KLAC • 10-K • FY 2025 • Positive

KLA's Record Year: 24% Revenue Surge Driven by AI Chip Testing Demand

August 08, 2025 • 1 min read

TL;DR

KLA delivered exceptional FY2025 performance with revenues jumping 24% to $12.2B and net income surging 47% to $4.1B. Product revenue grew 27% YoY to $9.5B, reflecting strong demand for semiconductor process control systems amid AI chip production ramp. Despite taking a $239M goodwill impairment charge, operating margins expanded 380bps to 39.2%. The company's strategic focus on advanced node inspection positions it well for continued AI-driven semiconductor expansion.

Financial Performance Overview: Revenue growth accelerated to 24% YoY, reaching $12.2B with product revenue up 27% and services up 15%. Gross margins expanded 110bps to 60.9% despite supply chain pressures. Operating income grew 46% to $4.8B excluding impairment charges, demonstrating strong operational leverage. Working capital management improved with DSO decreasing from 89 to 82 days. The company maintains an industry-leading operating model with 39.2% operating margins.
Strategic Initiatives and Operational Changes: KLA increased R&D investment by 6.4% to $1.36B (11.2% of revenue) focused on AI-enabled inspection capabilities. The company took a strategic $239M impairment charge related to legacy products while shifting resources to advanced node technologies. Management expanded manufacturing capacity 15% YoY while improving factory utilization rates. New product introductions in advanced packaging inspection are gaining traction with major logic and memory customers.
Market Position and Competitive Dynamics: KLA maintained over 50% market share in process control, extending its technology leadership in advanced node inspection. Customer concentration increased with top 3 customers representing 42% of revenue vs 38% last year. The company won 85% of competitive evaluations for leading-edge tools. Services penetration increased with 75% of installed base now under service contracts vs 71% prior year.
Operational Efficiency and Profitability: Operating leverage drove 380bps margin expansion despite inflationary pressures. Factory automation initiatives reduced labor costs by 12% per unit produced. Inventory turns improved to 2.8x from 2.4x through supply chain optimization. Service gross margins reached record 62.3% driven by remote support capabilities. Free cash flow conversion remained strong at 85% of net income.
Growth Catalysts and Material Risks: AI chip demand and advanced packaging trends provide strong growth visibility into FY2026. Geographic revenue concentration in Taiwan (38%) and China exposure (29%) present key risks. Customer capex timing and potential export controls could impact near-term results. New EUV adoption and 2nm/3nm ramps create expansion opportunities. Management expects 15-20% growth in FY2026 driven by AI-related investments.

Revenue

$12.16B ( YoY) with product revenue $9.47B () and services $2.68B ()

↑ +24%

Rd Spend

$1.36B ( YoY) at of revenue

↑ +6.4%

Net Income

$4.06B ( YoY) with net margin

↑ +47%

Gross Margin

(+110bps YoY) driven by pricing and mix

↑ 60.9%

Free Cash Flow

$3.45B ( YoY) with conversion rate

↑ +42%

Operating Margin

(+380bps YoY) excluding impairment charges

↑ 39.2%

Growth Indicators

$11.2B ( YoY)

↑ +18%

Customer Count ↑Top 3 customers 42% of revenue (+400bps YoY)

Services Penetration ↑75% of installed base (+400bps YoY)

Key Risks

Taiwan concentration (38% revenue) poses geopolitical risk
China exposure (29% revenue) vulnerable to export controls
Customer concentration increasing to 42% from top 3
Technology transition timing could impact near-term demand

Key Opportunities

AI chip inspection requirements driving complexity and ASPs
Advanced packaging adoption creating new applications ($5B+ TAM)
EUV expansion increasing process control intensity
Services penetration upside from 75% to target 85%

Bottom Line

KLA delivered exceptional FY2025 results driven by strong execution and favorable market conditions. The company's dominant position in advanced node inspection positions it well for continued AI-driven semiconductor expansion. While geographic concentration and customer capex timing present near-term risks, the long-term growth trajectory remains compelling. Key metrics to watch include services penetration, advanced packaging adoption, and China exposure evolution. Management's strategic shift toward leading-edge technologies should sustain competitive advantages despite increasing competition in mature segments.