KLAC Q1 Earnings Call: AI Demand and Advanced Packaging Drive Outperformance Amid Trade Uncertainty

Semiconductor manufacturing equipment maker KLA Corporation (NASDAQ: KLAC) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 29.8% year on year to $3.06 billion. The company expects next quarter’s revenue to be around $3.08 billion, close to analysts’ estimates. Its non-GAAP profit of $8.41 per share was 4% above analysts’ consensus estimates.

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StockStory’s Take

KLA Corporation’s first quarter results were shaped by heightened demand for semiconductor process control tools supporting AI infrastructure and advanced packaging technologies. CEO Rick Wallace pointed to “strong demand in leading-edge logic and high-bandwidth memory” as key drivers, with the company’s advanced packaging segment expanding due to customer adoption in AI-related applications. Management also cited persistent macroeconomic and trade uncertainties, particularly around tariffs and export controls, which impacted service revenue growth. Wallace addressed these challenges by noting, “We have not seen any change in demand or indication from our customers of any adjustment to their announced investment plans.”

Looking ahead, KLA’s guidance reflects continued stability in customer demand and ongoing investments in leading-edge semiconductor manufacturing. CFO Bren Higgins emphasized that gross margin guidance accounts for the near-term impact of new global tariffs. Management maintained that the company expects to outperform the broader wafer fabrication equipment market in 2025, supported by a differentiated product portfolio and strong customer relationships. However, uncertainty around global trade policy led KLA to postpone its planned Investor Day until 2026.

Key Insights from Management’s Remarks

KLA’s management highlighted several core themes behind the quarter’s performance, with a focus on the evolving semiconductor landscape and the company’s market positioning.

• AI Infrastructure Investment: Management attributed growth to ongoing investments in AI, which are driving more complex chip designs, higher wafer volumes, and increased demand for process control tools.
• Advanced Packaging Expansion: The advanced packaging segment experienced notable growth, with revenue expected to exceed $850 million in 2025. Management noted that adapting front-end inspection tools for back-end use has opened new profit streams and improved margins.
• Service Business Resilience: Despite export control restrictions affecting service growth, the service segment achieved its 52nd consecutive quarter of year-over-year growth, underscoring the predictability of recurring contract revenue.
• Tariffs and Trade Headwinds: Newly imposed global tariffs and U.S. export controls created a headwind for gross margins, particularly impacting service revenue in China. Management has started implementing mitigation strategies, including operational adjustments and pricing changes.
• Market Share Gains in Process Control: KLA continued to gain share in process control markets, especially in optical and e-beam wafer inspection. The company’s technology roadmap and investments have moved it from third position in advanced wafer-level packaging in 2019 to a projected leading position in 2025.

Drivers of Future Performance

Management’s outlook for the coming quarters centers on sustained demand from AI-related investments, expanding advanced packaging opportunities, and navigating ongoing trade policy risks.

• AI and Leading-Edge Logic Demand: The company expects continued investments in logic and memory chips supporting AI applications, fueling demand for both systems and services.
• Margin Stability Amid Tariffs: Management projects stable gross margins for 2025, despite a roughly 100 basis point headwind per quarter from global tariffs. Cost controls and favorable product mix are expected to help offset these pressures.
• Service Revenue Growth Risks: While the recurring service business remains a source of stability, export controls and reduced access to certain Chinese fabs are likely to moderate growth rates compared to historical trends.

Top Analyst Questions

• Harlan Sur (JPMorgan): Asked about the company’s ability to manage tariff exposure through its global manufacturing footprint. Management explained it has operational flexibility but significant investments would be required to fully adapt if trade dynamics shift further.
• Atif Malik (Citi): Inquired about the outlook for the services business amid export controls. Management projected service growth around 10% for the year, below long-term targets due to reduced access to Chinese fabs.
• Vivek Arya (Bank of America): Sought clarification on China’s revenue contribution and the impact of export controls. Management expects China to represent about 30% of business in 2025, with total China revenue down 15–20% versus the prior year.
• C.J. Muse (Cantor Fitzgerald): Asked about drivers of stable half-on-half revenue outlook, and whether memory or foundry/logic segments would lead. Management indicated memory may tick up slightly, while foundry/logic is likely to remain stable or slightly decline.
• Srini Pajjuri (Raymond James): Queried about the impact of high numerical aperture (NA) lithography on process control intensity. Management expects increased inspection demand as customers adopt high-NA tools, potentially benefiting KLA’s product mix.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) the pace of AI-driven semiconductor investments and their ripple effect on demand for KLA’s process control and advanced packaging tools, (2) the company’s ability to offset tariff impacts and maintain gross margins through operational and pricing strategies, and (3) trends in service revenue growth amid evolving export controls. New product adoption and further market share gains in process control will also be key indicators of execution.

KLA Corporation currently trades at a forward P/E ratio of 25.2×. Is the company at an inflection point that warrants a buy or sell? Find out in our free research report.

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