KLA at Citi’s 2025 Global Tech Conference: Strategic Growth Insights

On Thursday, 04 September 2025, KLA Corporation (NASDAQ:KLAC) presented at Citi’s 2025 Global Technology, Media and Telecommunications Conference. The event highlighted KLA’s robust performance driven by high-performance computing and strategic investments, while also addressing challenges such as export controls and a downtrend in its China business.

Key Takeaways

• KLA projects a strong fiscal year 2025 with targets of 62.5% gross margin and over 43% operating margin.
• The company anticipates a correction in its China business following substantial past investments.
• Advanced packaging revenue surged by 85% year-over-year, reflecting increased demand due to semiconductor complexity.
• KLA is committed to reinvesting in technology and returning value to shareholders through dividends and share repurchases.
• The company expects continued growth in process control intensity and service revenue.

Financial Results

• Revenue: Guidance suggests stability around current business levels as the year ends.
• Gross Margin: Aiming for a 62.5% target for 2025.
• Operating Margin: Expects to exceed 43%, surpassing long-term targets.
• China Revenue: Forecasts a decline, with China’s share dropping from 41% in 2024 to about 30% this year.
• Advanced Packaging: Revenue increased from slightly over $500 million to about $925 million, with 70% in process control.
• Service Revenue: Continues to grow in double digits, supporting dividends and debt service.
• Capital Allocation: Focus on reinvestment, strategic acquisitions, and shareholder returns.

Operational Updates

• High Performance Compute: A key driver, particularly in logic and N2 buildout.
• High Bandwidth Memory (HBM): Creating new opportunities in process control.
• Advanced Packaging: Growth due to increased complexity and high failure costs.
• Service Business: Sustained growth despite export restrictions.
• Design Starts and Reticle Business: Increased designs and large die sizes boost demand for process control.

Future Outlook

• 2025 Expectations: Revenue levels expected to remain stable.
• 2026 Prospects: Positive outlook with investments in leading-edge technology and HBM.
• WFE Growth: Anticipates a constructive year with increased market share.
• China Normalization: Business expected to adjust from previous highs.
• Capital Allocation Strategy: Continued focus on business reinvestment and shareholder value.

Q&A Highlights

• Process Control Intensity: Driven by customer needs and KLA’s capabilities.
• Advanced Packaging: Benefits from high value and cost of failure.
• China Outlook: Consistent with expectations for normalization.
• Gate-All-Around (GAA): Sustainability in investments due to architectural changes.
• Reticle Inspection: Growth due to large die sizes and EUV technology.

For a detailed understanding, readers are encouraged to refer to the full transcript below.

Full transcript - Citi’s 2025 Global Technology, Media and Telecommunications Conference:

Atif Malik, Analyst, Citi: TMT Conference. My name is Atif Malik. I cover US semiconductors, semiconductor equipment and networking equipment stocks at Citi. It’s my pleasure to welcome Rick Wallace, President and CEO of 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 gonna make a few opening comments, and

Bren Higgins, EVP and CFO, KLA: then we’ll dive into the q and a. Bren? That’s it. Thanks for having us. Appreciate your interest in KLA.

So just to to level set here with some comments from and some themes from earnings. As we had June was a good quarter, a raise on the September. Obviously, ’25 is is setting up more or less as 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 n two build out, which is has been very solid for KLA from a a share and an intensity point of view.

High bandwidth memory is creating opportunities for for process control inflection. We’ll talk more about that later today, but we’re 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 the lifetime of our tools, the the customer’s desire for availability and and performance in the service installed base.

So good situation there. Overall, the financial model, inclusive of TerrAs, we provided some context around 2025 at 62 and a half percent 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, you know, 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, you know, we’ll see how it plays out. Qualitatively, we think the investments continue at the leading edge.

That’ll be a positive for for WFE, same with the high bandwidth memory part of the market. Flash market is is 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, you know, we’ll see if it gets better or not. 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 on a growth year overall for WFE and and for KLA’s relative performance within it. So why don’t I just stop there, and we’ll go on to

Atif Malik, Analyst, Citi: your questions after. Great. Rick, let me start start off with you. You know, I’ve been doing sell side for fifteen years, and I know you’ve been at KLA for longer than that. There is something different about KLA.

You know, your SBC systems grew 15% last year, outperforming WFE. And again, this year, you’re outperforming WFE. I 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?

Rick Wallace, President and CEO, KLA: Thanks for having us also. Well, I think if you look at the 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 on high performance compute, there’s really three 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 seven 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 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 four 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 a 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 two nanometer is gonna 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 dye have gotten larger. So very large dye for defectivity mean 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 defectivity 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 in the manufacturing reticles, you have more reticles, and you have more single die reticles. So our reticle business is gonna 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 one 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 one 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 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 IQOS almost twenty 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 so you have all these dynamics at once. Process control intensity goes up in foundry logic because of design stars, 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 that’s that’s what you’re seeing right now. And I would say we’re in the relatively early build out of and 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.

Atif Malik, Analyst, Citi: That’s good because just on the last point, you know, we appreciate you guys walk us through process control and density assumptions underlying your target model. But but why is there a ceiling at this number when you’re talking about more design, you know, tip outs and AI is getting more complicated. You have, you know, twelve and eight HPM stacks and all needs to be tested. Otherwise, the black hole fails. So 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 something comes around and and it it might not be sustainable. So, why why would it be sustainable this time?

Rick Wallace, President and CEO, KLA: 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 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, it’s probably 45% process control intensity in the making of reticles.

It’s probably every reticle gets inspected multiple times. I mean, 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 percent 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, you know, 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 every they 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. Right. Yeah. That’s if I I

Bren Higgins, EVP and CFO, KLA: think when you back up and you go you look at where we were in 2020, 2021, KLE share of WFE was somewhere in the low six percents. This year, we’re approaching about 8%. You look at share of advanced packaging, was 1% or 2%, we’re 5%, six percent today. So we’re seeing some sustainability to the relevance of KLA over this time frame and our relative performance, I think, reflective of that. These drivers that are in some ways uniquely benefiting KLA as it relates to high performance compute as that becomes a bigger percentage of the overall market certainly provides a tailwind of 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, you know, it’s a couple points in the last few years. That’s but that’s a couple points on a 100 and plus billion dollars of of opportunity. So, so we’re pretty encouraged by what we’re seeing, and we think that these tailwinds as it relates to high performance compute will, will have some sustainability to them going forward.

Rick Wallace, President and CEO, KLA: 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 cuss customers’ customers are all determining that they need to have custom silicon.

Atif Malik, Analyst, Citi: Great. Rick, going back to advanced packaging, historically, you 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. You’ve 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

Rick Wallace, President and CEO, KLA: come in. So I’ll do part one and and let Bren do part two. So part one, what’s different? Why why? So my historical view of this, I think, as the company has always viewed this, is 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 over perform 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 cost 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 was 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 and 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 that 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 at 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 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, you know, 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’ll be is a lot of people playing in it and the margins will be won’t support our business model.

Bren Higgins, EVP and CFO, KLA: And I think you covered most of it, Rick. So I I think when you back up and just look at the growth and what what we said at earnings is, you know, we were slightly over 500,000,000 last year. We think and we’ve uptick the number over the course of this year at about 925,000,000 across this the the portfolio of KLA. About 70% of that is in process control. The bull and the other 30% is in our process business, which is has historically participated in a number of these markets, designed for these markets, now those markets have been inflected, and so we’ve got a pretty good competitive position there.

On the process control side, 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 under pattern inspection, so you inspect the substrate. That’s that’s an opportunity. Customers are also starting to use more advanced capability and will 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 it creates an opportunity for us to to leverage the existing portfolio. And we have a number of platforms platforms from kind of the base level of where we’re operating today. So we think competitively, we’re in a pretty good place as the technology profile of of packaging starts to change and increases over time.

Atif Malik, Analyst, Citi: Alright. So just on the competitive side, you know, AI was ramping very quickly and the incumbents benefited in year one and but but now things have kind of settled out with OSATs and they’re looking at your tools, are definitely far more capable of being being employed in the front end first and now they’re looking at the back end. So is it is it fair to assume that those those dynamics will continue into the future where they’ll they’ll like to invest in a tool that is, you know, three, four, five years, you know, advantage?

Rick Wallace, President and CEO, KLA: Well, it’s that’s 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 roadmap 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 in packaging wanted KLA there because they had used it in back end. And then a lot of that gets dictated to their supply chain too, 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

Atif Malik, Analyst, Citi: of them, there’s just not enough differentiation for it to make sense for us. And let’s talk China. One of your U. S. Peer provided a weak October 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 in in China.

Bren Higgins, EVP and CFO, KLA: Yeah. Sure. As I talked 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, about 41% in 2024. I think this year is gonna 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’s 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, you know, I think we’ve had consistent outperformance each quarter relative to consensus where we originally thought 15% to 20% overall that the China business would be down at somewhere between 1015% today. It can be lumpy quarter to quarter. If you look at the first quarter, it was 26%.

Second quarter, I think, 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, you know, of course, there’s, you know, revenue recognition dynamics and shipment dynamics, but September is probably stronger than 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. You’re seeing more investment from some of the more mature players in China as we think of the future outlook. But I would expect that to continue to kind of normalize as we move forward. We’ll you know, in terms of of of guidance into ’26, but I I think there’s an adjustment down off of the the pretty elevated levels over the last few years.

Atif Malik, Analyst, Citi: Great.

Bren Higgins, EVP and CFO, KLA: Oh, and then on on the last question is, 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 to to get the necessary approvals to ship to those facilities. We have service business in those facilities that’s not affected by anything in in the current ruling. So I I think it in terms of impact on business, there’s there’s nothing there.

Atif Malik, Analyst, Citi: Alright. Another concern, that some investors have is on the sustainability of, the gate all gate all around investments at two 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 three nanometer demand could be a lot stronger next year than two nanometer. But I I I think you guys have the the best view in terms of the mix and and when should we expect the the two nanometer gate all around spending to to kind of recover from first half this year into next year.

Bren Higgins, EVP and CFO, KLA: Yeah. I think as we look at next year, looking can always be lumpy quarter to quarter, and sometimes product cycles can influence the timing of when shipments happen versus the focus on, you know, ramping that capacity. Our view right now on on next year looks like it’s a growth year in terms of into as the next phase of investment happens. I would expect it leading edge, a a at least within our business, of of some additional investment. Obviously, there’s some investment happening in Japan, but also some potential investments happening here in The US off of some lower base lower base in in ’24.

So, yeah, look, architecture changes are always good for process control. Go back to FinFed, it was the last time share of WFE approached approached 8%. So we we think that, you know, we see some sustainability. Rick talked about all the different drivers and why it it is stronger at n two. 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 being pretty disciplined about that. So that ability of taking that capacity and try to use it at n two is fairly limited, and you have the technology driver of of the new 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, you know, that’s challenging challenge for the company is how we expand beyond this customer in terms of rolling out our our products in that part of the market. So we we think that there’s there’s good, you know, I think sustainable tailwinds here as we move into next year and in around the leading edge investment profile.

Atif Malik, Analyst, Citi: Rick, just on the the record reticle inspection year, again, I mean, when when I look at the lithography sales, you guys are outperforming that market in the reticle. So is it still the economics and the the tape outs, and what’s driving your outperformance?

Rick Wallace, President and CEO, KLA: So there’s a couple things, but but the biggest one, I think there’s there’s two main factors. One, the increase in large dye and single dye 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 affect it. But the inspection of reticles and the recall of those reticles I you know, 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 has driven up. But then there’s, as I mentioned, the single die. So that’s and Brent talked about this single die, you end up doing die database comparison, which is a higher ASP and a a bigger

Atif Malik, Analyst, Citi: opportunity. K. Let me pause here and see if there are any questions in the audience. If you have a question, please raise your hand. We’ll just keep going.

Services, Bren, your services growth is holding up much better than The U. S. Peers, a 10% type growth this year. 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 US peers?

Bren Higgins, EVP and CFO, KLA: Yeah. Our service business is 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 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 is a contract revenue stream. So we 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, that they continue to perform at 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 you also are doing preventative maintenance and other things to ensure the 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 drive as much efficiency as we can. So that’s how the the business generally works. Now the lifetime of the tools as 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 a tool was, it was probably ten to twelve years. Today, we’re in the high teens approaching 20. So we’re seeing the lifetime extend. That’s good. The install base is obviously growing much faster than than tools are coming off.

Our percent of ASP of a contract price is slowly growing over the over that time frame. It’s probably improved a percent in an environment where ASPs are also going up over that that same time frame. And then the final area is 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 than what the the incumbent was able to get prior to acquisition. I think the final thing is in and around markets like packaging sort of fits with the third is that the the service intensity is higher.

Right? The the uptime because of the 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 a great business. You know, the the profitability, we we don’t talk about it.

It’s an accretive profit stream generally. And if you think about, you know, the capital allocation practices of the company, you know, one of the things that that we we consider as we think about how we do it is is that if you look at the profitability of service, the service effectively, given its predictability and profitability levels, pays for the dividend and and the after tax debt service of the company. So it gives you a sense of of kind of, you know, profit levels overall. So it’s a it’s a resilient business. It gives us a nice anchor in in all environments and and holds up pretty well.

Rick Wallace, President and CEO, KLA: So just to add an Anzo anticote to 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. 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. 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 wanna, run, but they’re not doing it with process control. And this is back to Brent’s point of 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 wanna 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

Atif Malik, Analyst, Citi: the built in resiliency. That’s good insight. Gross margins brand new gross margins expect to be 62.5% this year, not far from the 63%

Bren Higgins, EVP and CFO, KLA: target model. Any upside to these gross margins? And also, what has been the net impact from the tariff situation? Yeah. Well, the 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, they all carry slightly different margin profiles. The impact of tariffs is about, and I said this in the call, think about somewhere between 5,100 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, you know, the things in terms of, you know, drawback processes and other things. Just to give some sense, it it was, you know, ’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 wanna do is do things that suboptimize operationally because that things can change, and then you’re kinda stuck. It’s not easy to do the things that that you can do.

But but it it certainly is creating opportunities for us to rethink how we’ve done things over the years and to figure out how to to try to mitigate some of that exposure. Where where we do have it, obviously, will be 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, you know, if we have, you know, incremental costs, we have to figure out how to pass those along both in service and and systems. But we’re gonna be thoughtful about that in terms of how we move forward, I I think the exposure is probably, you know, unless something changes in the environment, think somewhere captured in that range. And and I think if it changes, you know, I’ll provide updates when prudent.

Atif Malik, Analyst, Citi: And lastly on capital allocation, if you can kind of remind us about priorities on the cash, particularly as as you kind of eye the the growth phase of the company. So let me start and then and fill in. Reinvesting in

Rick Wallace, President and CEO, KLA: the business is the best investment we can make as long as it’s prudent investment. So we don’t want to over invest 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 and D. I think it was probably 2010, something like that. Yeah. It’s been a long time. Yeah.

So that’s number one. We’re going to reinvest in our businesses. We’ve got great businesses, great opportunities. But beyond that.

Bren Higgins, EVP and CFO, KLA: Yeah. And look at the I think strategically, we look at, you know, where where it makes sense for us to either augment the portfolio and because we think the portfolio approach is 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 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 priorities, so investing internally strategic priorities. But the business is is asset light, and and obviously, we journal generate a lot of cash. So we we believe in, you know, 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 1.5 times 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 to that. We just earlier this year raised the dividend, our sixteenth 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 in a systematic approach. You know, my view is that any excess dollar generally is is value destructive sitting on my balance sheet, and so we wanna make sure we deploy it as assertively as possible over time.

Atif Malik, Analyst, Citi: Great. We’re almost out of time. Rick and Brent, thank you for coming to the Citi conference. Thanks for having us. Thanks.

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