KLA at Cantor Fitzgerald Conference: Strategic Growth and Market Position

On Tuesday, 11 March 2025, KLA Corporation (NASDAQ: KLAC) participated in the Cantor Fitzgerald Global Technology Conference. The company, led by CEO Rick Wallace and CFO Brent Higgins, highlighted its robust market position and strategic initiatives in the semiconductor sector. While KLA anticipates growth opportunities in advanced packaging and optical inspection, it also addressed potential challenges in the Chinese market.

Key Takeaways

• KLA expects to outperform the semiconductor market, focusing on process control and inspection equipment.
• The company anticipates mid-single-digit growth in the Wafer Fab Equipment (WFE) market, reaching up to $105 billion by 2025.
• Advanced packaging, particularly High Bandwidth Memory (HBM), is a significant growth driver, with revenue expected to increase from $500 million in 2024 to at least $800 million in 2025.
• KLA’s gross margin targets are set between 60% and 65%, aiming for 63% plus at $14 billion business levels by 2026.
• China’s revenue contribution is projected to decrease, but KLA plans to offset this through diversification.

Financial Results

• The WFE market in 2024 is approximately $95 billion, with KLA achieving a 12% revenue growth, surpassing market performance.
• KLA’s gross margin guidance for 2024 is 62%, with a long-term target between 60% and 65%.
• Revenue from China is expected to decline from 41% to around 29% in the current year.
• The impact of exiting the Flat Panel Display (FPD) sector is expected to improve gross margins by 20 basis points.

Operational Updates

• E-beam technology sees increased demand due to improvements and AI integration, with lead times of 9-12 months.
• KLA’s optical systems cover 90% of UV reticles in production, with the next-generation system, Terron 710X, targeted for 2026-2028.
• The company is prepared to support unexpected demand within lead times, emphasizing the synergy between optical and e-beam technologies.

Future Outlook

• KLA forecasts mid-single-digit growth for the WFE market in 2025.
• The company expects China’s market share to decrease to 20%-25% over time.
• HBM is seen as a significant driver for DRAM intensity and process control needs.
• Advanced packaging growth is driven by shrinking interconnect density and the need for more sensitive solutions.

Q&A Highlights

• E-beam adoption is driven by the need for advanced characterization of transistors.
• HBM opportunities are primarily related to logic and DRAM die and advanced packaging.
• KLA expects more designs at leading-edge nodes to drive growth in foundry logic.
• The company believes it has adequately mitigated risks associated with Chinese market headwinds.

Readers are encouraged to refer to the full transcript for a detailed understanding of KLA’s strategic insights and market positioning.

Full transcript - Cantor Fitzgerald Global Technology Conference:

CJ Muse, Analyst, CANR: We better get started. My name is CJ Muse, with, CANR covering semiconductor, semiconductor equipment. Thank you all for coming. I have the, the honor, to introduce to KLA. I always think about KLA ten quarter, but KLA team, Rick Wallace, CEO Brent Higgins, CFO.

Welcome, gentlemen. Thanks, CJ, for having us. So I I have a number of questions, but I figured I would start with the all important, you know, where are we in the cycle? And most management teams talked about kind of an up mid single digit number for 2025. And, my sense is everyone thinks they’re going to beat that.

And therefore, are we not in maybe an up kind of 5% to 10% kind of world for the year, which considering where expectations were three, six months ago, that’s a real kind of positive surprise. So I guess, just first question, do you kind of agree with that assessment? And what’s your earlier early thoughts on 2026?

Rick Wallace, CEO, KLA: I’ll let Brent take that one.

Brent Higgins, CFO, KLA: Yes. So 2024 was a good finish for the company, where WFE levels were about 95,000,000,000 company. So it was up somewhere in the mid single digit. Company was up about 12%. So we had a nice relative performance last year, and and had a record revenue number too for the company, which I think under the circumstances with some of the moving parts we had related to China was a pretty good outcome.

You’re right. Our view on 2025 is more or less a mid single digit type growth year for the industry, which takes WFE levels up between a hundred and a hundred and 5,000,000,000. And look, we’ll see how how that plays through. Certainly for KLA, a return to growth at the leading edge, both in logic and foundry, but also in memory is a real driver for our business. We’re excited about those opportunities.

I’m sure we’ll talk more about them. So I think that is the biggest driver, and it’s a higher process control opportunity, particularly compared to the last two years, which were more legacy centric. Easiest way to think about it is that logic and foundry, WFE on the front end grows in terms of leading edge, grows, offsetting some digestion and export control affected business in China. The legacy parts of the industry are more or less flat. We see a little bit of growth off a very low base in the NAND flash market.

And then investments in DRAM specifically supporting HBM drives the uptick in the year. Against that backdrop, we feel very good both in terms of our about our relative performance, both in logic, foundry at the two nanometer node versus three, but also, the dynamics around HBM and how that how that translates into opportunity for KLA. Packaging is also a big opportunity in ’twenty five. We talked at earnings about growth of about, at least $800,000,000 up from $500,000,000 in advanced packaging. So another vector there of opportunity supporting what looks to be a pretty strong, not just this year, but as we go forward, each high performance compute market.

So just looking at all that, I think it translates into, you know, mid single digit kind of growth. Very good about KLA’s relative position. We’ll see as we go through the year whether, whether that view changes, but that’s where we sit today.

CJ Muse, Analyst, CANR: Perfect. So I think I’ll kind of pivot now between some of the end markets in ’25, ’20 ’6 trends and key technology inflections for KLA this year and beyond. So maybe to start optical versus e beam, obviously, you guys are the best in the world at optical. But we met a few weeks ago,

Rick Wallace, CEO, KLA: up in the market. We’ve been spending on e beam, as I talked to Ahmad, for quite a while. And the question was, when was it going to actually start showing up in wins? And so the we’ve always had the view that e beam and optical are complementary. And what we needed to have was a fast enough e beam that was also going to be able to sort through a lot of the noise.

It’s funny, when we talk about AI in our products, the first product to have AI was an e beam inspector from us back in, like, 2018. And so we’re finding now with the latest generation that we’ve introduced, that we’re actually getting wins and we’re seeing growth in some of our share gains this year. What we anticipate and, you know, as part of outperform is because of the strength of the e beam portfolio. And we’re seeing it surprised Brent on the operations side that we keep getting increase in the demand for that.

Brent Higgins, CFO, KLA: Yeah. And you know, it’s interesting for us because it’s always been something that’s been somewhat complementary. They’re complementary markets to the optical franchise. But now you have other applications, particularly in terms of gate all around and characterizing transistors, and transistor performance. And so, over time, we expect roughly 80% of the dollars in pattern inspection to be spent on optical technologies because those translate to production.

E beam has great sensitivity, but is incredibly slow. But it’s more than just pointing our inspectors and increasing the relevancy of optical inspection. There are unique applications that we think we can differentiate at also. That’s also a factor in how we see it. Now there’s also other parts of the market.

There’s a metrology market, where you’re doing more in dye measurements to, for overlay metrology as an example. And then there’s review. And so that when the dynamics is anytime you ship an optical inspector, you have to ship a review system to review and classify those defects. And it is something that being able to do that faster is a driver because of all the, to Rick’s point, all the nuisance that’s there. So it’s absolutely a factor that we think is a share opportunity.

Those are markets we haven’t had a strong share over the years. There’s growth. And so we’ll lay out a deeper analysis on this at our Investor Day in June, but we’re certainly encouraged by what we’re seeing in the market today.

CJ Muse, Analyst, CANR: Maybe just to get ahead of that a little bit. So you guys exited CD SEM, but you just talked about SEM review throughput. In 02/2007. Yep. Yay.

Not suggesting near term, but just trying to get the landscape of where you’re playing. So it’s SEM review, and it sounds like throughput, there’s some advantages there now. And then the other one, big one is EBI. And I guess for e beam inspection, are you attacking all three markets, voltage contrast, physical defects, buried defects?

Rick Wallace, CEO, KLA: Yes. And also reticle. I mean, we have a system that’s being used for advanced reticle inspection too. But the answer is yes. I mean, part of why this strategy took so long for you to hear about was we had debates about this internally.

Do you develop one segment and then grow or do you develop for all the segments and bring them out? And we actually want the second path, which is a longer, more expensive, but that’s what’s showing up now. And so we’ve got a portfolio of products for our customers, and we’re essentially seeing it both in the logic, advanced logic, but also advanced memory showing up and getting really strong results. Part of why I wasn’t sure I was going to be here is I was in Asia last week, and I was in Taiwan and Korea talking to customers. And it was interesting how their their view of our e beam has changed pretty dramatically from prior visits.

How so? Very positive and wondering why they can’t get more capacity.

CJ Muse, Analyst, CANR: And what are the lead times, for e beam inspection?

Rick Wallace, CEO, KLA: Well, from a new order now, it’s

Brent Higgins, CFO, KLA: either pretty consistent with other lead times. It’s somewhere in that nine to twelve month range. I think, ramp, although I think we’re in a much better position today than we were before. So, you know, the demand’s been strong and, and we’ll work our way around it. I don’t think it’s an impediment to the opportunity.

It’s just one of the usual operational challenges you face.

CJ Muse, Analyst, CANR: And when you talk about optical and e beam complementary, obviously, they’re very complementary in terms of, you know, as you talked about, what you can see in throughput and balancing that. But is there, an opportunity and an advantage for a customer to select you for both where they work well together.

Rick Wallace, CEO, KLA: Yeah. Absolutely. But both from, we’re we’re now sharing some of the algorithms, so some of the AI work has been done on both, and we actually have linkage between the system so that to Brent’s point, you can point them, but also you can validate. So if you could find it on e beam, can you then tune the optical to run it at higher speed and be able to continually monitor? But that was always the question was, what was the value of the portfolio?

Was there synergy? And finally, we’re seeing realization and customers are playing it back to us.

CJ Muse, Analyst, CANR: And I guess, is there a framework for thinking about the driver of adoption from, you know, three to two to, I want to get the name wrong, A 16, A 14. Right. A 14. Yeah.

Rick Wallace, CEO, KLA: I think it’s still, the customer is exploring. I mean, there’s a waterfall. If you look at, you know, thousand steps in the fab and there’s, let’s say, 200 that are being inspected, monitored on a routine basis. And like, you know, right now, for the most part, only two of those in advanced logic are being used by e beam. I mean, mostly, everything else is the fastest tool that can do it.

So whether it’s a dark field tool or whether it’s a BBP tool. And so the numbers are expanding as you go forward, provided we can have the coverage and the throughput, right? So the challenge always for any of these technologies was if it’s used as an engineering tool, it doesn’t drive capacity because you’re only debugging a line with it. And so the answer is yes, we’re seeing them implement. And there’s some layers now, and this is was a shock to us that they’re inspecting twice the same layer with optical and e beam because they’re seeing different things.

Brent Higgins, CFO, KLA: Wow.

CJ Muse, Analyst, CANR: So you also talked about reticle with e beam. Yeah. Obviously, very strong 640ES Terron optical, the 8X multi column e beam, but also soon the Terron seven ten X. So as you look at that portfolio, is there a framework for thinking about, you know, your share, for overall reticle inspection? And should there be a difference between in house versus mask houses?

Rick Wallace, CEO, KLA: Not a huge well, I mean, recall is it for an application, so sure. And then it’s more going to be optically based. But when you say soon, I think soon on 07/10 is Sorry. ’26 to ’28. Okay.

So it depends what your time frames are for soon. That is, the answer is yes. And really, actinic for reticle, our view has been consistently that when it’s really gonna be needed is when there’s high NA lithography, EUV lithography, which has slipped out. You know, I think there might be a couple layers at fourteen, but it’s it’s out there away. So I think it’ll more intersect with HVM for that.

So later, and right now, the question on 8XX has been, can we continue to provide more capability by adding more columns and getting the throughput up. So that is we’re getting good feedback on that. And then the optical tools continue to expand based on algorithms and just what we’ve always done, provide more illumination and more algorithms. We’re covering

Brent Higgins, CFO, KLA: most of the market with the optical systems, right, that 90% of the UV reticles in production are going through optical systems, given the nature of the lines in space density that’s on the reticles. So we cover most of the production use cases. And then you’ve got what’s happening in the fabs where they’re requalifying reticles. You also use a wafer inspection tool that doesn’t show up in how you calculate reticle inspection, but it’s a use case for wafer inspection to print the wafers and use that to validate the fidelity of the the reticle. So so those are the principal tools in the market.

And and, you know, we’ve got some advanced capability, obviously, with e beam and Atenic down the road. About a partnership we have with a key supplier with Carl Zeiss, as it relates to the optics for that system. And so the ability for us to to make adjustments to DNA very quickly, and there’s some synergistic value between, the optics and the support that they do for the scanner and for the inspector. So I think we’re in a pretty good place when the market need materializes there. Perfect.

Maybe moving to advanced packaging,

CJ Muse, Analyst, CANR: including HBM. You talked about $500,000,000 in $24,000,000 or $800,000,000 in $25,000,000 obviously great growth. But I believe that’s largely co ops. And so curious as you think about going to HBM III and IV, can you kind of walk through how the opportunity opens for KLA? Where are you in terms of having the right price, right gross margin KLA tool to serve that market?

And how do you kind of balance, you know, the margin requirements that you need, but also this high growth market that other players have traditionally supported?

Rick Wallace, CEO, KLA: Maybe I’ll intro and Bren can fill in the details. So I remember meeting, it was probably eighteen months ago, one of our major suppliers where they told us that we want your WFE, you know, your front end stuff in the back end. And we said, well, I don’t think you mean that because it’s too expensive, right? You’re going to say that, and then we’re going to put it in there, and you’re going to say that we and they said, no, no, we’re dead serious because what we’re seeing in packaging is the requirements are looking a lot more like the front end. And so you take what was a low end in the front end, and it becomes a high end in packaging.

And a lot of our growth and success in addition to some of the process stuff, but a lot of our growth has been that conversion of some of those capabilities and just the adoption of optical inspection, the adoption of some overlay, the adoption of flatness. And those are what I mean is films? Films. Yeah. And so those are the reasons.

And so, you know, what they’re telling us is the cost is so high. And CJ, I always look at what is the cost of what they’re making and what percent can they add on an inspection. Right? So if you think about a reticle, you can understand why they can spend as much as they do. The cost of the reticle is so high.

The issue was the cost of the packaging wasn’t high enough to spend a lot of extra money on the inspection. That’s not true anymore. And the cost of failure on a package. And so they’re throwing a lot more process control intensity at it. And what they’re telling us, that’s not slowing down, right?

So they’re trying to streamline the HBM process. But even as they do, they need more. So the answer is, you know, we say 800,000,000, but we don’t think it stops there in terms of growth. And the beauty is we’ve got all the roadmap. We have all the products, right, because all you have to do is continue to adapt the stuff that we have in leading edge.

The challenge for the guys that have come at this market from the low end was that they’re already stretched to the top of their capability. You know, so when we talk about packaging as our low end is their high end, and they’re kind of at a limit, whereas we’ve got a huge roadmap plus the opportunity that we have because we have the processing SPTS division. So those are kind of the roadmap we see from the packaging guys is fully integrated to the conversations we’re having with our leading customers on front end, and I think that market keeps growing for as

CJ Muse, Analyst, CANR: far as we can tell. So if we isolate to HBM, can you kind of walk through, I guess, bumps are getting smaller, wafer thinning? What are the tools that that you see as an opportunity for KLA?

Brent Higgins, CFO, KLA: So those are the things that are happening. Right? I mean, generally, is is that you’ll just run into height restrictions. So right now, historically, bump inspection has been more of a legacy packaging market. But as you start to increase the capability there, it creates opportunities for us to address with higher value systems.

So they’re the same systems and co ops, but but it’s it’s, you know, inflecting more from point of view. So most of our exposure today has been, to your point earlier, has been logic and but we’re increasingly optimistic about the momentum in memory as we go forward for some of the things that you mentioned. And

CJ Muse, Analyst, CANR: as you think about going to five or three nanometer on the logic die for HBM, freeing up space there for adding incremental logic, is that an opportunity that you see as well?

Rick Wallace, CEO, KLA: Yes. So HBM four you mean in memory or we’re still talking packaging?

CJ Muse, Analyst, CANR: The logic die within the HBM four stack.

Rick Wallace, CEO, KLA: Yes, of course. And so I think that there you know, back to the every conversation we have, customers are frustrated that they’re having to add process control as a percent of their spend, right? So that’s a natural thing for them, but they’re also saying they have to do it, right? So we know that there’s a driver and opportunity. They want cost effective solutions to do it.

And, you know, they want us to reengineer some of our tools for those applications. I don’t know what the Yeah. I mean, one of the

Brent Higgins, CFO, KLA: things, it’s it’s roughly 12 nanometer today and to your point, going to something more more aggressive. And if you look at what the biggest opportunity in HBM is is how it changes DRAM intensity on the front end. Forget the packaging part of larger dye because you have to drill the TSVs. You could microcontrollers. You have less redundancy.

You gotta make do you have to do this logic based dye? Then you have reliability checks to make sure that each of the chips functions, well, in the stack. And so all that’s driving the the bigger opportunity for KLA in terms of just overall intensity as it relates to DRAM. Then you take that HBM, do some of the connection stuff that we talked about earlier, integrate it in the interposer with the, with the logic chip. So, that’s the evolving opportunity, but we’re really encouraged by what we’re seeing just in terms of the DRAM die and the DRAM processing relative to advanced DRAM in terms of the intensity.

CJ Muse, Analyst, CANR: So we hit on advanced packaging, but really focused on HBM. Are there other technology inflections that we should be thinking about for other parts of advanced packaging?

Brent Higgins, CFO, KLA: I think the biggest issue is is that you start to shrink the interconnect density in the interposer, which drives you to need more sensitive solutions. To Rick’s earlier point, we’re addressing this part of the market with very high sampling rates. You’re 100% inspection with our lowest end capability, but we have the portfolio all the way up to, you know, e beam, not saying e beam’s part of this, but we would as you start to shrink the density, then you’re going to need more advanced systems. And typically, when you need more sensitivity, there’s a throughput trade off. And so it’s why I’m less concerned in the long run about the margin, gross margin implications of packaging today, which is a negative from a put and take point of view to the gross margin because it is our lowest in solutions.

But over time, we would expect that we’re going to ship more advanced solutions, which will carry a stronger margin profile that I think turns it into more kind of normal KLA over time. Now, we talk about these deltas. I mean, it doesn’t change our longer term view of the margin profile over time. But certainly in the near term has been a bit of a headwind as those tools carry, carry margins that are different than some of our advanced front end tools that make up a bigger part of our mix.

CJ Muse, Analyst, CANR: Gotcha. Maybe focusing on leading edge foundry, which you alluded to a little bit earlier. And I think there’s a couple areas where you’re very excited. So first one, going to N2, I think you’ve talked about process control intensity higher by 100 bps. And then secondly, as you move to HBC very quickly on five and three, you start talking larger die and requiring more process control insertions because you don’t want to have the yields on those larger die you know, be a disaster.

So as you think about those two trends, how are you thinking about overall kind of foundry for for KLA process control intensity, you know, into the ’25, ’20 ’6, ’20 ’7 time frame?

Rick Wallace, CEO, KLA: We can ask the number.

Brent Higgins, CFO, KLA: So for n two, and that’s KLA share of market. Right? We we have talked about our versus n three that our share of of market expectation is about a hundred basis points higher. And a piece of that is share. We talked about, EVM earlier, but but also there’s intensity changes.

The nature of a gate all around device is is complex. You still have while you don’t have an increase in the number of litho layers, you still have very advanced litho EUV layers or increasing EUV layers. So so they’re scaling defects down in the the the interconnects of of of the transistor design that are that are still a challenge, but then you have new defect mechanisms related to residual defectivity, buried defects, and so on. So all that we think is contributing, opportunity. The last time we had an architecture change in the industry, KLA’s share of market approached 8%.

I think when you look at the numbers we talked about earlier, I think we’re we’re more or less approaching that again overall across the market. So if you go forward, you look at the ramp of into particularly with the number of designs, some of the issues you talked about large die, higher value die, all those things we think are conducive, less reuse because of the adoption of the node, the strength of N3. And so we’re pretty optimistic about that, but also the roadmap going forward, both in terms of shrink, but also then you start talking about power distribution, other opportunities here over the next couple of years. So I like to say that, you know, you have all over the last five years or so, you’ve had a lot of things that have driven K at least share market up, logic foundry mix, relative to memory, well adopted nodes, limited reuse. I think all those things continue, but now the mix is shifting.

The mix is shifting to high value die, big die. And so that’s creating, I think, opportunities for us to see it continue to grow.

Rick Wallace, CEO, KLA: Well, and and the one continually surprising fact is the number of leading edge designs keep going up, right? And so, you know, you think about the conventional wisdom years ago was there’d be fewer because the costs are so high. But yet, what we’re seeing is and this is a unique benefit for KLA. If the number of designs go up, it means it’s a higher mix fab, which means process control becomes more important. It’s good for the reticle market because it means there’s more reticles being produced.

And the cost of these are so much, back to my point about the need for inspection measurement is also supported by the cost structure because you have to make sure that these are right. We also know that there’s an undersupply relative to demand of two nanometer right now in all the forecasts. We know that there’s more stated demand, and when you translate all the hyperscaler, you know, CapEx, they could come down a lot and you’d still be short of demand. And so that’s a great driver for us. But the other thing is that it’s playing to our technology strength.

So we’re gaining share because the performance differentiation becomes more important. So all the work we did on AI in our systems is showing up with our customers. So, you know, that’s why we’re pretty bullish on that. But also, on the memory side of everything that’s happening in high performance compute and AI, those memory chips are getting much harder to inspect. I mean, it’s literally, memory’s more important, logic’s harder, and the packaging.

Right? We have all three at the same time. Memory, I was thinking about this. There was a time where memory was our big driver. And then years ago, people went to 100% redundancy.

And the reason they did that, and so, you know, if you had a problem with your computer, you just reboot it because it was a memory leak, right? That’s not going to be okay in these high performance compute, right? So suddenly, the intensity around memory manufacturing for inspection and measurement has gone up again. And because they’re terrified of being the weak part of that very expensive stack. So we see process control intensity going up there.

So it’s kind of high performance compute is if we had to design a technology to drive our markets, we couldn’t have come up with a better one than everything that’s happening with AI and high performance compute.

CJ Muse, Analyst, CANR: Maybe a question on Intel. And I know you can’t be too specific, but I guess following on your comment around any which way you slice two nanometer, there’s shortages. My question is geared around, they either have to bring wafers in house or they have to recommit to more wafers at TSMC. And so this is more of a high level kind of foundry logic question. In terms of do you think the industry is is ready already capacity wise to support that kind of binary decision?

Or whenever it happens, we’re gonna need to spend more money.

Rick Wallace, CEO, KLA: Somebody’s gonna need to spend more money. Right? I mean, it’s not because the demand is already above the nobody’s allocated for that when we talk to customers, and there’s only a couple you could talk to. And so if there’s success on those leading nodes, they’re going to need some level, whether it’s 40,000, leading nodes, they’re going to need some level, whether it’s 40,000, what do we think, 50,000. They’re going to need some level of capacity to support it.

And, you know, the two nanometer stuff is already spoken for. Now, you know, you always plan for less than what customers are telling you you want. But yes, there’s going to if there’s success there, there’s going to need to have more capacity added. So that would and that’s upside to the model we talk about for 2025 if it were to happen in ’twenty five.

Brent Higgins, CFO, KLA: Yes, we contemplate different demand scenarios in terms of how we plan for our production given our lead times, nature of the lead times, the intrinsic lead times, some of the components. So we implicit in our model is carrying the flexibility to be able to support surprises and demand that are inside of lead time. So I think we’re in a pretty good place from a capacity and supply chain point of view to support the different scenarios that are potentially out there. And so we’ll see how that plays out. But to your point and to Rick’s point, it seems like that there’s opportunities for upside out there.

And, you know, we’ll have more to say about it when I think materializes.

CJ Muse, Analyst, CANR: And just to clarify, Rick, you think that surprise could actually happen in ’twenty five? My sense was there wasn’t enough cleanroom space.

Rick Wallace, CEO, KLA: No, no. I’m saying they could recognize they need it within ’twenty five. And so it would be a you couldn’t bring it on in time. Yeah. Gotcha.

Makes sense.

CJ Muse, Analyst, CANR: How about China? You previously talked about a $500,000,000 headwind and now you found other business kind of to offset it. Do you feel like you’ve completely derisked any sort of headwinds there? And what do you think kind of normalized China is as a percentage of your business over time?

Brent Higgins, CFO, KLA: So I talked about it at earnings that we would come our business percent would come down from about a little over 40%, I think, 41% last year to somewhere around 29% plus or minus this year. So, a pretty significant reduction. There’s capacity digestion that’s happening. There’s obviously the export issue you mentioned. So the last two years have been fairly unique in that you had a drop off in investment from your non China customers and your China customers with greenfield facilities and a lot of public funding, we’re able to basically fill that void.

So it drove the percent of business to elevated levels, but it was really unique, I think, to the timeframe and the constraints we had in ’twenty one and ’twenty two in terms of being able to satisfy overall demand. So I think over time, it drops down somewhere to 20% to 25%. There’s self sufficiency directives in China over time. And if you look at an 80% target and where they’re at sort of 20ish percent today, it does mean that you’re going to see a level of investment going forward, $25,000,000,000 to $30,000,000,000 of WFE. So, I think as you model that out towards the end of the decade, we see it somewhere in that range.

So yes, we had the impact that the overall estimates didn’t really change. We did see some marginal improvement at the leading edge, some additional strength in China from where we were when we sort of set those expectations. And we’ll see what happens in terms of that impact over time. Is there a licensing opportunity or not less clear? So you can reallocate certain systems that are strongly demanded, but that’s just a pull forward of business.

So from a gross impact level, I think we’re comfortable with the estimate we gave, plus or minus $100,000,000 And then we’ll see if there are opportunities to mitigate that and that changes moving forward. But at least that’s where we see things today.

CJ Muse, Analyst, CANR: Makes sense. So if I were to look at my bottoms up model, look at domestic China, Samsung, less so TSM or Hynix due to lack of cleanroom space as sources of upside for 2025. Would you generally agree with that view?

Rick Wallace, CEO, KLA: Yeah. Yeah. Sure. Okay.

CJ Muse, Analyst, CANR: How about gross margins? So you’ve guided 62% for the full year. You’ve contemplated decline, I assume, of higher margin China embedded in that. At the same time, you’ve exited or divested flat panel business. I guess, when you see an uptick in volumes, what kind of incremental gross margins should we be thinking about?

So our

Brent Higgins, CFO, KLA: margins by region are generally the same. What drives margin variability quarter to quarter tends to be product mix. Customers all buy different types of tools and carry different margins, outside of of volume driven deltas. That’s really the only difference across different customers. And in fact, if you look at customers in China, given the nature of some of our older systems, it may actually carry lower margins.

So, I don’t think, you know, on a go forward basis that that’s necessarily a headwind. We talked about the packaging dynamic earlier. So we feel like we’re operating today about 62%, as you mentioned. That’s the guidance we gave for the year, at roughly $12,000,000,000 business levels. So our target for our ’twenty six model was 63% plus at $14,000,000,000 business levels.

So given the mix we have, I feel pretty comfortable about our ability to continue to drive gross margins between 6065%, which translates into a number in line with our target model. The exit of FPD will have a marginally better impact, probably, you know, 20 basis points on the

Rick Wallace, CEO, KLA: overall, so it’s a factor. Growth in

Brent Higgins, CFO, KLA: our software business is also offsetting the So it’s a factor. Growth in our software business is also offsetting some of the mix dynamics I talked about earlier. So it’s, I think, very consistent with what you’ve come to expect from KLA. The biggest dilution factor we have is our services. Service is growing at a faster rate.

And so we have a lot of focus in our service business about driving the incremental margins of service, but that’s contemplated in that 60% to 65% long term incremental gross margin target. One of the challenges in service is supporting a much broader footprint, so you have to make investments more broadly, but you’ll ultimately get leverage on those investments. So we feel pretty good about, the ability to manage whatever that the ability to to manage whatever that dilutive force. I mean, we love the business. It’s a great business for us.

But and again, it’s as I said, I think it’s contemplated that overall target.

CJ Muse, Analyst, CANR: Perfect. Well, I think we’ve run out of time. So Rick, Brent, really appreciate it.

Brent Higgins, CFO, KLA: Thank you very much. Thank you.

Rick Wallace, CEO, KLA: 1111111111111 and

CJ Muse, Analyst, CANR: Alright. Well, good morning, Stella. My name is CJ Muse with Canner. I cover semiconductor, semiconductor equipment space. Very pleased to host Lam Research.

And this morning, we have Doug Bettinger, CFO. Thank you for coming, Doug. CJ, thanks for having me. I appreciate it. So I think Doug has initial statement to make, and then we can, push

Brent Higgins, CFO, KLA: the I

CJ Muse, Analyst, CANR: always seem to start with my safe harbor to keep the attorneys happy, so permit me. Today’s discussion may include forward looking statements that are subject to risk.

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