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Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation September quarter 2026 earnings conference call and webcast. All participant lines have been placed in listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star one on your telephone keypad. If you wish to remove yourself from the queue, please press star two. Please limit yourself to one question and one follow-up. Lastly, should you need operator assistance, please press star zero. Thank you. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead.
Welcome to the September 2026 quarterly earnings call. Joining me are our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results as well as our outlook, which we released after the market close, and it 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 always refer to calendar years. The earnings material contains a detailed reconciliation of GAAP to non-GAAP results. Our comments today are subject to risks and uncertainties reflected in the disclosure of the 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.
For any subsequent updates, please refer to KLA's IR website, which also contains investor events, presentations, corporate governance information, and links to our SEC filings. We will begin the call with Rick providing commentary on the quarter and our overall business environment, followed by Bren with financial highlights and our outlook. I will pass the call now to Rick. Rick?
Thanks, Kevin. KLA's September quarter beat the midpoint of our guidance ranges across all key metrics. Revenue was another record at $4.14 billion. This, coupled with our December quarter revenue guidance of approximately $4.7 billion, demonstrates the growth acceleration we plan for the second half of 2026. KLA's performance in the quarter was supported by continued strength in leading-edge foundry logic related to AI infrastructure investments and increasing process control intensity across leading-edge devices and advanced packaging. Other highlights for the quarter include KLA delivering operating margins above 46% for the first time ever. Gross margin was 62.7%, and free cash flow was $1.34 billion. Over the course of calendar 2026, the AI demand environment has continued to strengthen as reflected in our performance. Additionally, our strong customer engagement has provided visibility into a more favorable outlook for wafer equipment investment for calendar 2026 and 2027.
We see this reflected in our growing backlog and sales funnel forecast. We expect momentum across our business to continue into the December quarter, and we're positioned to deliver significant growth in calendar 2027. We've been proactively working with our strategic supply chain partners over the past year to increase their capacity in order to keep up with our demand. Advanced packaging remains increasingly critical to AI infrastructure expansion, and advanced packaging roadmaps continue to incorporate more sophisticated wafer front-end processes, which drive additional process control requirements. KLA's leading process control portfolio enables the company to address these requirements across a growing range of applications. For calendar 2026, advanced packaging process control systems revenue remains on track to hit approximately $1.1 billion or more than 70% year-over-year growth, nearly twice the growth rate of the advanced packaging market.
The growing complexity of KLA's installed base and lengthening tool life cycles continues to increase demand for services. KLA services revenue was $850 million in the quarter, up 14% year-over-year, supported by a growing installed base and continued customer focus on tool performance, productivity, and availability in this tight system utilization environment. Finally, KLA's process, PCB, and component inspection businesses are also benefiting from technology transitions and the rigorous performance requirements of high-performance computing. In summary, KLA is experiencing strengthening momentum driven by growth across the semiconductor ecosystem. The pace of our backlog growth is a key signal of accelerating momentum and provides confidence in our visibility into calendar 2027. Our September quarter results demonstrate the strength of KLA's market position and operating model execution.
Semiconductors continue to play an increasingly important role across global industries, with growth driven by investment in AI infrastructure and expanding demand across a broader range of applications and end markets. Together, these trends are supporting stronger, more durable, and more diversified long-term growth for the industry. Additionally, the growing complexity of AI-enabled semiconductors is increasing process control intensity throughout the manufacturing flow, reinforcing KLA's long-term growth opportunity. KLA's differentiated portfolio is uniquely positioned to address these requirements, while sustained AI data center investment and broader adoption of advanced packaging architectures continue to expand the company's addressable market. As we look ahead, we remain focused on supporting customer roadmaps, investing in innovation, and scaling our global capabilities to meet expected demand growth through calendar 2027.
As we progress toward our 2030 target model, we remain committed to disciplined execution, technology leadership, and our proven capital allocation strategy, which will allow us to create durable shareholder value. With that, I'll turn the call over to Bren to discuss the quarter's financial highlights.
Thank you, Rick. KLA delivered strong sequential and year-over-year growth in the September quarter. For the first time in our company history, KLA delivered operating margins over 46%. These results reflect our market leadership and disciplined execution, supported by our global team's dedication and focus on customer success. Revenue of $4.14 billion was above the midpoint of guidance and rose 13% sequentially and 29% year-over-year. Non-GAAP diluted EPS was $1.22, and GAAP diluted EPS was $1.18, each above the midpoint of the respective guidance ranges. Gross margin was 62.7%, slightly above the midpoint of the guidance range. Operating expenses were $688 million, including $395 million in R&D and $293 million in SG&A. Operating margin rose 240 basis points sequentially to 46.1%. Net income was $1.60 billion. GAAP net income was $1.55 billion. Cash flow from operations was $1.53 billion, and free cash flow was $1.34 billion.
The company had 1.311 billion diluted weighted average shares outstanding for the quarter. The breakdown of revenue by reportable segments and markets, major products, and regions can be found within the shareholder letter and slides. Moving to the balance sheet, KLA ended the quarter with $4.7 billion in total cash equivalents, and marketable securities, and $5.95 billion of debt. The company maintains a flexible and attractive bond maturity profile, supported by investment-grade ratings from all three major rating agencies. The industry outlook continues to strengthen, with visibility improving as customers increase long-term investment plans. Despite these fab space limitations, customers have been very resourceful and are accelerating delivery expectations across all segments. We are therefore raising our expectation for the wafer equipment market, including advanced packaging, to approximately the mid $150 billion range in calendar 2026.
KLA backlog continues to grow, and our sales funnel visibility is unprecedented, supported by new fab investments by a broad base of customers. We continue to plan for significant growth in calendar 2027. While we'll have more to say about market and customer segment expectations for next year in our earnings call in late January, we currently expect the wafer equipment market to exceed $200 billion in calendar 2027. Customer engagement remains robust with numerous new fab projects and greenfield facilities scheduled to come online in the quarters ahead. The primary area of focus for our customers is on delivery urgency aligned with new project plans. Against this backdrop, KLA's business momentum and critical role in leading-edge process control positions us to deliver accelerating growth for the remainder of calendar 2026 and continuing into 2027.
Our expectations of revenue growth acceleration in the second half of 2026 are playing out as more capacity comes online in our long lead time supply chain areas. This is resulting in growth in the second half of calendar year 2026 over the first half of approximately 25% and positions the company for continued sequential growth into calendar 2027. KLA December quarter guidance is for revenue of $4.7 billion, ± $200 million. Foundry logic revenue for semiconductor customers is forecasted to be approximately 60%, and memory is expected to be about 40% of Semiconductor Process Control Systems revenue to semiconductor customers. Within memory, DRAM is expected to account for approximately 84%, with NAND representing the remaining 16%. As a reminder, these business mix approximations pertain solely to our semiconductor customers and do not fully reflect our total Semiconductor Process Control Systems revenue.
Gross margin for the December quarter is forecasted to be 62.5%, ± 1 percentage point. While the company is demonstrating expected operating leverage across the business as it grows, this is being offset by persistently high memory costs for our system image processing requirements, as we have discussed in prior quarters. We are actively engaged across the portfolio to optimize memory efficiency in our systems, along with other product cost reduction initiatives. These efforts, coupled with driving our usual returns-based value sharing with our customers, should offset this headwind over time. Operating expenses are forecasted to be approximately $710 million in the December quarter. We will continue to prioritize next-generation product development, scaling our business execution, and company infrastructure investments to support expected revenue growth over the next several years.
We anticipate these expenses to grow sequentially through 2027, but at a much slower pace than revenue growth and consistent with our business model for operating margin leverage. As a reminder, our business model is designed to deliver 40%-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 expense for the December quarter, and we expect it to remain at approximately this quarterly level. Planning tax rate is 14.5%. Our tax rate will vary quarter to quarter due to the geographic distribution of profit and various discrete items. In the December quarter, non-GAAP diluted EPS is expected to be $1.44 ± $0.11, and GAAP diluted EPS is expected to be $1.41 ± $0.11.
EPS guidance is based on a fully diluted share count of approximately 1.306 billion shares. In conclusion, process control, and KLA in particular, remain critical to the AI ecosystem build-out and benefit from numerous ongoing relevance inflections, including increases in leading-edge designs across foundry and logic, device size and value, rising complexity and performance requirements, and the growing importance of advanced packaging. KLA is experiencing strengthening momentum and a broader set of growth drivers across the semiconductor ecosystem. The rate and pace of our backlog growth is a key signal of our accelerating momentum and increased confidence in our visibility leading into calendar 2027. Our September quarter results demonstrate the strength of KLA's market position and operating model execution and support continued confidence in our performance moving forward.
These recent results also illustrate the strength of KLA's market-leading portfolio, disciplined operating model execution, and continued confidence in improving our performance moving forward. Looking ahead, we remain focused on supporting customer roadmaps, investing in innovation, and scaling our global capabilities to meet expected demand growth throughout calendar 2027 and beyond. As we progress towards our 2030 target model, we remain committed to disciplined execution, technology leadership, our proven capital allocation strategy, and creating durable shareholder value. That concludes my prepared remarks. Kevin, please begin the Q&A.
Thank you.
Operator, can you please give the instructions? Sorry. Can you just give the instructions and we'll get started? Thank you.
Thank you, Kevin. At this time, if you'd like to ask a question, please press star one on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing star two. We remind you to please unmute your line when introduced, and if possible, pick up your handset for optimal sound quality. In the interest of time, we ask you please limit yourself to one question and one follow-up. We'll now take our first question from Jim Schneider with Goldman Sachs. Please go ahead. Your line is open.
Afternoon. Thanks for taking my question. Good to see the accelerated growth in the back half. Relative to calendar 2027, in your view of $200 billion in WFE, you obviously have some good things going for you with advanced packaging growth and so on. Can you maybe articulate how you're thinking about the way calendar 2027 shapes up and your level of confidence in your ability to outgrow that 30% rough market number for 2027? Thank you.
Yeah, Jim, thanks for the question. When we look at 2027, and we've been saying this for quite some time, we think the construct for 2027 sets up pretty favorably for us. First, we feel very good about our supply situation, right? We've been working at it for the last 12 months. We indicated we see an acceleration in the second half. Certain components have very long lead times, and so getting that to come online was a bit of a challenge in the first half, and we're seeing that play through, and that certainly informs our confidence in the December quarter, but also our views into 2027. The setup for 2027 around the leading edge, both in terms of the breadth of investment at the leading edge, new node investment, we think that sets up very well for the company.
Greenfield investment in DRAM, the HBM dynamics and how that's affecting process control intensity. We're also seeing uplifts in process control intensity in conventional memory. Advanced packaging has been a nice growth driver. I don't see any reason why, as we look at next year, that that part of our business wouldn't continue to grow faster than the market. So we feel overall that the setup is very leading edge centric. Packaging is augmenting the growth, and we think we're well positioned and our supply should be there to be able to enable us to meet the demand. Demand is strong. I would say that I'm still behind in supply, but I think that the trajectory is good, and we feel pretty confident about the guidance we've given.
Thank you. We'll take our next question from-
You have a follow-up, Jim? Go ahead.
Yeah. No, sorry. Just one quick follow-up. As you think about the way the shape of 2027 starts to materialize, anything to call out in terms of the back half of 2026 was certainly much stronger than the first half. Do you think it is going to be more ratable through 2027, or you see it, again, maybe being a little more back half loaded? Thank you.
Right now, I would say for the next several quarters, given the backlog growth and the visibility in the funnel, that we will see sequential growth for the next several quarters. Sort of implies second half stronger. I think it is more linear. It will not have, I do not think, as of now, the same significant uptick in half-to-half growth. It looks a little more linear to us, but we would expect sequential growth moving forward.
Thank you.
Thank you. We will take our next question from Harlan Sur with JPMorgan. Please go ahead. Your line is open.
Sure. Good afternoon. Thanks for taking my question. On the gross margin front, I know the team had some cost headwinds this year, memory pricing headwinds, maybe GPUs, CPU pricing headwinds as well. Moving into next year, I know the team has the benefit of new platforms, which carry higher pricing. Obviously, you are going to be driving higher volumes. Maybe you have other value pricing initiatives taking place. Can we expect the team to drive back into that sort of 63%+ range on a strong WFE outlook in 2027?
Yeah, Harlan, it is a good question. As you said, there are some moving parts in it. When you look at the target range, our target range that we outlined back in March, in Investor Day, was 63%-64%. Certainly, some of the cost inputs have been challenging. We are doing a lot of work inside the company, both in terms of broader input costs, but also memory, I will call memory optimization work in terms of our use of memory in our systems. There will be some mixed dynamics looking forward. We do have more advanced packaging growth. We have growth in our non-semi PC businesses, so that tends to be a bit of a headwind to the overall margin, although a contributor to both revenue growth and gross margin growth. Scale will offset some of that. We will see some manufacturing scale given the strong revenue growth environment.
And some of our pricing initiatives, we think, similar to what we are hearing from peers, we think that that will play through as we introduce new capabilities and we are able to share in the value of those new capabilities with our customers. So I think as we move forward, the memory environment will continue to be challenging. But I think as we go forward, we will see improvement. I do not know exactly when we will start to see it. But I think as we move through 2027, certainly as we move into the middle to the back half of 2027 into 2028, we will be, I think, consistent with the operating model or for gross margin that we laid out back in March.
No, I appreciate that. On the non-AI, kind of more legacy node segments, auto, industrial, IoT, obviously cyclical dynamics are strong. Supply is tightening at a very, very rapid pace, and we are seeing new capacity addition announcements. Is this contributing to the strong growth outlook next year? Maybe what percentage of your process control systems business is mature and specialties? Thank you.
Yeah, I would say around power. Power is certainly something that is an area of focus in the industry, and obviously there was a period of time where there was some over-investment there, but I'm starting to see some indications of some recovery in that part of the market. Obviously, what's driving the business in a more significant way is everything related to high-performance compute. When I look at the customers that are serving the more legacy-centric markets, I do think that I'm seeing some improvement. I think year to year, there's some growth. I don't think it'll be at the level of what we expect from the leading edge. You'll have activities in China which will grow, but I don't think will grow at a much slower rate.
I think when you look at the overall legacy, would expect to see some growth there, but the business is really being driven by what's happening at the leading edge. I think that there's opportunities for us to augment growth moving forward from some more business in that part of the market. Process control intensity tends to be lower in legacy nodes. If it's an established node, it's fairly mature unless our customers are changing designs or design rules or have new reliability requirements that could drive inflections in intensity. But the intensity levels in legacy are lower than what they are at the leading edge.
Thank you, Bren.
Thank you. We will take our next question from CJ Muse with Cantor Fitzgerald. Please go ahead. Your line is open.
Yeah, good afternoon. Thank you for taking the question. I guess a follow-up, Bren, on the gross margin side. If we isolate just to process control, you were north of 65% in June of 2025, and obviously as you talked about major headwinds from DRAM in particular. But curious, as those contracts roll off and you kind of move to new contracts, should we start to see better pricing as you pass that incremental along? Is there kind of a timeframe where you see process control getting back to that mid-60s level?
On a consistent mix, I could see it trending there as we move into the second half of 2027. We start to do deals around new products beyond the existing business that we have. It is very difficult to go increase prices when you have a deal in place on existing business and existing backlogs. I think as we move forward, I do not see any reason why, assuming mix is consistent, that we will not start to see some improvement in the process control parts of the business, apples to apples.
Also, CJ, Bren mentioned in the last answer, but I am not sure you heard it, was that there is work going on to utilize less memory in the systems, engineering work, which takes some time to do it. But when we design these systems, nobody really imagined the kind of increase in memory cost. I think the common response to that is to make the systems more efficient around using memory. Therefore, that will drive that percent content down over time. But it takes a while for those to get cut in.
Very helpful. I guess as a follow-up, Can you kind of talk about what you've seen in the last kind of three to six months from a lead time perspective, and how that informs kind of your outlook into 2028 and how you're thinking about hiring, and what kind of work specifically on the supply chain to get ready for this multi-year growth cycle? Thank you.
Yeah. CJ, the conversations we've had with customers the last few months have been very consistent in that there's a huge request that we prioritize their projects, and they're laying out multiple year investment cycles with an expectation that we'll support them through those ramps. So when we look out at the 2030 model that we laid out before, obviously the assumptions in that model are going to be exceeded before 2030. So there is a significant amount of investment that we need to do pretty much across the board with talent, but also with facilities and our investment in supply chain. So Bren can share some of his perspective on that.
Yeah. On lead times, I would say lead time, and they vary by product, but we're averaging right around 12 months or so. I would say that on the margin they're extending certain products, it can be even further out than that. For example, Gen4 and Gen5 product lines will have longer lead times. So it does vary, but I think we're in a pretty good position, as Rick said, to support it. I mean, we're making investments across the board. We'll add headcount both in manufacturing and service, in the volume centric parts of the business, and applications and engineering over the course of the next 12 months. We're investing in every factory we have. So there are expansion plans, not only meeting near term requirements and doing things quickly, but also supporting what we believe will be a multi-year investment cycle here.
We are encouraged by that in supply chain, particularly in those areas of long-term or long lead time items, particularly in the optics area. We are working with our key suppliers to make investments. The investments show up in different forms, but also investing to support what we expect to be a very strong outlook over the next several years. There is a lot of activity going on. Obviously, that flows through our numbers, activity that is supporting future revenue streams. But we think that first of all contemplated in the model and the guidance we have given, but certainly a lot of focus in those areas.
Thank you.
Thank you. We will take our next question from Timothy Arcuri with UBS. Please go ahead. Your line is open.
Thanks a lot. Bren, you did a really nice job this year, only losing like 20 basis points worth of WFE share, despite what was a pretty bad mix, actually. It sounds like you think WFE is going to grow like low to mid-30s next year, and your lead times are 12 + months, so you know exactly what you are going to ship next year. Are you going to grow more than that? Will you grow more than low to mid-30s, so you will gain share next year, gain WFE share?
Yeah, Tim, on 2026, I think the second half momentum highlights it, where I think the business is trending now. I mean, the first half was weaker and it wasn't so much mix of business as much as it was just our ability to supply it. The backlog is pretty significant. I've been short all year, same short now. So I feel that as we look at 2027, we feel pretty good. I talked about the setup, which I think is encouraging, but we feel pretty good about our ability to maintain and drive the growing KLA relevant story that we outlined in Investor Day. The parts of the market that are inflecting are very good for process control.
We think they uniquely benefit process control, and we think that as we are in a better position to supply and meet the demand, that we can maintain the trajectory that we laid out. It doesn't mean it happens in every six-month period or every quarter, but we think over time, similar to what we saw over the last five years, the next five setup is pretty strong, and we feel pretty comfortable about our views of share of market growth over the next, between now and 2030.
We think we can outgrow next year, Tim.
Got it. Rick, thank you for that. Thanks. Rick, I wanted to ask you about DRAM. It's up like $450 million in December. I mean, that's a ton. Your DRAM share is like 6% of WFE share. So that's like $10 billion of DRAM WFE right there. Is there something unique going on? I know there's some big new fabs that are starting to get equipped. Is it as simple as that, or is maybe your inspection intensity going up in DRAM? I don't think I've ever seen you grow DRAM systems that much. Can you speak to that? Thanks.
Yeah. Intensity is definitely going up. There's no question that we started seeing this a while ago, and I think it took a little while for our customers to fully understand and appreciate the challenges of making these advanced devices, and given their supply shortages, the incremental value of yield. If you think back to how memory worked years ago, it's a pretty different world where anything they could squeeze out in terms of yield, but also the performance expectations are much higher as these go into these mostly commercial operations. Yeah, it's intensity improving, and we see that continuing as we go forward.
I think the greenfield opportunity is also driving a retooling of fabs and retooling in a way where, to Rick's point, our customers' profitability levels are pretty high, and so yield is
Is equivalent to printing money in some ways. I think there's renewed focus there. I think that the roadmaps are driving the need for more investment. The performance requirements are more stringent, particularly when you look at HBM, for example, and less redundancy, IO counts, logic in base die, all these things are driving opportunities in this part of the market. In some products, we see intensity levels in DRAM that are similar to leading-edge logic. The market is definitely shifting there, and I think the new fabs is an accelerant to our views of growth. In 2027, we'd expect overall memory to be about 60% of the business, and in an environment where, to Rick's point, we feel pretty confident about our ability to perform pretty well relative to the overall market.
It's definitely changing in terms of the way you used to think about the business historically, and at least in terms of the DRAM impact.
Okay, good. Thank you.
Thank you. We will take our next question from Krish Sankar with TD Cowen. Please go ahead. Your line is open.
Yeah, thanks for taking my question. Rick and Bren, just to follow up on the last question on DRAM. You said you are going to outperform WFE next year. The two big drivers this year were DRAM and leading-edge foundry. That is going to be the same next year, I understand. Is it mainly because greenfield in DRAM is coming in and leading-edge foundry logic is moving to 2 nanometer? Are those the two key KLA-specific drivers for outperformance next year besides advanced packaging? Then I have a follow-up.
Krish, let me clarify. You are saying if the drivers are the same, why would it be different? Is that your question?
Yeah, I'm just wondering, is the mix shift going from DRAM from brownfield to greenfield and logic going from 3 nanometer to 2 nanometer?
Okay. I think, yes, those are drivers, but the other thing is we just weren't set up in the first half to be able to support. Assumptions, if you go back 12 months, were not for the kind of growth rate we saw. In fact, we thought the growth was going to be happening in 2027, but 2026 was going to be pretty flat. So it took a little while to get things going in 2026, which is why you're seeing our accelerated growth now. The demand has been there, and the demand will continue as the technology nodes continue. As we said, packaging is growing, and it'll outgrow the market next year. So I think it was not a demand question for us as much as in the first half of 2026, a supply question. Bren?
No, I think you covered it, Rick. The new facilities will, I think, create an opportunity for us that will drive some incremental as customers are setting up a new facility in a market environment that is both challenging from a complexity point of view, but also where yield is critical.
Got it. Super helpful. Then just my follow-up, I understand lead times are extending, but in general, besides ASML, KLA is one of the unique position that you always had long lead times. I'm just kind of curious, one of the view from some folks in the industry is that $300 billion could be the peak WFE a few years out. I'm just wondering from what you are seeing, given the fact that you have better visibility than us, how high do you think this WFE can grow? I know obviously there's wild cards like TeraFab, but obviously, also specific to how good the yield of your customers are. I'm just curious from your vantage point, what do you see the WFE potential to get to?
Well, I'm not going to guide a new number for 2030. Look, at Investor Day, we talked about $220 billion ± $20 billion view. And back then, where a lot of folks, I think, thought generally that was a middle-of-the-road kind of plan, I would say today it looks like a very conservative one. We're certainly more optimistic about higher levels of industry investment. We think the flow-through and thesis in terms of KLA's participation in that is the same. As we think about these growth scenarios, certainly given the lead times on some of our products and the parts that go into them, we have to contemplate those in terms of preparing our supply chain for those outcomes. We are having deep conversations with some of our key suppliers about our needs in 2029 and 2030, in that timeframe.
We're trying to position the company to make sure that we can continue to drive the company consistent with the way we laid it out, and support those higher-end scenarios that are being discussed in the industry.
Sounds good.
Thank you. We'll take our next question from Stacy Rasgon with Bernstein Research. Please go ahead. Your line is open.
Hi, guys. Thanks for taking my questions. The first one, to go back to that 2030 model. You are basically there on WFE next year. You are there at the high end or maybe even a little above on the operating margin target. But what stops you in that WFE environment from getting to the revenue that you talked about in 2030 next year? At least on the equipment side. I understand maybe services and some of the other stuff takes a little more time to ramp up. Is it just supply? Is it the mix of demand? Why should not I be looking at a 2030 model more into the 2027 timeframe, given where we are running?
Well, there were assumptions underneath it. First, there was the growth rate assumption around service, which to your point, we will not be there. That was based on an aggregate install-based growth that would contribute to that.
You also have the non-semi PC part of the business and the expected growth rate there. Within semi PC, underneath the number was an expectation of share growth over the next few years of a few points, and then overall share of market would slowly tick up from 2025, which was about 7.5% of overall wafer equipment, to closer to 9%. We are not there yet, but in terms of how the financial model works underneath it, I do not see any reason why the financial model would not perform consistent with the way we laid it out, because that growth is more demand from the same customers for a lot of the same products. I think we feel pretty good about the way the financial model will perform.
Obviously, there are things like share count and other things that go into an EPS assessment, but at least from a top-line point of view, I think it will be more or less consistent with the way that I laid it out. I think there were some assumptions that were implicit in there that we are going to drive to over the next years that we are not there yet. But in terms of the overall market, and the current performance, I think that flows through.
Got it. Thanks. For my follow-up, maybe to dig into that financial model. You have talked about 40%-50% incremental operating margin. I think I saw that out in the shareholder letter as well. But again, you are already running even close to the high end of that range. To get operating leverage from here sort of implies that the incremental operating margin needs to be above where you are running today. I mean into the high end of that or even higher. Is there any reason I shouldn't think about that incremental operating margin range to be structurally higher, given where things are running right now?
It depends a lot on year-to-year growth rates. If you look at in a more normalized growth rate environment, we will perform at the midpoint or so of the range. If you look at over the last year with revenue growth at 25%, and you take the guidance we gave for Q4, that puts you slightly above the top end of the range. If you think about 2030, given expectations for growth in 2030, I would expect we will be beyond that. It was more of a marker to give some sense to our shareholders and investors about how to think about how we are going to scale the company, what kind of leverage we will drive through the model.
But if we are looking at growth rates for the whole company that are closer to 20%, then I would expect we will perform more in line with the top end of the model or better. But that's just long-term, how we think about it, how we make investment decisions, how we size it, and then if the industry turns out to be stronger, then that drives upside.
Got it. That's helpful, guys. Thank you.
Thank you. We will take our next question from Joe Quatrochi with Wells Fargo. Please go ahead. Your line is open.
Yeah, thanks for taking the question. I was curious, your CapEx, I think this quarter was the highest I think I have ever seen it. Wondering if you could just kind of give us some color on what was driving that. Was there just also related to supply chain dynamics or something else?
Well, in the quarter, we made a significant land purchase in India to build a new campus there supporting our long-term growth. So, that was a large portion of CapEx. Now, I do expect our CapEx, I think as I laid out at Investor Day, I talked about 2%-3% of revenue going forward, but of course, revenue is growing. But on an absolute dollar basis, I would expect our CapEx to trend up over the next few years, somewhere between $600 million and $800 million per year. As I said earlier, we are investing at every site, and so, I would expect CapEx to trend north. It will be mostly around our capacity. There will be some things obviously we are doing in supply chain, but what the big needle mover is in the KLA space.
Thanks. The services business, I think you talked about operating at the high end of your long-term growth algo this year. Is there any reason that that wouldn't be the case in 2027? Or how are you thinking about the growth in 2027 for services?
Yeah, no reason to think that that wouldn't be the case. I think given the growth in the industry and what we're adding to the install base, that our systems are running at very high utilization. The value of yield in this environment, service, I think is, in terms of the target range, we're likely to operate here moving forward towards the higher end of the range.
Thanks.
Thank you. We'll take our next question from Melissa Weathers with Deutsche Bank. Please go ahead.
Hi. Thank you. I wanted to go back to the supply chain side of things. You guys are, as you said, you've been working on this for over a year. So, and maybe some of your competitors are just now starting to see some more acute shortages. Can you just, what inning would you say we're in terms of you guys expanding your supply? Do you see risk of further tightening on the supply chain, or do you think we're kind of through the worst of it? Just where do you think we are in that process?
Yeah. I talked about this at Investor Day. I think when you look at our supply, given the nature of some of our components, that what drives our ability to ship is typically around optical components, and those have the longest lead time. We run into all kinds of small issues, but once we set the volumes, get set by those high-end components. We just, I think supply chain team does an excellent job here managing all those little issues as they happen between the time that we get things scheduled and we ship tools. In an environment of very strong growth. I think everybody runs into challenges of working through hedges and buffer stock and excess inventory, and then when you start living hand-to-mouth in terms of what your suppliers can provide, and there's a lot of demand there, that starts to create challenges.
I think for KLA, we do not really compete for the things that matter the most to us. We do not compete with any of our competitors. We compete within KLA sometimes for those components. But once we have visibility there, it tends to be pretty reliable, and then we manage all the small component issues that happen along the way.
Thank you. I guess your December quarter outlook, is that supply-constrained at all? Not that I am complaining, but could that have been higher if you had more supply? Then same thing with the over $200 billion WFE outlook, is that like you have line of sight to that supply at this moment? Or I guess, how unconstrained is demand for that--
Yeah, Melissa.
--outlook?
I kind of live in reality here. I do not get wrapped up in the what-ifs. It is what can we ship, and how is our supply chain positioned for that, and that then translates into how we provide the guidance. As I said earlier, move rates on key components are increasing month by month, and so that informs not only what we expected to see in December, but how we are thinking about 2027. I would say over the course of this whole year, I could absolutely have shipped more. My demand was ahead of my supply. But I do think we are in a position where moving forward, we are seeing incremental supply come online, and that is informing the visibility and guidance that we have given.
Yeah, I think, Melissa, one thing to add, this is Rick. I think that for some customers, they can say that they want deliveries, and then what they find is they've got delays themselves in terms of facilities. So it's not just the equipment, it's the readiness of the fabs. I think if you look out over time, yeah, could you ship? Yeah, maybe, but it doesn't mean they could utilize it right away. So that's why I think these, when people talk about can you be there to support the industry, it's really you need all the equipment suppliers to be able to do it. You need the facilities, you need to build. It's longer than just can the equipment guys ship.
There's the case of a couple of customers right now that have asked for some deliveries, and then they're on hold because they're waiting for their facilities. Does that make sense?
Yep, it does. Thank you, guys.
Thank you. We'll take our next question from Chris Caso with Wolfe Research. Please go ahead.
Yes, thank you. Good evening. I just want to ask a follow-on to the capacity question as well, and maybe in two parts. One is, as we look in the business and let's say, let's look into 2028, do you think that the bottlenecks are more on the KLA side or more on your supply chain? Then for 2028, I guess most of us are expecting a pretty significant acceleration in 2028. Our continued growth in 2028 as customers have more clean room space. Are there any impediments to that that you see, given we've got some preparation time here?
Yeah. I think, again, if you go and look at the history of a lot of these build-outs, people can have these plans, but then they get into delays when they're building clean rooms. There can be delays in having enough power for those clean rooms. If you look across the supply chain over the last several years, there have been plans that have been delayed over time. Equipment can be part of it, but it's only part of it. Our customers are sending very clear messages that they want to bring on these additional fabs and to do these build-outs, but we have to kind of move in concert, which is why you often find we're part of a group that will be at supplier days for all these customers, and they'll be talking about those expansion plans.
So they can have. Right now, it's theoretical how big it's going to be. But as you get closer to it, we'll see it build out. So it's not as simple as we're going to be late, because we're working very closely with those customers as they're building. As I mentioned, there's one customer right now that's desperate for more capacity, and they can't take equipment because their clean room is delayed. That's because they don't have. So the bottleneck moves around. Bottleneck could be construction, it could be the fact that they can't get certain raw materials, or they can't get power. So you kind of have to look at it collectively and in terms of it's a little bit like the challenges associated with data centers. It's not just the data center, it's the power for the data center. Do they have it?
So that's why I think, yes, this industry is going to keep growing. In some ways, it's going to prolong the rate of growth because it's harder to add on as much capacity as some people are envisioning, for example, for 2028. But it does, I think, mean we're going to have a longer cycle in terms of the growth. So our motto is we're not going to be the constraint. We've said we're not going to be the bottleneck. We might have periods where we're a little behind. As Bren said, we'd like to ship, but we're doing everything we can, working with our customers, with our suppliers, so that KLA is not the bottleneck. It doesn't mean there won't be bottlenecks, it's just our goal is not to be the bottlenecks.
We can do anything inside the company, generally within the time fence it gets established within our long lead time components. What I mean by that is, that we can hire the people we need. We can drive the facility utilization. Obviously, CapEx decisions around new facilities is a long-term process, which is why we are making the investments. But you can also run extra shifts and so on to ensure that we are driving facility utilization. So we are never in a situation where we are the bottleneck, to Rick's earlier point. So I feel very good about how KLA's positioned, if we can do anything inside the company that within the time frame that gets established by our long lead time components.
Got it. That's a helpful clarification. Thank you. As my follow-up, I will ask about China, and it looked like it was up significantly in the quarter. I know that that revenue tends to be lumpy. Can you talk about what your expectations are for China, what's embedded in the Q4 guidance, and what your thoughts are for the China business as you head into next year?
Yeah. It will come down in Q4. As I said, actually, I think I have been saying this since March, is I thought that China, as a percent of the total, would be in the high 20, 28 percentile. So we will call it somewhere between 27% and 29%, and I still believe that therefore implies that the fourth quarter is in that similar range, given what we have done in the previous three quarters.
So it did pop up a little bit in September. But China is growing at a much slower rate than the overall business, and so it's coming down as a percent. I think in 2027, that will continue. I expect China will likely grow a little bit, but not at the same rate as the growth in wafer equipment outside of China. So we are probably operating somewhere, I would say, in the low 20th percentile in 2027.
Now, within our numbers, there's also our non-semi PC that also has business in China. There is more PCB type of investment that happens in China, component inspection in China. So it probably skews the numbers a bit up a little bit, but it's a small percentage of the overall, so not much. So I think the numbers I provided give you, I think, enough directional clarity about where the business is today and where it's going.
Great. Thank you.
Operator, can you take the next question, please?
Yes, my apologies. We will go next to Shane Brett with Morgan Stanley. Your line is open.
My first question is on advanced packaging. At your Investor Day, you mentioned that Kronos is the workhorse of packaging. We have the next three systems already ready. Are your customers requiring higher sensitivity tools? If so, can you talk about the competitive environment at these higher sensitivity levels? Thank you.
Well, in advanced packaging, it's been inflecting because of the move to more front-end like processes. Most of it, to your point, has been in the macro products, and we think the roadmap for those products, we're well positioned there. You are seeing more hybrid bonding in logic devices, which is driving the need for greater levels of sensitivity. We also talked about that at Investor Day. You start to move from micron-level sensitivity down to the 100 nanometer type sensitivity. It does drive the need for more advanced systems. So when we talk about our overall packaging exposure, the mix of systems is starting to trend more towards higher-end systems. The macro products are still, to use your words, the workhorse, but we're seeing more laser scanning and even in some cases, some Gen4 deployment for packaging requirements.
We think this part of the market continues to be an opportunity for KLA. We've been able to leverage a lot of the R&D that we've done across the more advanced platforms, and so we think we're very well positioned with proven products that can meet the higher-end requirements, and our customers understand that capability well. So we think we're pretty well positioned in terms of the growth opportunities in that part of the market.
Got it. Thank you. My follow-up's on logic. I know you assess node-to-node share gain after certain wafer start volumes installed, but internally, is there a preliminary expectation on your share gains from 2 nanometer, 1.4 nanometer? Are there any part of your product portfolio where you think the financial market would be surprised on just the magnitude of share gains? Thank you.
Yeah. We think the trend is in the right direction. One thing about the next generation nodes is they're starting to tune those nodes for high-performance compute requirements. And those require some of the more advanced capabilities and more sampling steps because of the value of the die. So with high-performance compute, you have large die, they're very valuable, defect density is a challenge. You also have a very rich design environment. All those are good contributing factors. I don't have a point position to give you in terms of the directional trend, but we feel pretty good about the ability to continue to grow our share of the market node to node.
I think our relevancy with e-beam inspection capability and the linkage we have to our optical becomes more pronounced, so it is not as much share as it is adoption, but those investments were made to really. They will show up more as we go to smaller designs.
Got it. Thank you very much.
We will take our final question from Timm Schulze-Melander with Rothschild & Co Redburn. Please go ahead.
Yeah. Hi there. Thanks for taking my questions. One for Rick and one for Bren. Maybe the first one, just comparing 2027 to 2026. When you look at the CapEx that was spent on it or is being spent on established nodes this year as a percent of the total market, and you look forward to 2027, could you just maybe describe how that ratio changes? Then I had a follow-up.
Well, you see more investment in 2 nanometer. I think 2 nanometer and 3 nanometer investments will be the focus in logic. You will see more there. You will also see some investment in the next generation node, so 1.4 nanometer. So, it is different. You did not have any of that more advanced investment, and it was more 3 nanometer centric in 2026. So I think it sets up good for us constructively in terms of just more 2 nanometer and more leading-edge investment in 1.4 nanometer.
Very clear.
In 2027.
Thank you. Then maybe one on memory in 2027. You have discussed your engineering strategy about how you are going to address that memory kind of impact to your bill of materials. Can you just maybe talk about what your purchasing strategy is for 2027 for memory, please? Thank you.
Well, certainly our focus early on and through this year has been mostly around securing supply. Look, when things started to ramp in early 2026, we felt pretty good about ensuring we had the supply, which was no easy feat generally because of the constraints in the overall industry. As demand has strengthened, we have had to go out and buy more at higher prices. Less concerned about supply, but certainly we are exposed to the pricing market, and that is informing the commentary that we have provided. But I think from a supply point of view, we feel pretty good about the supply we have secured to meet the requirements we have going forward.
It is very helpful. Thank you.
This does conclude our question and answer session. I would like to turn the program back over to Kevin Kessel for any closing remarks.
Yeah, thank you. Thank you everyone again for your interest in KLA. We know it is a very busy earnings day, busy earnings week, so we appreciate it. If we did not get your questions, hopefully we can connect here after the call in our callbacks. With that, I will turn it back to the operator to formally close out the call.
Thank you. This concludes the KLA Corporation September quarter 2026 earnings call and webcast. Please disconnect your line at this time and have a wonderful day.
Goodbye.