KLA Leverages AI‑Driven Demand to Outpace Wafer‑Equipment Market, Raises Advanced‑Packaging Outlook

KLA’s March‑quarter earnings painted a picture of a business that is both scaling and rebalancing. Revenue climbed to **$3.415 billion**, a 4% rise from the prior quarter and 11% higher than a year ago, propelled by “increased investment in leading‑edge foundry logic and high‑bandwidth memory,” CEO Rick Wallace said. Non‑GAAP diluted earnings per share (EPS) hit **$9.40**, while GAAP EPS reached **$9.12**, each topping the midpoint of the company’s guidance ranges.

The earnings beat was underpinned by a robust 62.2% gross‑margin, 45 basis points above the company’s own midpoint forecast. “Better‑than‑modeled service business mix and manufacturing scale” drove the margin lift, CFO Bren Higgins explained, even as operating expenses rose to **$670 million**—including **$389 million** for R&D and **$281 million** for SG&A—due in part to “materials timing and other reserve adjustments.”

Free cash flow surged to **$622 million** in the quarter, delivering a 31% free‑cash‑flow margin. Over the trailing 12 months, the company generated **$4 billion** of free cash, a figure that has enabled it to return **$875 million** to shareholders this quarter—**$626 million** in share repurchases and **$249 million** in dividends—bringing the 12‑month total to **$3.2 billion**.

A standout narrative from the call was KLA’s aggressive push in advanced wafer‑level packaging (WLP). The firm now expects its advanced‑packaging process‑control revenue to climb from **$635 million** in 2025 to roughly **$1 billion** in 2026, a jump that dwarfs its prior outlook and reflects a “14‑percentage‑point market‑share gain” that delivered 70% year‑over‑year revenue growth in the segment.

“We achieved the #1 position in process control for advanced wafer‑level packaging for 2025,” Wallace noted, underscoring the strategic importance of packaging as AI‑driven workloads demand higher bandwidth and tighter integration.

The company’s services arm also showed momentum, posting **$775 million** in revenue—a 16% YoY increase, though slightly down 1% sequentially as timing of revenue recognition shifted. Management highlighted that longer tool lifetimes and higher customer expectations for uptime are turning services into a “predictable long‑term tailwind” that anchors KLA’s capital‑return strategy.

Looking ahead, KLA raised its wafer‑equipment (WFE) market size forecast to “above $140 billion” for 2026, up from the prior 135‑140 billion range. The firm anticipates “high‑teen” sequential revenue growth for the full year, projecting June‑quarter revenue of **$3.575 billion** ± $200 million and a gross‑margin of **61.75%** ± 1 percentage point.

The guidance reflects a “modest product‑mix weakening” versus the March quarter and a persistent 100‑basis‑point margin drag from elevated DRAM ship costs. “We expect roughly a 100‑basis‑point impact on gross margin over the next several quarters,” Wallace said, noting that tariff headwinds should ease later in the year.

Analysts pressed management on the sustainability of the demand surge and the company’s ability to translate it into higher margins. Cantor’s CJ Muse asked about “extended lead times and visibility into ’27,” to which Wallace replied that the urgency “across different segments” is broad‑based, driven by greenfield fab projects in both logic and memory.

JPMorgan’s Harlan Sur probed whether the incremental upside stemmed from new greenfield capacity or from “accelerating technology migrations on existing capacity.” Wallace emphasized that both forces are at play, with “new fab projects… on the logic side and memory” and a “broad‑based” uptick in advanced packaging demand.

The Q&A also surfaced concerns about the AI‑driven data‑center capex pipeline. When Oppenheimer’s analyst linked hyperscaler AI spending to KLA’s WFE outlook, Wallace warned that “the industry is still under‑served” and that “the gap between AI capex and silicon supply is widening.” He likened the situation to Elon Musk’s warning about a semiconductor shortage through 2030, suggesting that even aggressive AI‑capex plans cannot be fully met without additional fab capacity.

Despite the margin pressure, KLA’s capital allocation plan remains aggressive. At its March Investor Day, the company announced a **$7 billion** share‑repurchase authorization, a 17th consecutive dividend increase, and a target to return over 90% of free cash flow to shareholders. The long‑term revenue CAGR goal was lifted to 13‑17% through 2030, with services expected to grow 13‑15% CAGR, reflecting a baseline semiconductor industry growth of 11% and a wafer‑equipment market expanding 1% faster.

The market reacted modestly but positively. KLA shares closed at **$1,816.21**, up 0.40% on the day and up 49.47% year‑to‑date, still 6.3% shy of the 52‑week high. The stock’s outperformance mirrors the company’s narrative of “sustainable outperformance” and its positioning as a critical enabler of AI‑driven semiconductor growth.

In sum, KLA delivered a solid quarter that beat expectations, expanded its advanced‑packaging outlook, and reaffirmed a bullish stance on AI‑related demand, while acknowledging a near‑term margin squeeze from memory pricing and a broader industry capacity constraint. Investors will be watching whether the company can sustain “high‑teen” growth through 2026 and capture the anticipated “4.5%” upside over the wafer‑equipment market baseline that management earmarked in its 2030 plan.