KLAC Q3 Deep Dive: AI, Advanced Packaging, and Process Control Drive Growth and Guidance

Semiconductor manufacturing equipment maker KLA Corporation (NASDAQ:KLAC) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 13% year on year to $3.21 billion. Guidance for next quarter’s revenue was better than expected at $3.23 billion at the midpoint, 1.4% above analysts’ estimates. Its non-GAAP profit of $8.81 per share was 2.2% above analysts’ consensus estimates.

Is now the time to buy KLAC? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

KLA Corporation’s third quarter was driven by robust demand in semiconductor process control, with advanced packaging and AI-related infrastructure emerging as primary contributors. Management emphasized strong execution in expanding their service portfolio and capturing share in advanced packaging, particularly as chip designs become more complex. CEO Richard Wallace pointed to “momentum in advanced packaging” and “increased complexity, shorter product cycles, and higher-value wafers” as factors accelerating customer adoption. The company’s process control solutions continued gaining relevance among leading-edge logic and memory customers, further supported by a notable rise in services revenue.

Looking ahead, KLA’s guidance is underpinned by expanding investment in leading-edge logic and memory, particularly high-bandwidth memory (HBM) and advanced packaging, to support AI and premium mobile applications. Management noted that increased process control intensity and broadening customer engagement are shaping next quarter’s outlook. CFO Bren Higgins stated, “Growth in 2025 is being driven principally by increasing investment in both leading-edge foundry/logic and memory to support growing AI and premium mobile demand.” The company expects to outperform the wafer fab equipment (WFE) market, even as it navigates potential headwinds from export controls and a normalization in China demand.

Key Insights from Management’s Remarks

Management attributed the quarter’s growth to surging demand for process control in advanced packaging and AI-driven applications, along with resilient services expansion.

• AI and advanced packaging momentum: KLA saw rapid growth in advanced packaging revenue, driven by increased complexity in semiconductor integration for AI workloads. Management expects advanced packaging-related revenue to exceed $925 million this year, up about 70%.
• Service business resilience: KLA’s services segment expanded 16% year over year, reflecting higher utilization rates and complexity in customer operations. The company highlighted the predictability and recurring nature of this business as a stabilizing factor.
• Process control intensity rising: The shift to more complex chip designs for AI and high-performance computing led to higher demand for inspection and metrology tools. Management cited broader customer engagement and more rigorous process control requirements as drivers.
• China normalization and export controls: While demand from China was elevated in the prior quarter, management expects it to normalize, with additional market access loss from U.S. export controls estimated to impact revenue by $300–$350 million through 2026.
• Capital returns and margin discipline: Strong free cash flow enabled continued dividend growth and share repurchases. Management reiterated its long-term target of 40–50% incremental non-GAAP operating margin leverage on revenue growth, emphasizing manufacturing efficiencies and product mix.

Drivers of Future Performance

KLA’s forward guidance reflects optimism around sustained AI infrastructure spending, growing process control needs in advanced packaging, and a disciplined approach to operating margins.

• Sustained AI and HBM investment: Management expects continued demand for process control tools as customers ramp up investment in high-bandwidth memory and AI data center infrastructure. This trend is driving both leading-edge logic and memory spending.
• Advanced packaging market expansion: The advanced packaging segment is projected to grow more than 20% year over year, creating a new served addressable market for KLA. The company anticipates its share in this area will continue to rise as device integration becomes more complex.
• Export controls and China headwinds: Ongoing export restrictions to certain China customers are expected to impact revenue by up to $350 million through 2026. Management is proactively adjusting business mix and monitoring normalization in China demand to mitigate these effects.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) continued momentum and share gains in advanced packaging, (2) the pace of AI and high-bandwidth memory-related investments by semiconductor manufacturers, and (3) the impact of export controls and the normalization of China demand on KLA’s revenue mix. Progress in expanding service offerings and capturing new customers in advanced logic and memory will also be important signposts for execution.

KLA Corporation currently trades at $1,235, in line with $1,237 just before the earnings. In the wake of this quarter, is it a buy or sell? The answer lies in our full research report (it’s free for active Edge members).

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