KLAC — FY2026 Annual Financial Report Analysis

Revenue up 11.7% on leading-edge AI spending, while China stalls and the reported margin jump is mostly the absence of last year's write-off

KLA makes the inspection and measurement tools chipmakers use to find defects during manufacturing — a category the industry calls "process control." Its fiscal year 2026 ended on June 30, 2026, and the 10-K filed on August 6, 2026 shows total revenue of $13.58 billion, up 11.7% from $12.16 billion, and net income of $4.83 billion, up 18.9%.

The growth came from one place in particular: customers building leading-edge logic and memory chips for artificial-intelligence and high-performance-computing workloads. Management's own words in the discussion of results are that the increase was "primarily driven by higher product revenues resulting from increased leading-edge customer investments in foundry/logic, memory and advanced packaging technologies, supported by strong demand associated with AI and HPC applications." ("Foundry/logic" means contract chip manufacturers and processor makers; "advanced packaging" is the step where finished chips are assembled together into a single component, which matters a lot for AI accelerators.)

Two things complicate the headline. China — historically KLA's single largest market by ship-to location — was flat in dollars and shrank as a share of revenue. And the year-over-year improvement in operating profitability is largely an artifact of a $239.1 million impairment charge that sat in fiscal 2025 and did not repeat.

The numbers

Two notes on how these were derived. Gross margin is the share of revenue left after the direct cost of building and servicing the tools; KLA states it directly (61.3% vs. 60.9%). Operating margin — the share of revenue left after running the whole business, before interest and tax — is not presented as a line item in KLA's income statement, which runs straight from revenue and costs to income before income taxes. The figures above are revenue less cost of revenues, R&D, SG&A and impairment, divided by revenue: $5,660.8M on $13,579.5M for FY2026, and $4,775.1M on $12,156.2M for FY2025.

Per-share figures reflect a ten-for-one stock split KLA effected on June 11, 2026; all share and per-share data in the filing has been restated for it, so the FY2025 comparison is apples-to-apples.

Where the growth came from, and where it didn't

By region (based on where product ships), the year was a story of everywhere-except-China:

Taiwan grew 13.7%, Korea 26.2% (KLA attributes this to "increased investments by memory customers, including investments supporting high-bandwidth memory and advanced DRAM technology roadmaps" — high-bandwidth memory, or HBM, is the stacked memory that sits next to AI accelerators), and North America 29.0%. Japan went the other way, down 19.2% to $915.1M, the only sizeable region to decline.

China's flatness has a specific cause that the filing names: revenue "was comparable to the prior fiscal year, as continued investments in legacy-node technologies by domestic semiconductor companies were largely offset by export control restrictions affecting certain advanced technology transactions." In other words, two forces roughly cancelled — Chinese manufacturers kept buying tools for older, mature chip designs, while US rules restricting sales of advanced equipment capped the other half of the opportunity. The practical consequence is that China's revenue share has now fallen from 42.8% in FY2024 to 33.3% in FY2025 to 29.8% in FY2026. That is de-risking by arithmetic rather than by choice: the denominator grew and China didn't.

Customer concentration went the other way. One customer — named in the filing as Taiwan Semiconductor Manufacturing Company — accounted for roughly 19% of total revenue in both FY2026 and FY2025, up from about 13% in FY2024. International sales were about 87% of revenue, down slightly from 89%.

Segments: one engine, one stall, one repaired loss-maker

KLA reports three segments. Segment revenue excludes corporate allocations and currency effects, so it differs marginally from the consolidated total.

Semiconductor Process Control — the core inspection and metrology business, 90% of revenue — grew 12% on foundry/logic and memory demand, advanced-packaging product adoption, and higher service revenue from a larger installed base of tools. But its profit grew only 9.6%, so its margin slipped about 0.9 points. Cost of revenues rose to 36.4% of segment revenue from 35.8%, and R&D to 11.0% from 10.6%. Growth here is being bought with a slightly heavier cost base, not falling out of operating leverage.

Specialty Semiconductor Process (deposition and etch tools for niche chip types) is the clear soft spot: revenue down 1% and profit down 35%, which KLA attributes to "lower customer investments and reduced product sales in China, mostly offset by higher service revenues." It is small enough — 4% of revenue — not to move the consolidated result, but it is the segment where the China restrictions show up most visibly in profit.

PCB and Component Inspection swung from a $281.2 million loss to a $108.0 million profit. Most of that swing is the impairment: FY2025 included a $239.1 million goodwill and purchased-intangibles write-down after KLA concluded the long-term outlook for its printed-circuit-board business had deteriorated. Stripping that one-off out, FY2025 segment profit would have been roughly −$42 million, so the underlying improvement is about $150 million — real, but less than half the headline swing. The improvement itself came from advanced-packaging demand and higher service revenue, partly offset by the absence of the Display business KLA exited in the prior year.

Margins: read the underlying number, not the reported one

Gross margin improved 0.4 points, and KLA breaks down exactly why: +0.5 pt from revenue volume (spreading fixed manufacturing costs over more sales), −0.2 pt from product and service mix, +0.2 pt from manufacturing labor and efficiency, and −0.1 pt from other service and manufacturing costs. That last bucket is where the pressure sits: it "included higher installation and warranty costs and increased costs due to tariffs, partially offset by lower inventory-related charges."

The 2.4-point improvement in operating margin is more flattering than the business deserves. Excluding FY2025's $239.1 million impairment, comparable FY2025 operating profit was $5,014.2M, or 41.3% of revenue — so the like-for-like margin gain is about 0.4 points, not 2.4. Operating expenses grew faster than revenue in percentage terms only modestly: R&D rose 13% to $1,532.1M (driven by $124.8M more in employee costs and $36.0M in engineering project materials) and SG&A rose 10% to $1,131.5M (employee costs $35.9M, facilities $23.9M, credit-loss provisions $22.7M). Both held flat as a share of revenue at 11% and 8% respectively.

Below the operating line, interest expense fell to $284.4M from $302.2M and net other income rose to $229.6M from $171.5M, together adding roughly $76 million to pre-tax income. The effective tax rate — the share of pre-tax profit actually paid in tax — rose to 13.8% from 12.5%, mostly because a smaller proportion of earnings landed in low-tax jurisdictions and less US income qualified for the export-related FDDEI deduction. That 1.3-point increase is why net income grew 18.9% while pre-tax income grew 20.7%.

Diluted EPS grew faster still, 20.4%, because $2.29 billion of buybacks took the diluted share count down about 1.3% to 1,319.6 million.

Takeaway: Strip out the FY2025 impairment and KLA's operating margin improved about 0.4 points, not the 2.4 points the reported numbers suggest — the real FY2026 story is volume growth from AI-driven leading-edge investment in Taiwan, Korea and North America carrying a business whose largest single region (China, 29.8% of revenue) has stopped growing under export controls and whose largest single customer now supplies ~19% of revenue.

Cash, capital returns and the balance sheet

Cash from operations was $4.14 billion, essentially flat against $4.08 billion despite 19% higher net income. The filing explains the gap: about $1.2 billion more collected from customers and $136 million less paid in taxes, offset by about $1.1 billion more paid to suppliers and $213 million more in employee-related payments. After $375.9 million of capital spending, free cash flow works out to roughly $3.77 billion.

KLA returned $2.29 billion via buybacks and $1.06 billion in dividends — $3.35 billion, about 89% of that free cash flow. The quarterly dividend was raised to $0.230 per share in the third quarter of fiscal 2026 (the 17th consecutive annual increase), and $9.74 billion of repurchase authority remained at year-end after the board added $7.00 billion. Cash and marketable securities ended at $4.90 billion against $5.89 billion of long-term debt.

Two working-capital items deserve attention. Accounts receivable rose 28% to $2,889.2M — more than twice the rate of revenue growth — and a new $180.7 million of long-term accounts receivable appeared where there was none in either of the prior two years. Both point to payment terms stretching. Inventories rose 13.6% to $3,648.5M, roughly in line with revenue.

Deferred revenue (contract liabilities — money billed or collected for tools and services not yet recognized as revenue, a rough indicator of work already committed) rose only 3.6% to $1,775.1M, well behind the 11.7% revenue growth. It is not a backlog figure, but it is not signalling acceleration either.

What to watch into fiscal 2027

Management's own forward statement in the filing is brief and unquantified: "Looking ahead to fiscal year 2027, we expect continued revenue growth as customer engagement and demand signals continue to strengthen." No revenue or margin guidance is given in the 10-K. Three specific pressures the filing does quantify or name:

• DRAM component costs. A few large suppliers discontinued certain DRAM chips used in KLA's own products, and the resulting shortage "caused a dramatic increase in the prices to acquire these chips." KLA states plainly that it expects the additional procurement cost "will continue to have an adverse impact on our gross margin in fiscal 2027." This also drove purchase commitments up to approximately $5.97 billion at year-end, most due within twelve months — a real call on working capital.
• Tariffs, with an unusual legal wrinkle. US tariffs already raised cost of revenues by increasing the cost of imported components for US-built tools, and KLA notes it has had to return customer deposits on cancelled orders. Separately, the filing records that in February 2026 the US Supreme Court ruled tariffs imposed under the International Emergency Economic Powers Act were not authorized, "creating uncertainty around the status of prior tariffs, potential refund processes and the scope of future presidential tariff authority" — an unresolved item that could cut either way. A Section 232 national-security investigation covering semiconductor manufacturing equipment, opened in April 2025, was still unresolved.
• Export controls on China. These already neutralized the growth in KLA's largest region this year. The ceiling stays where it is until the rules change.

The balance of evidence points to slower growth than FY2026's 11.7% unless leading-edge spending accelerates further: the growth is concentrated in a small number of very large customers whose capital plans move in steps, deferred revenue is not building, and gross margin faces a named cost headwind. The offsetting support is structural — service revenue, now 23% of the total and growing 16%, comes from recurring contracts tied to a growing installed base of tools and does not swing with new equipment orders. That is the part of KLA's revenue that cushions the next downturn in the notoriously cyclical equipment market.