KLA Corp (KLAC) — Q3 2025 Earnings Call Transcript

Welcome to our earnings call to discuss the March quarter and our June quarter outlook. Joining me is our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results released after the market closed and available on our website along with supplemental materials. We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified. All full-year references made refer to calendar years. The earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future investor events, presentations, corporate governance information, and links to our SEC filings. Our comments today are subject to risks and uncertainties reflected in the disclosure of risk factors in our SEC filings. Any forward-looking statements, including those we make on the call today, are also subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. Rick will begin with some introductory comments on the business environment and the quarter, followed by Bren with financial highlights and our outlook. Now over to Rick.

Thanks, Kevin. I will start with our March quarter results and talk about some comments about the current business environment, followed by some recent market share reports and finish up with some business highlights. KLA's March quarter results were above the midpoint of all the guidance range with revenue of $3.06 billion, non-GAAP diluted EPS of $8.41, and GAAP diluted EPS of $8.16. KLA's results continue to be fueled by strong demand in leading-edge logic and high-bandwidth memory. KLA's growing advanced packaging business also made another strong contribution in the quarter. These drivers demonstrate the critical investment required for building out the infrastructure that is supporting AI. While there's notable macro uncertainty across many sectors globally, KLA has not seen any change in demand or indication from our customers of any adjustment to their announced investment plans. That said, the current unprecedented global trade uncertainty and potential second-order effects on macro demand in the future are far from clear. Given this fluid business operating environment and potential implications for KLA, we've decided to postpone our Investor Day from June 18 to early to mid-calendar 2026. It's our hope that the macro environment will stabilize by then, and we look forward to expanding on the story of KLA's growth strategy and increasing market relevance. Our capital return announcements today reflect not only our commitment to assertive and explicit capital allocation but also our confidence in the business opportunities for KLA over the foreseeable future. Moving along to market share reports. This quarter marks the annual release of industry research reports showing KLA maintained a strong global share of WFE and Process Control market for calendar 2024. KLA's continued share leadership was highlighted by persistently strong customer adoption of optical patterned wafer inspection and share gain in advanced wafer-level packaging. Over the past five years, KLA's share of Process Control has grown by nearly 250 basis points. Notably, KLA's Process Control share of the advanced wafer-level packaging market has grown from being in the third position in 2019 to being on track to assume the leading position in 2025. Turning to highlights for the quarter. KLA delivered a 30% year-over-year increase in revenue in the March quarter due to increased investment in leading-edge logic and HBM. Second, AI continues to be a key catalyst driving KLA's consistently strong performance. As AI continues to advance, the semiconductor industry is experiencing more complex design, accelerating product cycles, high-value wafer volumes, and growing advanced packaging demand. These trends underscore the increased value of process control in assisting our customers in managing a dynamic production environment as investments and complexity increase, which uniquely benefits KLA. The further demonstration of this, the March quarter captured another period of strong momentum for our advanced packaging portfolio. Customer adoption of KLA's advanced packaging portfolio demonstrates the success of our market diversification, product technology roadmap, and growth strategies. KLA's advanced packaging revenue grew to over $500 million in calendar 2024 and is now expected to exceed $850 million in calendar 2025. Fourth, the KLA Services business grew to $669 million in the March quarter, up modestly sequentially and up 13% year-over-year. Newly announced market access restrictions in early December 2024 from the U.S. government export controls impacted service revenue growth in the March quarter. Still, as a sign of its predictability and resiliency, our service business marked its 52nd consecutive quarter of growth on a year-over-year basis. Finally, the March quarter was another solid quarter from a cash flow and capital returns perspective. Quarterly free cash flow was $990 million. Over the past 12 months, free cash flow was $3.5 billion with a free cash flow margin of 30% over the same period. This free cash flow margin ranks amongst the top 10% of companies in the S&P 500. Total capital returns in the March quarter was $733 million, comprised of $507 million in share repurchases and $226 million in dividends. Total capital returns over the past 12 months was $3 billion. KLA's results once again demonstrated Process Control leadership and the success of our broad portfolio and competitive differentiation. Our consistent performance further demonstrates the critical nature of KLA's products and services, which are uniquely positioned to enable growth at the leading edge, including the ongoing build-out of AI infrastructure. With that, I'll pass the call over to Bren to cover financial highlights and our outlook.

Thanks, Rick. KLA's March quarter results demonstrate market leadership combined with the consistent execution and dedication of our global team to get customer commitments and driving strong results, which fueled double-digit year-over-year growth and profitability improvement. Revenue was $3.06 billion, above the guidance midpoint of $3 billion. Non-GAAP diluted EPS was $8.41, and GAAP diluted EPS was $8.16, each finishing at the upper end of the respective guidance ranges. At the guided tax rate of 13.5%, non-GAAP diluted earnings per share would have been $8.55. Gross margin was 63%, about 50 basis points higher than the midpoint of guidance, as product mix within our Process Control segment was stronger than modeled for the quarter. Operating expenses were $575 million, about $10 million below the guidance midpoint, as the timing of prototype material expenses was lower than expected. Operating expenses were comprised of $338 million in R&D and $237 million in SG&A. Operating margin was 44.2%. Other income and expense net was a $36 million expense. The quarterly effective tax rate was 15%. Net income was $1.12 billion, GAAP net income was $1.09 billion. Cash flow from operations was $1.1 billion and free cash flow was $990 million. The breakdown of record revenue by reportable segments and end markets and major products and regions can be found within the shareholder letter and slides. Moving to the balance sheet, KLA ended the quarter with $4 billion of total cash, cash equivalents, and marketable securities, Debt of $5.9 billion and a flexible and attractive bond maturity profile supported by strong investment-grade ratings from all three major rating agencies. KLA's balance sheet provides the ability to fund our growth strategies, both organic and inorganic, and offer attractive capital returns to shareholders. The cornerstone of KLA's business is consistently generating strong free cash flow driven by one of the best operating models in the industry and a predictable and highly differentiated service business, which helps drive a capital return strategy that includes consistent dividend growth and increasing share repurchases over the long term. This strategy supports a strong track record of predictable and assertive capital deployment and remains an important differentiating element of the KLA investment thesis. To further underscore our commitment to capital returns and our confidence in the long-term value accretion of KLA, today we announced the 16th consecutive annual dividend increase, which is up 12% to $1.90 a share per quarter or an annualized dividend of $7.60. Along with this action, we also announced a new $5 billion share repurchase authorization, raising our total repurchase authorization to $5.46 billion. Turning to the outlook. The industry outlook continues to be driven by increasing investments in leading-edge logic, high bandwidth memory, and advanced packaging. For WFE in 2025, our outlook remains the same as in late January. We forecast WFE to grow by a mid-single-digit percentage from approximately $99 million to $100 billion level in calendar 2024. Growth is expected to be driven principally by increasing investments in both leading-edge foundry and logic and memory to support growing AI and premium mobile demand, partially offset by lower overall demand from China. Given KLA's business momentum, market share opportunities, and higher expected process control intensity at the leading edge across all segments, we are confident we will continue to deliver growth outperformance compared with the WFE market in 2025. KLA's unique product portfolio differentiation and value proposition are focused on enabling technology transitions, accelerating process node capacity ramps, and ensuring yield entitlement in high-volume production. We remain encouraged that our customer discussions have not changed and are working hard to align shipment slots with their requirements. In this industry environment, KLA will continue to focus on supporting our customers, executing our product roadmaps, and driving productivity across the enterprise. KLA's June quarter guidance is as follows. Total revenue is expected to be $3.075 billion, plus or minus $150 million. Foundry/Logic revenue from semiconductor customers is forecasted to be approximately 69%. The memory is expected to be approximately 31% of Semiconductor Process Control systems revenue to semiconductor customers. Within memory, DRAM is expected to be about 76% of the revenue mix and NAND, the remaining 24%. Gross margin is forecasted to be 63%, plus or minus one percentage point, inclusive of the impact of recently announced global tariffs. This estimate is to the best of our ability, given the complexities of the regulations and how they align with our global processes. Consistent with this assessment, we expect global tariffs to have a roughly 100 basis point headwind to gross margin per quarter, assuming relatively stable quarterly revenue expectations for the remainder of the calendar year. Of course, this environment is changing rapidly, and we will continue our assessment and evaluate mitigation opportunities within our operational processes and pricing strategies. For calendar 2025, based on results for the March quarter, guidance for the June quarter, and our expectations for business mix across systems and services, systems product mix, and factory utilization, we expect gross margins for the year to be approximately 62.5%, plus or minus 50 basis points. Other model assumptions include other income and expense net of approximately a $35 million expense for the June quarter and expect this to be roughly consistent throughout the calendar year. The effective tax rate assumption for June is 13.5%. Beginning in the September quarter, which is the first quarter of our fiscal year, our effective tax rate will reflect the adoption of global taxation Pillar 2, which is expected to increase the rate to approximately 14% in the second half of the calendar year. For the June quarter, GAAP diluted EPS is expected to be $8.28, plus or minus $0.78, and non-GAAP diluted EPS of $8.53, plus or minus $0.78. A quick update on our remaining performance obligations or RPO disclosure in our SEC filings. As a reminder, RPO is primarily a systems-only metric for KLA. In our report, RPO during earnings as it is disclosed on our subsequently filed SEC 10-Q and 10-K reports. There is significant divergence in practice, and companies have different definitions and disclosure practices on RPO. This lack of consistency among companies reporting can be a source of confusion for investors and make the disclosure difficult to compare across industries and peer companies. We will continue to provide our backlog balance annually in our 10-K report. We will update our quarterly disclosures for RPO starting in the first quarter of fiscal 2026, which is the quarter ending September 30, 2025, to be a transaction price for contracts that have not yet been recognized as revenue as of the end of the quarter. This disclosure of RPO would be consistent with the disclosure of our industry peers. In conclusion, our near-term revenue guidance continues to point relative to stability around current business levels despite the increased uncertainty from changes to global trade. We are staying close to customers as they also navigate this challenging environment. We continue to see solid growth in calendar 2025 and expect to outperform the mid-single-digit WFE growth rate by several points. KLA's focus on delivering a differentiated product portfolio that addresses customers' technology roadmap requirements and drives our longer-term relevancy and growth expectations. With the KLA operating model guiding our best-in-class execution, KLA is focused on implementing our strategic objectives designed to drive outperformance. KLA's focus on customer success, innovative solutions, and operational excellence drives industry-leading financial performance and allows us to return capital consistently. That concludes the prepared remarks. Let's begin the Q&A.

Thank you, Bren. Operator, can you please provide the instructions and begin the queue.

Good afternoon. Great job on another solid quarter of execution. Despite the view that the team is still going to drive $3 billion plus per quarter throughout the year, you're holding your WFE view of up mid-single digits percentage year-over-year. You're not seeing any major changes to your customer spending plans. Yes, you did highlight the 100 basis points hit to gross margin due to tariffs, but at the same time, you did also take up your full-year guidance on gross margins, but you're postponing your Analyst Day by nine months to a year on the potential trade and tariff uncertainty. I understand the direct impact concerns and risks on global demand for electronics. But is there also a significant tariff-related risk on your equipment and systems post, let's say, the 90-day reciprocal tariff? I mean, the team, I thought, was fairly geographically diversified across your manufacturing base. I wouldn't think so. Maybe just take us through some of the puts and takes around tariffs and trade and your ability to modulate your global manufacturing operations under different tariff-related scenarios to minimize the impact on your system shipping to different geographies.

Hi, Harlan, it's Bren. Thank you for your comments; there is a lot to consider. Firstly, our decision to postpone the Investor Day was mainly due to the current uncertainty. The global trade discussions today are unprecedented, and we will need to see how it evolves. I mentioned our perspective on the impact of tariffs on KLA, which is very dynamic and can change, but we anticipate a slight headwind in our gross margin, particularly in our service business, especially in regions like China, where reciprocal tariff impacts can affect us. We have exposure from parts being brought into our U.S. factory, but some of this is being alleviated through various exemptions. We will see how this all plays out over time. Additionally, we can take steps to mitigate impacts through our processes, such as managing our supply network and moving parts globally. In doing so, we will focus on what’s best for the business operationally. In a higher tariff environment, we may need to consider options where the return on investment looks favorable, so we are currently evaluating these factors. We are also examining our long-term pricing strategies in light of mitigation efforts. Given our concerns about tariffs and their potential second-order effects on the macro environment, we felt it was wise to reschedule the Investor Day to early '26, anticipating a more stable situation by then. We are looking forward to it and are excited about what is happening within the business. We've demonstrated strength in our results and growth in WFE share over the last few years. We believe we are well-positioned in core WFE and see opportunities in advanced packaging. Our service business has performed very well despite challenges from export controls. Overall, we think the business is in a good position, and we are simply responding to the significant changes in the global macro environment over the last three months. Regarding our operational footprint, we have a diverse global presence built over the past two decades, relocating products as necessary. Our approach starts with operational viability, considering cost and execution talent, followed by optimizing based on taxes, incentives, and regulations that can change over time. Ensuring that operational considerations come first is crucial. We will evaluate the situation and act in the best interest of the business moving forward. That covers everything I have to say about it.

I appreciate that. And then maybe on a bright note, Rick, as you mentioned in your shareholder letter, calendar '24, share rankings are out for Process Control. The team and the Process Control segment outgrew overall WFE last year, and despite your dominant number one position, you're 6.5 times larger than your number two competitor in the space. You still gained 50 basis points of share and a strong number one position, I think by my count, in five out of the six major subsegments within Process Control. I think the one area where it was a bit of a surprise where you made significant progress was in e-beam pattern wafer inspection, and despite optical continuing to dominate at a 7x larger market versus e-beam, the KLA team did double their e-beam inspection revenues last year. You gained about 700 basis points of share there. So the team's strategy has always been to introduce new solutions when the market is ready to adopt. So what's driving the incremental opportunity in e-beam? And how is KLA's e-beam platform sort of differentiated?

Thank you, Harlan. I believe the progress we've achieved in e-beam has been a long time coming. We've invested in our platforms for many years to enhance the e-beam products so that they can effectively complement optical solutions. The success we're experiencing now comes from these platforms performing at a high level, allowing customers to fully evaluate them. Notably, in the most challenging layers and nodes, people are actually using both optical EV mod and e-beam. We always aim for interoperability between the two tools to maximize the advantages of e-beam alongside optical. We're seeing positive results, and more importantly, our customers have recognized them as well. It often takes months or quarters for customers to test these capabilities thoroughly, but we are confident we are on a growth trajectory. We're pleased with our long-term investments in e-beam. There was a time when we were spending significantly on e-beam without immediate results, but we're excited about our current position and our customers are requesting more. We're optimistic about the future. Last year, we faced a situation where demand outpaced our capacity, prompting Bren and the operations team to quickly ramp up support. We are now in a solid position with excellent customer feedback and are very enthusiastic about the advancements we've made in e-beam.

Yes. Thanks, Rick. Thanks, Bren.

Thank you for taking my questions. I have a question on the services growth. I understand that it's a bit pressured this year because of the loss of fabs in China. Can you talk about your full-year outlook on the services for this year?

Certainly. The most significant impact we experienced was in the first quarter, where growth from one quarter to the next was relatively limited. This was despite achieving our 52nd quarter of year-over-year growth. The consecutive quarter-over-quarter growth was quite impressive, and the team performed well in that regard. When I reflect on the semiconductors for PC segment of our business, excluding the EPC part of our services, there was notable growth in 2024, exceeding our trend line with a mid-teens increase of around 16%. For this year, I anticipate low double-digit growth. Overall, our expectations for total service growth are around 10%, which is slightly below our long-term target. However, the constraints on access to manufacturing tools impact supply available to meet market demand. Some capacity may be added elsewhere to counter this shortage. Therefore, we expect that over the long term, our business will recover as we project service growth based on sustainable long-term growth expectations, including increased average selling prices and growth in semiconductor revenue. Overall, we remain optimistic about our long-term targets, although we expect to be slightly below those targets in 2025, around 10%.

Great. And as a follow-up, on advanced packaging momentum, good to see you guys raising the bar to $850 million and number one market share this year. Rick, if you can just pull the curtain a bit on your kind of competitive positioning in advanced packaging? Are you stronger on the logic side or the HBM side? And what are your thoughts about hybrid bonding adoption?

So I think I mentioned this before, Atif, that what we've really seen is the market in many ways has come to us. And this really kicked off a couple of years ago, mainly around packaging that we've seen pushed for AI applications and just the very, the high cost of that entire package. And therefore, it can support the kind of cost per inspection that you couldn't support on, frankly, lower-cost solutions in terms of the packages. So these packages, as you know, if you have a large chip combined with a number of memory chips that are stacked, the value of that is very high. So it's both inspection and measurement, but also some of the process capability that we have in SPTS. That's really differentiation in the solutions. In many ways, what we've done is we've taken the products that we have for the front end and adapted them for the back end, and that's what's getting traction now. And mainly, it's with and we've seen a lot of applications driving, and we see big growth. So we talked about going to $500 million to $850 million, and frankly, that growth trend continues; that's the message we're getting from our customers. So one of the things that we're still sorting through is what the available market is for KLA because we think about how much of WFE do we talk about, but there's also all this investment that's not necessarily included that in packaging. And so we're still sorting through what that looks like, and that's going to help us outperform the overall industry.

So I think one other point on this is, to Rick's point about being able to adapt our front-end solutions to the back-end is there are some incremental engineering requirements as it relates to handling substrates and so on in different environmental conditions; that's a lot of engineering, at least from a sensitivity and performance point of view in the systems that has already been done. So the ability to take that also brings a nice incremental profit stream to the company as we leverage some of that capability. And as that market starts to move to needing more capability, then you move up the value stack in terms of KLA solutions to address those challenges for our customers. So it's a great opportunity from a growth point of view, but it's also an opportunity from a margin point of view of something that was a bit of a headwind, given the nature of what was required, that turns into a tailwind as customers demand more capability from us. So we're really excited about that opportunity moving forward, particularly given the growth rates of advanced wafer-level packaging is likely faster than overall WFE growth over the next several years.

Thank you. I had a near-and longer-term question. On the near-term, I saw that China, I think, came in at about 26% in March. I think you had estimated closer to 29%. So does it go up in a kind of flattish top line year? And related to that, the $500 million impact that you had mentioned for the year, how much did you see in calendar Q1? How much more is left to go?

Yes, Vivek, regarding China, we discussed it last quarter and still estimate that by 2025, our business in China will make up around 20-30% of total revenue. However, we expect fluctuations throughout the year, with China accounting for 26% in Q1. I won't provide guidance for Q2, but anticipate around 30% for the year overall. Given the softer revenue guidance for the second half, this suggests that China's performance could decline by about 15-20% for the year as a whole. Concerning the impact of export controls, we assessed it based on December's figures and the adjustments made for shipments related to other customers projecting into 2025. I'm not concentrating on Q1 specifics, as our business dynamics are fluid, and the expected impact remains around $500 million in revenue, with a variance of about $100 million, mostly from systems. However, I won't connect Q1 data to other quarters. We have evaluated the overall impact over the next several quarters.

All right. And from a follow-up, I know a little early, but I'm curious, like, what's on your dashboard to gauge whether 2026 WFE could be up, down, or flat? How does China figure into it in terms of opportunity and risk because a lot of long-term investors in KLA, they're always looking out. So how would you want them to think about what your opportunity set is in 2026? Thank you.

In 2026, we had significant questions earlier this year due to macro uncertainty. Feedback on the AI development indicates that customers are still planning for capacity that doesn’t match the expressed demand. The number of wafer starts and implications for hyperscaler capital expenditures still appear understated. We expect this growth to continue, though it's challenging to predict how macro factors will influence this. As we noted at the start of the year, our main focus has been on leading-edge technologies, which include advanced logic for design starts, larger die sizes for AI training and inference chips, and custom silicon. Additionally, high bandwidth memory technology, which requires more detailed inspection than our previous memory technologies, is still in its early stages. We anticipate continued growth at the leading edge, which will mainly influence these other sectors. However, recovery in handsets and PCs, significant consumers of silicon, has been slow. We will have a clearer picture for 2026 as the build-out for 2025 progresses. Conversations indicate a positive outlook absent any significant macro changes, and overall forecasts look encouraging through to 2030. Currently, some hyperscalers are continuing and even increasing their investments in AI infrastructure, positioning us favorably.

Thank you.

Yes. Thanks for taking the question. Maybe just a follow-up on that, Rick. I mean, is cleaner in space of potential kind of gating factors as you look into '26? Or how do you think about that aspect of it?

No, I don't think so. I believe they can construct and position the shelves for investment based on their location. Therefore, I'm not concerned about the plans we have. I've always thought that the link among hyperscalers and concerns about AI overheating relate mainly to the cutting-edge silicon being the key factor. The positive aspect is that I don't expect them to overbuild, and growth will remain steady in the coming years to support it. That's why we feel more optimistic about the concerns regarding overbuilding. I don't think there's an overbuild, and I anticipate additional capacity will be available as needed. We are engaged in numerous discussions with our leading-edge customers about their needs, which we understand well down to specific products. In some areas, like the e-beam example I mentioned earlier, we are being informed that we need to increase capacity. It does take time for us to support that. Overall, I think we are in a strong position as we look ahead for the rest of the year, and we are quite enthusiastic about the opportunities in 2026.

That's very helpful. And maybe one for Bren. Just I wanted to kind of better understand just the uptick in the full-year gross margin, just given the fact that the dynamics around tariffs that you talked about. Maybe can you just help us understand kind of what's giving you the confidence there to increase it?

Yes, I appreciate the question, Joe. And I think what we're seeing is from a mix point of view, we've had a bit of headwind over the last few years as it relates to some of the cost dynamics as with the inflation that we experienced and what that meant to product cost. And as we're shipping new platforms, it's the opportunity for KLA generally to reset that as we deliver more favorable cost of ownership to our customers, but then reset that and the capability that exists in the next generation of product that comes to market. So that's certainly been a factor. I mentioned earlier that we're starting to see some scale benefits as it relates to advanced packaging, which we're encouraged by as well. So there's a number of factors. I'd say most of it is in product mix, but there's been certainly some opportunities for us to deal with some of the cost pressures we felt over the last few years. So yes, we've got the tariff impact. But despite that, I feel that we are trending more or less in line with this expectation of margins somewhere around 62.5% as we finish the year, plus or minus 50 basis points, so 63% in March and then the guidance, 63% plus or minus 1% for June. And then as you look forward, we're going to be somewhere, even with the full quarter of potential tariff impact is roughly 100 basis points. We're still somewhere in and around that 62% range given expectations for revenue levels that are relatively stable.

Hi. Thank you so much for taking my question. Maybe the first one, just on the sequential Q-on-Q. Could you just help us maybe with a bit of the gross profit bridge, pretty flat revenues but a really decent impact on gross margin? Maybe if you could just peel back some of the moving parts, that would be really helpful. Thank you.

I believe gross margin is about the same. We were at 63% and are projecting 63% in March with revenues remaining relatively stable. There are various factors affecting this related to the different products generating revenue in the quarter. Overall, we expect our outlook for the company to remain fairly consistent.

Yes. I was thinking more about the March quarter compared to the December quarter.

Compared to December, March was primarily influenced by the product mix of our business. We had a greater number of higher-value systems. Not every product in KLA's portfolio has the same margin, so the overall margin was more favorable towards some of our higher-value products.

Okay. And maybe just as a quick follow-up. I think if I caught it correctly, you talked about the service business basically being the sort of source potential tariff impact to margins. Maybe if you could just give us a bit of color about that and also maybe just kind of how you're thinking about how you might respond to that pressure kind of on a medium- to longer-term basis?

Well, one thing that's unique about KLA's service business is it's a high percentage of our revenue is contract revenue. And so we deliver and customers pay by a service contract, and we support the system and make commitments for service and support, uptime and performance, availability, and so on as it relates to those systems. So as part of that, we have to ensure that we've got the parts whenever there are failures. So typically, in a particular region, we are importing those parts to support the tools. And given it's a contract stream, we're the importer. So potentially carrying some exposure depending on where those parts might be coming from - and so there have been some exemptions that have come through as it relates to that, particularly as it relates to parts going into China. But that's been where we do have some exposure. So we'll see how that plays out. So that's the aspect that's tied to service. Obviously, you have tariffs potentially on parts that are coming from outside the country into the U.S. for tools that we're building in our factory in the U.S. that then ultimately, those tools stay in the U.S. If they round trip out of the U.S., then you can then draw back some of that. But as it relates to the service piece, the issue is, as I talked about. Now you're in a billable situation, and you could potentially adjust the customer because it becomes an ex-works type transaction; the customer would potentially then have to be the importer and then have the tariff liability. But because of the contract structure, it's a little bit different for us. Now ultimately, over time, if you're ending up with a structural cost increase, you have to come up with ways to pass that cost along. So there are different pricing strategies that we need to consider in our business based on what the long-term implications are.

Thank you, Bren.

Yes, good afternoon. Thank you for taking the question. I guess, Bren, I'm just trying to dig into your kind of relatively stable half-on-half revenue outlook, better than some of your peers. So curious, is that a function of perhaps less memory exposure, sustainable foundry, or greater seasonality from PCB in the second half or SPTS kind of taken off? I guess, what are the key drivers driving that sustainability?

Yes, I'm taking a quick look here, C.J. As I look at it, it looks, on a half-to-half point of view, looks fairly stable. I would say memory potentially could tick up a bit and foundry logic looks like it is probably make it tick down a little bit. But I don't see a lot of moving parts here as I look at it moving forward; I'd say the percent of businesses, at least as it relates to our semiconductor customers, it's pretty consistent.

Great. And then I guess as my follow-up, you highlighted great growth in advanced packaging. The lion's share of that is CoWoS. Can you speak to kind of the work you're doing on HBM, how you're thinking about insertions? Is it 8PM 4E, and is there a way to kind of size the opportunity sitting here today? Or is it too early? Thank you.

Yes. I would say that we are definitely experiencing increasing momentum. Most of our gains have been on the logic side, but in high bandwidth memory, as customers increase their chip stacks, it’s creating additional opportunities. We feel like we are gaining more traction; this is driving the need for enhanced capabilities, and we’re making progress with certain customers. Therefore, over time, as customers go through a selection process, it allows us to compete for some business. These customers are operating at high capacity to meet their demands, which means they might be hesitant to make changes. We need to wait for a selection as they shift to higher stacks. Furthermore, as we consider future technology advancements such as hybrid bonding, more opportunities will arise. We are seeing positive momentum in the memory sector, and we expect this trend to continue as we move through this year and into the next.

Yes, hi. Thanks for taking my question. First on branding. When I look at the U.S. revenue, it's up Q-o-Q, but the dollar figures are still pretty low. And I'm just trying to reconcile that with what TSM said about investing in Arizona. Do you think the Process Control being an early cyclical, some of the early purchases for Arizona are done? Or do you think there's still potential for the rest of the year? And then I have a follow-up.

Most of our business comes from our largest customers, primarily focused on Taiwan rather than Arizona. Arizona has experienced a slow investment cycle over the past few years, resulting in consistently low levels of business over an extended period. However, the emphasis on Taiwan is propelling most of our business in that direction.

Got it. And then a quick follow-up on tariffs. Thanks for the color on the service impact from tariffs. I understand a lot of moving parts, but I'm just wondering, if it ever comes to it, can you meet non-U.S. demand from your non-U.S. manufacturing facilities and U.S. demand from the U.S.? Or is it not as simple as that?

Well, as it relates to service? No, as it relates to systems. Well, look, as I said in the first question, I think it was Harlan's question at the beginning. We have a global footprint, and we've established it over the last couple of decades. We've moved products around the world depending on what makes sense operationally for us. You can't do anything in a short period of time. In a longer period of time, you'd have to consider, I think it would be very hard for us to have complete capability across factories. We certainly aren't in a position necessarily to do that today. But could you, over time, increase your flexibility? You'd have to make some investments to be able to do that, you could potentially do those things. But you be comfortable that that you're facing an environment is not going to change because those are significant investments you have to make.

Got it. Thank you very much. That's very helpful.

Hi, guys. Thanks for taking my question. My first was just in regards to C.J.'s question earlier just on the second half and whether it's weighted memory or Foundry/Logic. And it sounded like memory is up a little a little bit, Foundry/Logic maybe down a little bit. If you look at the mix of memory, some of your peers have already talked about like a sharper falloff in the second half when it comes to NAND. And I fully appreciate that your business is very small there. But the correct interpretation of that, that the DRAM side gets a little bit stronger and you see a little weakness on that? Are you seeing anything different just given or the timing of your NAND business?

I'd say that DRAM is the biggest driver. What you're seeing in NAND is more technology investments and some upgrades. So there's some activity there, but it's fairly limited. Most of what's driving our business is investment supporting our bandwidth memory.

Helpful. And then I think that it's obviously brave of you guys to go out there and kind of talk about tariff impacts already when many of your peers have kind of said, hey, don't look at the second half, and you guys are being pretty prescriptive when it comes to the gross margin. So maybe it's helpful. Can you guys talk about what you guys did in order to get to that 100 basis points per quarter? Like did you look at different facilities? Did you take everything as a whole? Like any kind of description or color as to how you got to that number would be super helpful. Thank you.

Well, Tom, what we needed to do was thoroughly analyze our business. There are quite a few uncertainties. I didn't mention earlier the various caveats that could cause changes. We're in a fluid situation, and things could shift quickly. We'll assess the situation in 90 days and beyond. However, we are aware of what we are shipping and our bill plans, as well as the lead times and what is arriving at our factories worldwide. We also have a clear view of the contract streams from a service perspective, especially since our contractual business is notably higher than that of many of our competitors. We'll see how things progress. I mentioned around 100 basis points, and we'll see if that changes. Ultimately, I can evaluate what's in service and what's in our factories. While there are potential uncertainties regarding suppliers, we've done our best to prepare for that. Additionally, we will implement mitigation strategies over time to counter any pressures we may encounter. Let me add. Because it reports to Bren, but I have a really strong logistics team, and the same team that got us through COVID without missing deliveries and without lifting guidance was the team that drilled through all this. So I would say that Bren's team was all over this. And that's why we were able to like assess the impact and then change even during the week, we were doing it or a few days, as the rules change. So I don't think it was luck, and we're not guessing. We did a lot of detailed work. The assumptions could change over time. And that's part of the concern we have about having everybody together for an Investor Day is something that changed the morning of that day. And so we're kind of waiting for things to settle out. But it was a lot of hard work. We know where our parts come. We understand the rules, and we applied them. That's how we got there.

Thank you. I have a follow-up about the second half comments that you made, in particular about the Foundry/Logic. I think the comment was that it's going to tick down a little bit. It was down a bit, and then you're guiding kind of flattish for this quarter. I'm guessing most of that is China. I'm just curious as to how you're expecting, and two, demand to kind of fare? And if you can talk about where we are in the N2 cycle? And then, I guess, as we go to next year, when do we expect 1.4 to kind of kick in?

Well, so I think around N2, the investment cycle we're seeing this year looks pretty strong as we've said, and we feel pretty good about its continuation of next year. Our customers are going to add in this first year somewhere around 40,000 to 50,000 wafer starts. And we think that you'll see at least a doubling of that into next year, maybe more. So we feel pretty good about some of the moving parts; it's not our only customer that's investing here. And so like I said earlier, I think half to half, it's things tick up a little bit, tick down a little bit, but more or less, our mix of business expectations from where we started the year is more or less about the same.

Got it. And then more of a longer-term question. I'm just curious to understand a little better what the implications from high NA. I know it's early days, but as we go to high NA, I'm reading that the reticle sizes will come down. I'm guessing the complexity will increase quite a bit. And of course, packaging complexity will go up. But if reticles come down. So just curious to understand what the implications for semi PC intensities with?

I believe these are the exact considerations our customers are evaluating as they decide when and how much to implement. One clear point is that the push for high NA is driven by the need to print smaller features, which has consistently been a key factor in our business. The same capability that allows for smaller features also means that smaller defects become more significant. Consequently, when our customers enhance the resolution of their lithography, they must also improve their inspection sensitivity. This is a positive development, but it also necessitates that we enhance our ability to detect issues in these advanced devices. The quality of reticles and their verification has been a major factor in EUV technology, leading to the creation of a separate area known as print check. In this process, customers analyze the wafers produced by EUV to confirm the accuracy of the design. Despite having tools for reticles, there is an additional layer of inspection involved. We anticipate that especially in the initial stages of high NA, a more extensive check will be required. Therefore, from our perspective, this results in a greater proportion of inspection and measurement due to continuous scaling. We are collaborating closely with our customers as they consider this, since one key decision factor is whether they have the necessary metrology and inspection capabilities to support these nodes. This is a significant part of the discussion. I would say that the most probable scenario for High-NA introduction will involve it being applied to a limited number of layers in whatever device or node it is introduced. Our customers must be strategic and will likely have contingency plans, such as multi-patterning or other methods, to meet their goals. Overall, this is beneficial for us, as EUV has successfully enhanced the importance of inspection. However, it remains uncertain when this will occur and which devices will be involved. I am confident, though, that our customers are consistently telling us that their decisions will hinge on their economics, not solely on performance, but also on the total cost of implementation.

Got it. Thank you, Bren.

Thanks a lot. Bren, I wanted to ask about semi-systems half-on-half. You quantified in the presentation you actually quantified the outgrowth relative to this mid-single-digit WFE this year. You said you're going to outgrow by several points. So if WFE is up 5, I take several to So that means systems will grow like 8, and you did 7.5% in last year. So that puts you at 8% for the year. So if we know what you're doing in the first half, it implies back half systems is down like 15% half-on-half. That's a lot. So do you take issue with that math? Because I thought systems were going to be more like flattish half on half, did like something change?

Yes, hi, Tim, I'm looking at the numbers here and based on revenue expectations, I think semi PC systems are going to be roughly spot on in the second half of the year.

Okay. Then outgrow by a lot more than 7...

Yes, several points relative to the WFE is up mid-single digits, I said we'd do several points better than that.

So I think we have enough updates.