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SEC filingKLA's Q2 FY26 revenue grew 7% YoY to $3.30B, with gross margin expansion to 61.4%, driven by service growth and memory investments.
For the three months ended December 31, 2025, KLA reported total revenues of $3.30 billion, up 7% year-over-year from $3.08 billion. The growth was driven by a 4% increase in product revenues and an 18% surge in service revenues, reflecting expansion of the installed base. Gross margin improved to 61.4% from 60.3% in the prior year, attributed to favorable product mix (0.4%), manufacturing efficiencies (0.2%), and lower inventory charges (0.4%) partially offset by tariff impacts. Operating income rose to $1.36 billion (41.3% margin) compared to $1.24 billion (40.3% margin) in the prior year. Net income jumped 39% to $1.15 billion, but the prior year included a $239.1 million goodwill impairment charge. Diluted EPS grew to $8.68 from $6.16.
By segment, Semiconductor Process Control revenues increased 9% YoY to $3.00 billion, benefiting from memory (especially DRAM) and advanced packaging investments. Specialty Semiconductor Process revenues declined 12% to $0.14 billion due to lower shipments to Chinese customers amid export controls. PCB and Component Inspection revenues fell 6% to $0.15 billion, largely from the exit of the Display business, partially offset by advanced packaging growth. Geographically, China revenue dropped 9% due to trade restrictions, while Korea and North America saw strong gains of 34% and 38%, respectively.
Management expects continued revenue growth in calendar 2026, but warns that escalating costs for DRAM chips used in image computers may negatively impact gross margins. The company continues to invest in R&D (up 11% YoY) to support leading-edge and AI-driven demand. KLA also returned $547.8 million in share repurchases and $249.7 million in dividends during the quarter. No specific quantitative guidance was provided for future periods.
As of December 31, 2025, KLA held $2.45B in cash and equivalents and $2.76B in marketable securities, totaling $5.21B in liquid assets. Long-term debt stood at $5.89B (fair value $5.55B), with no borrowings under the $1.5B revolving credit facility. Stockholders' equity was $5.47B, giving a debt-to-equity ratio of 1.08x. Inventory increased to $3.28B, while deferred revenue (contract liabilities) was $1.73B, of which $1.46B is expected to be recognized within 12 months.
The company disclosed $2.75B in significant purchase commitments as of December 31, 2025, primarily for inventory, services, and capital expenditures, with the majority due within one year. Additionally, $132.2M in guarantees were issued under $164.7M available arrangements. A virtual power purchase agreement entered in January 2025 had no material current impact. Factoring agreements sold $176.8M in receivables during the six-month period.
During the six months ended December 31, 2025, KLA repurchased 1.08M shares for $1.10B, leaving $3.94B in authorization remaining (a $5.0B increase was added in Q4 FY2025). Dividends totaled $503.7M ($1.90 per share quarterly, up 11.8% YoY). Capital expenditures were $201.5M (3.1% of sales). No debt was issued or repaid. The company also paid $86.8M for tax withholding on vested RSUs.
Segment revenue and profitability for Q2 FY2026: Semiconductor Process Control generated $3.00B revenue (+9.0% YoY) with a 44.6% operating margin; Specialty Semiconductor Process $140.6M (-12.4% YoY) at 7.6% margin; PCB and Component Inspection $152.2M (-5.5% YoY) at -1.6% margin. Geographically, China accounted for 30.2% of total revenue, Taiwan 25.6%, Korea 14.5%, North America 12.0%, Japan 6.9%, Rest of Asia 5.9%, and Europe/Israel 4.9%. Major product categories: Wafer Inspection 48%, Patterning 21%, Services 24%.
Operating cash flow (CFO) of $2,529M significantly exceeded net income of $2,267M, indicating strong cash generation. The CFO-to-net-income ratio was 1.12x, largely due to non-cash charges (depreciation & amortization $196M, stock-based compensation $144M) and favorable working capital movements, particularly a $179M decrease in accounts receivable.
Capex of $201M represented a 32% increase YoY, driving a capex intensity (capex/CFO) of 8.0%, up from 8.3% in the prior period. Though FCF is not explicitly stated, CFO less capex yielded ~$2,328M, comfortably covering capital returns of $1,597M (share repurchases $1,093M + dividends $504M), implying a payout ratio of 63% of CFO-less-capex.
Investing activities used $523M, driven by net purchases of available-for-sale securities and trading securities. Financing activities used $1,629M, primarily for share repurchases and dividends. Supplemental disclosures highlight income taxes paid of $403M and interest paid of $139M, both in line with prior periods.
An anomaly worth noting: accounts receivable decreased sharply ($179M) after a large increase in the prior year ($486M), signaling improved collection efficiency. Also, deferred revenue changes were mixed, with system revenue up $41M but service revenue down $27M. Overall, cash flow quality remains solid with ample operating cash generation to fund investments and shareholder returns.