J.P. Morgan: KLA beats expectations on results and guidance as longer equipment lead times reflect stronger process inspection demand

Where did results and next-quarter guidance exceed expectations?

KLA reported revenue of 4.136 billion dollars in the first quarter of fiscal 2027, up 13.1% sequentially and above both its prior guidance midpoint of 4 billion dollars and market expectations of approximately 4.04 billion dollars. Investment in advanced foundry and logic chips, DRAM inspection demand and advanced packaging all contributed to growth.
The company expects revenue of 4.7 billion dollars, plus or minus 200 million dollars, for its second fiscal quarter ending in December 2026. The midpoint is about 14% above the prior quarter and exceeds market expectations of approximately 4.52 billion dollars. The midpoint of adjusted earnings per share guidance is 1.44 dollars, also above market expectations of 1.35 dollars.
Management raised its expected revenue growth for the second half of 2026 relative to the first half from about 20% to about 25%, citing improved availability of long-lead-time components and continued strong customer demand.

Management raised its forecast for global wafer fab equipment spending, including advanced packaging, in 2027 from approximately 190 billion dollars last quarter to more than 200 billion dollars; it also raised its 2026 forecast to around 155 billion dollars. Investment in new fabs and upgrades to advanced logic and DRAM processes are the main drivers.
The more complex chip manufacturing becomes, the greater the need for defect inspection and measurement at critical process steps. The company believes advanced process transitions, new DRAM fabs, more intensive inspection and advanced packaging will support revenue growth in 2027 exceeding the growth in equipment spending.
Revenue from advanced packaging process control systems is expected to be approximately 1.1 billion dollars in 2026, up more than 70% year over year. Following discussions with management, JPMorgan expects foundry and logic to account for about 60% of 2027 revenue and memory for about 40%, with the two businesses growing more than 30% and more than approximately 60% year over year, respectively.

The company's order backlog continues to grow, average equipment lead times are around 12 months and still increasing, and customers are requesting earlier deliveries. Management expects revenue to continue growing sequentially over the next several quarters as additional supply becomes available, but customer fab readiness and long-lead-time components may still limit the pace of shipments.
Adjusted gross margin was 62.7% in the first fiscal quarter, while operating margin was 46.1%, up 2.4 percentage points sequentially. Management expects operating expenses to grow significantly more slowly than revenue as scale increases.
Higher sales volumes and pricing for new products and features support gross margin, but relatively high memory costs and a rising share of non-semiconductor process control business will exert pressure. Management believes gross margin can approach the long-term model midpoint of 63.5%, particularly in the second half of 2027 and in 2028.

JPMorgan raised its fiscal 2027 adjusted earnings per share forecast from 5.47 dollars to 5.74 dollars and maintained its Overweight rating; it raised its price target from 238 dollars to 240 dollars.
The price target applies a valuation multiple of approximately 34 times to the bank's estimated exit earnings power of 7.10 dollars per share at the end of 2027. The multiple is above current trading levels for large semiconductor equipment companies and reflects the bank's assessment of improving industry equipment spending and KLA's own growth prospects.