What drove this quarter’s beat?

  • KLA reported revenue of 4.136 billion dollars for the first quarter of fiscal 2027 ended September 2026, above the market consensus of 4.038 billion dollars. Adjusted earnings per share were 1.22 dollars, also above the consensus of 1.19 dollars.
  • The beat came mainly from equipment products: product revenue was 3.285 billion dollars, up 16% quarter on quarter and 33% year on year, above the consensus of 3.19 billion dollars. Wafer inspection and patterning equipment revenue rose 19% and 18% quarter on quarter, respectively, driven by investment in foundry, logic and DRAM/HBM.
  • Service revenue was approximately 850 million dollars, up 14% year on year and 4% quarter on quarter. A favorable share of service revenue and economies of scale helped overall gross margin reach 62.7%, about 0.2 percentage points above company guidance, despite continued pressure from memory costs.

Can growth continue next quarter, and what constrains margins?

  • The midpoint of the company’s revenue guidance for the second quarter of fiscal 2027 is 4.7 billion dollars, above the market consensus of 4.518 billion dollars. The midpoint of its adjusted earnings per share guidance is 1.44 dollars, above the consensus of 1.35 dollars.
  • The gross margin guidance midpoint is 62.5%, slightly below the market consensus of 62.6%. Product mix, ongoing tariffs and DRAM cost pressure continue to affect gross margin.
  • China revenue increased by 455 million dollars quarter on quarter, and its share of total revenue rose from approximately 26% last quarter to approximately 34%. The company expects that share to decline in the next quarter and in calendar 2027. Over the same period, inventory rose from 3.649 billion dollars to 4.09 billion dollars, while inventory days rose from 238 to 239 days.

Why does management expect to outperform the equipment industry in 2027?

  • KLA management expects the wafer fab equipment market to exceed 200 billion dollars in calendar 2027. Bernstein says this implies market growth of approximately 35%; the firm believes the trend’s continuation depends on data-center construction maintaining its expected pace.
  • New fab space is coming online, spending on advanced logic, DRAM and packaging is rising, and some of KLA’s earlier supply bottlenecks are easing. The growing importance of process control equipment in fab spending also leads management to expect the company to grow faster than the industry; Bernstein therefore estimates that process control equipment revenue growth will far exceed 30%.
  • Service growth has another driver: faster growth in the installed equipment base. The company expects service revenue growth in calendar 2027 to exceed 15%, the upper end of its target model. In advanced packaging, the company reiterated its target of approximately 1.1 billion dollars in process-control-related revenue for calendar 2026, an increase of more than 70% from 635 million dollars in 2025.

Why was the price target cut as earnings forecasts rose?

  • Bernstein raised its KLA revenue forecast for fiscal 2027 from 18 billion dollars to 18.8 billion dollars and its adjusted earnings per share forecast from 5.47 dollars to 5.74 dollars. The company expects quarterly operating expenses in calendar 2027 could increase by at least approximately 40 million dollars, but operating leverage from revenue growth will still drive operating margin expansion.
  • The firm maintained its Outperform rating but cut its price target from 250 dollars to 225 dollars: market valuation compression reduced the fiscal 2028 forward price-to-earnings multiple it uses from approximately 35 times to approximately 30 times, offsetting the effect of its higher earnings forecasts.