margin model. You can see incremental margin improvement expectations. So we think versus this 22 to 25 baseline, we'll see about a 1.3% increase in the points or 1.3 points of improvement in incremental gross margins. Part of that are the value differentiation things you see on the right, but also part of that is our ability to scale our manufacturing organization.

We have growth scale, obviously, given the growth rate expectations of the business. We're driving leverage through factory consolidation to our bigger factories, drive more efficiency and leverage on the investments we're making. And then a lot of focus on driving productivity and how we introduce products and how we deliver those products and drive quality and so on. And you have a version in service, again, increasing value at the top on the right for service. But the incremental margin expectations in service are about 1.3x what they were at the beginning of the decade.

And one of the big drivers for that is that you can see service and parts expense. We have invested a lot to support our customers' regional efforts. And as those regional efforts come to scale, you start to get a return on those investments. And so we would expect on a go-forward basis, the incremental margins of service. Service carries a lower gross margin. But given the growth rate of systems and the improvement in the incremental it becomes less of a gross margin headwind over time. There's also a lot of productivity and Brian talked about is I won't belabor it around how we're designing for product development, how we're leveraging AI and automation, parts, planning, predictive maintenance too.

As contract goes up to optimize our cost structure under those contracts. And that's the best thing about our contracts and we know what we have to deliver to. We can make sure that the costs underneath it are optimized. And so there are a lot of focus in this area. And I think the combination of these things will drive some incremental gross margin improvement up at a pretty high level as we go forward. Supply chain. With the growth over the next couple of years, I'm getting lots of questions from investors on supply chain. And can we ramp to support the business. So I thought it would be prudent to spend a little bit of time talking about, well, how do we manage the supply chain? How do we think about it? And you can see our supply chain, I really break down our components into three types.

So our complex subsystems like this, sole-sourced relationships, long-term relationships with customers, things we have a few more options but still long-term relationships and our higher volume critical components and then more of a traditional supply chain this Tier 3. Now one of the things you have here in the lower left is that what is our time fence. When we start to order material to the time we ship it, the natural time fence is almost 60 weeks. It takes a lot of time to procure glass and deliver volume level optics.

And so we have to do a lot to manage against that back to my comments around inventory where we buy long lead time materials, we build hedge kits to try to shorten that so we can action for customers early. It still takes time to do that. One of the issues in the first half of this year that we talked about at earnings is that the momentum in the industry picked up really, really fast. And when we were making a lot of decisions around the first half capacity we were inside a lead time, and that momentum picked up. Now as we get in the second half, we have a lot more flexibility and capacity, and it's influenced the outlook I provided earlier. So we had these decade-long relationships.

We work very closely with engineering, supply chain, long-term commitments. We provide our suppliers 8 quarters of visibility. We don't cancel orders. You go back to '23 and '24, the industry corrected a bit. Our inventory levels went up. I need them to be positioned to support us going forward. And we've invested about $250 million over the last couple of years in supplier capacity. So we invest a lot here. This drives the total volume here as well. And then we have the opportunity to manage all the usual issues that pop up in a constrained environment. This doesn't matter so much today.

Rearview mirror. You all remember this. But maybe the best indicator of future performance is what happened in the past and the validation of the model, and I think we're better positioned today in terms of how we manage supply chain. But when the last time the industry was supply constrained. Our ability to ship tools and get them out and recognize revenue was at a level that exceeded all our peers. And so I think we're in a better position today. We learned from that experience. We've leaned in. So I feel pretty good about our ability to compete over the long run and to meet the market demand that's out there.

I don't -- generally, for high-value components, we don't compete against our competitors because of relationships are mostly so sourced we compete within KLA sometimes with these suppliers, but we don't compete. So when industry strained, I'm not going to have to worry about an allocation necessarily. But you do have the challenges of ensuring that you're well positioned, and I think we've made the investments to do that. This is the trajectory of the OpEx curve over time. And you can see -- you can see the R&D curve and you can see SG&A.

And as you look at our 2030 plan, we think the R&D stays about 11%, which is an improvement versus the last plan with 13%. But SG&A basically comes down from where we were around 8.5% or so, 9% down to about 7% moving forward. So more leverage in our model and OpEx as we go forward. When you look at -- this is this R&D concept I talked about earlier, and I'll show some examples of this. But when you look at the -- about the pace of innovation. So what you have here is you have different revenue levels in these 5-year periods, and then what you have is the translation in the R&D as a percent of revenue in the middle. And then what you have over here is the ROI, so the return on investment.

So what this means is that we can invest over a longer period of time to sustain our products to deliver new capability to customers. And at the same time, we can improve R&D intensity, but also drive up our returns. Back to my point, is it moves fast enough, we can we can make investments. We can do them over a longer period of time, and it drives a structural profitability benefit. And when you look at a couple of our products, and this is the Gen 5 product, you can see we have the best way ahead, so accomplishing a few things in my messages here, but like 6 years.

And then if you look at here, you can see the revenue, then there's more work to do, right? And then it finally scales. So you have to invest way ahead of the of the requirements. But what happens today because the pace of innovation is not every 18 to 24 years, this spending, if it were that tight, this spending would contract and you'd have to do a lot more of it in a much shorter period of time. And we're also investing in the next-generation platform, which is the platform, meaning that it's a new architecture, wavelength of a system.

So you can change a lot here, but you can invest and you can spread that investment out, you can optimize it over time. You can still deliver unique value to customers. And you can see what the revenue ramp looks like. And this particular product you see an 8:1 return to KLA as we measure it. This is laser scanning. And you can see, in this case, a much longer period of investment before requirements, and then we see a similar trajectory of revenue growth over time. So the ability to over a broader time frame, all translates into lower R&D as a percent of revenue. In this case, it was a 4:1. So good examples.

We have some that aren't as good. But in general, every product has a similar sort of investment cycle and then translates into new capability living customers. So our customers benefit and we benefit. Here's the example from packaging. So Ahmad talked a lot about investing in the handling requirements of packaging very different than 300-millimeter hard wafer is very consistent. And so this is macro inspection. Which is the market that -- or the product that serves most of the packaging marketing. You see back here, this was the front-end revenue, a slighter color.

What you have here in this is this is the packaging investment that we were making over time to be able to support this market. Then, of course, we see this accelerate, and this represents the #1 position in this part of the market. But all of this R&D is transferable to the rest of the portfolio. So the rest of the portfolio, which has higher capability. So when the design rules become more aggressive over time, we're very well positioned to deliver without incremental R&D to support the requirements of that market. Very hard to compete against that. I think we're well positioned. And ultimately, the operating margin translation because the R&D investment has been made and now ported puts us in a very good position in terms of how it affects our R&D spending over time.

Now let's talk about AI. So the way we're looking at AI, not about our products and product development, but how we're looking at it in terms of business operations across the company. We are a very data-driven company. We generate data everywhere. As you might imagine, we generate the most data in the fab, so that translates back into how we run. So we have access -- we have data. So how do we accelerate the access to that. And all these things are little small things, but across whether manufacturing service or corporate operations, you start doing them, picking them off, start saving time and then it starts to fundamentally change how people work.

So we're big believers that we can do this. There's also process automation. Where do you have humans in the process, repetitive tasks and so on. So there's actions that are happening here. And then we're also doing things that drive multiple vectors of return as you look at machine learning, mass correlation pattern recognition type activities. We are integrating a lot of heterogeneous data to drive either cost improvement, asset optimization and so on. predictive maintenance. And so we're doing those efforts, bigger lifts. So we're spending money today, but we expect, over time, we're going to start to see meaningful benefit to the company in all these areas.

And you can see some of the things here. It's not a full list of some of the things we're doing that I thought people would recognize that are things that are in-flight inside the company today. Ultimately, as I tell our employees got to save money, you got to bend the cost curve, got to drive up revenue per head count. And so what you have here is revenue per SG&A head count. We have a target that we think that we can drive it from 1.3x at the beginning of the decade baseline to 1.9x. And it's a big factor in how we're thinking about how we're scaling SG&A over time and how we offset some of the dynamics related to applications and other drivers in our business that are more volume intensive. So let's talk about the target model.

So when you look at the target model, what you have here, traditional WFE and WLP and then you have the wafer equipment intensity over time. So the way we thought about it was a range of 16% or so, so about 15% in terms of the overall capital intensity or equipment intensity in the market. And we thought that this was a reasonable place to think about it with a range. Some people have a different view of growth. Some people have a different view of capital intensity, but plus or minus roughly 10%. That's how we thought about it. And within that, the $215 billion about 20, low 20s advanced packaging versus core WFE.

And you can see a lot of the drivers of wafer equipment intensity over time. So our model is in the semiconductor revenue is growing that WFE will grow or wafer equipment will grow about 12%. If you look at what will happen to the next thing, so what size of the market, but then also how does it affect -- how does KLA relevance change? We talked about -- we gained 50 bps here, 150 bps here. We think it goes up another 150. Part of our range includes whether it's 9.25%, plus or minus 25 basis points on 9%.

You can see some of the assumptions in the middle. Obviously, what's changing the most in our long-term revenue growth model is what's happening structurally in the industry. And then what are the contributions to the overall growth rate from systems, which is going to be between 1% and 3% of the overall service, which drives an incremental 1% CAGR on our long-term growth. That translates, and you saw versions of this earlier, right? $12.7 billion in 2025, $10.6 billion for systems, $2.7 billion for service gets us to $26 billion. If you look at semi PC service -- or semi PC systems, 16.5% CAGR against the industry at 12%. So we think we're positioned to continue to outform,and that's how that 1.5% on the $25 million translates back in terms of growth rates relative to the market baseline and our expectation from our business.

In terms of capital allocation, given our expectations about, look, we like the businesses we're in, our focus is on driving those businesses and capitalizing on this opportunity. Most of the capital, if you're looking about the capital base and what's changed from 22% to 25% versus 26% to 30% will be share repurchases as we deploy that cash. And you can also see a change in expectations around SG&A was 14 coming to 11 as an indicator or a driver of scale in the model. We need $4 billion to $5 billion to run the company. We think that's a reasonable and conservative place to be and how we'll think about cash on the balance sheet as we move forward.

Leverage ratio target at 1.5 to 2x gross leverage of about 1x today, so have some capacity implicit in our ratings that we would flex that over time but live more or less in our target range. You see the announcements we made earlier. And so here's the target model. You can see 2030 model versus 2026, $26 billion, plus or minus $2.5 billion, 63.5% gross margin, plus or minus 50 basis points. Obviously, offsetting what looks like a 50 basis point headwind related to tariffs, if things kind of continue the way we think. R&D at 11%. SG&A at 7% translates into 45% to 47%, so 46% at the midpoint, up from 42% at the midpoint, $84 in earnings, $8 plus or minus 8% in target free cash flow of 90%. You can see the macro assumptions on the right.

One of the assumptions around mix of business. We expect foundry logic to be 60% plus but kind of in that kind of lower end 60% plus a little bit as we go forward. And I think if you -- we've got -- our EPC business, which is not in the semi PC calc is grows more mid- to high single in terms of how we're modeling it. Tax rates are about a point higher than the last plan for completeness.

So before we move to the Q&A, I think the key takeaways from the Investor Day today. First, you heard Rick talk about best-in-class outperformer. We think we're uniquely positioned. We understand the market drivers. We think they favor and drive KLA relevance. We're excited about them. You heard Amad talk about. We think we understand the market pretty well. We have good strategies. Our portfolio is well positioned. We can meet customers' technical requirements and their economic ones. And those change in the different stages of maturity in a process node ramp.

As Brian talks about the service business, great business, that gets better in every metric as we go forward. And in terms of our 2030 target model builds on a credible history of execution and operating leverage growth and consistent capital allocation. So structural semi growth is changing and raising, we like it, industry 12% WFE, 11% semi, intensity and share gains, greater than 150 basis points operating leverage through the model at the high end of our operating margin -- incremental operating margin target, continuation of a disciplined capital allocation and return strategy leads to durable EPS combining. And so I think the answer to the question, as I asked earlier before, is it's going to be better in the next 5 years. Thank you.

Now it's time for our Q&A session. Please welcome back to the stage, Bren Higgins, Rick Wallace, Ahmad Khan and Brian Lorig.

Okay. So we have two mics. One over here. With me, one over on the other side with Ed. Raise your hands, obviously, for Q&A, and I'll come to you. So start over here with Atif.

Thank you for a great presentation. I have a question. You made a good point that as the HBM based die becomes a bigger portion of the area you -- it plays in to KLA's hands in terms of higher process intensity on the logic side. My question is, if the industry were to pivot more towards SRAM-based accelerators for ultrafast inferencing. How will that impact -- obviously, some opportunity will come out of HPM and play more into the logic side? How will that impact your process in density?

Yes. Great question. First, to clarify, I didn't mean to say that just the base is logic. What I was actually emphasizing is the DRAM die itself, which is above the base die the logic content of that DRAM die is increasing significantly because of the sense amps, which is closer to now logic. Plus you have a base tile which is all logic. So those are the two factors today.

We love SRAM. In short, SRAM is very logic is, and it's hard to yield. And our process control intensity in SRAM is high. And that's the reason why process control intensity and logic is SRAM would be beneficial to process control. The trend is real. [indiscernible].

Sorry. Stacy Rasgon with Bernstein. Bren, I wanted to ask you a little bit about the medium-term numbers that you gave. So as strong as calendar year '26 WP is, it's a constrained year. We're missing cleanrooms and everything else. They come online starting into next year. And so I guess what I mentioned is like why would WP not actually grow faster in '27 versus '26 given the constraints on [indiscernible]. And I guess, number two, is it reasonable to assume that you should outgrow WP in '27 as that happens, your lead times are longer, you're maybe more dependent on those cleaner builds. And your overall market seems to suggest you can outgrow WP's process control.

Yes, the first question, so I did say at least as fast. I think if you look at expectations moving forward, we feel pretty good about the growth rate. So I think, look, we'll see we're in March of '26. We'll see when we get there. But yes, there's a ton of momentum. There's a lot of sites that are being built. There will be -- customers are trying to align schedules with that construction schedule. But we feel very good about how well we're positioned, what we're seeing in terms of customer engagement, what we're seeing in terms of backlog. And I think as you move to greenfield, I think it also creates opportunities as new fabs are fully equipped. So I feel pretty good about our ability to continue to -- our track record of outperformance over the next couple of years.

And just the current calendar year, you took it up to high teens, right, versus whatever it was before. Might as suggests that something like a 20% half over half, depending on what you want to assume for next quarter. Is that kind of what you have in mind? That seems where it's [indiscernible].

We'll see how this quarter finishes and how we guide June. But yes, I would expect the half to half to be pretty strong in the second half. And that the overall company high teens, the equipment business, semi PC will be closer to 20%. I don't what we see today. And we'll see as we go, what happens in terms of customer momentum and whether that changes. We have more flexibility in the second half. We'll see how that goes. But for now, that's where we are.

Joe Quatrochi, Wells Fargo. Maybe one for Brian on the services side. How do you think about just kind of -- you talked about some of the ramp in services you've seen in advanced packaging and in DRAM, but how do you think really the service intensity across the different end markets? And how is that changing as we move to 2030?

Yes. Thanks, Joe. So certainly, there are some differences across the different segments, but we also think about servicing products. And the products, as Ahmad outlined, are now being used traditional front-end projects used in advanced packaging used with tighter requirements in HBM. And so service intensity increases in those areas. And that's part of the reason why we showed that really good growth from 2022 to 2025. And those are catalysts for growth as we look out through 2030.

So Joe, I think some of the billable business happened in memory segments, packaging segments in the past. So as the requirements for those customers and the capacity constraints that have given sold out in a lot of cases, has started to change the service mindset of a lot of those customers. And so as we think about growth, that's one of the elements of growth is that, that service mindset is going to change because the value of the process control and the value of what they're inspecting is increasing.

Chris Caso from Wolfe Research. The question is the mix of advanced logic versus memory within this forecast. And you had talked about, obviously, process control intensity increasing in memory side because of HBM and such. Does that mean that memory will become a larger part percentage of your business as you go through this period. Obviously, that has -- also has to do with the relative growth rates between those markets.

Yes, I think so. If you go out a few years ago, the industry was high 60s, mid to high 60s in terms of percent of equipment. And so our model here has a view that it moves from that into the low 60% range. We'll see how it plays out over time. The changes in intensity in memory mean that the mix effect has less of an effect on KLA. So -- but we thought in terms of how we would model it, we thought low 60s made sense given the growth expectations that are happening in and around high-performance compute put differently because of that.

Actually, perhaps you're more agnostic as far as mix. And if memory grows a little faster or the larger grows a little faster, maybe that doesn't actually make a difference.

No, that's true. Look, in high bandwidth memory, we are seeing in some product lines today. We're seeing intensity levels that are as high as high-end logic. So that's a bigger percentage of the total, it creates opportunities. We'll see how that flows through the rest of the portfolio. But yes, we're less -- the business is less sensitive to the mix of business moving forward.

Harlan Sur at JPMorgan. I caught up with one of the largest fabless AI, XPU ASIC chip companies recently. They designed a high-volume custom mix for you chip for one of the top hyperscaler titans in the world. they're currently getting about 60% yields at 3-nanometer, an increase of those yields by just 3 percentage points, right, drives incremental revenue per wafer that pays for the entire cost of that 3-nanometer wafer.

And their foundry partner is already at historical targets for defect density and yields within this tight supply environment, larger die sizes, customers are pushing their foundry customers to drive even higher than historical yield targets, and that's on their foundry partners existing capacity footprint. That's not even on next year's greenfield fabs, right? These companies need these chips now.

What is the team doing to sort of help your customers on this front, improving yields beyond target historical defect densities on existing technology, existing capacity footprint. And how is the team monetizing this opportunity? I assume it's both the tools and services opportunity, but wanted to get your views.

Yes. So. I didn't fully cover this point earlier, but we do some estimates on what the incremental revenue generation is with improvement of yield Rough numbers are like 1% improvement in yield could lead to at least $150 million in profit because you have already spent the money buying the equipment and everything else. So it's a pretty substantial number. And this is one of the reasons why intensity is going up. We keep seeing this. That's why I felt comfortable with this 7.4% number going to on what -- how we do it is what I described, we are working very closely with all of the high-end logic customers to drive yields up. But it is a complex -- it is a very complex thing. To do it requires time and effort and eventually the yields do go up.

Is there a services aspect to it and other orders, helping your customers maybe implementing different yields and so on?

So we do have a team of people, we call it, PCS. These are not KLA experts, but they are device physics experts. So we send those people out to specific locations where they will have a yield problem on a particular module. Then we deep dive it and then we go work on those issues. And this team is in very high demand I don't have enough of these people and they are able to really help customers drive deals out you.

The sampling is pretty valuable, right? So as it translates to not only the performance of the systems across the fleet and that they have to match, but also the availability at that performance level becomes even more critical. So it is a factor in how we think about we monetize the opportunity as we work closely to be able to enable that. So there's a service element that's, hey, look, this information is as valuable today given the cost of what we're inspecting. So the fleet needs to be up and active and they rely on us to enable that.

And Harlan, it's not just in the case of the 1 that you're talking about, even with leading-edge customers that if they get increased demand at legacy nodes, and they're yielding in the '80s, they recognize more yield is worth a lot, especially when their customers feel supply constrained. And when we talk to our customers, customers, they're all frustrated that they're supply constrained, like for sure.

It's Krish Sankar from TD Cowen. Another question for Ahmad. If I heard it right, you mentioned e-beam revenue was about $450 million last year. It seems like it's growing pretty nicely. Is it mainly coming from the multi-column product for reticle are you actually gaining share on the wafer die size also?

First, I said $400 million and $450 million. And second is the mask part is not included in the e-beam revenue number. I -- that is a separate segment. So therefore, I didn't mix it, even though the mass system is e-beam related. Those are very expensive systems and the numbers would go up pretty significantly if I add those. So this is a wafer part.

So it's in its e-beam, it's e-beam inspection. It's e-beam inspection, which is a single e-beam inspection, very high resolution between 1 to 4 nanometer. It's voltage contrast, also e-beam inspection, where we look at electrical defects. It is multi-beam. We are very proud of introducing 300 being a multi-beam system for primary voltage contrast applications and then eventually it will go to physical as well. And it includes e-beam review, which is after you do a brightfield inspection, you review your results, and that's the review part, a small portion of e-beam metrology. Those are the 4 segments that equate to that rough number of $400 million.

Vivek Arya from Bank of America Securities. Thanks for hosting a very informative Analyst Day. Actually, first, I just wanted to clarify, I think we kind of know the answer, but still any impact, disruption from whatever is going on in the Middle East, whether it's to you, whether it's your customers, right, in terms of any supply disruption. I hope you know the answer, but still would love anything that you might have.

Not currently on any disruption.

Okay. Very good. So my main question is, if I go back to your Analyst Day slides, right, from the '22 Analyst Day, your assumption at that time was foundry logic was going to be 55% of the mix, right, and it ended up being much higher. So how much of the share gain that you had was just because the foundry mix turned out to be a much bigger part of the industry. And if, let's say, over the next few years, if, let's say, memory becomes a bigger part of the industry, I don't know, 45%, 50%, whatever, just because there is so much faster growth expected in memory. What does that do to your share gain potential? Because I think the assumption is that if there is greater share of wallet that goes into more greenfield, more memory, more capacity rather than technology, that it naturally favors, right, some of your competitors. So I would love to hear your perspective on that.

Well, as we said in the earlier question, right, we're a lot less sensitive going forward than we were historically. So less concerned about that. The other thing is our long-term model assumes a pretty high level of efficiency in the industry, right? So if you think about the last 5 or 6 years, the leading edge was incredibly efficient. And if you think going forward, we are multiple players that are investing in leading and near leading edge. So that creates kind of a market inefficiency that I think that would create an opportunity for us.

The other thing is that I put up those R&D charts where I talked about R&D efficiency and I showed Gen 5 and I showed Voyager, and you see the revenue ramp and then it dips down and then goes back up again. There was a period of time of a lot of legacy investment. And we think the legacy investment, which has a lower process control than advanced logic will be a smaller percentage of the business going forward. I think the legacy business will be 25% to 30% of overall WFE. And all that is generally logic investment in terms of just what's accessible to us. So I think for a combination of those factors, we feel pretty good about the plan we laid out.

The only thing I would add is when we were making the slides for 2022, the chips were very different than we were making in the slides for 2026. These chips are very different, large die, much more logic, it's a very different packaging, the way it comes together. It's a very different world.

And no different green field versus operate in memory?

Greenfield requires a lot more process control in the beginning because it is difficult to ramp a greenfield. So I think to your earlier question on 2027, there's going to be more greenfield, and that is that is also very beneficial.

And not to confuse things, but there's this blending happening too. As you know, the foundries are making memory and the memory guys are making a lot of logic, right? So it's kind of getting a little more muddled as we look at how that matches. So I think the bigger than that mix, the bigger change that we're experiencing is the move to the hyperscalers as customers and away from consumer. The consumer tolerated a lot more than -- and just a GPU versus CPU example, the guys who made CPUs used to bind them based on defectivity, right? You can't do that. You can't do that in high-performance compute, right? You can't bid on them.

So all these -- all the stresses in the system have gone up because these things are going into data centers. And all the stresses in the fab have gone up because more people are doing designs. I think that's the tension that we're seeing with our customers in the fab is that they have got tremendous pressure from so many more people driving design. So it's -- it's in that -- we really didn't anticipate that in 2022, how dramatically that was going to change. And I think my comment earlier about how much chat is being used or how much of these reasoning models, that's just driving tremendous demand for compute. I mean it's just -- so that's part of why I think this industry is going to underserve quite a bit the demand that's been out there for the next few years. And the bottlenecks will move. But memory is a different game for us now for sure, with high-bandwidth memory, it's a different game and packaging.

And how that influences the share of the total equipment as we add that in and look at that over time, those numbers are based on the total market opportunity. So that's a factor that wasn't something we considered in the '22 plan for 26 and is a more meaningful factor going forward.

CJ Muse with Cantor Fitzgerald. Thank you very much for today. Great presentations. I wanted to focus on advanced packaging. So when you think about process control share gains of 150 bps over the 4 years. How much of that do you think will come from advanced packaging? And moreover, when you think about how many more kind of guys are going into these packaging, are you seeing the vision for more process control insertions? And our customers, as the back end looks more like the front end, are you seeing customers willing to pay higher and higher premium versus 5 years ago where the ASPs were significantly lower than what you guys do typically in the front end?

The story and then you can fill it in. the conversation we have with our customer a few years ago on packaging which the one in Taiwan.

Yes. So well, I'll start then. I got pulled into the meeting with Ahmad.And usually, these guys talk about, well, depends where we are in the cycle. Your stuff is too expensive versus we have these missing defects. But what we were getting was we have to -- you have to help us with EUV adoption and their second topic was packaging. And this was the guys out of the front end. We're like literally, Ahmad and I were like, are you sure because we're not going to discount our equipment for packaging. And they said, no, we definitely need you to take your portfolio and modify it so can Morgan packaging. And we're in Taiwan.

And they said, and we'll have a team in California next week next week go over your plans.

And with this customer, you respond. And it was December 10. And next week, they were going to show up. So we had to figure out how to get them to come on January. But that's the intensity not the process control intensity, but that's the intensity we deal with. So I will leave the share comment to Bren, but about insertion of process control, I'll take that one. So as you know, in HBM, there is two different processes that are being used to stack dies. There's one company that has a process and everybody else uses the second process.

And there's more latitude in the first process but almost no latitude in the second one. So when you go with the second process, as the [indiscernible] goes up, your failure rates are on a log scale. So it's not very easy unless you do heavy process control. This is part of the reason why people are thinking of doing hybrid bonding. And they may do wafer-to-wafer bonding and hybrid bond, and they might do that. And in that case, process control intensity goes up then why does process control intensity go up.

We participate very heavily in Colas, right? And we do a great job for our customers in cost. But those same customers are trying to do 2.5 SoIC. All of that is hybrid bonding. The specs I showed you for hybrid bonding were 10 the 10x tighter. So our corona systems are not going to be sufficient. We believe Puma will be successful, Voyager and most likely, you will need to use brightfield systems for doing that type of inspection. In Brightfield we need to ship the system with that thing that is on that corner and this thing. So the cost is just -- it is, but the value of the package is quite high.

So we believe that the future of packaging, the specifications are going to get tighter. Now I don't personally like to get into the when which road map will happen. We are going to grow in 10 city no matter what because hybrid bonding will drive intensity but even the TCF bonding drives intensity up. So we're good either way. So we're not choosing, but the trends are all positive. So we think it continues to grow because of that. That's why we feel comfortable with signing up to a higher intensity number.

And look, we're going to be greater than 50% in that ballpark in 2025, a share of process control. Most of our share today is more concentrated in leading-edge logic. There are opportunities in memory as we move forward. Some of the things that are happening in logic will drive higher value systems/there's OSAT engagement as you start to see some offloading to OSAT. So we feel -- I'm not going to put the stake in the ground of a specific share number, but we feel very good about the trajectory of our share, and we think we're pretty well positioned with existing platforms that customers know how to use that have demonstrated value in the front end that are very applicable to the back end or the packaging requirements.

Shane Brett from Morgan Stanley. One of your leading-edge logic customers has more openly talked about opening up their foundry data externally and how external vendors, including yourself, has helped drive up their yield. To the extent that you can, can you talk about how you contribute to that yield improvement and how this broadening of leading and tags pend contributes to your growth?

Yes. So I spoke about earlier. I will give you another preview of what we did in front end and then now we are doing in packaging. But all of the systems are KLAX and all the systems that our competitors may generate petabytes of data. So we had this vision about 15, 18 years ago, that the complexity is going to go up, and we need to provide a solution by which customers can organize the data and then after that, run models. So we have a system that enables us to collect all the data that comes out of KLA systems.

We're agnostic in this area as to what customers buy. So we will take competitors' data also, organize it. We have KLA models that enable you to find correlations, meaning that if you have overlay performance problem in a particular layer, does that affect defect and we can correlate those to and we can now do like 6 to 8 parameters of different types of things that are causing a problem. So we do tha -- but the system is also open, customer can write their own algorithms and import this on. We have now changed that from wafer to tiles, and we're now providing that same system capability for advanced packaging.

So every die can be traced back to every wafer, every stacked die can be traced to wafers, chambers, everything. So we are developing the advanced packaging module. I hope that answers the question.

[indiscernible]

I see. You were talking about that part. We fully engaged with them as well. It's hard for me to give specific customer details. But as I said earlier, one of the first things we are doing is using our process control team, the PCS team to help segment the airline and figure out where the defect forces are. And then our engagement is pretty open. I mean, their CEO has made comments about KLA engagement with them. So we're very engaged in driving and helping improve it.

Collaboration levels are high, and we talked about the broader base of investment we're seeing at leading and near leading-edge investment. And so we're optimistic. I think again, the collaboration is high.

Yes, I think once you have to go to foundry model, you cannot bind devices. That's one issue. And the second is variability goes up because as designs come in. So at 10-nanometer, which is the last successful note for some customers, the margins were pretty large. But if you go to 20-nanometer, that variability is very tight. I mean, you just cannot use that book. You've got to let go up that book, all the things you have learned, 2-nanometer is a very different world, 3, 5-nanometer very different world.

All right. This is Charles Shi from Needham. I have a question about the radical inspection side of the business. For what it's worth, there's always some debate about KLA, the inspection metrology technology a few years. I mean, probably more than 10 years is optical versus e-beam and I mean to '20, I think the debate is probably more or less settled. But a more recent one, I think it feels like it's about the radical inspection. It's $193 million Gen 4, Gen 5 print check versus actinic.

And now I think you talked a little bit more about e-beam. So going back a couple of years, I think you kind of tied to a tight actinic inspection adoption to at least on the wafer fab side to the pellet calization, I didn't hear much. You talk about palletization, but we kind of feel like pelicaterization rate seems to be going up. And does that change how you feel about that mix of the market between 13, Prince, e-beam and actinic? And is [indiscernible] is still a factor there?

Yes. Let me start, and then you take it. Okay. So this idea that it's settled is just never settled with you guys. I mean, I remember hearing 20 years ago, when I became CEO that optical was going to run out of gas and e-beam was going to take over. Look, the thing you ought to remember is we have a portfolio we're typically attacked with products and with messaging with people that have a single product. So what they're going to say is that product is going to take over, right?

Because that's kind of got to be their pitch. And so in general, it's not really how our customers respond or behave. Our customers keep trying to optimize the cost of inspection, the efficiency of it to get it done. So they use this portfolio, which is what we try to explain today. Specifically, as it gets to this question around Actinic and Ahmad talked to it, and I'll let him take it. But I think in general, it's easy to take a shot at us and say, we're going to win in this certain segment, but it's not actually how the market ends up behaving.

And if you see the products that are being used for reticle, it would be nice if it was such a simple thing that one system did everything, but it's never actually been that way. there's multiple systems that provide the capability, which is why in aggregate, if you look at KLA share over time. And if you plotted that against all the announcements of people taking share, right, it would be hard to reconcile the two.

Right. So I'll try to recon size, but it's -- you asked a very detailed question. So just for everybody else, this is the mask. And there is a plastic film on it, and that's called the pellicle if you -- but this is a 193 reticle not an EUV reticle. So if there's a plastic thing on it, then how can a particle drop and affect the design, that's where the debate is EUV reticles are not sealed pellicles, number one. So even if you see -- if you put a pellicle, the particle can get in from the side, number one.

Number two, if you add pellicles, it reduces the throughput of an EUV scanner. And therefore, now you are spending more money doing that. The pellicles do burst. And because of that, you have to clean EUV scanners, there's costs associated to it. There's two religions here. One people say, do not do pellicalization, do very, very few for very few layers and do heavy metrology. And that is 1 religion. There was another company that has a different relation. Now there is changing, which is you pellicalize everything, and then you don't have to worry about it, but the problem is pedicles not sealed. So that's where the debate is. Now if in the future, there's going to be CNT pellicles that are very clear.

And then it wouldn't matter if you pelicalize or don't palloculize because a DPV system will work and EUV system would work. e-beam system would work because e-beam is done before palletization. So I don't think there is a big technical debate. We truly believe that this is a portfolio solution. Why? Because of the requirement of 100%. If the requirement was to just catch 70% of the defects, I'll build 1 tool, and it will work. The problem is that they want the defects cost. That's why it's a combination of deep UV, e-beam. We will develop -- we are developing an acetic inspection system and print check, and print check doesn't care about to. I hope that is clear, but this is a very detailed subject one, I'd be glad to spend more time on. It's not a lack of confusion in our mind.

And we will have more time for that at lunch. I'm looking at the clock. We're going to have time for one last question here in a moment. It will come from the front. But just some final announcements just before we end, because I know that in otherwise, everyone will be moving it up. I want to thank everyone again for obviously, your attendance and your attention, and we hope it was both informative and educational. We will be moving outside after this last question, where we'll get the tables will be set up, and it will be around Robin set up. So get your food go sit down. The executives will fill in the tables and we'll be rotating every 15 minutes for the next hour.

Of course, the demos will remain open until 2:00. Some of you folks got your early in salad that's great. If not, I highly encourage you to. And last but not least, if you didn't get a chance, we're going to have our CTO, Ben Sai, here during the lunch hour and afterwards to talk through a lot of the technology showcase items that are here in this room. So I encourage you also if you have time to come back in and explore that a little bit further. But with that, we'll have the last question coming here.

Thank you and sorry to keep everybody from their lunch. I'm Melissa Weathers from Deutsche Bank. You talked about how your users of AI and a lot of your products and how that's helping to improve your own performance. I assume your customers are also trying to use AI as much as they can to improve their yields and even some of your semi cap peers are probably using it as well. So can you talk about what are you seeing from them in their efforts to improve yields on their own through AI processes?

Yes. So in AI, something very important is context, right? So our machines provide us immense context for problems that we can zero in. So that context comes from design. It comes from optical architecture. It comes from the patch we're looking at. That problem is what I would call it is a high variability broadband. That's what we do. slow variability problem, slow variability problem, temperature of the fab changing you have some other issues, humidity changing. You have all sorts of others overlay over there changing and then see the over hair changing.

Those types of things you can do on general data. So this is a collaboration. They do that type of work. We do this type of work. I don't think this is in conflict for process control. Hybrid metrology ten years ago, was going to just take over everything, but nothing -- it doesn't work. You need sensors on the problem. So I think we are working on two different things. We are actually also working on that based on that thing that I talked about, the entire fab and data, all of those things and the customers can plug in their algorithms. So I don't think we're in comfort.

I think in terms of in the process, world, people using it. We have a slight glimpse into that because we have a division that makes process tools. There's just so much less data. I mean, most of what we are is data processing and image processing as a company. So we're naturally more inclined and we've been working on algorithms literally for the whole 50 years of the company. I think that for ASML has talked about having AI inside of their systems. They have a lot of parameters inside to try to optimize.

But I think this notion that we're all going to use it to be more productive is true, but there are certain things that it's -- you have to have access to the modest to the data, and then you have to have -- the challenge in our image computing is it's such a high data rate that we have to process it locally in order to be able to provide information to our customers. So it's been quite a driver for us, and we think that it's even inside the algorithms we've seen developed in the last 6 months are giving us more capability of the existing platforms than what we thought 6 months expense. And that's going to be really important for our customers because it will enable us to provide even more of an upgrade path as we go forward for these investments that we've made.

So that will conclude the Q&A session. Again, thank you, everyone. It will also conclude the webcast. I want to thank everyone who is a remote who joined us as well. Thank you very much.

Thank you all.

That concludes the formal part of our Investor Day and webcast. Now please join us for lunch with management and make sure you check out the AR/VR models of KLA products before you leave.

Good afternoon. My name is Stephanie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation December Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead.

Welcome to the December 2025 quarterly earnings call. I'm joined by our CEO, Rick Wallace; and our CFO, Bren Higgins. We will discuss today's results as well as our March quarter and calendar 2026 outlook, which we released after the market close and is available on our website along with supplemental materials. We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified. All full year references we make refer to calendar years. The earnings materials contain a 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. 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 make on the call today, are 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. We will begin the call with Rick providing commentary on the business environment and our quarter, followed by Bren with financial highlights and our outlook. Before I turn the call over to Rick, I wanted to remind everyone that we are hosting our Investor Day on March 12 and invitations were recently e-mailed out. Now over to Rick.

Thank you, Kevin. I will summarize KLA's overall performance for 2025 and the December quarter as well as cover the current industry landscape. For 2025, KLA continued to deliver relative growth outperformance, along with strong profitability, free cash flow generation and return to shareholders. For 2025, revenue grew 17% to a record $12.745 billion with our process control systems business outpacing the industry growth by several points. Earnings per share grew 29% year-over-year, demonstrating the strong leverage in our model, and KLA maintained industry-leading gross margins and operating margins of 62.8% and 43.6%, respectively. Company also grew free cash flow 30% to $4.4 billion and returned $3 billion in a combination of dividends and share buybacks. KLA's process control system revenue grew 19%, and our service business grew 15% for the year, and 2025 is expected to be another year of process control share growth for KLA. The demand for AI infrastructure, coupled with KLA's industry leadership in process control positions the company well in supporting all major growth vectors in semiconductor manufacturing, including advanced logic, high-bandwidth memory and advanced packaging.

In the December quarter, KLA delivered strong results across the board with revenue of $3.3 billion, non-GAAP diluted EPS of $8.85 and GAAP diluted EPS of $8.68. Highlights contributing to this performance include 17% year-over-year revenue growth fueled by investment in leading-edge foundry logic and high-bandwidth memory and DRAM. AI remains a core driver of KLA's performance and a key factor in our growing industry leadership. As KLA's solutions enable our customers to deliver products needed for AI, our systems are also applying AI-driven analytics to deliver actionable insights that streamline chip manufacturing and accelerate innovation and time to yield for next-generation AI applications. We believe that our experience reflects the compelling capabilities, cost and power consumption available with GPU-based compute architectures and is fueling the ongoing HPC infrastructure build-out. Looking ahead, KLA's innovations with AI will produce actionable data for our customers that accelerate system performance, reduce the cost of ownership and improve their return on investment in KLA systems.

In the December quarter, KLA continued to grow in advanced packaging. The rising demand for more powerful systems of chips is driving advanced packaging and increasing the value of process control in the chip package, which has fueled significant growth in this expanding market for KLA. KLA continues to see strong momentum in advanced packaging revenue growth and market share with calendar 2025 total systems revenue of approximately $950 million, representing over 70% year-over-year growth. And as we look forward to calendar 2026, we expect this momentum to continue with year-over-year percentage growth expectations in the mid- to high teens, driven by faster than market growth for our process control products. KLA Services business grew to $786 million in the December quarter, up 6% sequentially and 18% year-over-year. This was the 16th consecutive year of annual service revenue growth with a compounded annual growth rate greater than 12% over that time frame.

Finally, the December quarter remained strong for both free cash flow and capital returns. Quarterly free cash flow was a record $1.26 billion. Total capital return in the December quarter was $797 million, comprised of $548 million in share repurchase and $250 million in dividends. Total capital returns over the past 12 months was $3 billion. The industry dynamics to support the demand for AI infrastructure reinforce KLA's growing relevance for our customers and our broad product portfolio plays a critical role in enabling customer success. Additionally, the emerging and fast-growing advanced packaging market further strengthens KLA's relative position. Finally, rising semiconductor content across diverse end markets, coupled with strategic investments in legacy nodes remains a key driver of dependable long-term growth for KLA and the semiconductor equipment industry. And with that, I'll turn the call over to Bren to discuss the quarter's financial highlights.

Thanks, Rick. KLA's December quarter results reflect strong year-over-year growth with an industry-leading margin profile. The results also exemplify our market leadership, consistent business execution and the dedication of our global teams in meeting customer commitments. Revenue was $3.3 billion, above the guidance midpoint of $3.225 billion. Non-GAAP diluted EPS was $8.85 and GAAP diluted EPS was $8.68, each above the midpoint of the respective guidance ranges. Gross margin was 62.6%, 60 basis points above the midpoint of guidance due to stronger-than-modeled service performance and manufacturing efficiencies. Operating expenses were $653 million and included $384 million in R&D and $269 million in SG&A. Operating margin was 42.8%. Other income and expense net was $32 million. The quarterly effective tax rate was 15%. At the guided tax rate of 14%, non-GAAP earnings per share would have been $8.99. Non-GAAP net income was $1.17 billion. GAAP net income was $1.15 billion. Cash flow from operations was $1.37 billion and free cash flow was $1.26 billion. The company had 132 million diluted weighted average shares outstanding for the quarter. The breakdown of revenue by reportable and end markets and major products and regions can be found within the shareholder letter and slides.

Moving to the balance sheet. KLA ended the quarter with $5.2 billion in total cash, cash equivalents and marketable securities and debt of $5.9 billion. The company has a flexible and attractive bond maturity profile supported by investment-grade ratings from all 3 major rating agencies. KLA generates consistent strong free cash flow driven by our high-performing operating model. Over the past 5 years, free cash flow has grown at a 20% compound annual growth rate, above the 16% revenue compound annual growth rate over the same period. This growth, coupled with resiliency across business cycles, helps enable a comprehensive capital return strategy that features double-digit dividend growth and share repurchases to support long-term shareholder value creation.

Turning to the outlook. The industry outlook for 2026 has strengthened over the past few months. We expect the core WFE market to grow in the high single to low double digits, reaching the low $120 billion range, up from approximately $110 billion in 2025. In addition, we expect the advanced packaging component of the market to grow at a similar rate to approximately $12 billion for a total market forecast in the mid-$130 billion range, an increase in the low double digits versus our forecast for 2025. Customer spending profile is expected to broaden across all major end markets. Given KLA's strong business momentum, expanding market share and higher process control intensity at the leading edge across all segments, we begin 2026 well positioned to outperform and increase our share of the overall market. We are experiencing strong customer momentum that has accelerated over the past 3 months and is reflected in our system backlog and sales funnel. Our view today is that the first half of 2026 revenue will grow mid-single digits compared to the second half of 2025 with accelerating growth in the second half of the calendar year. Customer lead times for our products are increasing due to supply constraints, limiting first half growth potential across many of our products. KLA's unique product portfolio differentiation and value proposition are focused on enabling technology transitions, accelerating process node capacity ramps and ensuring yield entitlement in high-volume manufacturing. The market environment and the complexity of our customers' technology road maps are compelling, presenting both challenges and opportunities for KLA to maintain its relative outperformance. In this industry environment, we remain focused on supporting customers, investing for the future, executing product road maps and driving productivity across the enterprise.

KLA's March quarter guidance is as follows: revenue of $3.35 billion, plus or minus $150 million. Foundry/logic revenue from semiconductor customers is forecasted to be consistent with the December quarter at approximately 60%, and memory is expected to be approximately 40% of semi process control systems revenue to semiconductor customers. Within memory, DRAM is expected to be roughly 85% and NAND the remaining 15%. As always, these business mix approximations pertain solely to our semiconductor customers and do not reflect our total semiconductor process control systems revenue. Gross margin for the quarter is forecasted to be 61.75%, plus or minus 1 percentage point. Although volume levels are relatively consistent quarter-to-quarter, product mix is modestly weaker versus the December quarter. This guidance also includes the incremental impact of the rapidly escalating cost of DRAM chips used in the company's image processing computers that ship with our systems, creating a headwind to our gross margin expectations. This pricing environment has changed profoundly over the past 2 to 3 months and has been highlighted regularly in the industry press and analyst reports. While we expect this pricing environment to be transitory, current modeling suggests that this situation will persist through 2026 and have a roughly 75 to 100 basis points negative impact on gross margins for the calendar year. As DRAM capacity additions accelerate over the next several quarters, we expect this cost dynamic to improve as we exit the calendar year, and we are modeling a return to a normalized pricing environment for our memory requirements and our longer-term business forecast. Considering this impact, coupled with product mix and volume expectations, we expect gross margins to be approximately 62%, plus or minus 50 basis points in calendar 2026. Operating expenses are forecasted to be approximately $645 million in the March quarter. For 2026, we continue to prioritize next-generation product development and company infrastructure investments to support expected revenue growth over the next several years. And we anticipate these expenses to grow by roughly $15 million sequentially throughout the year. Our business model is designed to deliver 40% to 50% incremental operating margin leverage on revenue growth over the long run. Other model assumptions include other income and expense net of approximately $25 million for the March quarter and expect it to remain at this quarterly level for the calendar year. For taxes, our established practice is to provide an effective tax rate assumption for the calendar year when providing guidance for the March quarter. Given expectations of geographic distribution of revenue and profit, Pillar 2 adoption and recent tax changes in the United States, the planning tax rate for 2026 is 14.5%. We would expect some quarter-to-quarter tax rate variance due to discrete items. For the March quarter, non-GAAP diluted EPS is expected to be $9.08, plus or minus $0.78, and GAAP diluted EPS is expected to be $8.85, plus or minus $0.78. EPS guidance is based on a fully diluted share count of approximately 131.7 million shares.

In conclusion, our near-term revenue guidance reflects consistent growth and relative strength. We expect to outperform the market in 2026, driven by multiple tailwinds driving rising process control intensity and growth in advanced packaging. KLA continues to focus on delivering a differentiated product portfolio that addresses customers' technology road map requirements and production efficiency objectives, which are driving our longer-term relevance and growth expectations. The KLA operating model guides our best-in-class execution. Our focus on customer success, innovative solutions and operational excellence drives industry-leading financial performance, enabling us to return capital consistently and predictably. KLA's business is uniquely positioned to capitalize on today's technology inflections and growth drivers. We are encouraged by strengthening customer confidence and engagement, which informs our business forecast. The long-term secular trends driving semiconductor industry demand and investments in WFE and advanced packaging are compelling and represent a relative performance opportunity for KLA over the next several years. KLA's business has gone from being primarily indexed to leading edge R&D investment and fab capacity ramp to now addressing all growth phases in WFE and advanced packaging, enabling leading-edge process development, time to results in fab capacity ramps and optimizing yield in a high-volume production environment. In addition, the growing investment in custom silicon, particularly among hyperscalers developing their own custom chips has led to a proliferation of new higher-value design starts and increased demand on our customers to deliver performance, volume and time to market. As design mix and complexity grows, so does the need for advanced process control. As a result, KLA is seeing consistent growth in process control intensity as each new chip design requires rigorous inspection, metrology and yield optimization solutions. KLA is uniquely positioned to benefit from these trends as we expand our market leadership and deliver differentiated value to our customers. That concludes our prepared remarks. Kevin, please begin the Q&A.

Thank you, Bren. Operator, can you please provide the instructions and begin the Q&A session.

[Operator Instructions] We'll now take our first question from Vivek Arya with Bank of America Securities.

For the first one, your forecast for WFE for this year. Yesterday, your peer reported and suggested that WFE could grow over 20%. I think they said 23%, and you're suggesting something in the high single to low double. So I was hoping you could clarify what is kind of the apples-to-apples inclusion or exclusion. And then part of that, you're suggesting advanced packaging only grows, I think, in that same pace, high single to low double. -- but that's very surprising given how fast the AI market is growing and just the correlation of that advanced packaging market to AI. So basically, if you could just give us apples-to-apples why such a big disconnect between your view of WFE growth versus what your peers suggested yesterday?

Vivek, it's Bren. So I did talk about this a little bit in the letter, but I think one of the issues that has become a little bit noisy over the last couple of years has been the rise of advanced packaging as a market. And the inclusion of it in WFE forecast, and I think you and I talked about this in your conference back in June was that -- what do people exactly include in these numbers, and it varies a little bit across analysts and across companies. If you look at our forecast, our view on consistent traditional core WFE in 2025 was around approximately, and we'll see how people report, but approximately $110 billion and that the advanced packaging market, as we look at it, the total market is roughly in that $11 billion range. So we'll call it the low 120s. As we look at 2026, looking at it in the same way, we see advanced packaging growing somewhere in excess of $12 billion. So it will probably be in the double digits. We'll see. It tends to be a quicker turn business. So we'll see how that plays out. And that core WFE is rising from 110, as we said, to about -- somewhere in the low 120s. So I think when you add the 2 together, you end up in the mid-130s which is, I think, consistent with what Lam said yesterday. But that's how to think about the market. I don't know how they think about it and what they include and what they don't. We try to capture all elements of the market as it relates to process and process control. And so that's how we look at it overall in terms of what happens on the wafer, film frame, advanced component and so on. So that's how we see it. Hopefully, that helps. And one, Vivek, Rick, just to add one part of that. The question on the growth of packaging, we're talking to our customers, they are frustrated with the shelves that they have available. So part of what's slowing down the growth this year is their ability to have their factories built to support packaging because of the growth. So that's why we see it more -- we'll see a lot more growth in '27 as a result of that. There is demand, but I think it's a matter of getting the facilities ready, which is a theme generally right now with our customers. So I think on the go forward, we're just going to aggregate it. And I think that helps. But what I tried to do is provide over the last several months or so, some disaggregated view of what's traditional core WFE, the same WFE we've looked at over the last multiple decades and what the advanced packaging market looks like as you add the 2 together and you get to the mid-30 130s as we look at 2026.

Got you. And for my follow-up, just kind of two clarifications. One is what's your assumption of China WFE kind of absolute percentage growth? How much was China WFE as part of that $120-plus billion in your definition, kind of all in WFE, how much was China? And then what are your assumptions about what China would do this year? And then how much are your supply constraints limiting your growth? Is there a way to quantify, right, how much growth you're kind of leaving on the table because of your -- where are those supply constraints? And how much are they limiting your growth this year?

All right. There's a lot in there. For China, our expectation is that China is flattish, maybe slightly positive, modest growth in 2026. It was modestly negative in 2025. For the company, as a percent of our revenue, we think it will be somewhere in the mid-20% to high 20% range. as we look at it. I think if you look at the total China WFE inclusive of the restricted fabs, we see China somewhere in the, we'll call it, in the mid, maybe mid-$30 billion range, mid- to high $30 billion range in 2026.

Anything on supply constraints?

Look, I think as it relates to the first half, we're virtually sold out across most of our products. Given the lead time of our products, our decisions that were driving the first half were decisions we made in the middle of 2025 generally. As we move into the second half and as we talked about in the prepared remarks, we see the second half accelerating versus the first half. We have a little bit more flexibility. But there are constraints in terms of what our customers are asking for. We're seeing our lead times extend. There are facility readiness dynamics that will be -- play a role in terms of timing of shipments. The one good thing is that given all the new facility or greenfield visibility we have is it does give us pretty good confidence as we look out into 2027. And most of our conversations today about new orders are for deliveries late in '26 and into '27. So it's pretty clear from a visibility point of view. We feel pretty good about our ability to ramp the business. I think if you look back to 2022, I think we did a pretty good job in terms of ramping to support a pretty robust environment. And so I think that those practices and our investments and how we manage our supply chain will play through in terms of our ability to satisfy demand as we look out over the next 12 to 24 months.

We'll take our next question from Harlan Sur with JPMorgan.

Your core process control systems business delivered yet another strong year of WFE outperformance. I think it grew 20% versus 2025 WFE of like plus 10% to 12%. Within this, inspection significantly outperformed yet again for like the third or I can't remember fourth or consecutive year growing 25%, patterning growing 12%. How are you guys thinking about the growth in inspection and patterning relative to overall WFE view of sort of low teens growth this year? I mean given the focus on yield and manufacturability, would you expect a similar level or more of outperformance in process control for calendar '26?

Yes, Harlan, it's Rick. Thank you. I think the -- recognizing the outperformance, I think we're feeling really good about the trends that we're seeing, especially in inspection and especially as they relate to the BBP products. And to Bren's point, I think we've been trying to add capacity in that product line and probably we're going to need it based on our conversations with customers. So I think there'll be continued growth. And everything about what we're seeing in the build-out for AI, Bren talked about the increased designs, the larger die and now what we're seeing in HBM, which has become a huge driver. And in many ways, a bigger story is the change in intensity around memory has been pretty dramatic in terms of if we look back the last couple of years and the heavy usage of advanced inspection to support that. So it's good. I mean we're looking at a modeling as we go forward and our customers have told us '26 is expansion and setting the stage for even more expansion in '27. And so we think we'll continue to see strong growth associated with that. I think that the capacity -- I mean, metrology is historically a little closer tied to some of the capacity. So we'll see some relative recovery. And then reticle is going to be very strong because it's so tied to the number of design starts and the challenges associated with advanced maps. Bren, am I missing anything?

Yes. I think to your question about relative performance, I think despite the more mix related to memory, as Rick talked about, our performance in HBM is changing the intensity profile. And so we feel pretty good about our ability to sustain the multiyear outperformance that we've seen. So I think it's pretty exciting. The portfolio is in a really good place from an overall share point of view, and we're seeing intensity rise in a number of markets. So we feel pretty good about it.

Great. And for my follow-up, it's pretty well understood that on all these new sort of advanced technology transitions, you do need a lot more inspection and metrology capabilities, right? But on top of that, given the industry's chip supply tightness, your customers are looking to even further squeeze more supply for a given sort of current installed base. I'm wondering, is this -- and so they're focused just as much on technology transition, but on the existing capacity footprint, trying to drive more supply via yield improvement, better manufacturability. I'm wondering if this is also driving incremental demand for your process control solution.

Yes, certainly. I mean we have seen, in some cases, back penetration of technologies once the recognition was that 2 things have happened. In some cases, if you go back in time, they'd moved from one technology to the next and not really pay much attention to the prior. Now there's more demand at the prior and if they're getting advantages in the capabilities in the latest technology node, we see back penetration to squeeze out, to your point, more yield. Right now, because of the constraints, and I think if you -- when we talk to all our customers, we hear a common theme is they're constrained by the ability to build new fabs and new shells. So to your point, they're, for the most part, trying to do everything they can to optimize. And then the pricing environment is such for them that, that additional yield is worth more. And so that's the other factor that's driving them.

We'll take our next question from Joseph Quatrochi with Wells Fargo.

Maybe just to kind of understand the supply constraints that you're seeing in the first half. Any way that you can kind of help us understand just what could growth have potentially kind of been first half versus second half if you didn't have those supply constraints? And then is it mostly just DRAM? Or is it also other components like optics and things?

Well, Joe, the biggest long lead time aspect of our build of material is an optical component. So to my earlier point about the lead time for that tends to be pretty long. So that does -- like I said, we were making decisions last summer that was affecting what we expect to ship in the first half of the year. So that's probably the biggest factor. We don't really look at what we could have done. Certainly, in the last few months, we've seen a strengthening from customers for more demand in the first half. And so I mean, the good thing about our differentiation and our market position is that we can balance pretty well across our customers to make sure that we're trying to meet their needs. At the same time, we're not missing business or losing business. So our lead times are extending. Our customers know that. And so we're managing it accordingly. So I don't think I go, oh, I could have done this or I could have done that. It's what can you do? And so I think that that's the nature of our conversations with customers, and then we look to improve as we can. As we move in the second half of '26, we will see the business accelerate. I would expect second half to have high single, maybe low double-digit type growth as we move into the second half of the year. I think as an industry, you have to remember if we moved independent, if we could supply everything everybody wanted right away, it still would be a limit. There are other factors that limit their ability to ramp these fabs. So our customers, when we talk to them, we are having the same conversation with our peers that they're having with us because collectively, they need all the equipment in order to be able to ramp. And so the frustration for a lot of them now is they've got demand. And in some cases, they don't even have the ability to build the shelves as fast as they want and then fill it out. So to Bren's point, collectively, we're all being asked to accelerate equipment delivery, but it's not really because we don't have BBP that we're missing out. It's part of their overall solution. So when we talk to them, they really want to prioritize when they get that equipment to be able to facilitate it. But we're not going to lose share because of...

That's helpful. And then as a follow-up, just trying to understand like the kind of trajectory of gross margin. I mean it seems like maybe based on the guidance, March is kind of the bottom and we move higher from here. And anything you can share on just the ability to pass through higher component costs to reprice your backlog?

Yes. So I think you're right. It looks like March is probably the low point for the year as that goes. And as we move across the year, we'll see an increment up. We're going to be -- our first priority as it relates to memory supply is securing supply to ensure that we can meet our delivery commitments and support our customers. That's our primary focus. We also would expect that the tariff burden as we progress through 2026, given some of the process things we're doing within the company will also diminish in terms of its impact. I talked about a 50 to 100 basis point impact related to tariffs. We're closer to the top end of that range today, and we'll see that come down, I think, over time. So as it relates, I thought it was important to give you some sense of it in terms of the expectations for the year, 62% plus or minus 50 basis points. We think the memory situation is transitory. And really, as it relates to how we price our products, it's much more of a value-oriented pricing model and less about cost movement, particularly around commodities. So it's important that we continue to maintain the product cadence that we have in terms of launching new products and variants of new products -- and that gives us an opportunity to enhance our cost of ownership offering to our customers, add new capability and also take into consideration some of these dynamics around costs that we've been dealing with for some time, starting with some of the pretty significant inflation just a few years ago to this issue today. So that's how we're thinking about it right now.

We'll take our next question from C.J. Muse with Cantor Fitzgerald.

I guess first question on gross margins. How are you thinking about the progression through the year given the overall guide of 62%? And then more importantly, I guess, what are your thoughts around 2027 and the ability to kind of pass along the higher DRAM costs, which I don't assume will go away anytime soon. And I guess as you deliver kind of newer products, what impact should that have on incremental gross margins into next year?

Yes. So over the course of the rest of this year, I think that margins -- look, product mix is probably the biggest factor in quarter-to-quarter variability, but I would expect gross margins to trend north, part of it being our expectations around mix here, but also expected increases in overall volume. So I think that there's some scale benefits that we'll see that will flow through. Over the long run, I feel pretty comfortable with, as we talked about, our model that we presented at our last Investor Day of 63% plus type gross margin profile. I feel still very good about that. And given the mix of our business, the growth rates of service and so on. So I think as we look into 2027, I would expect to see gross margins continue on kind of an incremental cadence from where they are. And I feel pretty good about 63% plus as we go forward and we see some normalization in some of these cost areas.

Very helpful. And then I wanted to focus on DRAM. I think your share of wallet historically has been kind of 7%, 8%, 9% depending on the year. But curious now with HBM, particularly as we evolve to HBM 4 and 4E, how do you see that share kind of progressing in '26 and '27?

Sure. I think technologically, there's a lot of reasons to explain why we're seeing higher adoption. One, we've talked about before is less redundancy. The value of these devices is higher, so there's a less willingness to give away real estate to redundancy. -- of data in and out, there's more metallization layers, which require more inspection. And then the increased use of the advanced lithography, which requires in EUV more inspection. So all those things are driving up the intensity of DRAM, and it looks much more similar to what logic did not that long ago. So I think all those issues are driving that, and we feel really good about that going forward as we're engaging with customers and they're seeing the benefits of -- for many of them, they haven't been employing a lot of process control like this in most of their working lifetime. So we're seeing them getting used to that and coming to us for more capability. I think the other thing is the process variability flexibility in the past, depending on end market was something that customers could bin devices. And with high-performance compute, they don't have the ability to do that. So that's driving more rigor around ensuring that each of the devices in the stacks performs to pretty tight specs. The demand environment is also driving opportunities in our service business as customers look to keep these tools up to have maximum uptime to ensure good performance, where in the past with redundancy, you might see less contract penetration. We think it's a growth opportunity here moving forward given the nature of these devices and their requirements.

We'll take our next question from Shane Brett with Morgan Stanley.

My first question, I just wanted to follow up on CJ's question earlier. But you previously talked about DRAM process control intensity increasing 100 basis points with EUV and another 100 basis points with HBM. But is there a world in which DRAM process control intensity just really gets close to advanced logic?

Well, it's still a ways away from advanced logic given the high mix of designs. And so that's, I think, the biggest issue that you see in advanced logic that's different than memory. So we're pretty encouraged by what we're seeing. We'll see how this plays out with more EUV layers and so on in DRAM devices. So we think that it's just the market requirements are driving more inspection, more metrology, and we think that will be a positive trend. I'm not sure I'm ready to commit to something that looks like advanced logic, just given the nature of those devices and the differences in a logic fab versus memory.

Got it. And my follow-up is on foundry logic. So you've called out a broadening of foundry customers over the last year, and it's clearly materializing with your customers' CapEx announcements. But could you talk about the process control intensity at these customers? And just how good can leading-edge logic for you be this year?

I'll start and then let Bren fill in. We are seeing the broadening. We're definitely seeing the intensity. I think to Bren's point, there's a couple of factors that you have to look at, maybe 3 really. One is the technology node and a big factor is die size and then another one is the mix. And so if you have a company that's doing advanced logic, but they're not on large die and they're not high mix, that intensity is just not going to be as high as if you have somebody that's doing all 3. But it's higher than it's been. And in order to be competitive, they're increasing it. So we kind of model that going forward, and that's -- and we'll lay this out in a lot more detail when we look at our 2030 conversation at the Analyst Day. But we are seeing it going up for this year. And there's -- when we talk to our customers in advanced logic, even they are talking about it depends. It depends on if they get more customers, it depends on how much more capacity they need, then their investments will follow based on that. So it's a little hard for us to judge what that's going to end up being.

We'll take our next question from Timothy Arcuri with UBS.

Mid-single digits half-on-half versus the back half of last year. But I think you made a comment answering a question about high single digit.

Tim, do you mind starting over? I think when you began your question, you were kind of like right in the middle, so we didn't pick up the start of the question. And I didn't want you to finish and then have to do it again, if you don't mind.

Okay. Perfect. So Bren, we know you said the first half of this year is going to be up mid-singles versus the back half of last year. So we know what June is. June is like 3.6% and change. I think in answering a question, you said high singles to low doubles. And I think you meant the back on that because that would sort of imply that the calendar back half would be something like $7.5 billion. And like I asked because that's not up that much versus the $3.6 billion that you're saying for June.

Tim, yes, so that was a half-to-half statement. I said, so we'll see how it plays out, right? I'm not going to guide specifically with more detail. I tried to give you a sense of this -- our expectations of growth in the second half of the year. And I think it's likely in that sort of high single, low double range for now. So we'll see how things play out as we move forward.

Okay. And then advanced packaging, I think unless I look back through the transcripts, I thought last quarter on the October call, I thought the expectation was that the advanced packaging market this year would grow more than 20%. And now I think you're saying mid- to high teens. Did the market downtick? Or did stuff pull in? Or maybe I'm just parsing numbers, but I'm just kind of wondering if like something changed.

No, we're pretty encouraged by what we're seeing in the market. It's not a large market, so the percentages can move around a fair amount. We're very encouraged by what we're seeing from a share point of view across the market. So we'll see. I tried to provide some context. I think it's likely in that, we'll call it, 10% to 20% range. And so that's why we said what we said. What's interesting about our process control position in that market, if you go back to 2021 in process control, we were roughly 10% of that market. That overall market was what I called a rounding error in terms of how you thought about WFE. But now as you look at the size of the market and the opportunity that's there, it is now becoming part of what's called -- what I think is this core overall equipment market. Our share was down in the 10% range. I think when you look at 2025, we're close to half the market in share. And I think in 2026, we feel pretty good about our prospects moving forward. So it's a great opportunity. There's a lot of advancement that's happening there. Sampling rates are high. So -- and we have a broader portfolio that we think customers will start to leverage more as we move forward. So it's a pretty, I think, exciting market. And we have great drivers within what I call traditional WFE, and we have this evolving SAM that we think will augment our growth here moving forward.

We'll take our next question from Chris Caso with Wolfe Research.

I guess first question would be characterizing the relative growth of memory versus foundry logic for this year. And I recognize that a lot of that has -- probably has to do with clean room space constraints, as you said. But what -- how do you think it shapes up for this year and then particularly in the second half of the year as some of the revenue starts to improve?

We think that certainly, the DRAM part of the market will grow faster than foundry/logic will grow, driven mostly by the demand for HBM, but also, as we talked about, the challenges in conventional memory as well. So the way we're modeling is we think overall foundry/logic is up 10% to 15% for the year from a WFE point of view. and that the DRAM part of the market is probably 15% to 20% versus last year. Flash, a little harder to pin. I think it's slower than DRAM. It's a lower -- it's a lower base, a lower number. But I think the biggest, at least from our point of view, I mean, certainly, the biggest drivers for WFE this year and from a growth point of view overall is what's happening in advanced logic and what we're seeing in the DRAM market.

As a follow-up, I think you've talked about 12% to 14% kind of normalized service growth. Given the rising utilization rates, the fact that the folks are a bit tight now, how does that affect the service growth for both '26 and as you kind of start into '27?

Well, there's a number of factors that are driving growth. Certainly, to your point, I mean, higher utilization. I mean our tools tend to stay very well utilized no matter where customer overall utilizations are because it's the best way to manage capital even in downturns is to drive yield. So our customers in terms of how they buy our systems is they buy them, they run them at very high uptime. And the value is in the performance of the systems and matching performance in terms of information on defectivity and metrology and so on. So the growth expectations of the growing installed base, this installed base living longer, opportunities for where things are tighter in the market, opportunities around memory, as I talked about earlier, opportunities in packaging. And then growing streams in our acquired businesses where we think we can leverage the infrastructure of KLA to drive revenue growth and service out of acquired businesses. Those are all our vectors for growth here moving forward. So we feel very confident about the 12% to 14% go-forward target model for service revenue. And I think there are a lot of drivers that suggest we can operate at the higher end of the range versus the lower over time.

We'll take our next question from Jim Schneider with Goldman Sachs.

I was wondering if you can maybe provide a little bit more precision following on the last question. Do you expect that -- I mean, clearly, you expect DRAM to be stronger in the short term, but do you expect the growth in foundry/logic to actually expand substantially into the back half of the year such that those growth rates would be closer to matched or not? I'm just trying to think about how that plays out in terms of process control intensity for you over the course of this year.

Yes. So I can't comment exactly on where the overall industry levels will be. I mean, certainly, as it relates to KLA's business, I would expect the foundry/logic part of our business to be kind of stronger in the second half. than the first half right now. But it is -- I think it's pretty fluid and there's, I think, kind of consistent growth expectations, half to half across both segments. Well, and we know from public comments some of our customers have made that they are definitely facility constrained, right? So their ability to ramp, I'm sure they're going to do everything they can to pull that in, but I think we're going to see in the foundry/logic space, the setup for '27 is pretty remarkable. And we'll see more, I think, late in '26 as they have the opportunity. But there's a lot of discussions already about preparing us, the equipment supply companies for '27.

That's helpful. And then maybe as a follow-up, relative to the China market, you outlined your expectations for WFE growth there. But I'm wondering, in terms of your -- the competitive landscape, you have a very, very strong portfolio sort of across the board in your product space. Have you heard any kind of incremental interest from your customers in China or from the government in terms of promoting more onshore solutions there?

Well, I think that to the degree where we can compete, we continue to offer capabilities that customers want. I think the biggest constraint we have and the biggest challenge we have sometimes in China is when we're not permitted to sell, but alternative non-U.S. companies are permitted to sell to the same customers. And those are conversations we've had with the government. We're not going to opine on those decisions overall of which companies are on that list. In terms of competition from China, I think there's been more progress made quite a bit more in the process tools than there has been in either lithography or in process control, partly -- largely because of the technology required to do that. So we feel pretty good about competing anywhere in the world, including China. And what we push for in the cases where we've had some unfair disadvantage is we just want to level playing field as it pertains to actions taken by the government.

We'll take our next question from Krish Sankar with TD Cowen.

This is Robert Burton on the line for Chris. I know you've talked a good amount on some of the previous questions. But just in terms of these capacity constraints, are there any areas of the market that are larger pain points in your ability to ship tools to? And any areas where potentially you could be constrained and would need more capacity once foundry and logic takes off more in calendar year '27?

I mean if you think about -- this is Rick. If you think about our portfolio, we, by and large, ship the same products same kind of products for advanced technologies, whether it's memory or foundry logic. So it's not like we're constrained on to support the memory guys or the logic guys. It's more the thing Bren talked about where optics is an example where you only have so much capacity over time and you can add it, but you can't add it quickly because it takes a lot of work to increase the number of -- the output of very complex optics. So it's more product specific to our products than it is customer specific. And I guess the only other thing I'd add to that is what's driving the market today is really leading edge demand. And so it isn't like we -- when we went through '23 and '24 with more legacy products where we had a broader mix of products. What customers want today are leading-edge solutions. And so that's where most of the focus is.

Got it. And then your DRAM shipments were particularly strong this quarter. I think you had mentioned in the last call, you expected them to be up. But were there any shifts in your view over the quarter? And what sort of demand visibility do you have into that market for this year?

Yes. As we said earlier, I mean, certainly, over the last few months, we've seen fundamentals of overall equipment spending strengthen and certainly a desire by our customers to get tools sooner rather than later. So we've tried to manage our way around that, and the demand is broad-based. So I would say that overall demand has strengthened in the last few months in that part of the market, the whole part of -- all markets, frankly.

We'll take our next question from Stacy Rasgon with Bernstein Research.

For my first one, I want to ask Tim's question a slightly different way. So you gave the guidance for the first half, which kind of gives me June. And again, if I'm modeling, you said high single to low double, the second half would be up, call it, 10%. That would put -- my math suggests that kind of total revenue is up, I don't know, 12%, 13%, which is about what you're suggesting the whole WFE market is growing. So like you said you're gaining share. So why wouldn't that number be higher? Like where is the share gains given that half over half in the second half that you're talking about?

Well, so Stacy, I mean, part of this is the blended numbers, right? So you're getting that. When we talk about share gain overall, we're looking at our semiconductor process control business in terms of its relative performance against the total equipment market. So there is that. Again, I allow you to do the work. I'm not going to guide the full year to that level of precision. I will say that we feel very good about our ability to grow faster than the market. And you've got service element, you've got our non-semi elements that are also factors in our overall growth rate.

Okay. Because I mean services is growing about that much as well. You said 12% to 14%. And I just feel like that half over half, and maybe there's just conservatism built into it, but it feels like, like I said, call it, 10% or whatever feels light anyways. So my second question, just around China, the last time you reported, it was after the affiliate rule been put in place and before it was taken off. What are your thoughts on, I guess, recovery of that revenue? And like how does that bake in to your thoughts on China revenue next year? Because to my mind, like your -- I don't know if your China guidance for next year now is higher than it was last quarter or not, but presumably some of that affiliate revenue should be coming back?

Yes. I would have -- I think back 3 months ago, we thought China would be modestly down, and now I think it's going to be up for us this year. So that business has come back in and feathered through within our forecast and some of the commentary we provided here.

And how much was that again? I can't remember, $300 million or $350 million? I can't remember.

Yes, in that ballpark. I mean some service elements, but yes, in that ballpark.

We do have time for one additional question. We'll take our final question from Tom O'Malley with Barclays.

As I look out, you talked about more share gains. Where should I be paying attention? Is that more on the leading-edge foundry logic side? Is that more in the advanced packaging side? Just because to Stacy's question, right, like you're talking about a core WFE that you're growing in line with, maybe you're being a little conservative to start the year and end up beating that as we go along. But I would imagine if you include advanced packaging as well, that's an area where you've had a lot of strength. So I would imagine that would accelerate the growth rate. Maybe explain where you're seeing those share gains? Is it more so on the AP side or on the leading-edge foundry logic side?

Well, we're certainly seeing share gains in AP, as I talked about earlier. I think there's a lot of positive momentum there. I think we've done extremely well in logic, and I think there's a lot of momentum on the memory side. As it relates to the overall business, I wouldn't say our share is pretty consistent across the different segments. mean so it really comes down to our products. So reticle inspection had a really strong year. We think that, that's part of the market is inflecting. We're doing pretty well there. We see some positive momentum in our electron beam businesses. And so we think that, that's a positive here moving forward as well. So I think between what's happening in packaging, what's happening in e-beam, what's happening in reticle and our largest businesses like our broadband plasma business or high-end pattern inspection, it's a market that's growing faster, and we have a strong share. So it will influence the overall share numbers just because of the relative growth rate of that segment versus other parts of the market. So those are the areas we feel pretty good about our share position here in 2025 in terms of gaining share. And we think that we'll continue to increment what was a really strong share position. We'll continue to increment here moving forward given the nature of the portfolio and our ability to compete, meeting customers' technical requirements and their cost requirements, being able to leverage the network effect across the systems. So we think that, that enhances our competitive offerings and positions us well here moving forward from a share point of view.

Super helpful. And if I may, just a really quick follow-up. Your competitor talked about the different vectors of market growth into their guidance for WFE in 2026 and said foundry/logic good growth, DRAM good growth, but NAND a bit below that. I was curious if you agree with that assessment when you look at the broader market. And then obviously, you're hearing some NAND guys report tonight maybe talking a bit more aggressively about spend. Do you think that as this year goes along, maybe that view can change if you see an acceleration a bit more quickly on the NAND side from a technology transition perspective or some greenfield capacity? I know it's a smaller business for you, but interested in your thoughts.

I think the challenge, given the constraints in the industry around how much can actually be supplied, any new demand that's showing up today, as I said earlier, in terms of our conversations with customers is more about '27 deliveries. Also, they're not a competitor. They're a peer. We have enough competitors.

Thank you, Tom. All right. I wanted just to thank everyone for their time. I know it's a very busy earnings season and a very busy earnings day. We look forward to seeing hopefully many of you at our Investor Day in New York on March 12. And with that, I'll turn it back to the operator for any final instructions.

Thank you. This concludes the KLA Corporation December Quarter 2025 Earnings Call and Webcast. Please disconnect your line at this time, and have a wonderful day.

Good morning. I'm Tim Arcuri. I'm the semi and semi equipment analyst here at UBS. And very pleased to have KLA. Very pleased to have Bren Higgins with KLA, who is the CFO. Thanks, Bren.

Yes. Thanks for having me.

Great. Well, Bren, let me start by asking you what I'm asking everybody and just to talk about the wafer fab equipment market generally. You're sort of pointing to the first half of next year as are most being modestly up, flat to actually modestly up is what you said. And then having an acceleration into the back half of next year. Can you talk about the drivers? Does it have to do with DRAM fab readiness? How does the loading of each vertical look next year?

Sure. So a lot there. I'll first start with just 2025 has been a really good year for the company, right? We've seen our share of market go up. We've seen mid-teens, if you take the midpoint of our guidance, mid-teens revenue growth, high 20% EPS growth, stronger share of overall WFE. So we really feel very good about how the company is executing, how it's positioned from a competitive point of view and really excited about some of the drivers that we think that continue as we move forward. We've seen some of this over the last year or 2 in terms of what's happening with high-performance compute and what it means to process control.

The nature of a very robust design environment has always been good for process control. We went through a period of time in the last decade where limited number of designs at the leading edge. Customers could debug a process very easily with one particular design instead of trying to debug across multiple designs.

The follow-on designs weren't happening, so there was a reuse element. All this was not great for the process control market or process control intensity. But from 7-nanometer forward, we've seen a really strong design environment. And so each product has its own, I'll call, kind of ramp cycle. Customers have to be efficient with how they're managing their capital. They don't want to start too much inventory. They don't want to start too little. They have to deliver to a tight market window.

The node gets consumed. So as they move to invest in the next node, don't really use a lot of the previous node. So a design environment that's robust can be really good for us, particularly as you think about the whole kind of node maturity over multiple years because of just the challenges of managing that kind of environment.

Large die. Large die benefit KLA in a unique way. It doesn't really change the process world very much, but large die has a defect density challenge. Your yields are lower with larger die. The value of the die doesn't change a process market means a lot for process control because our customers will invest more to ensure that, that value is captured and managed.

Process variability is a challenge. You can't -- for very rigorous performance requirements, you have to have a very predictable process. So large die can be -- is very good for KLA, and we see that changing, particularly as it relates to high-performance compute as a driver for our business in logic. High-bandwidth memory has its own requirements that have been good for process control intensity. And then you've got advanced packaging, which is growing as an opportunity. I'm sure we'll talk about some of these things.

As you look, though, at what's driving leading edge, and I think it continues into next year, is you see a broadening of investment at the leading edge, but you see 2-nanometer node investment, you see a broadening investment, as I said. High-bandwidth memory continues to happen. I think that drives growth into next year. I think it probably grows a little faster than overall logic/foundry grows next year.

NAND flash will grow a little bit, but off a low base. I think China is kind of sluggish, at least in terms of the parts of the market that we fully understand. There's parts of the market we can't serve. So as we look at next year, we haven't quantified it, but we feel very good about the growth across all the market segments.

Like others, we feel that first half is lighter than the second half. I think the first half grows versus the second half of '25. I know I said flat to modestly up. I think it's probably more in that kind of modestly low to mid-single-digit kind of growth rate into the first half of next year. So we're seeing some acceleration from customers in terms of engagement. I still think the second half is bigger than the first half, but certainly feeling more confident with some of the engagement. We're seeing lead times extend. So pretty excited about what's in front of us here as we look at next year.

So it seems to me like the next 2 years, whether it's next year is a great year, whether it's 2027 is a great year, it depends on when the fabs are ready and whatnot. But it seems to me like maybe $150 billion in WFE is not an inconceivable number sometime maybe in 2027. I don't want to pin you down on an actual WFE number, but would you generally agree that the next 2 years should be sort of a -- I mean, these should be the best 2 years we've seen just in terms of the year-over-year growth rates in quite some time. Is that a fair statement?

I think the next 2 years based on customer conversations, and I think some of the facility constraints that exist this year, you're right, we'll see -- I think if they had opened facilities might be able to add more in the current year. But I think over the next couple of years, it feels based on customer conversations today to be a pretty strong environment. There's the WFE level and then there's the advanced packaging market. And what was a rounding error in WFE up until just a few years ago is now a pretty meaningful market. And I think as we think -- talk about the size of the market, we have to kind of think about both of them now, right? So like if you look at this year in 2025, WFE is, we'll call it, somewhere in the -- between $105 billion and $110 billion probably.

But advanced packaging is another $11 billion on top of that. So sometimes when the numbers are out there, I think sometimes people -- it's not clear whether they're including one or the other. I think now you have to include it because it's a growing TAM. I think it's going to grow faster in WFE, and it's a meaningful number now.

Yes. Okay. And let's talk about your share of that WFE TAM. You gained another 60 basis points last year. Do you think you can gain share again next year given all the dynamics that you talked about?

I think we feel very good about the trajectory of our business, what's happening in these markets. The broadening of investment, as I mentioned, the leading edge will be good. The leading edge has been very efficient over the last few years. But I think as you move into next year, leading and near leading edge will be a higher investment level. So I feel very good about that.

Process control intensity, high-bandwidth memory is higher than conventional memory. And so you have some conventional memory investment that's going to happen, too, to support that market as we've seen pricing change meaningfully in that part of the market. But high-bandwidth memory is also pretty positive, I think, in terms of its effects on our business.

So over the last couple of years, we've seen the mix shift a little bit from -- it was close to high 60s percent in 2024 of WFE that was logic/foundry. 2025, I'll call it, kind of mid-60s. I think as we look at 2026, it's probably somewhere around 60%, maybe low 60s, but in an environment where you would see memory as a greater percentage of total, you think they put pressure on our relative performance. But I think what's happening at leading-edge logic plus what's happening in high-bandwidth memory is mitigating some of that effect, and we've had pretty good relative performance over the last couple of years as a result of all that.

And how do you think about foundry? I mean, this year, you've monetized a lot of the N2 dollars, not to say that you won't also get N2 into next year, too. A14 starts maybe at the end of next year, so you might start to monetize some of that at the end of next year, but that's more of a 2027 thing. So how do you think about each of these nodes? And is there a significant step-up in process control intensity, say, in A14 versus N2 versus N3? Or are they all stepping up at a similar rate?

Well, so N2, and we've been pretty vocal about just our overall view of KLA's share of WFE at the 2-nanometer node has been at least 100 basis points higher than N3. And as you think about the first 3 to 4 years of a node, the first 150,000 kind of wafer starts is how we do that modeling.

Over time, you see higher levels of investment typically on the front end and then it tends to moderate a bit. Historically, it used to moderate a lot. But now because of this design dynamic I talked about and the shift in mix in terms of value of the parts, we're seeing that rollover effect is more minimal now.

So as I look at next year, the predominance of investment, again, I talked about broadening investment, but you're going to see a lot of N2 investment. You'll see some N3 investment. And you're right, you might see next-generation investment at a very kind of small level towards the end of the year, which is kind of typically how that customer will start to develop and work on the next process node. So as I look at the year, I think that the logic/foundry part of the business steps up in the second half, and I expect growth really from all the customers that are investing in leading edge.

So I've always thought of it as over the course of a node, you get roughly 70% upfront and it falls off in year 2. It's like 70-30, whereas for a films company, it's more the opposite. Are you saying that it's more evenly balanced for you now?

I wouldn't call it evenly, but it's much closer to that. So I would say that I expect overall from my customer that this year will have an up year versus last year.

Great. Let's talk about China for a second. So you and all your peers see China down next year. I don't agree. I think it's up. But what are the drivers for it to be down? And then as part of that, can you talk about the BIS affiliates rule, which was put in place and it cost you $300 million out of your December quarter revenue. And can you talk about the dynamic of that as you allow those companies, you give them a year reprieve, they're going to probably try to get as many tools as they can as fast as they can. So that seems like it could be a real upside driver for you next year.

Well, if you look at the overall market and part of what's -- China has been interesting, if you go back to '21 and '22, you had our non-China customers, you had the supply constraints and consume generally most of the capacity. You had a lot of greenfield activity. And so when you saw other parts of the business cycle in '23 and '24, you had this backlog of business that you were able to ship to. And so that drove China investment from kind of the low 20s into the mid-30s in terms of overall WFE.

Now there's a big part of that market that is not accessible. So when you think about the whole market, you got to -- not accessible to U.S. companies. You have to try to say, okay, how much is that, but it's a little bit hard to figure out. We try to do our best to figure it out. So as I look at this year, I think it's kind of modestly down. I think next year, it's kind of flattish. So I wouldn't say that it's falling off dramatically. I mean the rest of the business is growing. So its percent of KLA is declining. It was 40% in '24, 41%.

Over the course of this year, I've been pretty explicit about our views that it would come down to somewhere around 30% this year. And I think next year, it looks like it's somewhere in the mid-20s. And I said this on the earnings call. The BIS rule change did affect about $300 million, and we'll see how that -- and that was $300 million basically of business we expected between November when the rule dropped and the end of '26. And so we're working with that customer to reslot that business. I would expect that to come back.

I don't think it changes the overall WFE because I think that was WFE that was likely going to get spent anyway. It just wouldn't be spent with U.S. suppliers. But that certainly changes my view of overall China where I would have thought China would have been down for KLA down 10% to 15%. It's probably down overall about 5% to 10% with the overall market down less than that. So that's how we see it.

I think that business will come in, and we'll slot that over the course of the year. And our engagement with the customer has been generally regular engagement, so around those projects. So I don't think there's anything other than trying to work real hard to get these tools slotted when there's a lot of demand and interest in getting slots earlier. I mean we're certainly seeing, I think, more measured investment on the logic side. But on the memory side, it definitely feels like there's more momentum to try to do more earlier.

Yes, we've actually heard that. So during this conference, we've heard a lot of talk about the memory companies coming in and pretty much 24 hours a day asking for pull-ins and when can I get tools earlier, particularly NAND, but also DRAM. So can you actually speak to that?

Yes. So I'm seeing it more on the -- now NAND isn't our strongest market. So I think the engagement level in NAND has been okay. And there's a certain level of business, but it's the smallest part of KLA. But on the DRAM side, we're definitely feeling it.

And your ability -- I mean, given your lead times, your answer to those customers is like, I can't do a whole lot for you because I'm already given away those slots probably. But that probably helps your possibly March, right, and certainly June as they're trying to pull stuff in.

I think we work really hard to try to accommodate all our customers' needs and juggle our slots to be able to deliver to what they require. We have a rule of KLA. We don't lose business because we can't deliver. So we figure out a way.

Can we talk about competition in China? So you're pretty unique because the films companies, they do have domestic -- their domestic alternatives in China. For you, there aren't. I mean there's Skyverse, but they're not shipping that much. So can you talk about sort of the threats that you see in the domestic Chinese market? Are these companies shipping enough to make you concerned?

Well, so because of the nature of process control, the complexity of our systems, this probably applies to lithography at some level also. The level of competition is more at -- and most of the investment in China is at legacy nodes. And so where you do see competition is at very legacy nodes. You see some of that business at these restricted facilities.

And then you might see some of that business that will show up as customers in China will buy or try to have some of the competitive offering just as a business continuity measure because they never know what the future might mean, and they've got to run their facilities. The level of business has been pretty modest.

If I look at sourcing Gartner, I think Gartner suggested somewhere between $200 million and $300 million in 2025. So we see some of that presence. I wouldn't say it is super formidable at this level. But you're always concerned if your competitors can engage with customers and start to learn and try to leverage that in other places. So we're sensitive to it. I think where we can be directly, it's less of an issue. I think where they're winning is in places we can't serve.

Great. And then foundry. So obviously, there are 2 main foundries, but there's another large company who's making a big push in foundry. So maybe foundry becomes a broader market for you. So what are your assumptions around sort of the breadth of the foundry market? I mean, obviously, more customers who are doing foundries, better for you.

Yes. And that's -- as I said earlier, I think the efficiency of the leading edge, there was a lot of maybe inefficiency in legacy nodes and all the investment that was happening in China and other places. But the leading edge has been very efficient. So I think -- or near leading edge. As you start to move into next year, we do expect, and it's been pretty well publicized that we'll see higher levels of investment off pretty low basis, but it's certainly gives us some confidence as we're looking at next year of this broadening investment.

And we think at the end of the day, competition is good in the market. And I think some of that will play to KLA. I think there's a lot of opportunities for us to engage and collaborate at a higher level. And so we're excited about working with those customers and in some cases, new leadership teams to try to make some progress here in terms of competitive positioning in this part of the market.

Great. You talked before about advanced packaging. And I believe you said it was $925 million in revenue this year. It's up 20% year-over-year. I think 1/4 of that is SPTS, which has actually been a bit soft this year. Can you talk about how big of a business advanced packaging can be for you? And there's all this discussion about panel level advanced packaging. How can you play there?

Yes. So it's -- we've -- and we've been upticking over the course of this year in terms of expectations of revenue this year from advanced packaging. We talked about it being about $925 million across the total portfolio, 70% of which is process control. It's actually up versus like a little over $500 million. So 70% year-to-year from last year. And we're seeing most of that happen in the logic part of the business. We're seeing a lot of strength there as our customers are really integrating these new -- basically integrating a GPU and HBM device into what is effectively a system.

The amount of processing that's actually happening and the sample rates to ensure that these valuable die and valuable memory is functioning as designed. As I said, the process variability, performance specs are very high. So it's been -- it's driven this part of the market to the need for more advanced capability.

Years ago, our presence in the back end was fairly limited what our -- how much value could -- given of the devices our customers are making, could they add in terms of process control make sure that the device was functioning. If it was a mobile chip, not as much, right? And so the investments and the need for higher-end capability wasn't as high. But as you move to high-performance compute, you have very expensive die, a lot of areas of risk. And so how much are you able to invest as a proportion of the value of the underlying thing that you're inspecting has it been a change in the market. And the requirements are becoming more complex.

So in some ways, and our customer came to us and said they needed our front-end capability in their packaging fabs. And so we've been able to leverage the front-end portfolio to be able to meet these market requirements. And so we've seen nice share gain on the logic side. We're seeing good momentum on the memory side, some different processes in memory. As they move to different -- because of the size of the die, they move from like wafer level packaging to panel-based. It's -- they're seeing similar kinds of market dynamics and market opportunities. It changes some of the engineering we have to do to be able to handle the larger panels. But the fundamental architecture of the systems doesn't change.

And so we feel very good about how we're positioned with the portfolio that currently the lowest end part of our portfolio is addressing this market, but there are additional capabilities and systems that are going to be panel capable that will also be able to meet these increasing requirements. So we feel very good about our market position here as we move forward.

Great. So one sort of structural change, it seems is that your backlog is a little higher than it used to be. So I've covered the stock for 27 years, I think it is. And I don't remember -- I mean, sure, like in the last 2 years, your backlog totally ballooned, but it's back down to 7 to 9 months, and I think it's going to stay in that range. And that's a couple of months more than you used to have in backlog. Is there something structural going on? Is this -- China is building all these new fabs or really everyone is building new fabs. And so they have to get in line earlier. Is that part of the dynamic as to why you have more structurally higher backlog?

I think it's part of it. And certainly, we saw it go way up because you had greenfield fabs. And if you're building a fab, the last thing you want to do is finally finish that big construction project and then not have the tools when you need them. And so -- and if you were a customer that was a relatively new customer to KLA, we would want orders, we want deposits and things like that to make sure that -- to get comfort around that business. So that's come down over time, particularly to the dynamic I mentioned about what happened in '23 and '24. We're now in this 7- to 9-month range, closer to the higher end and maybe potentially going above that, given some of the greenfield activity that's expected out there.

But it historically was about 5 to 6 months. So 7 to 9 months is actually a little bit more because there's more greenfield activities, it's more customer -- a broader set of customers. Our long-standing customers, we've always tended to operate with a build-to-forecast model. And so we stay very close to them and understand their requirements. Having the backlog isn't necessarily something I need to get confidence in what I'm building for some of our major customers. So as you see more of the business coming from them, you're not going to have as much backlog related to them moving forward.

Now I think there is some discipline given some of the history to understand that the more visibility they can provide for us, the better because we have to supply an entire industry and everybody has their piece of delivering to meet these market requirements. So the more visibility we have, the better we can plan for from a capacity point of view. Our material lead times are pretty long. When you're building optics, it takes some time to have capacity. And so more visibility is better. But at the same time, we're pretty close as -- given our position in the market with these customers. And so it's not so much of a factor in terms of how I think about what we're going to plan for.

Got it. Can we talk a little bit about gross margin? You've done a nice job. You guided 62% for the quarter. What are the puts and takes on gross margin? I mean if we're going to have these banner 2 years, where do you think gross margin can go? And what are the puts and takes on that?

Our pricing is much more related to what we're selling than where we're selling it, right? So every customer buys different products. We have a portfolio of products. And so the margins can vary across the different products that we have. So that tends to be quarter-to-quarter, the biggest driver of any variability in our gross margin tend to come from just those mix dynamics.

The packaging market has been a great opportunity as we talked about, but it's been dilutive to corporate averages from a gross margin point of view. Obviously, we've had the tariff headwinds, which are closer to 100 basis points today. I said 50 to 100. I think we can mitigate some of that in some of our operating processes around how we move parts. We have a lot of repairable parts, and we do -- we have a factory in the U.S. So as we move parts back in the U.S., you kind of incur tariff exposure. So you think about how can you do that more efficiently to kind of avoid tariffs where it didn't really matter all that much before. And so we just did what was -- what made sense. But over time, obviously, the structural tariff environment cause you to look at some of these processes differently.

So I think as we move through '26, we'll see that impact come down. There's the lower end of that range. I'm hopeful as we get in the second half of the year, it's towards the lower end, maybe lower than that. But I think structurally, we're going to have a little bit of headwind related to that. Service grows faster. Service has dilutive gross margin, but kind of contemplated in the models that we have and that we share with investors. So our incremental operating margins tend to be between 60% and 65%. I don't have any reason to think that they wouldn't continue at those levels.

And right now, we're going to be somewhere in that mid-62% range this year. And I would expect as we're looking at next year, and we'll have more guidance at earnings in January. But I think we're probably operating probably at 62.5%, plus or minus 50 basis points as we look at next year.

Great. And let's talk about service for a moment because I remember not too long ago where the films guys service businesses were growing faster than yours. Yours was growing high single digits. theirs was growing low to mid-double digits. And now that's kind of flipped. So yours is growing 12% to 14%, possibly even 15%, theirs is growing less than yours. So what has changed in that? Are there different strategies that you're employing? What's driven that?

Yes. It's interesting. Our business is very different, right, because it doesn't really have a big consumable element. It's also all service revenue. There's no upgrades or other systems kind of business in any of our numbers. So -- and it's -- 75% of it is contract, so service contracts. So our service business or our business in general is a very high mix, high complexity, relatively low volume business.

And as a result of that, is very difficult for our customers to do self-service. A lot of the parts are custom parts. So the supply chain for those parts is us. And so we're able to manage that well. What customers buy from us is they buy performance of our systems and performance means specs, it means matching and availability. And so while we do break and fix, what we do -- what we really sell is the performance of the system and the availability of it. And so because it's -- customers spend what they want on process control, what they need and then they run the tools at a very high level of uptime, they rely on us to keep them up, and we price the contracts with different elements of our delivery system, and we can kind of monetize that in terms of the support levels we offer. And so that's generally how they look. And there's no -- there's very little redundancy.

So if you go into an environment where things slow down, they don't really take process control offline because it's the most capital-efficient thing they can do, right, is to ensure that they have yield and predictable outcomes in the fab. If you had asked me in 2013, what our percent of ASP was then versus where it is today, I'd say we're 150 basis points higher today. So prices have gone up, the price of the contracts have gone up. If you ask me the average life of a KLA system, I would have said 10, 12 years, we're in the high teens now. So we're adding tools to the installed base much faster than they're coming off.

Markets like high-bandwidth memory, packaging, given the sampling that's happening and the performance requirements, their customers are now looking at those opportunities differently from a service point of view. So that's a nice tailwind. Acquired businesses, we've done pretty well with taking acquired business and putting it in our system and driving more value out of service than they could independently because we have the scale and the engagement.

So all those, despite the impact of the BIS rules as it's related to some market access and certain fab access, we've been able to grow service in that 12% to 14% range. I was looking back 2022, we've set out a growth plan for service for 2026. And as we're doing our planning cycle, I'm looking at 2026, and we're pretty much right on the number despite the headwinds as it relates to the export controls.

And it carries what we believe is an accretive stream at the operating margin level. So we feel good about the trajectory here. I think it continues at these levels. And it's a nice anchor and predictable stream for the company that went down here in 25 years. If you look at how we think about capital structure and capital allocation in the company, part of it over time has been the presence of this service business and our ability to rely on it in terms of its cash flow generation. So I think it's a less understood but becoming more understood aspect of the story that's pretty important.

Do you think that it can keep growing at 12% to 14%?

Yes.

Great. Well, thank you, Bren. We're out of time. But thanks again.

Thanks for having me.

Good afternoon. My name is Stephanie, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the KLA Corporation September Quarter 2025 Post-Earnings Conference Call.

[Operator Instructions] Thank you. I will now turn the call over to Kevin Kessler, Vice President of Investor Relations and Market Analytics for KLA. Please go ahead.

Welcome to the September 2025 quarterly earnings call. I'm joined by our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results as well as our December quarter outlook, which was released after the market close and is available on our website along with the supplemental materials. We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified. All full year references made refer to calendar years. The earnings materials contain a detailed reconciliation of GAAP to non-GAAP results.

KLA's IR website also contains future events, presentations, corporate governance information and links to our SEC filings. 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 make on the call today, 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. We will begin the call with Rick providing commentary on the business environment in our quarter, followed by Bren with financial highlights and our outlook.

Before I turn the call over to Rick, I wanted to provide a save the date for our Investor Day. It has been rescheduled for Thursday, March 12, 2026 in New York. Now over to Rick.

Thank you, Kevin. To kick off our call today, I'll cover a few highlights from our quarter that showcase how the company is benefiting from the growing relevance of process control and AI infrastructure investment and our momentum in advanced packaging. KLA delivered strong results across the board in the September quarter with revenue of $3.21 billion and non-GAAP diluted EPS of $8.81, GAAP diluted EPS was $8.47. This performance demonstrates how KLA process control leadership has expanded beyond leading-edge R&D investment to address all growth markets in WFE, including high bandwidth memory and advanced packaging. .

Accelerating investment in scaling AI infrastructure is fueling technology development investment across the leading edge driving more designs, increased complexity, shorter product cycles and higher-value wafers. Alongside this growth, the industry is also seeing rising demand for advanced packaging. In this complex environment of rapid AI technology development, process control accelerates time to results by resolving process integration challenges during the fab and ramp-up phase to optimize time to market for a diverse mix of semiconductor designs.

KLA's leading-edge customers are also challenged to optimize yield and limit process variability in high-volume production environment, resulting in increasing process control intensity. In this increasingly complex semiconductor device technology landscape, we're seeing rapid growth in demand for KLA's advanced packaging portfolio, which has emerged as a meaningful market for the company as heterogeneous device integration has become more complex. KLA's advanced packaging systems revenue continues to gain momentum through a combination of intensity gains and market share improvements across our portfolio.

For calendar year 2025, we expect advanced packaging related revenue to exceed $925 million, up approximately 70% year-over-year. KLA Service business also continues to [ build ] our strong growth. Services grew to $745 million in the September quarter, up 6% sequentially and 16% year-over-year. Consistency and resiliency are hallmarks of the KLA service business.

Finally, the September quarter was strong on both cash flow and capital returns front. Strong cash flow in the quarter was at a record of $1.066 billion. Over the past 12 months, free cash flow was $3.9 billion, with free cash flow margin of 31%. Total capital return in the September quarter was $799 million comprised of $545 million in share repurchases and $254 million in dividends. Total capital return over the past 12 months was $3.09 billion.

In summary, KLA business is both enabled and benefits from today's technology inflections and the growth drivers related to AI as well as from growth in advanced packaging. KLA's business has gone from being primarily indexed to leading-edge R&D investments in foundry logic customers to now addressing all growth markets in WFE, including memory, advanced packaging and leading edge and legacy node logic. As we look ahead over the next several years, the long-term secular trends driving semiconductor industry demand, investments in WFE and advanced packaging are compelling and represent a relevant performance opportunity for KLA.

In this dynamic growth environment, our consistent execution reflects the resilience of the KLA operating model, the strength of our global team and our disciplined approach to capital allocation focused on long-term investment and maximizing total shareholder value. With that, I'll turn the call over to Bren to discuss the quarter's financial highlights.

Thanks, Rick. KLA September quarter results reflect double-digit year-over-year growth and improved profitability. Revenue was $3.21 billion, above the guidance midpoint of $3.15 billion. Non-GAAP diluted EPS was $8.81 and GAAP diluted EPS was $8.47, each above the midpoint of the respective guidance ranges. Gross margin was 62.5%, 50 basis points above the midpoint of guidance, driven by a stronger product mix and manufacturing efficiencies. Non-GAAP operating expenses were $618 million. Operating expenses included $360 million in R&D and $258 million in SG&A. Non-GAAP operating margin was 43.2%. The Other income and expense net was a $28 million expense with upside to guidance principally driven by a favorable mark-to-market adjustment on a strategic supplier investment. The quarterly effective tax rate was 14.1%.

Net income was $1.17 billion. GAAP net income was $1.12 billion. Cash flow from operations was $1.16 billion, and free cash flow was $1.07 billion. The breakdown of revenue by reportable and end markets and major products and regions can be found within the shareholder letter and slides. Moving on to the balance sheet.

We ended the quarter with $4.7 billion in total cash, cash equivalents and marketable securities and $5.9 billion in debt. The company has a flexible and attractive bond maturity profile supported by investment-grade ratings from all 3 major rating agencies. A cornerstone of KLA's business is consistent strong free cash flow generation. driven by one of the best operating models in the industry and a predictable, highly differentiated service business. This helps drive a comprehensive capital return strategy that includes consistent dividend growth and increase in share repurchases over the long term.

Our actions this year emphasize our commitment to capital returns and our confidence in KLA's long-term shareholder value accretion. On April 30, 2025, we announced the 16th consecutive annual dividend increase, up 12% to $1.90 per share per quarter or an annualized dividend of $7.60 per share. Along with this action, we also announced a $5 billion share repurchase authorization.

Turning to the outlook. It continues to be driven by increasing investment in leading edge logic, HBM and advanced packaging. Growth of advanced packaging supporting heterogeneous chip integration has led to a new meaningful served market for KLA. What was once a rounding error in wafer fab equipment is now according to KLA internal estimates an approximately $11 billion market, growing faster than core WFE. This is particularly true as chip density shrink and the processing required for package increase risk for our customers.

For KLA, this creates a new served available market that will augment the company's revenue growth over the next several years. The market and technology road map for leading edge WFE supporting high-performance compute is driving relative inflections for process control. This opportunity, coupled with the evolving complexity of advanced packaging, supports an even broader market opportunity for KLA.

As we approach the close of calendar 2025, we continue to expect mid- to high single-digit growth in WFE, modestly improved from our previous outlook discussed last quarter. Growth in 2025 is being driven principally by increasing investment in both leading-edge foundry logic and memory to support growing AI and premium mobile demand, partially offset by lower demand from domestic China. Given KLA's business momentum, expanding market share opportunities and higher process control intensity is the leading edge across all segments. We remain on track to outperform the WFE market in 2025.

The advanced packaging market is also expected to grow more than 20% compared to last year. Finally, customer discussions have become more constructive on expectations for calendar year 2026 to be a growth year for the industry with a broader spending profile in 2025 for both WFE and advanced packaging. While it is still too early to provide precise calendar 2026 revenue guidance, our view today is that first half revenue levels will be roughly flat to modestly up compared to the second half of calendar 2025, with accelerating growth in the second half of the calendar year. This outlook is inclusive of the revenue impact related to additional market access loss related to certain customers in China resulting from extended export controls from the U.S. government.

We estimate the revenue impact on the December quarter and calendar 2026 to be approximately $300 million to $350 million for KLA. For 2026, this impact is spread roughly evenly across the first and second half of the calendar year. KLA's unique product portfolio differentiation and value proposition are focused on enabling technology transitions, accelerating process node capacity ramps and ensuring yield entitlement and high-volume production. The market environment and the complexity of our customers' technology road maps are compelling and bring challenges and opportunities for KLA to continue its relative performance.

In this industry environment, KLA remains focused on supporting customers, investing for the future, executing product road maps and driving productivity across the enterprise. KLA's December quarter guidance is as follows: Total revenue is expected to be $3.225 billion, plus or minus $150 million. Foundry logic revenue from semiconductor customers is forecasted to be approximately 59% and memory is expected to be approximately 41%, semi process control systems revenue to semiconductor customers. Within DRAM -- within memory, DRAM is expected to be about 78% and NAND the remaining 22%. As always, these business mix approximations pertains solely to our semiconductor customers and do not fully reflect our total semiconductor process control systems revenue.

Gross margin is forecasted to be 62%, plus or minus 1 percentage point based on relatively consistent factory output versus the September quarter and product mix revenue expectations. Operating expenses are forecasted to be approximately $635 million in the December quarter as we continue to make product development and infrastructure investments to support expected revenue growth. Given our expectations for company growth and product development road map requirements, we will maintain our operating expense trajectory.

Our business model is designed to deliver 40% to 50% incremental non-GAAP operating margin leverage on revenue growth over the long run. Other model assumptions include other income and expense net of approximately $32 million expense for the December quarter, the effective tax rate assumption has risen slightly to 14%, reflecting the impact of recent global tax changes.

For the December quarter, GAAP diluted EPS is expected to be $8.46, plus or minus $0.78 and non-GAAP diluted EPS of $8.70 plus or minus $0.78. EPS guidance is based on a fully diluted share count of approximately 132 million shares.

In conclusion, our near-term revenue guidance shows modest growth and is consistent with our views from the start of the year of relative top line stability. We expect to meaningfully outperform the mid- to high single-digit WFE growth rate in 2025, driven by rising process control intensity, inclusive of the significant growth of the advanced packaging market. KLA focuses on delivering a differentiated product portfolio that addresses customers' technology road map requirements which are driving our longer-term relevance and growth expectations.

KLA's business is well positioned for today's technology inflections and growth drivers. We are encouraged by the customer engagement that informs our business forecast. Long-term secular trends driving semiconductor industry demand and investments in WFE and advanced packaging are compelling and represent a relative performance opportunity for KLA over the next several years.

In addition, the growing investment in custom silicon, particularly among hyperscalers developing their own custom chips have led to a proliferation of unique device designs and increased demand on our customers to deliver performance, volume and time to market. As design complexity and diversity grow, so does the need for advanced process control. As a result, KLA has seen growth in process control intensity as each new chip design requires rigorous inspection, metrology and yield optimization solutions. KLA is uniquely positioned to benefit from these trends as we expand our market leadership and deliver differentiated value to our customers. That concludes our prepared remarks. Let's begin Q&A.

I'm sorry, I was just going to pass it over to you to start the process. Thank you. .

[Operator Instructions] And we'll take our first question from Harlan Sur with JPMorgan.

Congratulations on the strong quarterly execution. Last quarter, you had this early view given your lead times, customer discussions on calendar '26 being a growth year. You reiterated that today, but talked about being more constructive on that growth rate. So it was another day -- with another 90 days of visibility given that leading-edge design starts are continuing to expand at a rapid pace, the recent and significant AI data center infrastructure announcements, has the magnitude on the WFE growth outlook improved? Or is it more just confidence level on the growth that you were thinking about 90 days ago and you mentioned the broader spending profile on WFE and advanced packing. Can you guys just elaborate on that a little bit?

Sure, Harlan. I'll start. Thank you for the comments. I don't know if it's really a strengthening outlook as much as it's just -- we're getting closer to it. Customers, particularly our long-standing customers and their lead time expectations, we're starting to get more constructive about exact timing. We're encouraged by what we're seeing certainly for KLA at the leading edge with a broadening level of investment. We think that's going to be positive on leading edge foundry logic.

DRAM is also constructive. And with the investments in [ HPM ], that's been very process control intensive. And so that's been a really good sign as well. Flash market is, I think, continues to grow. The rest of the legacy market, I'm not so sure there's much growth there, and I think we'll have a little bit of a correction in China.

Obviously, we're feeling the effects of some new control that's impacting our view into next year. But we were expecting China to normalize anyway. So I think as we look at it all, we're pretty constructive on WFE growth, rising in capital intensive -- process control intensity. And packaging has a lot of momentum, both in terms of intensity, but also share. So we feel pretty good about what's in front of us, and we'll have a lot more to say specifically about growth in the industry and our expectations for KLA beyond what we said in the comments. We'll have a lot more to say when we report for December and January.

One thing, Harlan, just to add to Ben's comment. What we do see and kind of feel is body language from customers pretty strong in terms of wanting to make sure they're securing slots. So we're having kind of conversations with people not wanting us to get away from them because they're worried that they may not be able to achieve their objectives if they don't [ bind us ] up. And I suspect that's across the other equipment guys, too.

Got it. And I appreciate that. And then specifically on advanced foundry and logic, in addition to the increased process control intensity, as the industry moves from 2-nanometer to less than 2-nanometer right there, there's an added dynamic, I feel like where your foundry customers are standing up fabs in totally new geographies, right? So more uncertainty on yield ramps, systematic defects, like different type of workforce, right? .

And then on the advanced logic side, the large guy here is more focused on building out a world-class foundry business, which means way more focus on yield and manufacturability versus their historical trend. I'm Wondering if these additional dynamics are driving the potential for incremental process control spend as you look into next year?

Well, sorry, I do think that there -- as the customers are dealing with the new design rules and some of them, especially that are maybe back in it, if you will, trying to be leading edge, they're benchmarking what do they need for process control, and we're seeing kind of very constructive conversations around that. So I think that's true. I think it's kind of filling out the rest of the players, if you will, in terms of how they're thinking about investment and process control. So yes, I'd say that, that strengthens, if there are more players doing more leading edge in more locations, that's going to be accretive to overall intensity.

Yes. One of the themes over the last couple of years has obviously been significant investment augmented by China and legacy design rules. But when you think about leading edge, leading edge was tremendously efficient, right, with most of the investment being really driven by one of our customers. I think as you start to see a broadening out there, it creates more opportunities for leading-edge engagement, process control intensity as a lot of the strategic investment happens to support what is an accelerating growth opportunity for our customers. So I think we're encouraged by that profile as we move forward.

We'll take our next question from Vivek Arya with Bank of America.

On the foundry logic side, you are, I think, guiding it to decline to 59% from 74% of sales, I believe, so a decline of over $300 million sequentially. I'm curious what's causing this drop? How much of this is the China restriction? How much of this is the China impact? And is this kind of just a 1 quarter lumpiness? Or is there more to read into it as we look into the first half of next year?

Yes. So Vivek, for our semiconductor customers on the mix side, on the leading edge, it's upticking in the December quarter, but it's being offset by a reduction in China. China was elevated in September at 39%. And just for a reference point, our expectations for the total year for China, and I have been pretty consistent with this for the last 9 months or so as we thought it would be somewhere in 30% plus or minus range. So it was a little bit elevated versus the annual trend.

So as China comes down, part of that is you have leading edge going up. And then you also have memory as -- and particularly in DRAM, we see that upticking in the December quarter. So there's some moving parts there that's what's happening. As it relates to the recent export controls, I would say the impact on the December quarter is fairly immaterial to the company overall and that we were able to move slots around. We've got certain products where customers get in the queue, and so we can pull business forward. It's a lot of different customers. But obviously, over the long term, that's lost business. And so as we said in the prepared remarks, we think that's about $300 million to $350 million between now and the end of '26. So hopefully, that gives you a little color on the moving parts.

Our next question will come from C.J Muse with Cantor Fitzgerald.

I guess I was hoping to focus on gross margins. You guided down 50 bps. I'm assuming that's just product mix. I'd love to hear your thoughts there. And then, Bren, you're highlighting, again, the 40% to 50% incremental operating margins. If we are in a world where WFE continues to grow kind of in a double-digit world over the next couple of years, should we be thinking that you're at the higher end of that range, even kind of greater contribution from the higher-margin silicon.

Yes, C.J., on the guide down, you're right, it's about 50 bps, and it's mostly related to just mix adjustments in the quarter. As I've said over the last couple of quarters, there is a tariff impact that we're dealing with, which is more or less consistent quarter-to-quarter. That's roughly 50 to 100 basis points of the impact. So yes, we're guiding [ 62 ] and output is relatively consistent. So it's really a mix issue.

In terms of how we were thinking about running the company and over the long run, certainly our 40% to 50% long-standing incremental operating margin target does drive how we size the company. Gross margin obviously is a factor in that. And so we have to think about where gross margins are trending as we consider that. We outperformed that target pretty significantly as revenue has grown in the mid-teens. I'd call it above trend line growth in 2025. So as we move forward, I think the easiest way to think about that is if you're more or less a trend line, we're more or less in the middle of the target range.

And if growth levels are above that high single-digit trend line, we should outperform it growth levels below, we'll probably underperform the target a bit. But that's how we're going to size the company over time, and our performance over longer periods of time is obviously very consistent with that.

We'll move next to Joe Quatrochi with Wells Fargo.

I appreciate the qualification or quantification on the advanced packaging WFE. I was curious just to think about just the advanced packaging process control intensity. I think just based on some of the things you put out there or talked about in the past, it's like high teens. Is that the right way to think about it? And then how do you think about where that goes over time?

No, I wouldn't say it's that high. I think if you look at KLA's share of WFE, I mean, one of the interesting things and as I said in the prepared remarks, is it wasn't much of a factor for us in our business. you don't have to go back more than just a few years, and the percent per KLA was in the 1% range. And now if you take our views on 2025 at $11 billion or so, we're approaching 6%. So we've seen an escalation here in terms of intensity as the requirements have changed fundamentally related to the high-performance computing on the logic side and the memory side. .

So we think that, that continues over time. I don't think you're going to see that kind of that slope of growth. But we do expect that as density shrink and processes become more complex than it does play to the need for more more advanced systems. And of course, we have our front-end portfolio that we can use to address this interesting market. So I think it's a new SAM for KLA. We have a lot of great drivers within that we think are driving process control and KLA share of the market, and we're augmenting that growth with this growth that we expect to see in advanced packaging that likely over time grows modestly faster than WFE.

So it's a really encouraging opportunity. And I think as we start to move up the value chain in terms of new capability required, and I think it creates an opportunity for us to drive something in the neighborhood or better than general corporate averages on margins?

We'll take our next question from Tom O'Malley with Barclays.

I wanted to ask a bigger one that people have been trying to the earnings period here. I understand that it wasn't in the preamble. But [ Lam ] went out and talked about $100 billion of AI spend is roughly equivalent to $8 billion in WFE or additional spend. And they talked about most of that being related to memory. Do you agree with that statement? Or do you have any qualification for how you would look at that ratio?

I think in general, this is Rick. I think in general, if you think about what goes into a data center, the percent that is memory, the percent that is GPUs or logic and then the rest, you're probably at about -- you take $100 billion, then you could say that half of that would be semiconductor related and the intensity on that kind of gets you to that run rate.

But I don't think it's necessarily 50-50 in terms of memory and in terms of the logic side. So our view is you're pretty close. And then we would -- as we were just talking out in packaging, so we get closer to $10 billion on the $100 billion because of the investment that's not just semiconductor but packaging. And we think our opportunity in that is pretty good because, again, those are all the high challenging process control elements, kind of everything that we've been talking about larger die, more valuable die, more HBM is really challenging from a process control, getting more so and then packaging. So we're in general agreement, we would add back in the packaging part, and we think our participation in there is above our average intensity for the rest of the industry.

We'll take our next question from Timothy Arcuri with UBS.

Bren, Rick was talking about customers starting to want to get in line for. So I would imagine bookings were pretty good. So can you give us RPO? I know it was $7.9 billion last quarter. Where did it end this quarter?

Tim, we don't -- we changed our disclosures, so we're not disclosing that anymore. But what I will tell you is that if you look at our lead times, our expectations for our lead times, as I said last quarter and they've been converging after a couple of years of elevated backlog related to a number of greenfield projects that have now shipped through. And if you look at the composition of our business going forward, really tied to our -- some of our long-standing customers that tend to operate in 6 months to kind of lead time windows.

Our lead times have converged and I think, normalized between 7 and 9 months. Now if you go back and look at 2020, 2021, even go back historically for KLA, it used to be about 6 months. Now our customer base is broader today. And I think there's a combination of a little bit more new fab activity that will push those up. But the context that we provided in terms of our expectations for growth next year and how that plays through in terms of KLA's first half and second half is supported by an order flow that is consistent with those lead times.

So I think that, that is how you should think about it in the 10-K each year, we will provide our -- as we have historically, we'll provide our backlog. And so that will give you an anchor point in terms of backlog on an ongoing basis. But 7 to 9 months, and it looks pretty consistent in that range as we go forward.

I guess you did give it that last quarter, Bren, is that like new this quarter?

Yes. We changed our disclosure, Tim, and we highlighted that we were going to make that change back in the March quarter earnings results. We said when we started the new fiscal year beginning July 1, that disclosure would change. There were a number of reasons for that, the primary reason being the inconsistency in how that disclosure was being interpreted and reported across our industry. So we have aligned more closely with the disclosure that our peers have, and that's what we're going to do here going forward.

Okay. Then I guess as my second question. So you said last quarter, Bren, that China was going to be for you, down 10% to 15% this year. But even to get down 10%, I have to have China down like $250 million Q-on-Q in December. Is that the right number that China is going to be back to like 30%, 31% in December?

Yes. In the December quarter, I think China will be high 20s. So yes, you're in the range. We'll see how the quarter finishes up. But I think in the high 20s is how modeling and then it translates into maybe 30%, maybe 31%, very consistent with the way I've talked about it all year long. .

And the other thing I'd say is, as you look at 2026, we think it's probably it comes down into the mid-20s. And obviously, some of that is driven by the export restriction, but also some general normalization that we've been talking about that would be coming. So we think it's likely settle somewhere in the mid-20s as we look at 2026, at least how we see it today.

We'll take our next question from Krish Sanker with TD Cowen.

I have a 2-part question. One is in the past, you've spoken about 2-nanometer [ gate all-around ] as 100 basis points improvement in share for you [indiscernible] a, is that true -- still the case? And number 2 is, I think if I remember right, the advanced packaging share is about 50%. If I do the math on that $11 billion and $925 million, it seems like advanced packaging, WFE intensity is around mid-teens. Do you think advanced back-end inspect -- process control intensity is getting higher than front end? Or do you think it's still below

I think it's still below. I mean, just the first part of your question, we haven't -- look N2 has been a more intensive process control intensive node. Obviously, you have an architecture change that's that's quite significant. The other issue is that as you think about larger die that creates opportunities for more process control intensity. So -- and I think the litho scaling and litho layers with larger die design or HBC designs tends to drive more litho layers in the process as well.

So when we look at N2 overall versus N3, we do see an improvement in overall intensity. There is a share element to it, too. We're encouraged by some of the share movement we're seeing. But overall, that's how we see it. As it relates to advanced packaging, I think our logic share is higher than our memory share. We'll have more to say in terms of articulating how this this market breaks up.

But as I look at KLA share of the advanced packaging market, we're about 6%. And if you look at KLA's share of the PC market, it's closer to 8%. So the process control intensity is not as high and sampling rates are pretty elevated these days. And we'll see over time if that changes. Certainly, the need for more capability will be a requirement here moving forward. But we'll see how those things trade off over time as our customers move forward.

Then I think you also mentioned that some of your front-end tools are being used to back end. I'm just kind of curious, especially on the macro inspection or inspection side, is there an overkill, like even [ ASNO ] spoke about introducing new [indiscernible] tool for advanced packaging, would you consider introducing new tools for back-end packaging? Or are you going to use the front end tools? .

No, I mean -- it's funny you say that because that was our initial reaction when the customers want us to put our front-end portfolio in the back end, we said, "Oh, are you sure?" Because the cost of that are you sure you need it, and they were quite certain that they needed it because of the -- just think about the cost of yield failure in packaging and how much it's worth to ensure that that's not happening. So that's what we've really seen in terms of that. They're not -- it's obviously not our most advanced tools, but it is.

They are systems that we use in the front end and that would have been considered the most advanced tools you go back a few years. So absolutely, they're the ones that pulled us in. I mean we did not come to them. It was almost the other way they said, we want you to to provide this capability. So when we think about the road map for packaging, and remember what we're talking about advanced packaging, we're in many ways, early innings because there's still other technology inflections that are going to go into HBM over the next several years as the rest of the market catches up with these advanced packages.

So we're really talking about a pretty small percentage of available packages being inspected at this high level. Now over time, people will learn more about it, and they won't inspect it the frequency. So that's why we see the growth will continue, but it won't continue at the rate we've had for the last couple of years, but it should outpace overall WFE growth. And our share position is great for 2 reasons. One is that we've got this capability. But beyond that, unlike our competitors that are coming from the back end, we have road maps and a lot of customers have tremendous value in that road map ability.

And we'll take our next question from Charles Shi with Needham

I noticed that based on your Q4 guidance, the KLA process control revenue in DRAM is probably going to grow 50 percentage year-on-year. I don't think the overall DRAM WFE is growing that much. And I think historically, people don't really think the KLA as a DRAM house more of a leading-edge logic house. So wonder what's happening this year? Why is it growing this much faster than specifically, is it kind of tied to the EUV insertion DRAM? And how do we think about 2026 DRAM side of the process control growth?

Yes. It's an interesting observation. For those of us who have been around for a long time, we remember when DRAM was actually leading technologically and was the biggest market for inspection for KLA. And what happened was, for many years, there was a bit of a holiday in terms of design rules in DRAM and the need for process control and what the use case was.

But when you get into what's going on with -- especially around the high-bandwidth memory, and the challenges that people have relative to the new design rules, we're actually seeing, in some cases, higher sensitivity requirements in some cases for DRAM on some layers that we're even seeing in logic. So we've had a bit of a reversal of some -- in some areas, and we've seen big adoption of early on as people are [ developing ] these processes and then realizing they don't have a lot of process margin. So that's the other thing, is there -- and when they start EUV, then they're using our systems for [ precheck ].

So you see a lot of applications happening, and that's really what's been driving this increase. We thought it would happen. Years ago, we were hoping it would happen sooner, but it's definitely we're seeing leadership in some areas in terms of the need for process control as they retool these DRAM facilities to deal with some of the new market requirements.

Look, the introduction of EUV was certainly a factor in terms of process control intensity. We think overall, probably changed at about 1 point. But then if you look at the requirements for HBM, we think it's increased at another point or so. Rick talked about a lot of the issues. The other thing you have to keep in mind is that the reliability requirements in a stack of DRAM chips and an HBM device, the device is only as good as the weakest DRAM.

And so the performance requirements, the process variability that the customer can accept, you can't spin these devices that go into an HBM integration. So there are a number of things that are happening there that are positive for process control intensity.

Got it. Maybe a quick follow-up. I think going back a couple of years ago, you guys talked about the delayed [ pellicleization ] what that means to the KLA mask inspection portfolio. I thought the thesis was that without pellicle, your existing mask inspection plus print check probably works the best. But with the pellicle, maybe actinic works better.

I know this has been an ongoing discussion for many years, but we are hearing recent -- some recent reporting out of Taiwan, talking about your leading foundry customers potentially converting a fab into a pellicle fab and wonder what that means to your overall strategy on mask inspection. If you shed some light on that?

Yes. So rather than going to specific strategies, specific customers have, I can tell you we're in conversations with all the leading mask manufacturers in the fabs in terms of what is their strategy relative to reticle qualification and requalification because it's a critical area. And and although we don't have all the pieces in that, we have many of the pieces because there's many points along the way, whether you're calling the reticles in the fab, you're doing recall or you're doing verification and print check. So we're heavily involved in those conversations.

As you know, the challenges with pellicleization and the trade-off is throughput. And so that's always the issue of using pellicles as you give up some of the live performance. There have been advancements and we're well positioned to support those. But when we talk about a record year in our reticle business, obviously, people are buying with the future in mind as they do that, and we continue to see growth going forward, we feel pretty good about our ability to participate as we go forward in terms of any scenario that plays out. But I can tell you we're very heavily involved in customers with those conversations.

We'll take our next question from Chris Caso with Wolfe Research.

I guess the first question is regarding the commentary on '26 because you have a little more detail about what you're seeing first half versus second half. I assume that it's a combination of advanced logic and DRAM driving that second half? And is that just simply a function of where your lead times are that some of the improvements we've seen over the past couple of months are just now flowing through in orders given where the lead times are right now.

Yes. As we said in the prepared remarks, and I think the first half is maybe flat to slightly up, and we'll see as we move forward, where that ends up. But at least that's how it looks today. And I think you'll see growth accelerate more into the second half. Lead time discussions, we're talking about slots, but I think there's some facility dynamics also that are influencing some of the timing. But would expect advanced logic and the broadening of the investment that I mentioned to be a driver into the first half.

But there's continued momentum on the DRAM front, too. So we're pretty encouraged by what we're seeing there. Obviously, it'll be offset by some weaker numbers out of China, but the leading edge dynamics are encouraging.

Just a question on gross margins as we go into '26 also. And with some of the mix changes, particularly with China probably coming down as a percentage of the mix, anything we should think about with respect to gross margins as we start modeling through '26?

Yes, Chris, I'll give a little bit more specific guidance on margins and operating expense expectations based on our revenue picture at next quarter. Gross margins for KLA are generally impacted, I'd say, almost exclusively impacted by what we sell, not so much who we sell to. And where we sell it. So it really is a factor of how it's impacting certain product types that we have a pretty extensive portfolio of products, the broadest in our segment of the industry.

And depending on what you're buying, it can carry different margin profiles. Certain parts of the market, like packaging tend to carry a more dilutive stream, as I mentioned earlier, I think, over time, that goes from being a headwind to a tailwind. Service tends to grow, has a dilutive gross margin, but we believe an accretive operating margin. So you do have some of the moving parts. The tariff impact, when you compare year-to-year, we really that's more second half dynamic this year. And my hope is given some of the things that we have going on in the company in terms of assessing how we can try to mitigate that exposure that, that becomes less of a headwind over time.

I think structurally, we're in a world where we'll be dealing with higher tariffs, but I do think there are things we do in terms of how we operate the company, where there's some ROI in terms of just how we move parts around the world and how we reduce the leakage and drawback scenarios as we understand and track different parts attributes that help reduce some of that. So I think there are a number of dynamics at play that will become less of a headwind over time.

And depending on the growth of the business, obviously, that will happen as volume will have an impact, too. So I want have more to say about, I think those are some of the context behind the different moving parts.

We'll take our next question from Shane Brett, Morgan Stanley.

I wanted to follow up on Charles' earlier question, but your memory customers have been talking of CapEx growth into 2026. But just given how strong this December quarter DRAM guide is, how should we think about your memory growth expectations into next year relative to this really strong December quarter?

Yes, I apologize. I know that Charles asked that and we didn't answer that question. There are definitely some timing factors that are influencing process control, timing relative to other products. As I look at where we're at, I mean, this year has been a very strong year in DRAM for the company. I would expect next year to be a growth year as well. And I think a lot of these announcements, I think, as we start to see that play out and we'll see whether that is more of a second half dynamic into next year and how much that sort of carries forward. But what is clear is, across all of our customers, I expect them to spend more and to see growth in our DRAM investment from our customers into next year.

[Operator Instructions] We'll take our next question from Edward Yang with Oppenheimer.

Rick, Bren, most of my questions have been already answered, but maybe you could talk about your outlook for foundry-related revenue opportunities outside the dominant Taiwanese customer. I think at least one major foundry has historically underinvested in yield improvement tools. Maybe that tune is changing. So are you seeing any change in engagement there?

Yes. I would say that we're encouraged by, as we said earlier, we're encouraged by the broadening of investment that we're seeing at the leading edge as we go into next year.

Yes. The conversation qualitatively, the conversations we have with customers that are looking to, as you mentioned, not the leader that are looking to do advanced logic, we do have a lot of conversations around what they're asking our advice, what do they need to be successful, especially since they maybe haven't been pressing the latest nodes. And so there's a lot of conversation we have about the specific things they're trying to accomplish. It depends on the dynamics, it depends on their mix. It depends on their die size. It depends on what their expectations are for how fast they want to ramp. .

But it is, for sure, a lot of conversations we're having. And as Bren says, we feel pretty good about those discussions. I think for a lot of people, the process control part, they haven't really fully understood how the world has changed in the last few nodes. And so those conversations are ongoing.

And just as a quick follow-up. Yesterday, the leading AI accelerator company talked about a $0.5 trillion backlog. We're seeing these flurry of deals involving the major AI lab players. From your vantage point, can you level set for us, is the semi cap industry position to serve that scale of demand? Or is the ecosystem discounting some of these projections as aspirational.

Yes. I don't -- I guess I would maybe pass it a little bit differently in the sense that I think the semiconductor industry has been prudent in terms of adding capacity. And right now, when we talk to -- when we try to reconcile the external discussions about CapEx and would that translate into in terms of wafers, not enough wafers will be available to achieve those objectives in the time frame. And our view is that it's not necessarily a bad thing. It means it's not going to -- it's unlikely to overheat if those forecasts remain intact because there's more gating factors than there are people making announcements. It's easier to make an announcement about investment in the data center than it is to build a new fab. So I think it's going to take some time for the industry to absorb and support the capacity demands implied by all the public announcements.

We'll take our next question from Blayne Curtis with Jefferies.

I just want to go back to the DRAM comments. You talked about the increasing capital intensity. I'm just kind of curious about kind of the conversations. Obviously, massive numbers have been thrown out there. Just kind of curious, I think someone asked us prior about what -- was that always the plan to have DRAM up this much? Or have things been pulled in? And then I guess, just if you could elaborate a little bit more color on those conversations you said where they're looking for capacity, like what's holding it up? Is it just they need fab space? Or are they unsure about the demand? Just any color there would be great.

Yes, I would say that you definitely feel there's more urgency on the DRAM front in terms of timing. We'll have to see how that plays out in terms of slots as we move into next year given our lead times, what we can accommodate and obviously, we try to work closely with our customers on that front. But there's certainly. And I think from a pricing point of view, I think the dynamics that are driving HBM pricing overall, there's definitely a sense of urgency from our customer base. And as I said earlier, across the top 3, I do expect higher investment levels next year than we're seeing here in '25.

I think the other way to think about it, if you think that there's 3 components, primary components that go into supporting these AI infrastructure build-outs, you have obviously the GPUs and the accelerators around those, you have the packaging and then you have the memory. I think you're going to see over time that you go in phases of which one seems to be short supply. And we kind of went through a phase of that with packaging being behind. And now I think the realization by a lot of our customers is they might -- there might be more opportunity in memory than they thought, and those are accelerated from what they even told us a few months ago. .

So I think that that's part of what you're seeing. I think everybody is a bit amazed by the number of applications that are being realized using AI. Even inside of KLA, we keep coming up with new ways to leverage the technology. And I don't think we're the only ones doing that. So I think the memory guys are right now feeling well, there's more opportunity if they could add capacity. And those are kind of the conversations because they realize that it takes longer, as I said, to ramp the supply chain than it does to make these announcements about CapEx. Thank you.

We'll take our next question from Jim Schneider with Goldman Sachs.

Maybe just 1 follow-up relative to the earlier question about the diversification in your leading-edge logic and foundry customer base. Is that something that's more on the inquiry level at this point? Or are you actually seeing that either in your order book or in the form of forecast from those customers at this stage?

I would say we are seeing it, and it's certainly as it informs our views of next year. We're seeing it in the order forecast. And the -- as Rick talked about earlier, I think there's a lot of collaborative discussion about how we can help navigate and ramp and drive time to results in this capacity.

And then maybe just as a quick follow-up. Maybe you can help us just refresh your expectations about kind of confirming mid-teens is the right level for service growth in 2025 and maybe give us a sense about whether that could accelerate next year?

Yes. We've seen service actually pick up a little bit here. It's been a little stronger than we expected. Obviously, we've had some FX benefits, but we've also had some strengthening as utilization rates have gone up. We've seen some strengthening in some of our billable business. So I think our service growth will be in our target range of 12% to 14% this year. And I would expect right now as I look at next year, that will be in the same range as well. So I think we feel pretty good about where that is. both based on the growth expected in the installed base, the life time increase in the tools, the incremental value that's coming from the complexity in the systems and how that's affecting the pricing as it relates to contracts, the opportunities in the acquired businesses that we've acquired over the last few years to drive their service business and new requirements that we're seeing, this is a factor in '25 as well. But as you think about packaging, a different service model for packaging, but also for DRAM, where where the utilization rates to some of the earlier questions have been higher and higher expectations of performance of our system.

So I think there's some new opportunities for growth there that, frankly, if you go back a couple of years, I don't think we fully anticipated, both on the packaging front but also on the high bandwidth memory front supporting HBC. .

We'll take our next question from Timm Schulze-Melander with Rothschild & Co.

Actually, I just had 1 with respect to your outlook for next year. You talked about this broadening in demand for 2026. Could I just ask, could you just paint some color around to what extent that already bakes in [ high NA ] engagements or whether that would be an upside to your outlook for '26?.

One thing, look, on the R&D front, there's a lot of collaboration with customers, how that translates into revenue is not part of the outlook. It's most of what the engagement is, is on ramping the continuation of the N2 ramp, our 2-nanometer ramp across our customer base. And so isn't influenced by the adoption of high NA in that time frame.

We do have time for 1 additional question. We'll take our final question from Brian Chin with Stifel.

I appreciate that. Maybe a question here. I think there was a reference earlier about the potential for some acceleration in second half of next calendar year. I'm sure it's not one single thing, but how much of that second half outlook is tied to new clean room space availability, knowing that some of your tools, probably some of the first that go into a greenfield fab.

Look, there are some issues, I think, with space constraints potentially. It's not, of course, on every customer, but I do think that that it could affect some timing as we move into the second half of next year and into '27 as you start to think about the next node ramping and some of the new fabs coming online in memory. So right now, I don't think space is going to be an issue. Obviously, that would depend on the strength of demand, yes, that could change. But for now, it's certainly a factor, but I don't think it's a big factor as it stands today, and we'll see how things go.

Maybe if I had a time for a quick follow-up. On advanced packaging, I think to date, a lot of your inspection business strength has been strongly tied to logic. How much of your continued optimism on market and KLA growth in package next year involves expansion opportunities in HBM packaging?

I feel good about market share, both in logic and in memory on the packaging front. We've seen positive trends in both segments over the last couple of years, and I think that, that continues into next year.

Thank you, Brian, and thank you, everybody, for your interest in KLA. We appreciate your time today, and we'll be in touch. I'll turn it back over to the operator for any closing instructions. .

Thank you. And this does conclude today's KLA Corporation Quarter 2025 Post Earnings Call. Please disconnect your line at this time, and have a wonderful day.

Okay. Good morning, everybody. Welcome to the Goldman Sachs Communacopia + Technology Conference. My name is Jim Schneider. I'm the semiconductor analyst here at Goldman Sachs. It's my pleasure to welcome KLA, CFO, Bren Higgins; and President of Semiconductor Products and Solutions, Ahmad Khan. So I want to make sure I got that right. Welcome, guys. Thanks for being here.

Thanks for having us.

Thank you.

Bren, maybe to kick off, I think you might want to give us a brief kind of recap on the quarter and the business outlook as you see it as we start off.

Okay. And first, again, thank you for having us. Happy to have Ahmad here. Ahmad runs our systems businesses in the company, also runs our channel, so he can bring some good insight to product road maps and customer dynamics. So happy to have him here. I think it's a treat to have him here in front of investors today.

Just to, I think, level set on some of the themes from earnings. Obviously, the June quarter was a good quarter for the company. We had a raise into the September quarter. 2025 is shaping up more or less as we had expected and we articulated at the beginning of the year. We've seen some incremental improvement overall reflected in the results relative to guidance. But in general, the trends have been pretty consistent.

The logic environment has been very compelling in terms of investment at the leading edge. The 2-nanometer node has been great for KLA in terms of process control intensity. And so we're seeing investment that's happening there. High bandwidth memory is creating lots of opportunities, and I'm sure something we'll talk about in terms of rising process control intensity in DRAM. The nature of not just the devices themselves, but the performance requirements of the market are also pretty compelling for KLA.

And then the packaging market, which is an interesting market, you just go back just a few years ago, was a few billion dollars kind of in the margin for error of WFE. And today, somewhere, at least as we define advanced packaging, somewhere in that $10 billion to $11 billion level. And we've seen that market as complexity has increased, the opportunity for us to differentiate has become a much more compelling opportunity, we think is an increasingly compelling opportunity over time.

And so that's been a nice inflection in our business as well as that market has moved to us. We raised our guidance. Last year, we did a little over $500 million in terms of advanced packaging revenue. And each quarter, we have continued to raise it this year, both on the strength of intensity with high sampling rates from customers, but also share opportunities. Last quarter, we talked about $925 billion of opportunity this year, and we'll see how we ultimately end up, but certainly a lot of momentum in that part of the space.

Service, despite some of the challenges around the U.S. export controls denying access to certain fabs, our service business is still performing in double digits. I think that's a great trend that we're seeing. I think we can talk more about service later in terms of the drivers and why it's a unique business. But we have a long-term target of 12% to 14%, slightly below that now. But given some of these constraints, I think we feel pretty good about that and our ability to continue and grow at that level over time over the next several years.

Financial model is what you would come to expect from KLA. Gross margins at 62.5% for the year was part of our guidance. That's inclusive of some tariff impact that we're spending a lot of time on trying to figure out how to mitigate. We've got a number of things going on in the company. But right now, we see it at a 50 to 100 basis points of impact. Overall operating margins ahead of our long-term target model of 40% to 50% incremental operating margins on revenue growth, and we're above the top end of our model for this year.

So the execution is very good. I think from a priority point of view in the company supporting our customers is always a priority. We're pretty excited about what's happening at the leading edge, some of the dynamics I talked about earlier in terms of opportunity that obviously puts responsibility on us to ensure that we're collaborating to ensure that we can support. We've got a number of really critical programs in the company in terms of investments that we need to make to ensure that we've got the products that support the road map.

Innovation is the lifeblood of KLA allow us to drive the differentiation that drives that business model that I talked about. And then finally, I think that we, like everyone else, are looking for opportunities to continue to drive leverage through our business model to take advantage of the opportunities out there from a productivity point of view, the tools that are now emerging that will help us bend the cost curves in our nontechnical areas but even in technical areas as you get more efficient with code and so on.

So we think that those are the sort of priorities that we have in the near term, and we're pretty excited about the dynamics that the growing segment of the market around high-performance compute and as that increases as a percent of the total it creates a lot of unique opportunities, we think, for process control and for KLA. And so we're pretty excited about what that future holds. So why don't we stop there and go on to your question.

Yes, perfect. So relative to process control intensity, can you maybe remind us about what share of WFE you're initially aiming for in -- for 2026 from your prior Analyst Day, where you're currently tracking? And what's the added upside as you think about your position in advanced packaging that you just mentioned?

Sure. And I'll let Ahmad weigh in on some of the context behind it. But we laid out a plan at Investor Day in 2022 in 2026 to get to 7.25% plus process control or KLA share of WFE. And if you look at the results this year, we think we're trending closer to 8% this year. So we're meaningfully ahead of that target model. Now if you back up to where we were in 2021, 2022, that was down in the low 6% range. Everybody adds up the denominator a little differently. But we've seen a meaningful change in share of the overall market over the last few years. So to the drivers of that, why don't I let Ahmad weigh in?

Yes. So the AI inflection is really tilted towards process control. We are benefiting quite a bit from this inflection. And one of the core reasons is AI has driven both advanced logic but also advanced DRAM. And in that, one of the inflections that we see that affects KLA positively is that the die size of individual chips is increasing at a very big rate, right?

The die sizes were very small in the past, and now the die sizes are increasing. And this die size increase inflection is happening at mature nodes at 5-nanometer and 4-nanometer and 3-nanometer, but also happening at 2-nanometer advanced logic. So just imagine, if you step back and you had a wafer and you had 2 dies on it only and you had 1 killer defect that killed the die, your yield would be 50%. And if you had a wafer that had 10 dies and you had 1 killer defect, your yield would be 90%.

So as die sizes increases where you may not see litho intensity or deposition intensity because the wafer size is fixed, but process control intensity goes up because of the criticality of die size. We call that D0. So we see that in logic and also in DRAM. Secondly, in DRAM or in HBM, traditionally, you had only DDR devices. And now you have HBM. And in HBM, you have a stacked device, a stacked device that starts with a logic-based die to control the rest of the circuitry.

And that is -- it's between 7-nanometer to 10-nanometer node logic that's going to go eventually to 3-nanometer. So that is logic intensity. The second is that you have stack dies on top of it. And in this stack die, you have a lot of TSVs and you have a lot of logic circuitry, which is different than the traditional DDR, which has repeating patterns. Because of this, process control intensity is going up.

Now as you're stacking these dies, the value of the die goes up as you stack #3 and #4 and #5. And therefore, customers want to make sure that process control is done, ensuring that the previous stack is not wasted. All that happens and then you have to put that together in a CoWoS fab. So you have a logic die, which comes from a front-end foundry. If you have a loss of that die while you're doing the integration on CoWoS, you can get another die, of course, it costs you money. But if you lose HBMs, you have to write your customers a check.

So all that integration drives process control intensity also in packaging. So we see process control intensity going up in logic, primarily because die size is going up and complexity going up. We see it in HBM manufacturing because the logic content is high and stacking content is high. And then we see intensity going up in packaging because you're taking very expensive devices and you're integrating them together.

And the ROI of doing that inspection is far better than losing the die. So we see these trends all being positive. And longer term, as you know, if you looked at the number of transistors that were available for a GPU about 5 years ago, close to about 50 billion to 80 billion transistors, today, it's full field reticles doing 100 billion to 200 billion transistors. So die sizes are increasing, number of transistors are increasing. We see the same trend in memory, more stacks of HBM and larger dies, and this trend will continue as well.

So one of the other things that's happening -- has really happened in the industry since about 7-nanometer introduction, we go back to 2019, 2020 is there was a period of time where the number of designs at the leading edge was declining. And you had a period of time where there was a slowing in the scaling road map, and that was a factor. And so you just didn't have -- it wasn't as compelling to necessarily move to leading edge for a lot of different designs.

Also, the cost of design was very high. So the leading-edge road map as it became more compelling from a device performance point of view was one thing, but also as the cost of design has come down really enabled by the broader industry, enabled by TSMC, it's created this environment where you have this proliferation of designs. And that benefits KLA uniquely because managing a high mix in a fab is really challenging for our customers.

So you have lots of designs, lots of different process flows. You have the sort of capital optimization that you don't want to start too many, you don't want to start too few in terms of wafers, you have to deliver to a tight market window. All that really benefits KLA in a unique way. The other thing is as we're seeing today, the N2 node has -- 15 or so customers doing designs at N2.

You've got 10-ish high-performance compute customers doing designs. So it's driving pretty rigorous performance requirements on that front. But you also then have a very highly utilized N3 node. And so the ability to -- for our customers to migrate capacity, try to reuse some of their capacity is more constrained. So we think the N2 node will probably be the largest over the first 3 years or so node from an overall design point of view. And it's pretty compelling overall with some of these other challenges from a technical aspect that the design environment creates a unique opportunity for the company as well.

Yes. Fair enough. Okay. You talked on advanced packaging before, you touched on that. Maybe how should we think about your exposure to advanced packaging and your share of that market? And then more broadly, can you maybe go into detail on the [ 3% ] of your revenue that's not tied to process control?

The nonprocess [indiscernible]. Okay. All right. So advanced packaging, well, I talked about some of the inflections that we're seeing overall. And we can talk to some of the overall challenges and the complexity and the shrinking pitch is the density of the lines and spaces in the package and the complexity of that and the risk that the customer takes to the value of the package itself, you think about what a GPU cost integrated with HBM. And so you're seeing very high sampling rates in that part of the market.

There's a need for more complex tools, and we've been able to see the back end kind of evolve in a way where the front-end capability is now required. We see our customers managing it very much like they manage the front-end requirements. And so that's been a nice inflection. We've seen share increase in that part of the market. On the memory side, it's evolving a little bit differently, but we also see some momentum that's happening there to some of the dynamics that Ahmad talked about earlier.

I don't think packaging is going to continue to grow like it has in the last couple of years. But we do think over time that given this die size challenge and the need to integrate these packages and the performance requirements of these packages that sampling will likely stay pretty high. I don't know if it will stay as high as it is today, but we will stay pretty high. And the complexity road map is increasing. And so our customers will start to need more advanced capability from KLA.

Over the next several years, we think it likely grows faster than WFE overall. In the parts of the business that aren't process control, we have our process business, which is specialty semiconductor business. And a big chunk of its exposure is in advanced packaging. It also has exposure in specialty MEMS and those parts of the market. It's a $500 million to $600 million business for KLA, you can see it in our segment reporting and has uniquely designed for some of these markets. And we found that pretty attractive when we acquired Orbotech as they've been able to design around specific requirements in those markets. Those markets have now inflected and so it's created a pretty differentiating business from a financial point of view.

So we think we can leverage the relationships. We've absolutely been able to do that with that business and probably at a level that they were unable to do prior to the acquisition. And so it's proving that the operating model of KLA can bring value in markets beyond process control. So we're excited about that. And there's also our PCB business, which has been under some pressure from a capacity point of view as it relates to some of the weakness in mobile markets and lack of investment. We're starting to see some signs of life there. We'll see how that progresses over time.

Just to build on packaging. The main inflection that has happened in the marketplace is that you used to make a device in the front-end logic and then you did a fan-out package of that device and then you put it on a PCB, right? That world has changed, right? Because now it's really a system on silicon. And that inflection is really what is driving the packaging intensity.

You don't take a final wafer cut it and put it in a package and put it on a PCB. You start building from there onwards with memory, with other things, and this inflection will continue, and that's why the packaging inflection is continuing. And the cost of these dies are very high because repair on PCB was simpler. You would take the final package, put it on PCB, you can repair it in the event that, that integration didn't go well.

But the repair on a CoWoS wafer is very, very difficult to do. So therefore, intensity of process control is going up because the value of the package is high and the difficulty of repair is high.

Great. That's a great perspective. Maybe shifting to WFE. Just kind of give us a sense about where you expect WFE to land in 2025, maybe your initial view on 2026 and some color on the moving parts within that.

So I'll just echo some of the thoughts from earnings. We did provide a little bit of context. I think 2025, our view is pretty consistent that we see growth rates in kind of the mid-single digits from last year. You do have this packaging element that's a little bit, I think, distorting some of the views of where WFE really is. Do you have them -- I think going forward, we're going to have to start to separate these 2 markets out because it's not in the margin for error anymore.

But if you look at sort of traditional WFE, we see it trending in that mid-single digits. As we -- and I talked to the dynamics that were driving that earlier. As we look at 2026, just qualitatively, we continue to see a lot of momentum at the leading edge. We think that there's some broadening of investment at the leading edge that happens next year that certainly informs our forecast. Now my forecast is obviously influenced a lot about my business and where we sit.

So I certainly have some perspectives on certain parts of the market where there's a lot of relative strength for KLA and maybe less so in other parts. But we think the leading edge, we think there still continues to be momentum in DRAM, a broadening of investment likely there supported by HBM. China is down this year. We think down roughly 10% to 15% in 2025 versus 2024. I think probably continues to correct a bit into next year. Most of the investment is in legacy nodes. And they've been -- investment levels have been pretty high over the last couple of years. So I would expect some sort of consolidation or normalization of that investment.

If you look at the legacy non-China markets, they pulled back a fair amount. I don't see them getting worse. I don't really see a lot of investment, but I think it kind of holds together as we move into to next year. And the NAND market is, I think, continues to be pretty constructive off of pretty low levels of investment overall. So I don't think that -- I think possibly could be some growth there off of a pretty low level overall. So I think that's generally how we see it. Again, we haven't quantified it, but it's our expectation today as we look at '26 that we think WFE has growth to it and that we think packaging continues to grow as well.

Yes. In terms of foundry/logic is a mix within that overall envelope, do you think for you that foundry/logic ever gets back to that sort of like 80% high point that you hit before? Or was that just sort of a confluence of events with NAND being incredibly weak and so on that just kind of is unlikely to repeat?

Yes. So NAND was weaker. And then obviously, memory does have the cyclical dynamics that I think always continue. I think HBM is interesting in that there's a lot of customization and logic-like aspects of HBM moving forward that might change some of those dynamics. But I think if you look at where the growth rates are more elevated, certainly, that's on the logic side.

And so look, our models, if you -- back in 2022, I talked about maybe 60% mix over the kind of long run, given some of those episodic sort of cyclical dynamics in memory would be logic/foundry. If you asked me today, I think we're probably in excess of 2/3. So I think that memory will grow at kind of longer-term GDP plus type growth rates. And I think logic/foundry will be more consistent with overall semiconductor revenue given the drivers of it.

So I think in that environment, I think it's very constructive for KLA given the relative process control intensity in logic versus memory. We're seeing momentum on the memory side that I think even in any environment where like even this year where memory is about 5 points less than last year, we see a very good setup for relative performance. So I think on a go forward for a lot of the reasons we just talked about we feel very good about KLA's ability to maintain not only our position but also see a continuation of some of this relative share WFE opportunity that we've seen over the last few years.

Very good. You mentioned NAND before. You talked about you think it's sustainable. Can it still grow from here? And then I guess, maybe give us your view on a framework to think about process control intensity stepping from HBM3 to 4.

So I don't think I said what I need to say about NAND. I don't know if there's much more I can add on that, at least as we look at next year. Obviously, that's much market sensitive to consumer dynamics. So we'll just see how that plays out. But off the level of investments, roughly $11 billion. And if you just go back to 2017 or 2018, it was $18 billion, $20 billion. So it's down considerably from where it was many years ago. So I think from the low level, it's -- I don't think it has a lot of downside, let's just put it that way. Do you want to talk a little bit about some of the dynamics in HBM...?

I think on 3 going to 4, there's a couple of inflections. First is, of course, the logic circuitry for 4 is more advanced and some customers are thinking of very advanced nodes for the logic-based die. Today, the logic-based die is mostly very trailing edge nodes. And because of that, you use older process control systems. So intensity goes up because you're going to advanced logic die. The second area is that the I/O connections increase quite significantly, in some cases, can double.

And in that case, that you have to go back again and increase the die size because otherwise, you just won't get enough transistor density -- DRAM transistor density. The die size will increase, which is beneficial to KLA and then the number of steps would go up as well. The other inflection is that most customers currently are using bump technology to do integration of HBM. There is trends to go to hybrid bonding and hybrid bonding has advantages and then disadvantages from a yield point of view. So I think KLA will play a very important role in delivering hybrid bonding type tools as well, along with the ones that we're doing today, which is bump technology. So all of these are positive trends that will be beneficial to KLA.

One of the great things about high bandwidth memory is the performance requirements of high-performance compute are very, very tight and rigorous unlike PC markets where you have memory leakage and your computer locks up and you go and reboot, you really can't do that with a high-performance server. And you need to run at very high levels to feed the GPUs. And so it's creating reliability requirements around DRAM that's much higher than in other markets.

And therefore, the performance of the stack is completely dependent on the weakest one. So the stack performs kind of in line with the weakest DRAM in the stack. And the process variability that our customer can deal with because there's -- you can't really downsell to another market. You have a device that doesn't necessarily meet spec, but there's another lower-end PC, for example, you can put that device because it still functions. Much harder to do that in an HPC environment. So those are trends that are continuing. They're pushing some of the logic circuitry, the I/O counts are increasing. All these are leading to higher performance requirements, and we think that over time is beneficial to KLA.

Fair enough. We spent a lot of time talking already about process control intensity, but can you maybe talk about EPC and remind us of kind of like what's the long-term growth rate for that business looks like for you?

Do you want to...?

Yes. So there's several businesses in EPC. The main message I would say is that we're shifting that entire portfolio towards packaging because packaging is growing. And the second thing I would say is that there's a shift, which is -- the value is going from PCB to substrates and from substrates to silicon. So what we are doing is shifting our entire product portfolio to deliver that. So there are several businesses in it, right?

There's a process business that was heavily leveraged towards specialty. Now it's mostly leveraged towards -- more than 50% of it is leveraged towards packaging. An example of that is in specialty to make credit cards, you have very, very small dies and you need to do singulation using silicon etch. That same technology can -- in the future will be used for doing dicing inside memory chips and also eventually logic chips.

So that whole transition is happening now in the process business heading towards packaging. PCB markets are moving towards substrates. So that's a positive thing. Component inspection is growing because -- simply because semiconductor revenue used to be around $550 million. It's heading towards $1 trillion. So final component inspections are increasing and our component inspection business is increasing. We have a software business in there that essentially delivers all the coordinates and cams for direct write and inspection systems. That business is growing at a good clip. So I think all these businesses are doing generally positive. But again, the growth rates are not very similar to the front end and for packaging. The growth rates are different. But the businesses and the portfolio are heading in the right direction.

When we acquired this business back in 2019, our view that the PCB integration into the substrate as it integrates into the package was part of our thesis. And we're slowly starting to see that play out. I talked a little bit about the dynamics in specialty and how that relates to just trying to leverage the relationships that KLA has. And if we can find differentiated process businesses that those can make sense for KLA from a growth point of view. So I think we've been able to check some boxes there. We ran it separately because of -- it was kind of separate and distinct, at least from a channel point of view to our semiconductor process control business.

But as we've seen the importance of packaging increase, we're seeing our customers drive it together. Back to my earlier comment about the back end becoming very front-end like. And so because of that, we went from having a separate EPC group that operate kind of independent and independent with its own channel into a more of a consolidated view to ensure that we're representing and performing kind of productively and strategically aligned with our customers.

So the market drove this kind of consolidation kind of EPC isn't really kind of a relevant group within the company. Obviously, we do the segment reporting that shows distinct business segments because they are. But how we engage has really evolved a lot in the last few years. And it's, I think, allowed us to get better alignment and to take advantage of, I think, of some of these opportunities that are going to be pretty compelling. And we're building the road map to ensure that we can support where the growth is and where we think we can differentiate, which ultimately then drives the KLA model.

Yes. And on services, a little slower growth rate in 2025. Do you think we can see a bit of a catch-up in 2026?

Yes. As I said earlier, whenever you have a fab you're servicing and then you can't get in that fab, it's going to impact the near term. In the long term, though, our service business correlates much more to semiconductor revenue growth than it does to WFE growth. So I feel very comfortable with the long-term growth rate. I don't want to guide 2026, but our long-term target model of 12% to 14%, I feel very comfortable with it. We're seeing dynamics and trends in that business. And it is unique in the industry, given its contract stream, 75% of the revenue is contract. useful lives are increasing. We're seeing the value in terms of what customers are paying for contracts slowly increase over time as the complexity increases as our commitments to performance and availability also increase.

We're getting -- and I didn't say this about [ DVC ], but in the businesses we've acquired, we're getting some growth from leveraging our infrastructure to support the service business. I think small companies sometimes struggle with the global infrastructure to monetize service to the extent we can do. And so that's an element of growth. And then in areas like packaging, where sampling rates are quite high, customers are now looking at the service model in a different way. We don't sell necessarily parts and break fix. I mean obviously, we do that.

But what we sell to our customers is we sell performance of the systems, which means spec performance, matching performance and availability. Process control tools are always used. They rarely idle. If they idle, it's very modest because it's the most efficient thing is to drive yields, right, to meet not only the customer requirements, but even in constrained environments to optimize capital. So process control is purchased at a certain level, uptime requirements are quite rigorous and performance matters not only to continue to find what matters, but also to ensure that the performance across the fleet is very consistent. Those are unique drivers for our business, and I think that they are contributing to some of the underlying trends that we're seeing, which I think drives that long-term growth rate.

Very good. I'd be remiss if I didn't sneak in a couple of financial questions here in the remaining time. So let me go do that.

I love financial questions.

Very good. So OpEx, when you think about your financial model, sort of what are the priorities for managing OpEx going forward? What are the kind of the key drivers? But then from a leverage perspective, if you grow $1 of revenue, then how much does OpEx grow going forward?

Yes. So $1 of revenue, I mean, if you think about our model, it's 40% to 50% incremental operating margin, right? So we're going to -- the drop-through will be 40% to 50%. Our incremental gross margins are 60% to 65%. So you end up with for every $100 million, we'll call it $10 million plus kind of incremental OpEx. Obviously, some of that supports volume. But really, our priorities and if you look at the spend in the company, we are a portfolio company. We think it's hugely valuable to our competitive differentiation.

Most of our competitors are point product competitors. One of the most important things Ahmad does is understand the road map and make sure that we're allocating the R&D dollars across the products in a prudent way, understanding that we have to solve our customers' problems and have an intimacy around their road map many years from now. To deliver an evolutionary product, we could spend $100 million and take 3 to 5 years. If you're talking about revolutionary products, we could spend a few hundred million dollars or more and take 5 to 7 years or longer. So these are not small bets. We have to ensure that we're picking the right problems to solve, problems at scale to production, and we can solve them uniquely.

R&D sort of intensity probably stays in that 12% to 13% range on revenue growth over time because that's fundamental to the business model. We think we can continue to drive leverage through the nontechnical areas of spend. I talked about that as a priority earlier and that's certainly something that our teams are looking at as we go through our regular planning process and how to leverage some of the tools that are out there to bend the cost curve to ensure that the leverage model continues over time.

So we feel pretty good about our ability to do that, and we're going to continue to make these R&D investments to support the business and ensure that we're maintaining and driving the relevancy we talked about earlier.

Great. Dividends, and [indiscernible] the growth of your dividends over time, would you sort of recommend that tying that to the growth of your services business given the recurring nature of that business? And should we assume kind of like the same CAGR as we've seen historically?

Yes, it's interesting to bring that. I mean conceptually, that's how we got comfortable with it, and it's certainly been part of the cadence of how we thought about increasing it. Our dividend, we've raised it 16 years in a row, and we just did in April to $1.90 a share per quarter. And we maintained a growth rate of about 15%. Now you go translate back to service and you go, okay, so service is growing top line somewhere 12% to 14% given the leverage in the service model.

And the fact that service has grown every year, except for one in the '25, it's certainly been a factor and drives our comfort level about being able to have a dividend policy and being very explicit about our ability to grow it and then have an annual cadence that you don't have a dividend unless you're growing it over time. And I think if you're explicit about it, you can get it valued.

So certainly, the comfort around not just the dividend, but also our ability to fund, which has driven our capital structure perspective, the ability to also have service fund the after-tax cost of debt and the capital structure as well. So that's fundamental to it. We have some other governors we think about long term over time, payout ratios as a percent of free cash flow is another. But we're going to grow it at 15%. Generally, we think that the overall business can grow 10% to 12%, we can drop through 40% to 50%. We can do -- allocate the capital prudently, grow earnings per share at 1.5x the revenue growth rate. We're not a -- we're a fairly cash-light business.

We make investments in working capital, but that's what should translate into free cash flow growing in the teens, and we ought to be able to continue to maintain this trajectory of mid kind of 15%-ish kind of growth. Now we're going to return 85% of the cash flow the company generates. I talked about the dividend. That's 25% to 30% in terms of the long-term payout ratio. And then the rest is allocated through our ongoing systematic buyback program over time.

And we're going to then do periodic assessments around the capital structure of the company and what's the best use of the capital structure in terms of opportunities for growth. We're always going to invest in our business. We're going to look at other opportunities to augment the portfolio. We'll have a high bar around how we look at that because we understand the alternative. But how do we put the capital structure and the capital to work in an assertive way to drive the overall value of the company over time.

Yes. And just a quick word on M&A. Where is that kind of -- I think you sort of addressed it there, but maybe just do you see it being sort of more on the back burner relative to your historical cadence or not?

We like the businesses we're in. We've talked a lot about the opportunities around both logic, memory, packaging, about what's out in front of us. We always look at everything against the -- juxtaposed against the returns that are available in buying back the stock in terms of how we allocate the capital. We've done a number of things to augment our portfolio. Ahmad mentioned some of our software capabilities earlier in the company. So we've made some investments there. They augment and strengthen the portfolio. That's been part of our focus, small things.

But then we've also found some markets that are within semi that are kind of new money or adjacent markets to process control. We got into chemical process control through an acquisition a few years ago. It's $150 million business today inside the company. And so we're looking at those kinds of opportunities. We can leverage the channel. We can leverage the operating model. We can leverage our customer relationships. There's a regulatory backdrop that we have to be sensitive to. So I think that obviously informs our opinion on it. But we like the businesses we're in. And so that will be the primary focus of the company.

Great. We'll have to leave it there. We're out of time. So thanks so much for being here. We appreciate it.

Thanks for having us.

Thank you.

Good morning. Welcome to day 2 of Citi Global TMT Conference. My name is Atif Malik. I cover U.S. semiconductors, semiconductor equipment and networking equipment stocks at Citi. It's my pleasure to welcome Rick Wallace, President and CEO, KLA; as well as Bren Higgins, EVP and CFO of KLA. We also have Kevin, our friendly neighborhood IR, in the audience as well.

Bren is going to make a few opening comments, and then we'll dive into the Q&A. Bren?

Atif, thanks for having us. I appreciate your interest in KLA. So just to level set here with some comments from some things from earnings as we had -- June quarter was a good quarter, a raise on the September quarter. Obviously, '25 is setting up more or less as we expected through the year. My business is really being driven by what's happening with the high-performance compute market.

On the logic side, the N2 build-out, which has been very solid for KLA from a share and an intensity point of view. High-bandwidth memory is creating opportunities for process control inflection. We'll talk more about that later today, but we're pretty excited about what's happening in that part of the market. And advanced packaging is growing as an opportunity as the complexity of the package increases and the ability for KLA to differentiate also plays along with that.

So we feel pretty good about the trajectory of the business. Our service business, despite some restrictions and access to fabs that have come from export controls, continues to grow in double digits, consistent with its long-term model. And we're pretty excited about what's happening there in terms of the lifetime of our tools, the customers' desire for availability and performance in the service installed base.

So a good situation there. Overall, the financial model, inclusive of tariffs, we provided some context around 2025 at 62.5% gross margins and operating margins in the 43%-plus range and outperforming our long-term incremental operating margin target of 40% to 50%.

So '25, I think as we continue here, we provided some soft guidance in terms of expectations of revenue levels being more or less around current business levels as we exit the year.

Early views on '26. We'll see how it plays out. Qualitatively, we think the investments continue at the leading edge, and that will be a positive for WFE, same with the high-bandwidth memory part of the market.

Flash market is reasonable and at low levels. So I don't see things falling off there too much. And I think the legacy business is overall about -- I don't think it's getting worse, but we'll see if it gets better around it. So in general, that's where that is. And I think China, after a couple of years of significant investment in legacy we would expect, and we're seeing a down year in our China business this year and would expect next year to probably correct some more as we move forward. So we're constructive on a growth year overall for WFE and for KLA's relative performance within it.

So why don't I just stop there, and we'll go on to your questions, Atif.

Great. Rick, let me start off with you. I've been doing sell-side for 15 years, and I know you've been at KLA for longer than that. There is something different about KLA. Your SPC systems grew 15% last year, outperforming WFE. And again, this year, you're outperforming WFE. Understand the process control intensity was around 13% per the Gartner data. So if you can walk us through -- and your stock multiple has expanded, what is different this cycle versus the prior lithography-driven cycles?

Thanks for having us, Atif. Well, I think if you look at the dynamics in the industry and where the investment is going and the technology that's being deployed, Bren mentioned it a bit. But if you think about the hyperscalers and the work that's going on high-performance compute, there's really 3 things that are happening simultaneously, which are opportunities for KLA and then we can talk about our execution against those opportunities.

Number one, in terms of the number of designs that are happening at the leading edge has historically been a concern of the industry that with each subsequent node, because of the cost, you would see designs go down. Now that inflected at 7-nanometer and partially because the design tools became more usable and the number of people that could do designs in the foundries went up.

But now there's another dynamic which is driving a lot of that high-performance compute. The need for silicon proprietary technology by a number of end users is driving the number of people that are doing designs up. So if I go back even a couple of years ago, and I remember when the first hyperscaler started doing their own design, Apple, of course, had been doing it for a while, but suddenly, you see design starts going up. And then more recently, I think we count up to 10 hyperscalers between the 4 big ones and others doing custom silicon. And that's driving -- why is that important for KLA? Well, it's important for KLA because a couple of things happen if you have multiple design starts.

One of them is the fab complexity goes up dramatically. So you have a much higher mix fab, which means the ability -- if you're running 100 process flows and multiple designs for multiple people, you've got to make sure you don't start too many wafers and you don't start too few and you've got to ramp them quickly to yield.

All that's good for process control because in order to do that, they want better insight, our customers want better insight of what's going on in the process. So just start with the number of design starts inflecting, and it looks like 2-nanometer is going to be even more design starts because more people are doing them.

The other thing that's happened due to the work on high-performance compute specifically is AI is the die have gotten larger. So very large die for defectivity meaning the same number of defect across a wafer will have lower yield. So the result of that is customers end up inspecting more to protect and drive down that deep activity to increase the yield. So bigger die, more design starts. And then the other thing that happens at the same time is in the reticle and the manufacturing reticles, you have more reticles and you have more single-die reticles.

So our reticle business is going to have a record -- all-time record year in 2025. And we have a number of opportunities to continue to grow that based on our product road map and based on the needs. That's just the foundry logic side of things.

And this is in a market where really only 1 player is at the leading edge. And I'm sure we'll talk about if there's opportunity for others to get in. But right now, that's 1 player doing it. The other thing that's changed with high-bandwidth memory is the memory for many years was the intensity, in other words, the amount you had to inspect to produce memory was not a very high percent of the budget.

And this went back to years ago when customers started building in redundancy into their memory and they would repair all the memory, and it was mainly consumer application. When high-bandwidth memory started being used, it's for -- it's always-on, it's for -- and so customers have been demanding less redundancy, more reliability in these chips because I can't just reboot the PC; and more complex design architecture around periphery, all of which is driving inspection intensity up.

And then the -- so you have logic driving it, you have memory driving it and then the third part, which we'll talk about, is packaging. So advanced packaging I'll admit, we thought advanced packaging was going to be important when we bought ICOS almost 20 years ago. But now it's finally happening. And it's happening and what's happening is the demands of high -- of the advanced packaging look more like what was in the fab.

And so a lot of our equipment is being redeployed to address the packaging. So you have all these dynamics at once. Process control intensity goes up in foundry logic because of design starts, bigger die, more advanced nodes, new architectures for transistors, goes up in memory and it goes up in packaging.

Overlay that with the execution we've had on our product road map and our ability to address those, that's what you're seeing right now. And I would say we're in the relatively early build-out of, and we'll talk more at our next Investor Day about what we see as this progresses, but we think there's more to go.

That's great because just on the last point, we appreciate you guys walk us through process control, intensity assumptions underlying your target model. But why is there a ceiling at this number when you're talking about more design tape-outs and AI is getting more complicated, you have 12 and 8 HBM stacks and all needs to be tested. Otherwise, the Blackwell fails. So help us understand what determines the ceiling on the process control intensity for you guys? Because the impression that some investors have that you guys are early beneficiaries when a new technology like Gate-All-Around or something comes around and it might not be sustainable. So why would it be sustainable this time?

So we're still -- I mean, you mentioned 13%, right? The question is always a combination of what drives the need and do you have the capability. And there are more problems to be solved that we're not solving right now that if we solve them would drive it up.

If you look at reticle manufacturing, the making of reticles, probably 45% process control intensity in the making of reticles, right? It's probably -- every reticle gets inspected multiple times. I mean, if you look at the intensity in that, now that's a pretty unique area because the cost of a reticle being bad is so high that you get 100% inspection, and you have to have 100% capture rate of critical defects.

But there's still room to run in terms of the process control intensity. We don't really know and our customers don't know. We know that it doesn't move that fast. It takes each cycle for it to increment, which is why we talk about a trend line as opposed to an ultimate destination for this. But it is a combination of need and capability. And of course, customers are doing everything they can to reduce the need for more process control in terms of making more stable processes. But it's been creeping up. And the other dynamic is, as I said, there's only one real player at the leading edge in volume, right? So that would also change the dynamic.

Yes. Atif, I think when you back up and you go, you look at where we were in 2020, 2021, KLA's share of WFE was somewhere in the low 6 percents. This year, we're approaching about 8%. You look at share of advanced packaging, it was 1% or 2%, it's about 5%, 6% today. So we're seeing some sustainability to the relevance of KLA over this time frame and our relative performance, I think, is reflective of that.

These drivers that are, in some ways, uniquely benefiting KLA as it relates to high-performance compute and as that becomes a bigger percentage of the overall market certainly provides a tailwind of opportunity moving forward, as it relates to those metrics. So those are metrics we focus a lot on. It's not just our share within our market, which is obviously very strong, but also our relevancy within WFE.

And it's a couple of points -- in the last few years, but that's a couple of points on $100-plus billion of opportunity. So we're pretty encouraged by what we're seeing and we think that these tailwinds as it relates to high-performance compute will have some sustainability to them going forward.

And again, the most significant thing that's happened is increased number of designs. That's the most significant for -- I think, for the industry because it speaks to how many people have now viewed having advanced semiconductor as part of their differentiation. And obviously, the world years ago, the belief was every node, you'd have fewer players capable of competing. That may be true in the manufacturing of it, but it's no longer true in the design and the economics of that design are many customers', customers are all determining that they need to have custom silicon.

Great. Rick, going back to advanced packaging. Historically, you guys have been tied to kind of lithography-driven cycles where you have a new wavelength comes along and you have more inspection need for it. But advanced packaging is a market where lithography is not driving any demand, it's mostly process tools, inspection tools.

And you talked about 85% growth this year in advanced packaging. So can you just touch on what's unique about your advantage in advanced packaging? How sustainable it is there? There have been some incumbents in the market as you come in.

So I'll do part 1 and let Bren do part 2. So part one, what's different? Why -- so my historical view of this, I think as a company, has always viewed this as, this is, in the end, all about economics. Everything in process control is about the economics.

How much is it worth it to inspect something or measure something has to do with what do you do with that information and the relevancy of that information to manufacturing process. So the reason -- like if you overperform a spec and somebody else can essentially do the job at a lower price point, they're going to win because it's economics.

So in the reticle case, back to my very high percent of inspection on reticles, the cost of an advanced reticle is so high that you can add a lot of costs in the inspection. Take the other end of the continuum, we were briefly in a market through acquisition where they were inspecting solar wafers. And my joke was you could step on the wafer and they would yield. So there is no inherent value in that inspection on solar. So eventually, it went away because the cost of solar was so cheap of those wafers. It's economics in the packaging.

The value of these packages is so high and the cost of failure is so high that that's what's driving the increased need. And in the initial phase, they're going to largely inspect everywhere, and they're going to look to try to debug this process. But because the cost of the package is so high, the end product, it's going to have a relatively high intensity over time, the sampling will change as they debug the process, but the view of how much is that loss at risk is what's higher. And for a long time, like in the chiplet era, it wasn't -- it still wasn't valuable enough, right? If you're making chips for a mobile phone, you can't add that much to the cost. That's not the case. That's not what we're seeing in high-performance compute. That's what's changed.

And so a little bit for us because we get asked this question, would you go after these other lower-end markets, it's like we don't want to go after a market where differentiation, you can't get paid for differentiation because what that will be, there's a lot of people playing in it and the margins will be -- won't support our business model.

I think you covered most of it, Rick. So I think when you back up and just look at the growth and what we said at earnings is we were slightly over $500 million last year. We think and we've upticked the number over the course of this year, about $925 million across the portfolio of KLA. About 70% of that is in process control. The other 30% is in our process business, which is -- has historically participated in a number of these markets designed for these markets and now those markets have been reflected. And so we've got a pretty good competitive position there.

On the process control side, you have most of the optical inspection business, which is the bulk of that, but there's also other businesses within KLA that are also benefiting. You have to inspect the interposer. So we have patterned inspection. So you inspect the substrate. That's an opportunity. Customers are also starting to use more advanced capability, and we'll likely do more of this going forward to point to have a reference for some of the higher volume optical inspectors. And so we have that capability in the company.

So as the customers start to deal with a shrinking design rules, it creates an opportunity for us to leverage the existing portfolio. And we have a number of platforms from kind of the base level where we're operating today. So we think competitively, we're in a pretty good place as the technology profile of packaging starts to change and increases over time.

All right. So just on the competitive side, AI was ramping very quickly and the incumbents benefited in year 1, but now things have kind of settled out with OSATs and they're looking at your tools, which are definitely far more capable of being employed in the front end first and now they're looking at the back end. So is it safe to assume that those dynamics will continue into the future where they'd like to invest in a tool that is 3, 4, 5 years advantage.

Well, that -- it's a very cost-sensitive sector. So you have to win on cost of ownership and that, as you know, is a combination of things. But it starts with you have to have capability for the job. And then the intangibles that you get, you can win if you're tied if you have a road map that the other side doesn't have. You can win if you're tied if they're familiar with your product because they've used it. I mean it's less true in some of the OSATs, but it is more so the case that people that went from the front end to the back end and packaging wanted KLA there because they had used it in the back end.

And then a lot of that gets dictated to their supply chain, too, of what they're using. So -- but we still have to win cost of ownership. You're not going to charge you might have a higher price, but the cost of ownership needs to be competitive because these are all very sensitive markets, right? And so you might have an initial build-out, but eventually, you've got to get competitive. So we don't chase every opportunity because some of them, there's just not enough differentiation to make sense for us.

Great. And let's talk China. One of your U.S. peers provided a weak October quarter guidance, driven somewhat by China and your outlook on China is up half-over-half. Can you talk about, at least on your side, what you're seeing in China? And then also if you can touch on any initial thoughts on the recent news that the Commerce Department is revoking the waivers for the international customers in China.

Yes, sure. As I talk about earnings, I think our view on China has been pretty consistent over the course of the year. We were, as a percent of business, top 40%, 41% in 2024. I think this year is going to be somewhere in the neighborhood of about 30% plus or minus. I talked about that perspective back in January when we lead into the year and it has been pretty consistent in each earnings call with that perspective.

We've seen some strengthening as we've seen some strengthening in the overall business, but the ratio of China has been more or less the same. So that translates, I think, into -- given that I think we've had consistent outperformance each quarter relative to consensus, where we originally thought 15% to 20% overall, that the China business will be down at somewhere between 10% and 15% today. It can be lumpy quarter-to-quarter. If you look at the first quarter, it was 26%. Second quarter, I think, was over 30%. So I would expect the second half to be stronger. We'll see how it plays out over the course of the year. Right now, I would say, of course, there's revenue recognition dynamics and shipment dynamics, but September is probably stronger in December. But the overall view for the year is more or less consistent.

And as I said in the opening remarks, as we look at next year, you're seeing investments change. We've seen more investment from some of the more mature players in China as we think of the future outlook. But I would expect that just continue to kind of normalize as we move forward. We'll see in terms of guidance into '26, but I think there's an adjustment down off of the pretty elevated levels over the last few years. Correct.

And then on the last question, I don't think it changes. You just move to license-specific environment. We'll be supportive of our customers and the license requirements to get the necessary approvals to ship to those facilities. We have service business in those facilities that's not affected by anything in the current ruling. So I think in terms of impact on business, there's nothing there.

Another concern that some investors have is on the sustainability of the Gate-All-Around investments, the 2-nanometer, 1.4. And there's some seasonality in spending from your foundry customers, maybe more first half loaded. And some of your peers are of the view that the 3-nanometer demand could be a lot stronger next year than 2-nanometer. But I think you guys have the best view in terms of the mix. And when should we expect the 2-nanometer Gate-All-Around spending to kind of recover from first half this year into next year?

Yes. I think as we look at next year, look, it can always be lumpy quarter-to-quarter and sometimes product cycles can influence the timing of when shipments happen versus the focus on ramping that capacity. Our view right now on next year looks like it's a growth year in terms of N2 as the next phase of investment happens. I would expect at leading edge, a broadening at least within our business of some additional investment. Obviously, there's some investment happening in Japan, but also some potential investments happening here in the U.S. off of some lower base in '24.

So look, architecture changes are always good for process control. If you go back to FinFET, it was the last time share of WFE approached 8%. So we think that we see some sustainability. Rick talked about all the different drivers and why it is stronger at N2, all those drivers are consuming a lot of that capacity, which is being measured in terms of how it's being added to support the market. I think customers have been pretty disciplined about that. So that ability to taking that capacity and try to use it at N2 is fairly limited. And you have the technology driver of the new architecture.

We also -- Rick talked about some of the share opportunities within what's happening in reticle. We're also seeing some opportunity with the customer in e-beam that is a challenge for the company is how we expand beyond this customer in terms of rolling out our products in that part of the market. So we think that there's good, I think, sustainable tailwinds here as we move into next year in and around the leading-edge investment profile.

Rick, just on the record reticle inspection year, again, when I look at the lithography sales, you guys are outperforming that market in reticle. So is it still the economics and the tape-out? And what's driving the outperformance?

So there's a couple of things. But the biggest one, I think there's 2 main factors. One, the increase in large die and single die reticles drives more, and there's both inspection and then there's recall. The other one is the number of starts. So lithography, if you have more designs, lithography doesn't really effect it but the inspection of reticles and the recall of those reticles. EUV, because of the nature of what the light does to the reticles, you actually have to reinspect them fairly often because of potential damage.

So there is a market associated with that technology, which has driven up. But then there's, as I mentioned, the single die. So that's -- and Bren talked about this, single die, you end up doing by database comparison, which is a higher ASP and a bigger opportunity.

Okay. Let me pause here and see if there are any questions in the audience. If you have a question, please raise your hand. I would keep going.

Services. Bren, your services growth is holding up much better than the U.S. peers, 10% type growth this year. I understand they might have some 200-meter legacy China system exposure. But can you walk us through the key drivers of your services business? And any reasons why you're outperforming the U.S. peers?

Yes. Our service business is unique, I think, relative to others. I mean one thing about process control is it is a high mix, high complexity, relatively low volume purchase for our customers. And the utilization rates or the uptime expectations are very high. So if you're a customer, you buy process control and you tend to run at a very high utilization because it is about driving yield or driving improving time to results and debugging processes. So there's resiliency to how the business holds up. Because of those requirements, a lot of our business, about 75% is a contract revenue stream.

So we don't really sell break and fix. Obviously, we do that. But what we really are selling is performance of the systems over time and the continued performance specs that they match other tools in the fleet in the same fab and the availability of the system. Now underneath that, there's obviously parts that break and you replace them, but you also are doing preventative maintenance and other things to ensure the performance of the tools. So we sell contracts with support structures.

We can monetize different elements of that support structure. And the customer can then rely on it and then we can build the organization underneath to try to drive as much efficiency as we can. So that's how the business generally works.

Now the lifetime of the tools as demand has broadened for semis is increasing. If you had asked me when I became CFO at KLA back in 2013, what the lifetime of the tool was, it was probably 10 to 12 years. Today, we're in the high teens, approaching 20 years. So we're seeing the lifetime extend. That's good. The installed base is obviously growing much faster than tools are coming off. Our percent of ASP of a contract price is slowly growing over that time frame. It's probably improved 1% in an environment where ASPs are also going up over that same time frame.

And then the final area is that one thing that has become clear that in acquired businesses, there are opportunities to drive service at a higher level, deploying the KLA operating model around service. And so it takes some time. But in every product generally that we buy and some of the dynamics are different, we're able to get more out of the service businesses than what the incumbent was able to get prior to acquisition.

I think the final thing is in and around markets like packaging, which fits with the third is that the service intensity is higher, right? The uptime because of the need for high sampling rates is putting pressure on that infrastructure as well. So we're seeing a tailwind around that capability that is also driving additional service revenue. So it's a great business.

The profitability, we don't talk about it. It's an accretive profit stream generally. And if you think about the capital allocation practices of the company, one of the things that we consider as we think about how we do it is that if you look at the profitability of service, the service effectively, given its predictability and profitability levels, pays for the dividend and the after-tax debt service of the company. So it gives you a sense of kind of profit levels overall. So it's a resilient business. It gives us a nice anchor in all environments and holds up pretty well.

Just to add, [indiscernible] this. When customers often negotiate service contracts, with us and with others, they'll ask for the ability to idle tools if things slow down, right? So we build -- as opposed to renegotiating, it's in the contract that if they want to do that.

Historically, they've asked for it and almost never done it, right? Even when the other, when the process tools would idle, they wouldn't want to idle the process control because it's their eyes in the fab. And so what they don't want to do is lose visibility. So we actually see that dynamically. You can imagine the other businesses going down as capacity goes down and they want to run, but they're not doing it with process control.

And this is back to Bren's point of high mix. If you don't have that many of any tool, like if you have a lot of process tools, you can not use a few of them if things are slow. But process control, you don't have a lot of extra tools. So they don't want to and they want visibility because yield is still a big lever no matter what kind of business you're in, yield is a big lever. So we think that's part of the built-in resiliency.

That's good insight. Gross margins. Bren, your gross margins expected to be 62.5% this year, not far from the 63% target model. Any upside to these gross margins? And also, what has been the net impact from the tariff situation?

Yes. Well, so I think we felt very good about and continue to feel very good about the trajectory of our business. Obviously, what drives KLA's margin profile quarter-to-quarter is more in the mix of business. Every -- we have a portfolio of products, and they all carry slightly different margin profiles. The impact of tariffs is about and I said this in the call, I think, about somewhere between 50 and 100 basis points of impact, at least where we stand today, there's mitigating actions that are underway in the company to try to limit that exposure through how we move parts around the world and things in terms of drawback processes and other things.

Just to give some sense, it was -- '24 was very de minimis. If you go back historically, the impact of tariffs. So it was never something that was a factor in how we thought about operational processes. But there's certainly operational things we can do differently that's better for the business that rise in priority given the economic exposure you have and what is likely a higher structural tariff environment moving forward. The last thing you want to do is do things that suboptimize operationally because that things can change and then you're kind of stuck. It's not easy to do the things that you can do. But it certainly is creating opportunities for us to rethink how we've done things over the years and to figure out how to try to mitigate some of that exposure. Where we do have it, obviously, there will be cost implications like any other cost increase.

And KLA is more of a value transaction. But at the end of the day, if we have incremental costs, we have to figure out how to pass those along, both in service and systems. But we're going to be thoughtful about that in terms of how we move forward. And I think the exposure is probably unless something changes in the environment, I think somewhere captured in that range. And I think if it changes, I'll provide updates when prudent.

And lastly, on capital allocation, if you can kind of remind us about priorities on the cash, particularly as you kind of with the growth phase of the company.

So let me start and then Bren can fill in. Reinvesting in the business is the best investment we can make as long as it's prudent investment. So we don't want to overinvest in any business. And what I mean by that is be inefficient. So first, we fully fund every program, and we've got more engineering, more engineering spend. I can't remember the last time we had a down year of R&D. I think it was probably 2010, something like that. It has been a long time. Yes. So that's number one. We're going to reinvest in our businesses. We've got great businesses, great opportunities. But beyond that...

Yes. And look, I think strategically, we look at where it makes sense for us to either augment the portfolio and because we think the portfolio approach is a competitive advantage for the company. So there's a number of things we've done on the strategic front where we've acquired some capability that enhances the portfolio. There's also some new market opportunities that are adjacent markets to where we're at. We like our position in process control in semi. And so that's really where our focus is. So obviously, that would be second sort of strategic priority of investing in internal strategic priorities.

But the business is asset-light and obviously, we generate a lot of cash. So we believe and it's really a capital allocation decision that we deploy every dollar that's not allocated. And we do that through the dividend, which grows at the growth rate of what we expect our growth rate of cash flow to be in an environment where we think we can drive top line growth of 10% or so that we can drive earnings per share growth of 1.5x the revenue growth rate, and we should be able to grow free cash flow somewhere in line with that.

So that's the governor of how we think about certainly one of them and how we think about the dividend. And we believe in a regular cadence of that. We just earlier this year, raised the dividend, our 16th consecutive annual dividend increase. It consumes 25% to 30% of free cash flow. We target that range so we can ensure that we can continue to maintain that cadence. And then the rest is distributed through ongoing share repurchases and a systematic approach.

My view is that any excess dollar generally is value destructive sitting on my balance sheet. And so we want to make sure we deploy it as assertively as possible over time.

Great. We're almost out of time. Rick and Ben, thank you for coming to the Citi Conference.

Thanks for having us.

Thanks.

Good afternoon, everyone. My name is Bou, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation June Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions]

I would now like to turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead, sir.

Welcome to the June 2025 quarterly earnings call. I am joined by our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results as well as our September quarter outlook released after the market close and available on our website along with supplemental materials. We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified. All full references made refer to calendar years. The earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future events, presentations, corporate governance information and links to our SEC filings. 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 make on the call today, 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 introductory comments on the business environment and our quarter, followed by Bren with financial highlights and our outlook.

Now over to Rick.

Thanks, Kevin. I'm going to cover KLA's business highlights for the June 2025 quarter, including commentary on KLA's relevance in the AI infrastructure build-out for the June quarter, KLA's results were strong across the board, and we were at or above the high end of our guidance ranges. Specifically, revenue was $3.175 billion. Non-GAAP diluted EPS was $9.38 and GAAP diluted EPS was $9.06. We also had record free cash flow of over $1 billion for the quarter. KLA leadership and process control and has put the company in a unique position at the center of enabling success for our customers to build out infrastructure to support artificial intelligence.

Prioritized investment to ramp AI capabilities has fueled growth at the leading edge across the semiconductor industry through more complex designs, faster product cycles, higher-value wafers and increased demand for advanced packaging.

In DRAM, investments in AI have been focused on high bandwidth memory which demands higher performance, enhance reliability, reduced redundancy and more sophisticated logic circuitry at base diet chips that control the HBM stack. Demand for leading-edge logic, HBM and advanced packaging capabilities were the key contributors to KLA's performance in the June quarter.

The importance of process control continues to increase due to semiconductor scaling, new architectures and materials and increasing designs, in particular, process control can improve time to results by debugging process integration challenges and the fab ramp phase and optimizing yields across a high-volume manufacturing environment with high semiconductor device design mix.

Additionally, the evolution and complexity of requirements for advanced packaging is creating new opportunities for the value of KLA's process control and process solutions. Finally, this leads to increased relevance for KLA service business as KLA systems become more technically complex are utilized for longer periods in the fab with customers where they're expecting optimal tool performance and availability.

To deliver solutions to meet this demand, the company leverages the KLA operating model to focus on prioritizing, productizing new innovation in our product road maps and ensuring that our business operations can scale and execute to capitalize on strong growth and expanded market share in the most critical markets for our customers. To date, we've seen no material changes in customer demands or unannounced investment plans. As a result, our WFE assessment for 2025 is consistent with our expectations that were stated last quarter.

There are more details about this quarter's highlights in our shareholder letter, but in short, KLA grew revenue 24% year-over-year in the June quarter with sustained strong investment in leading-edge foundry and logic and HBM. This quarter also marked another period of strong momentum for our advanced packaging portfolio. We now expect advanced packaging systems related revenue to exceed $925 million in calendar 2025, up from our previous estimate of $850 million last quarter and over $500 million last year.

In services, our business grew to $703 million in the June quarter, up 5% sequentially and 14% year-over-year. Finally, the June quarter was strong from a cash flow and capital returns perspective, quarter will be free cash flow topped $1 billion for the first time, ending at $1.065 billion. For the last 12 months, free cash flow was $3.75 billion and the free cash flow margin of 31% over the same period.

Total capital return in the June quarter was $680 million, comprised of $426 million in share repurchases and $254 million in dividends. Total capital return over the past 12 months was $3.05 million.

KLA's June quarter results reaffirm our leadership in process control and the strength of our broad and differentiated portfolio. It also demonstrated the essential role of KLA's products and services play and supporting semiconductor industry growth. Our consistent execution reflects the resilience of the KLA operating model, the dedication of our global teams and our disciplined capital allocation to invest in our business over the long run and maximize long-term shareholder value.

And with that, I'll turn the call over to Bren.

Thanks, Rick. KLA's June quarter results were strong. Revenue was $3.175 billion, above the guidance midpoint of $3.075 billion. Non-GAAP diluted EPS was $9.38, above its guidance range. GAAP diluted EPS was $9.06, which was at the upper end of the guidance range. At the guided tax rate of 13.5% non-GAAP diluted earnings per share would have been $9.

Gross margin was 63.2%, slightly above the midpoint of guidance as the quarter played out mostly as expected. Operating expenses were $603 million, about $8 million above the guidance midpoint.

Operating expenses were comprised of $353 million in R&D and $250 million in SG&A. Operating margin was 44.2%. Other income and expense net was a $23 million expense with upside from guidance provided by a favorable mark-to-market adjustment of the strategic supplier investment.

The quarterly effective tax rate was 9.9%, well below guidance as various discrete items impacted the quarter's result.

Net income was $1.24 billion. GAAP net income was $1.2 billion. Cash flow from operations was $1.16 billion, and free cash flow was $1.06 billion. The breakdown of revenue by reportable segments and end markets in major products and regions can be found within the shareholder letter and slides.

Moving to the balance sheet. We ended with $4.5 billion in total cash, cash equivalents and marketable securities and debt of $5.9 billion. The company has a flexible and attractive bond maturity profile supported by strong investment-grade ratings from all 3 major rating agencies. The cornerstone of KLA's business is consistent strong free cash flow generation, driven by one of the best operating models in the industry, and a predictable and highly differentiated service business. This helps drive a comprehensive capital return strategy that includes consistent dividend growth and increasing share repurchases over the long term.

Our recent actions emphasize our commitment to capital returns and our confidence in the long-term shareholder value accretion of KLA. On April 30, 2025, we announced the 16th consecutive annual dividend increase, which was up 12% to $1.90 per share per quarter or an annualized dividend of $7.60 per share. Along with this action, we also announced a new $5 billion share repurchase authorization.

I'll now turn to the outlook. It remains driven by increasing investment in leading-edge logic, high bandwidth memory and advanced packaging. For WFE in 2025, as stated earlier, we are maintaining our original outlook for mid-single-digit growth in WFE from approximately $100 billion in 2024. This growth is expected to be driven principally by increasing investment in both leading-edge foundry/logic and memory to support growing AI and premium mobile demand, partially offset by lower overall demand from China. Given KLA's strong business momentum, expanding market share opportunities, higher process control intensity at the leading edge across all segments, we remain confident in our ability to outperform the overall WFE market in 2025.

Finally, early customer discussions are constructive on expectations for calendar year 2026 to be a growth year for the industry. KLA's unique product portfolio differentiation and value proposition are focused on enabling technology transitions, accelerating process node capacity ramps and ensuring yield entitlement and high-volume production. We continue to be encouraged that our customer discussions on product road maps and capacity planning have remained consistent. In this industry environment, KLA will stay focused on supporting customers, executing product road maps and driving productivity across the enterprise.

KLA's September quarter guidance is as follows: Total revenue is expected to be $3.15 billion, plus or minus $150 million. Our quarterly revenue expectation and general stability for the remainder of the calendar year remains consistent with that articulated over the past 2 quarters. Foundry/logic revenue from semiconductor customers is forecasted to be approximately 75% and memory is expected to be approximately 25% of semi process control systems revenue to semiconductor customers. Within memory, DRAM is expected to be about 79% and NAND, the remaining 21%.

As always, these business mix approximate approximations are for our semiconductor customers only and do not completely represent our aggregate process control systems revenue.

Gross margin is forecasted to be 62%, plus or minus 1 percentage point, reflecting a slightly weaker systems revenue mix expectation and a 50 to 100 basis point impact from announced global tariffs. This tariff impact estimate is below our original estimate of roughly 100 basis point headwind to gross margin that we discussed last quarter. This environment is due to our industry and the long-term tariff situation remains unclear. We continue to assess the impact across our business and identify potential mitigation actions to reduce our exposure to this headwind over time. We will provide periodic updates on our assessment when appropriate.

For calendar 2025, based on the results for the June quarter, guidance for the September quarter and our expectations for the business mix across systems and services, including the systems product mix, tariffs and factory utilization, we expect gross margins for calendar '25 to remain approximately 62.5%. Operating expenses are forecasted to be approximately $615 million in the September quarter as we continue to make product development and infrastructure investments to support expected revenue growth. Given our expectations for company growth and product development road map requirements, we will maintain our operating expense trajectory. Our business model is designed to deliver 40% to 50% incremental non-GAAP operating margin leverage on revenue growth over the long run.

Other model assumptions include other income and expense net of approximately $33 million expense. The non-GAAP effective tax rate assumption for the September quarter and the remainder of the calendar year is 13.5%, lower than the 14% we had previously estimated based on our expectations for the geographic distribution of income. For the September quarter, GAAP diluted EPS is expected to be $8.28, plus or minus $0.77, and non-GAAP diluted EPS of $8.53, plus or minus $0.77. EPS guidance is based on a fully diluted share count of approximately 132.4 million shares.

In conclusion, our near-term revenue guidance remained stable, indicating the continuation of current business levels and our customer discussions support this outlook. Based on conversations with customers, we anticipate continued solid growth in calendar 2025. Given the revenue commentary for the remainder of the calendar year, we expect to meaningfully outperform the mid-single-digit WFE growth rate. KLA focus is on delivering a differentiated product portfolio that addresses customer technology road map requirements, which are driving our longer-term relevance and growth expectations.

KLA's business is well positioned for the current technology inflections. While we cannot ignore the near-term geopolitical trends, we are encouraged by the customer engagement that informs our business forecast. The long-term secular trends driving semiconductor industry demand and investments in WFE and advanced packaging are compelling and represent a relative performance opportunity for KLA over the next several years.

That concludes our prepared remarks. Let's begin the Q&A.

Thanks, Bren. Bou, if you could please queue folks for questions.

[Operator Instructions] We'll go first this afternoon to CJ Muse of Cantor Fitzgerald.

So I just would love to hit on your comment around early customer discussions constructive for growth in 2026. You work typically from 8 plus month lead times. Obviously, you've got some visibility into '26. So I would love to hear kind of how those conversations are going. And what needs to happen to have firm conviction on growth in '26.

Yes, CJ, thanks for the question. And I think it's a little bit early for us to quantify it. But certainly, we're encouraged by the discussions we're seeing. We think that as you look just across the industry, based on those discussions that we'll see customers investing more. Obviously, what's driving the space today is high-performance compute. And so that part of the market is strong. And we'll have to see how other end markets play out in terms of what that growth looks like. But certainly, at the leading edge, we're encouraged by the activity we're seeing, supported by that market.

We're optimistic that we might see some broadening of investment there. DRAM continues to be strong, fueled by HBM. Flash is coming off of low levels, but I think the flash market continues to be constructive moving forward. Overall, legacy seems like it's bottomed. So I think we feel pretty good about where that is. We'll see what growth looks like, but at least in terms of where it's at now. I don't think it's any worse.

And then our modeling as it relates to native China activity is that it's likely down somewhere in that -- we'll see how far down, but I think it's down after a couple of years of pretty elevated investment in '23 and '24. So if you think that '25 is down and we think '26 is probably had some headwinds as well as that normalizes, given most of the focus there is off legacy.

Just to add, as we see the continued investment in the advanced logic, as Bren mentioned, we see momentum as more and more players are bringing their design. So you think about the sustained investment in advanced logic and then even some investment going back a note. So we're also seeing some additional -- so we feel really good about logic foundry in terms of that overall momentum plus the packaging momentum we've talked about.

Very helpful. I guess on the domestic China front, you talked earlier indication of lower again in '26. Curious, as 3 regions, Wuhan, Shanghai, Beijing are competing for supremacy, and we've now gone from 4 to 6 large kind of players, how does that kind of inform your view? Does it give you a sense that things would only decline a little or a lot? Or just too early to tell?

Yes. I think it's too early to tell at this point. As I said, we had 2 years of a lot of backlog we had to shift through and work off, which we have done. And I think now that we're seeing investment from our other customers, we're seeing that drive our business outlook more strongly here moving forward. So we'll have to see as we move forward here.

But my sense just in terms of looking at it bottoms up and trying to reconcile with some of the some of the top-down kind of market outlook information. I feel like it's probably got some headwinds to it in terms of the investment levels relative to '25.

We'll go next now to Harlan Sur of JPMorgan.

Great job on the quarterly execution, guys. Year-to-date, so March and June, your Process Control Systems business, right, that's inspection and patterning that's up 35% year-over-year. So it looks like you guys are setting up for another strong year of growth and maybe even more share gains, right? But within that, inspection is up 50% year-to-date, while patterning kind of flattish, but kind of similar to the profile in calendar '24, where inspection drove most of the growth. So maybe you can just help us understand, a, the drivers of the massive strength in the inspection is a broad basis across optical dark feel, bare wafer, e-beam. And then maybe help us understand the relatively flattish growth in patterning. And do you guys anticipate another year of total share gains in process control? .

Harlan, thanks for the comments. A lot there. I'll try to unpack it a bit. I mean, certainly, we've seen a strong inflection in our optical pattern inspection business. We were supply constrained in that business for some time. Now we have more supply, and so we're shipping through a lot of backlog for that product, and that product is well positioned and really critical for gate all around. So that's been a nice driver.

Obviously, what's happened in packaging has also been a nice driver for this part of the business, sampling rates and inspection given the challenges are very, very high. And so that's been a nice tailwind for that part of the business as well. So inspection has definitely been inflecting.

As it relates to patterning, you have really 3 businesses that are in patterning. You have optical metrology, which is around overlay and then you also have no measurement reticle inspection. And with overlay, as we've seen some slowdown in advanced litho with -- from a customer point of view, there's an attach rate of that business to litho. And so that's reduced, I'd call it more really nonconsumption in that business. So that's been a little bit weaker. Really the only business we have that has an attached to litho generally.

Film measurement, I think it's a little bit lumpy, would expect better-than-market growth out of that business as we go through the year for 2025. And for radical inspection, it's a lumpy business, we have some large integers in there, but would expect to see that business grow meaningfully and at a record level for calendar '25 versus '24. So a little bit of just what happens in the quarter, but I think from a directional point of view, I think we'll see stronger patterning as we move through the second half of the year.

Yes. And Harlan, to your point, I think overall, we are seeing process control intensity continue to rise for all the reasons we've talked about, the advanced designs, large die. And so initially, at least a lot of that favors inspection and Bren talked about some of this -- the facts and patterning. And then the radical comes around. I mean, for KLA, reticle in 2025 is going to be a record year. So we feel good about where we are positioned there and we have more products coming along. So we feel process control intensity continues to strengthen, and our market position is very strong.

Very insightful. And yet again, you guys upped your target for advanced packaging revenues from $850 million to $925 million for calendar '25. That's up like 80% year-over-year. I assume it's a combination of HBM and 2.5D and 3.5D advanced packaging. We know that many of next-generation 2-nanometer AI GPU, XTU designs are targeted for this packaging architecture stack chips, more HBM stack. Just overall significantly more complex versus 2.5D. But maybe you guys can just help us understand -- where are you guys seeing the incremental upside? I think this is like the third or fourth time that revised your full year outlook for Advanced Packaging. So where are you guys seeing the incremental upside?

So Harlan, you touched on a lot of it. And I think it's a combination of -- it took us a little while to have the products that were requested. And so a little bit of that is adoption and then some momentum once we started getting going. And then just the ramp it all comes back to the build-out associated with the AI infrastructure. And for us, that's the third leg. We talked about logic/foundry, advanced designs, bigger die, talked about HBM and talk about packaging. And really, it's that part of packaging. And I think as our customers see success with our portfolio, we're gaining share.

So the exciting part for us is apart from WFE dynamics, which I think we do spend an awful lot of time about, this is really outside of WFE. So we're seeing growth in packaging as a sector for inspection metrology. Also our process position there is good. And then we're gaining share. So you have a really nice combination. When we talk to customers, we think we're closer to at the beginning of this trend than at the end of it. We think this is -- there's a lot of growth to come.

Yes, Harlan, the other thing I'd say is just if you just go back just a short period of time, let's go back a few years to 2022 as a percent of advanced packaging, our semi process control business. Given the nature of the requirements was pretty low. You're probably about a 1% intensity. Today, we're sitting somewhere around in that 5 to 6% range. So just in a few years, we've seen our position change quite dramatically as the requirements, to Rick's point, have increased. So we're pretty excited about the growth rate and opportunity there. And we think that this continues to be a growth area as we move into next year. .

We'll go next now to Vivek Arya of Bank of America.

On the first one, the process control intensity in memory, I wanted to get your views on this. Historically, it used to be lower, closer to, I think, mature nodes. How is that process control intensity evolving as the industry is moving from traditional DDR DRAM to more high-bandwidth memory. Is there a way to quantify what the benefits are to KLA because HBM is expected to be one of the fastest growth drivers in AI accelerators? So I'm just curious to understand how your opportunity is evolving as the industry migrates to HBM and then advanced versions of HBM?

Yes. So I'll give you a qualitative and Bren can do the harder thing of giving more quantitative qualitatively, you have more advanced, bigger, more valuable buy with more challenging circuitry in the periphery and less redundancy. So -- and you have a tremendous pressure coming because these are in high use and therefore, these die don't rust. These are unlike the duty cycle is high. So you've got -- and they're part of an expensive system. So what our customers have said is they increased -- and as you know, there's multiple players, they've increased the inspection, both in the development but also in the build-out. And they're finding that they need everything they can get as to Insight. And because these are more valuable die with less redundancy, the deep activity levels in the past that might have been acceptable or not and so not acceptable now.

So they need more coverage. They need higher tools, plus they're introducing new technology. So everything is driving toward higher process control intensity. We've been I don't know that we've been surprised, but we've been pleased by the adoption, and we think there's more demand coming as people understand the challenges. And then their -- our road map cadence that's different than the consumer cadence was. So I think from their standpoint, there's not a lot of pressure to deliver a yield. So that's what's happening and why this adoption is very different than memory has been in years for us.

So when DRAM went with the EUV, we started to pattern a couple of layers or a few layers with EUV, we saw a step-up in intensity. So process control intensity was somewhere around 9% to 10% of WFE back before. And then with the introduction of EUV, we saw that improve. We saw that improve about 100 basis points. When we move to HPM, we think that there's another 100 basis points or so of opportunity there. We'll see how that plays out over time.

But as Rick said, as the requirements have changed, it's increased the value of our products and changed how customers sample and their expectations around reliability. You also have a bigger die, which benefits everyone, but I think some of these challenges that they have around the market requirements for HBM are benefiting process control uniquely. And so we're seeing that on the logic side, but we're also seeing that on the memory side as well. So right now, we look at it, we think there's probably another incremental 100 bps on top of that. So if you go back pre EUV to where we are today, it's probably somewhere in the neighborhood of 200 basis points of higher process control intensity. And our share position and momentum is in a pretty good place. So we're encouraged by what we see.

All right. Very helpful. And then for my follow-up on gross margins, kind of near and a little more medium term. So if let's say, December quarter sales are flattish, should we assume gross margins stay flattish? Or are there any other mix effects, et cetera, that we should keep in mind? And then kind of more medium term, what are you doing to mitigate that tariff cost pressure? Can it be mitigated? Like when should we assume that you have some alternatives in place to get the gross margins back to the trend line?

Yes. So the first part of your question, we talked about our views of calendar '25 gross margin at 62.5%. So if you take Q1 and Q2, and our guidance for Q3, that will lead you to an uptick in gross margin in the fourth quarter based on our expectations now around revenue mix as of the next quarter. So that should get you there. You can do the math and figure out how to get there.

But as it relates to tariffs, there's a lot. I mean, first of all, as I said in the prepared remarks, it's a new thing for our industry. It hasn't been a factor in our business operations historically. So now as we face the likelihood of higher structural tariffs moving forward, there are some business processes as it relates to how we move parts around, how do we leverage free trade zones and things like that to reduce leakage of tariffs as it -- where you pay a tariff, but then you have an opportunity when you turn around to export where you can reclaim or clawback the tariff that you pay related to the export. So there are a lot of those dynamics that are mitigating factors. Obviously, if it drives structural cost increase, then that's something that we'll have to deal with, both in our service and system businesses over time, just like we would with any other cost increase.

But we think that there's some opportunities to go do some things on the process side, where, look, we got a lot to do. The ROI wasn't all that compelling even though it might have been a better process, well, if you add in the economic cost of incremental tariffs, all of a sudden, some of those issues rise up or opportunities rise up to the priority scale. So that's really how we're thinking about it.

I think for the Street in terms of how you're modeling KLA, I think that the 50 to 100 basis point guidance headwind is probably the way to think about it. And then as I start to see either some stability or some changes in terms of how we're doing things that reduce that, I'll provide that update when appropriate.

We'll go next now to Shane Brett of Morgan Stanley.

Apologies for asking a bit of a near-term question. But if I'm understanding this correctly, your September quarter foundry logic revenue is likely to strengthen sequentially, but your memory revenue across both DRAM and NAND decline. I thought that the memory mix, specifically DRAM, may uptake a bit more in the second half. So just talk about the big business mix here and if we could see a memory uptick in the December quarter?

Yes, the way it's lining up, I think that we'll see DRAM stronger in the December quarter than the September quarter. It's just really about timing of revenue, revenue recognition, those dynamics. The shipments of the final product acceptance processes that we run through that drive revenue into a particular quarter. But as I look at it and you think about some of the project timing that's out there, I would expect to see an uptick into the December quarter.

Got it. And for my follow-up, so 2022 Analyst Day, you set out a $14 billion revenue target for '26, which I think was based on $125 billion WFE assumption. I think your market share gains have clearly checked above what you're probably thinking in 2022. Just could you talk about those market share gains and sort of where your kind of current assumptions are towards -- as we think towards 2026, not really asking sort of revenue guide, but if you can kind of give us a few crumbs on how to think about '26.

Well, you're right, the 2026 plan assumed WFE level in the mid-$120 million range. And so we'll see whether we get there or not. But I would say that for KLA, we don't need $125 million to make that plan. But given the strength that we've seen in our share of WFE, the growth rates we've seen in packaging, Obviously, we've had some headwinds as it relates to export control in terms of lost opportunity, but also how that's affected our service business. But in general, we feel like we're pretty well positioned from a share of WFE point of view. .

We assumed a 7.25% share of WFE. If you take out packaging, I think our share of WFE is approaching 8%, then you add in the packaging opportunity. So we'll see. If I got WFE levels in the mid-teens, I think we got a shot at it. But I think when you consider puts and takes, we don't need as much given the growth rates we've seen in our overall share of market. Now that's been intensity driven. I mentioned packaging. We're also, I think, pretty confident around some of the share opportunities we also have. That's all that's part of that number.

The financial model underneath is operating very consistent. Absent the tariff effect, we'd probably be in line or maybe even slightly better on the gross margin side at that revenue level. So the rest of it is driven by our incremental operating margin model and our expectation of drop through to EPS based on business performance, but also capital structure action of EPS growth of 1.5x our revenue growth rate. So it really is going to be predicated on where WFE ends up in terms of how we perform against that target. But the financial framework is executing as we expected.

We'll go next now to Charles Shi of Needham.

Maybe my first question, a little bit more about China as a percentage of sales, 26% in March, 30% in Q2. So is the 30% still the right number kind of going into the second half of the year? Or shall we kind of expect some upside because the data point so far has suggested there has been some upside in China WFE so far? But I kind of wonder, since you still view China something down this year? Kind of want to get some thoughts there.

Yes, Charles, I'll try to unpack this a little bit. If you go back to earnings in January, we talked about our China business dropping to the 30% level assuming a $3-ish billion run rate, and that's down from about 41% in 2024. So obviously, Q1 was lower, which means that you're likely to see higher percentages as you move forward. So our -- we fast forward to April and the guidance in April was very consistent with that. If you look at where we sit today, I still see it at roughly 30% plus or minus. .

Now the second half will be higher than the first half because you were 26% and 30% in Q2. So I think the second half is higher than the first half. But for the company overall, we're still in line with that 30% expectation plus or minus a couple of points. Now our business has strengthened. We were a $3 billion run rate. Now we just guided $315 million. So some of that strength has been reflected in China at a consistent percentage. So at the beginning of the year, we thought our China business would be down somewhere between 15% and 20% overall. As I said today, I think we're probably down somewhere between 10% and 15% on just the general strengthening overall. So China behaving pretty much as expected and expect the year to end up somewhere around 30%.

I appreciate the color. Maybe another relatively high-level question. I see -- listen to your answers to questions from other analysts on this call regarding process control intensity. I think historically, people kind of associate or positively correlate process control intensity with lithography intensity, lots of discussion on litho intensity this year, feels like the consensus is probably coming down, but I think that historical correlation kind of broken down over the past couple of years, process control intensity actually was on the way up. Litho probably kind of coming down as we remove any of the stockpiling in China, those kind of factors.

So kind of wanted to get the sense from you guys, what do you see that the process control intensity? Where is that correlation breaking down? And what's the outlook going forward from here? Do you expect that the bifurcation is kind of going to be sustaining structure or maybe the new reversion event at some point in down the road?

Yes. That's an insightful question. The -- if you go back in time, and I won't go too far back, but often the process control for lithography was associated with wavelength shift and lithography, usually driven by one large manufacturer of a microprocessor. And so that was the hates that kind of set everything. And so in those cases, you'd be going to a new design rule and you need new lithography, maybe the mix was different with advanced. And so you see intensity go up and those same drivers would be driving process control intensity to your point. .

What's changed quite a bit is the dynamics associated and it started happening a few nodes ago where we saw a proliferation in advanced designs at bleeding edge. Because historically, what you also saw was fewer people designing at the leading edge. So therefore, it was pretty correlated. Around 7 nanometers, we started seeing more designs happening. And the design intensity around the number of designs chasing leading edge doesn't really do anything for lithography intensity. In fact, it doesn't do anything for much capital intensity, except for process control intensity because you have a higher degree of variability because you have more designs going through at the leading edge. You drive reticle consumption up higher, and that has been a very stable market.

But more importantly, you have a very high mix stab where the variability is more and more challenged. And then you have to manage that in terms of how do you make sure you're yielding enough and not pretty too many wafers in, that's all about process control. That's not about other things, not about litho.

And then add to that, the latest thing that's accelerated even further is the number of large die and associated with AI. So you have another driver that's doing it. On top of all that, you have what's going on in advanced packaging, which is allowing people to integrate a lot and in many ways, reduces the need for other equipment but increases the need for process control.

Lastly, you have what's going on in HBM. So it's kind of a perfect transition from a -- if your business is process control, this is a really good time because every one of these drivers is driving the intensity in the way that customers can afford to have more processes control as they don't need as much intensity in their other parts of semiconductor manufacturing. So you're exactly right, but it's really the proliferation of design and the drivers around AI.

We'll go next now to Tom O'Malley with Barclays. .

When you answered the question earlier in the call on 2026, I appreciate it's early, and you don't want to give more color. You talked about the broadening of leading edge, and I think you were very intentional around using that word. Are you talking about additional customers coming in on the leading edge side? Are you just talking about the broadening of opportunities in the existing pillars of customers that you already have?

Both, talking about both. We're seeing more people at the leading edge, as we've talked about, higher mix foundries. And for the first time, I think, in quite a while, we're seeing more players doing leading edge or very close in proximity to leading edge across. So we're seeing some momentum there. Some of that's been in the news. And as a result, what we're seeing is a broadening of customers as well as a proliferation of design. And I think it is the proliferation of design that is driving the broadening of customers.

And when you guys look out into '26, you obviously are also thinking -- look at the environment you just described, you talked about a lot of different areas in which process control is going to do a lot better than other areas of equipment. How are you comfortable in talking about the strength of the broader market where you kind of describing a dynamic where maybe you're taking more of the pie and obviously, having more of the pie, the market may look a lot bigger? So maybe can you walk us through what you're doing to understand what your intent is of total WFE next year? Do you see share gains and maybe the market isn't as big, but you maybe have a piece of that market that's a little bit larger. How do you kind of figure that out as you look at your forecast into next year?

Well, I'll take the qualitative, and let Bren wants to do the quantitative part. We don't actually know exactly what we know or what the trends are happening, and there's always been this thing about process control that kind of cuts both ways. One, is can you solve these problems? And if you could, you -- people would buy systems to do it. But for a long time, there are a lot of unmet needs. And so people would find other ways to solve those problems because eventually, they're going to figure it out. And what I mean by that, let's say, you need to find a specific defect in a specific part of the process you need to segment that process to find it. Well, if you don't have the tools that are actually capable of doing that, customers will figure out another way around it, maybe not nearly as efficient.

But so part of what's changed is we have more of those tools and part of what -- the reason we have that is our portfolio has been strengthened through a lot of investment over the years. And we talked about quite a while ago, the repeated application of advanced processing of our own systems using AI has given us more ability to solve those problems in conjunction with some new product offerings such as our e-beam portfolio means that we can give customers a better way to manage those.

So from the standpoint of that, but I don't actually think in some customers, they are figuring out dynamically how much process control they need, and it's still incumbent on us to prove the value when they introduce it. But when we say we're pretty confident going into '26, it's because we have more and more places where customers are telling us, in some regards, they're playing back to us what we may have said to them a while ago, we know we need more process control intensity. We need you to help us get that portfolio and they're making sure that we have the ability to do that. Those are encouraging conversations that we're having in the. We understand why because we're involved in a lot of the debugging of these processes to understand.

You also have architectural changes that are just making it harder. And so the dynamics of supporting these advanced nodes, and as I mentioned before, we're in kind of the perfect storm for all the process flows, whether it's HBM and those are more challenging, whether it's advanced logic with bigger die and also the packaging. So that's why we feel pretty good about '26. And Bren can maybe add more color.

Yes. Look, we all know our own business is probably best. So when we try to provide some color on where the industry is. Obviously, that's informed by what you know and our closest to. So we thought that it was prudent at this point given the nature of customer conversations to provide our perspective next year, the way we did.

To Rick's point, we do see opportunities for our business to continue to inflect. One thing about larger die is it increases defect density challenge where everybody benefits from bigger wafers, but the defect density challenges when you have large die creates new opportunities for process control. When you look at high-performance compute, you also look at the value of those die. And so that, given the nature of that, customers are investing more to ensure that those chips function as designed, and the performance specs are quite rigorous.

So all that gives us a certain amount of confidence around our own business, and I tried to do my best to give you at least the perspective that I have today in -- at the end of July or what next year -- what we think next year looks like.

We'll go next now to Joe Quatrochi of Wells Fargo.

Yes. Maybe just a follow-up to that kind of line of questioning. If we think about just -- you talked about the rising and diversity design that starts in HPC increasing KLA's relevancy. I guess, how do you think about just the sample rates or what that does to sample rates for process control? Do we just think about that as being maybe the peak to trough is less steep on a new node ramping? Or is this kind of a step function higher in terms of sample rates? .

Yes. This is another interesting development, Joe. And I'll -- as we have that same question, if you go back historically, you'd have a new node, you would ramp at the beginning of time, you'd ramp it up and then you run it in volume. And so you see process control intensity most -- highest at the front end, right? That's what you're referring to. What's happened now, though, is because there are multiple designs, what we're seeing is they'll be bug, the customer will debug a new process on a specific device type, a specific wafer and they'll around that. But not long after, you'll get other designs that are coming in that have their own version of those ramps, and they're not the same.

And in many cases, the process flows for different customers are different. The die size might be different. So you're really having a compounding of ramps inside what looks like HBM and a lot of these HBM fabs are actually doing process ramps of the new nodes, plus there are continued improvements inside of that node in terms of what that capability. And even to one degree, we saw somebody go back to a prior node and introduce more process control because what was introduced into that prior node was a larger die. And so it's not the traditional model people think of when you go back in time of you ramp it and then you run it. That's not what's happening.

There's multiple ramps because every one of these -- these devices come in. There's some benefit to some customers to not be first with their advanced design. In fact, there's an economic benefit coming in 6 months later, but it doesn't make it easier to ramp it in the production. So that's why when we look out and we look at the distribution and we were looking for -- are we seeing that effect of seeing it front-end loaded then the answer is no. That's not what we're seeing. In fact, in some cases, we're seeing it going back because the -- these waivers are so valuable that if there's an entitlement of yield and they can get more, they're actually putting in more process control to squeeze those lines to get more capability. So very different than the traditional view of how process control ramps with the new technology node.

Joe, the other thing is that when these nodes are well adopted. So the design levels are high, then that limits what our customers are able to do in terms of trying to reuse their equipment at least as it relates to our products. And so as we've had a litho road map, we've had new architectures, the Moore's Law attributes have been good that drive the design environment high, then it limits the reuse of capacity. There's a number of technical challenges that also limit it, but certainly, the adoption levels of the leading edge by multiple designs is a factor as well.

And let me add 2 more things. because you have multiple reticles, reticles have always been 100%, right? You're inspecting all the reticles to make sure, and then you have a recall, but you're inspecting them to make sure they're good. And why? Because they're so expensive and the cost of failure is so high. We're actually seeing that dynamic in packaging, too. Because the cost of these advanced packages are so high that they're running at 100%. So that doesn't even fall off. That's just because of the cost structure of those. So multiple situations, it's not as easy to model as it used to be, but it's good for process control intensity.

That's super helpful. And maybe just as a follow-up, I think earlier to your question, you said, and correct me if I'm wrong, but you said reticle revenue -- reticle inspection revenue this year would be a record or pretty strong growth. Can you help us just understand like what's driving that? I know that like China had been a source of demand for that, but I think there's also quite a bit of demand on leading edge or in minus 1 nodes.

Yes, Joe. So China is a factor there, right? Because the very limited number of captive mash shops, so investments to develop merchant mask ecosystem. So there is legacy node reticle tools that are continuing to be a factor for us.

Requalification opportunities in the fab given the nature of the number of designs, the value that Rick talked about and the limited use of pellicles is also a factor. The other thing that you have that's also driving it is more single die since most of the reticles, let's say, 60% plus of reticles are single reticles, you need to inspect those reticles against a reference. And so whether that is a database reference of the design, whether that's a different golden reference, then that's also a factor.

We're also seeing benefit in terms of print check on the broadband plasma Gen 4 platform -- or Gen 5, that one is in Gen 5 platform. That is doing reticle qual as well. And that business shows up in our in our optical inspection results and not in patterning. But there's a number of drivers and a ton of investment happening by customers to ensure that these reticles are -- the fidelity of the pattern is good and that they're not introducing any defectivity because you need 100% defect detection reticle inspection or you print that defect on to every guy. So a number of good drivers across multiple products.

But just to point out, what Bren talked about using optical for print check, that is not included when we say we're having a record year in medical, but it's without that. .

We'll go next now to Timothy Arcuri of UBS.

Bren, can you -- I know you're going to shift how you report backlog and RPO, but I think that's maybe with the new fiscal year. So can you give us RPO? .

Yes. So we'll report in the 10-K, I think we're going to file it here in another week or so. RPO will be somewhere around in the neighborhood of $7.9 billion.

So it came down by like $1 billion?

Came down by about that much, yes. We're starting to see, as we said earlier, as we've shipped through a lot of the long backlog customers now and some of the supply-constrained products, we're now seeing our business being driven by our long-standing customers that operate with shorter lead times. So now we're normalizing lead time. We've been talking about it for a number of quarters that we were moving towards it. I think now we're getting into that range where, look, our long-standing customers have historically 6- to 8-month lead times, the packaging business has 2- to 3-month lead times. So we're seeing a normalization of lead time that's happening here, and that's affecting the backlog level.

It took a while to get here. We were up at, what, 18 months of backlog. Now we're down around 8 months of backlog. You have to remember, the RPO number is significantly a systems number. So when you do the math on it, you have to compare it against the systems revenue. And so when you do that math, you end up in that 7- to 9-month range that I talked about.

Yes. I mean, we've been talking about that for a while that it's going to -- but it was the $1 billion that was stripped out by you. So basically that's canceled by you.

No, no, no. That was part of our shipments. I mean we don't really see our backlog cancel all that much. I mean we had to strip out backlog as it relates to export controls when that happen. But whenever we make adjustments that are debooking adjustments, those are typically related to an event like that. Our backlog tends to pull together what customer gives us an order.

And you have to remember, we had a number of new customers that were doing greenfield projects that to get a slot when you want it, what do we require? We require an order, we require a deposit, we require letters of credit. So that was a big part of the backlog. Now you fast forward to where we are today and you look at our long-standing customers that you know well, well, those customers, we build the forecast with. And so the order to shipment timing tends to be in that 6- to 8-month time frame. So we're seeing more of that business going forward, and that's reflected in the lower backlog levels. I would expect, now we've normalized, it to stay more or less in this range here going forward.

And just on service, you were seeing up 10% for the year, but you seem to be running out of that? Is it like what's in this year. Can you talk about that?

For the -- I'm sorry, Tim, you're breaking up a little bit. Service. Yes, overall service. I think we're in that ballpark. Yes, 10% plus range for the year.

Okay. So -- but it's still going to go up sequentially in September and December, right?

Yes. It generally does, right? I think because as you add tools and tools come off of warranty, unless you have some situation where all of a sudden like you lose access to a fab, and we thought that might put some pressure on sequential growth. But we've also seen the dynamics in our service business start to inflect in terms of performance requirements, availability requirements and our general attach rate. So it's the 52nd quarter of year-over-year growth for service and we'd expect to see sequential growth in service as we continue through the year. .

And ladies and gentlemen, we have time for one more question this evening. We'll take that now from Brian Chin of Stifel.

Other, thanks for sneaking me in here at the end. One of my questions is the kind of been asked here, which you remarked on pretty well, which is basically that these data center ships are kind of breathing life into minus 1 node, it sounds like. I think that's something that's pretty important to say. Maybe one last, my question will be to be mistaken, but I think when you discussed in the past, it sounds like your near-term opportunity set in advanced packaging was particularly in 2.5D or CoWoS packaging rather than an HBM. Is that the case? And where is more of the -- is that the case, I guess? And also, are you addressing more inspection applications still? Or is metrology part of that as well?

Yes, most of share gains that we've seen so far have been in the logic area with Colas, although we are seeing increased momentum in HBM. So we're pretty excited about directionally where that's going. So it certainly is informing our view of share opportunities. It is more defect loaded than metrology because sampling rates for metrology tend to be a little bit lower as the design rules that are typically used in packaging are larger. And so that limits some of the metrology opportunities in the short run. But from an inspection point of view to Rick's earlier point, the sampling rates are incredibly high because you don't want to miss defects, you don't want to overkill devices either. So you don't want to under kill and miss something. They don't want to oversell either. And I think so that's driving higher sensitivity requirements from KLA.

And at this time, Mr. Kessel, I'd like to turn things back to you, sir, for any closing comments.

Just thank you, everybody, for your time, for your interest in KLA. We appreciate it. We know it's a busy week of earnings. It's a busy day. We'll be in touch as we go forward. Thank you. Bye-bye.