# How KLA makes money

CXProWealth Business Lens · KLA (KLAC) · Q1 FY2027

Read from the 10-Q for the period 2026-07-01 to 2026-09-30, filed 2026-10-29 with the SEC (accession 0000319201-26-000034): https://www.sec.gov/Archives/edgar/data/319201/000031920126000034/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $4.1B (+28.9% on the year)
- Operating income: — (operating margin —)
- Net income: $1.5B (net margin 37.4%)
- Gross margin: 61.9%
- Free cash flow: $1.3B (32.3% of revenue)
- Cash conversion (operating cash flow / net income): 0.99x
- Capital expenditure: 4.7% of revenue

## Where the money goes (Q1 FY2027)

- Wafer Inspection → Total revenues: $2.1B
- Patterning → Total revenues: $862.5M
- Specialty Semiconductor Process → Total revenues: $113.6M
- PCB and Component Inspection → Total revenues: $167.5M
- Services → Total revenues: $850.5M
- Other → Total revenues: $30.7M
- Total revenues → Costs of revenues: $1.6B
- Total revenues → Gross profit: $2.6B
- Gross profit → Research and development: $395.1M
- Gross profit → Selling, general and administrative: $301.5M
- Gross profit → Interest expense: $67.9M
- Gross profit → Income before income taxes: $1.8B
- Other expense (income), net → Income before income taxes: $30.3M
- Income before income taxes → Provision for income taxes: $275.5M
- Income before income taxes → Net income: $1.5B

## Where the revenue comes from

### Products and services (SEGMENT REPORTING AND GEOGRAPHIC INFORMATION - Revenue from External Customers by Products and Services (Details))

| Member | Value | Share |
|---|---:|---:|
| Wafer Inspection | $2.1B | 51.0% |
| Patterning | $862.5M | 20.9% |
| Services | $850.5M | 20.6% |
| PCB and Component Inspection | $167.5M | 4.1% |
| Specialty Semiconductor Process | $113.6M | 2.7% |
| Other | $30.7M | 0.7% |

The members sum to total revenue.

### Segments (SEGMENT REPORTING AND GEOGRAPHIC INFORMATION - Summary of Results for Reportable Segments (Details))

| Member | Value | Share |
|---|---:|---:|
| Semiconductor Process Control | $3.8B | 90.8% |
| PCB and Component Inspection | $242.2M | 5.9% |
| Specialty Semiconductor Process | $139.5M | 3.4% |

The members sum to total revenue.

### Regions (SEGMENT REPORTING AND GEOGRAPHIC INFORMATION - Schedule of Revenue from External Customers (Details))

| Member | Value | Share |
|---|---:|---:|
| North America | $618.0M | 14.9% |
| Rest of Asia | $218.2M | 5.3% |
| Europe and Israel | $194.3M | 4.7% |

The members do not sum to total revenue.

### ConsolidationItems (SEGMENT REPORTING AND GEOGRAPHIC INFORMATION - Reconciliation of Total Reportable Segments Revenue to Total Revenue (Details))

| Member | Value | Share |
|---|---:|---:|
| Total revenues for reportable segments | $4.1B | 100.0% |
| Effects of changes in foreign currency exchange rates | $123.0K | 0.0% |

The members sum to total revenue.

## Income statement, as filed

| Line | Q1 FY2027 | Of revenue |
|---|---:|---:|
| Total revenues | $4.1B | 100% |
|   Product | $3.3B | 79.4% |
|   Service | $850.5M | 20.6% |
| Costs of revenues | $1.6B | 38.1% |
| Research and development | $395.1M | 9.6% |
| Selling, general and administrative | $301.5M | 7.3% |
| Interest expense | $67.9M | 1.6% |
| Other expense (income), net | ($30.3M) | 0.7% |
| **Income before income taxes** | $1.8B | 44.1% |
| Provision for income taxes | $275.5M | 6.7% |
| **Net income** | $1.5B | 37.4% |
| Basic (in dollars per share) | $1 | 0.0% |
| Diluted (in dollars per share) | $1 | 0.0% |
| Basic (in shares) | 1,305,330,000 |  |
| Diluted (in shares) | 1,311,064,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2009 | $1.5B | -$577.9M | -$523.4M | $195.7M | $22.2M | $173.5M |
| FY2010 | $1.8B | $314.2M | $212.3M | $447.8M | $30.2M | $417.6M |
| FY2011 | $3.2B | $1.2B | $794.5M | $823.2M | $51.2M | $772.0M |
| FY2012 | $3.2B | $1.0B | $756.0M | $941.6M | $57.6M | $884.0M |
| FY2013 | $2.8B | $729.7M | $543.1M | $913.2M | $74.6M | $838.6M |
| FY2014 | $2.9B | $772.1M | $582.8M | $778.9M | $67.5M | $711.4M |
| FY2015 | $2.8B | — | $366.2M | $605.9M | $45.8M | $560.1M |
| FY2016 | $3.0B | — | $704.4M | $759.7M | $31.7M | $728.0M |
| FY2017 | $3.5B | — | $926.1M | $1.1B | $38.6M | $1.0B |
| FY2018 | $4.0B | — | $802.3M | $1.2B | $66.9M | $1.2B |
| FY2019 | $4.6B | — | $1.2B | $1.2B | $130.5M | $1.0B |
| FY2020 | $5.8B | — | $1.2B | $1.8B | $152.7M | $1.6B |
| FY2021 | $6.9B | — | $2.1B | $2.2B | $231.6M | $2.0B |
| FY2022 | $9.2B | — | $3.3B | $3.3B | $307.3M | $3.0B |
| FY2023 | $10.5B | — | $3.4B | $3.7B | $341.6M | $3.3B |
| FY2024 | $9.8B | — | $2.8B | $3.3B | $277.4M | $3.0B |
| FY2025 | $12.2B | — | $4.1B | $4.1B | $335.3M | $3.7B |
| FY2026 | $13.6B | — | $4.8B | $4.1B | $375.9M | $3.8B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +11.7% (year before +23.9%): slowing
- Operating income: +5.8% (year before -28.2%): accelerating
- Net income: +18.9% (year before +47.1%): slowing
- Free cash flow: +0.5% (year before +23.6%): slowing

## Operating figures stated in the filing

- Services share of total revenues: 20.0% (as of 2026-09-30). "In addition, our services business has grown consistently year-over-year and accounted for approximately 20% of our total revenues in the first quarter of fiscal 2027." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Largest customer share of total revenues: 21.0% (as of 2026-09-30). "In the three months ended September 30, 2026, two customers accounted for approximately 21 % and 13 % of total revenues each." (Item 1. FINANCIAL STATEMENTS)
- Largest customer share of total revenues: 15.0% (as of 2025-09-30). "In the three months ended September 30, 2025, three customers accounted for approximately 15 %, 11 %, and 10 % of total revenues each." (Item 1. FINANCIAL STATEMENTS)
- Second-largest customer share of total revenues: 13.0% (as of 2026-09-30). "In the three months ended September 30, 2026, two customers accounted for approximately 21 % and 13 % of total revenues each." (Item 1. FINANCIAL STATEMENTS)
- Second-largest customer share of total revenues: 11.0% (as of 2025-09-30). "In the three months ended September 30, 2025, three customers accounted for approximately 15 %, 11 %, and 10 % of total revenues each." (Item 1. FINANCIAL STATEMENTS)

## Key insights

### Defect inspection now brings in half of revenue

Wafer Inspection grew 37.34% to $2.11B and now makes 51.04% of revenue, so leading-edge defect finding carries KLA's growth.

Wafer Inspection revenue was $2.11B in the quarter, up 37.34% from a year earlier, against total revenue growth of 28.86%. Its share of revenue rose 3.15 points to 51.04%. Patterning, the other core product line, grew 29.22% to $862.5M and held its share at 20.85%. Both sit inside Semiconductor Process Control, which brought in 90.77% of segment revenues. _(from the filing)_
The filing attributes the growth to "higher demand from leading-edge customers in memory, advanced packaging, and foundry/logic technologies", and says leading-edge nodes are "increasing process complexity and process control intensity". It names EUV adoption in logic and DRAM, including high-bandwidth memory, as a long-term driver that is "expanding our served market". _(from the filing)_
Analysis: each new node adds process steps and shrinks features, so a chipmaker needs more inspection per wafer, not only more wafers. That ties KLA's growth more closely to how fast customers move to new nodes than to how many chips are sold in a given quarter. _(analysis)_
The flip side is a narrower base of growth. Services grew 14.21% and Specialty Semiconductor Process 13.35%, both well below the total, so the steadier lines lost share: services fell 2.64 points to 20.56% of revenue. _(from the filing)_

### Research costs grew a third as fast as sales

Revenue rose 28.86% while research rose 9.61%, so income before taxes grew 39.3% and reached 44.1% of revenue, up 3.3 points.

Research and development was $395.1M, up 9.61%, and selling, general and administrative $301.5M, up 12.07%, against revenue growth of 28.86%. Their shares of revenue fell 1.68 and 1.09 points, to 9.55% and 7.29%. Income before income taxes rose to $1.82B from $1.31B. _(from the filing)_
Most of the margin gain came below gross profit. Gross margin rose only 0.58 points, to 61.85%, while the two expense lines shrank by 1.68 and 1.09 points of revenue. The filing attributes the rise in research spending mainly to higher headcount and compensation, and the statements report no separate operating income line. _(from the filing)_
Net income grew a little slower, 38.14% to $1.55B, because the tax provision rose 46.2% to $275.5M. The effective rate was 15.1% against 14.4% a year earlier, which the filing attributes to the Undertaxed Profits Rule under the OECD's Pillar Two minimum tax. _(from the filing)_
The leverage runs both ways. In FY2024, annual revenue fell to $9.81B from $10.50B, and net income fell further, to $2.76B from $3.39B. The filing says the company must continue to make "substantial and focused investments" in research. _(from the filing)_

### Capital spending doubled, and cash still matched profit

Operating cash flow of $1.53B was 98.9% of net income while capital spending doubled, so the quarter funded its own expansion.

Capital expenditure was $194.8M, 4.71% of revenue, up from $95.9M a year earlier, as the company plans to "expand manufacturing capacity and increase production levels to meet customer demand". Free cash flow was still $1.34B, 32.3% of revenue. _(from the filing)_
The filing attributes the rise in operating cash flow mainly to higher customer collections driven by higher shipments, partly offset by larger payments to suppliers. Inventories and receivables both grew in the quarter and used cash, so the match with profit came despite a working capital build. _(from the filing)_
The quarter closes a gap from the last fiscal year. In FY2026, operating cash flow of $4.14B was 85.8% of net income of $4.83B, and free cash flow of $3.77B was 78.0% of it. In FY2025, operating cash flow of $4.08B roughly matched net income of $4.06B. _(from the filing)_
Analysis: the filing also says the company increased purchase commitments to secure key components. If inventory keeps building faster than shipments, cash conversion could slip back toward last year's level; if the build turns into deliveries and collections, it supports the cash behind buybacks and dividends. _(analysis)_

### Competitive edge

- **Harder chips need more inspection per wafer** The filing ties demand to rising process control intensity at leading-edge nodes, where KLA's core segment brings in 90.77% of segment revenues.
- **Installed tools turn into recurring service revenue** Services of $850.5M grew 14.21% from mostly subscription-like contracts, a layer tied to installed tools rather than new orders.
- **Gross profit funds a large research budget** Research spending of $395.1M took 15.4% of $2.56B gross profit, funding the lead the filing says success depends on.

### What to watch

- **The largest customer's share rose to 21%** Two customers accounted for about 21% and 13% of revenue, against 15% and 11% for the two largest a year earlier.
- **China demand sits under evolving export rules** The filing ties China growth to mature-node foundry and logic customers, where evolving US export rules affect what the company can sell.
- **Operating leverage reverses when chipmakers pause spending** Product revenue follows orders and delivery timing, and the fixed research costs that lifted margins this quarter could weigh on them in a downturn.

## Investor view

**Wafer inspection reached 51.0% of KLA's revenue as leading-edge chipmakers bought more defect-finding tools**

### How it makes money

KLA sells the inspection and metrology tools chipmakers use to "measure, detect, analyze and resolve critical nanometer-scale product defects", so their factories reach "higher yields at lower cost". Product sales were $3.29B of the quarter's $4.14B in total revenues, or 79.4%. The rest, $850.5M, was service. _(from the filing)_
Semiconductor Process Control is the core: $3.75B, or 90.8% of segment revenues. Inside it, Wafer Inspection brought in $2.11B and Patterning $862.5M. The two smaller segments, Specialty Semiconductor Process at $139.5M and PCB and Component Inspection at $242.2M, sell deposition and etch tools to specialty chipmakers, and inspection and imaging tools to makers of circuit boards and advanced packages. _(from the filing)_
Service is the second engine. It comes "largely from recurring 'subscription-like' contracts" for maintenance that keeps installed tools running, and the filing says its size is "typically a function of the number of systems installed at our customers' sites and the utilization of those systems". Services were $850.5M in the quarter, about 20% of total revenues by the company's own count, up 14.21% from $744.7M a year earlier. _(from the filing)_
After costs of revenues of $1.58B, research and development took $395.1M, or 9.55% of revenue, and selling, general and administrative $301.5M, or 7.29%. Interest expense was $67.9M. That left income before income taxes of $1.82B, 44.1% of revenue: a large engineering budget carried by a much larger gross profit of $2.56B. _(from the filing)_

### What shifted

Revenue reached $4.14B, up from $3.21B a year earlier and from $3.66B in the prior quarter. The filing gives one reason for both comparisons: "higher demand from leading-edge customers in memory, advanced packaging, and foundry/logic technologies, supported by continued data center investment and the adoption of AI and HPC semiconductor devices". _(from the filing)_
The mix moved toward the defect-finding tools. Wafer Inspection grew 37.34% to $2.11B, and its share of revenue rose 3.15 points to 51.04%. Patterning grew 29.22%, holding its share at 20.85%. PCB and Component Inspection grew fastest, 42.81% to $167.5M, which the filing ties to advanced packaging. Services grew 14.21%, so their share of revenue fell 2.64 points to 20.56%. _(from the filing)_
Costs grew more slowly than sales. Research and development rose 9.61% and selling, general and administrative 12.07%, against revenue growth of 28.86%, so their shares of revenue fell 1.68 and 1.09 points. Income before income taxes rose 39.3% to $1.82B and reached 44.1% of revenue, up 3.3 points. _(from the filing)_
Gross margin rose 0.58 points. The filing's bridge from a year earlier credits revenue volume and manufacturing efficiencies, and charges the "mix of products and services sold" and other service and manufacturing costs, which include "the impact of tariffs". It adds that higher headcount costs were partly offset by spreading overhead over higher manufacturing volumes. _(from the filing)_
Net income rose 38.14% to $1.55B, a little slower than pre-tax income, because the tax provision grew 46.2% to $275.5M. The effective rate was 15.1% against 14.4% a year earlier, which the filing attributes to the Undertaxed Profits Rule under the OECD's Pillar Two minimum tax. Diluted earnings per share rose to $1.18 from $0.85 as diluted shares fell to 1.311 billion from 1.324 billion. _(from the filing)_

### Risks in the filing

Export rules and trade. The company lists "evolving Bureau of Industry and Security" rules as a risk to its ability to sell products to, and service, certain customers in China, alongside tariffs, retaliatory trade measures and uncertainty over tariff refunds. It says government regulations and tariffs "have impacted our results of operations and may continue to do so". _(from the filing)_
Concentration and the cycle. It names "a highly concentrated customer base" and "the cyclicality of the industries in which we operate". In the quarter, two customers accounted for about 21% and 13% of total revenues, against about 15% and 11% for the two largest a year earlier. _(from the filing)_
The technology lead. The one risk factor updated in this report is about protecting it. The company says larger competitors may design around its patents, that collaborations with customers and suppliers are key to some research projects and their end could "significantly impair" that work, and that advances in AI may make misuse of its intellectual property harder to detect. _(from the filing)_
Supply. It names limited-source suppliers, "the availability of rare earth elements" and "DRAM chip shortages" as risks to the cost and supply of components, and says it has "increased our purchase commitments, in part to secure the supply of key components", which may change the timing and size of its costs and working capital needs. _(from the filing)_
Of these, concentration is already in the numbers: fewer customers carry the quarter and the largest carries more of it. The cycle is visible in the annual history, where revenue and profit fell in one year before the current climb. The trade and supply risks show only indirectly, in the mix and other-cost charges the filing sets against gross margin. _(analysis)_

## Founder view: mechanisms

### Pricing on the customer's yield

KLA does not sell machine time. It sells the value of finding a defect before it ruins a lot of wafers. At the leading edge a lost lot costs the chipmaker far more than an inspection tool, so the tool is priced against the customer's yield, not against KLA's cost to build it. Each new process generation adds steps and shrinks features, which multiplies the places a defect can hide, and the inspection budget grows with it. _(analysis)_

### Every tool sold becomes a service contract

Each system shipped stays in a customer's factory for many years and needs maintenance, parts and upgrades to stay productive. KLA turns that installed base into recurring contracts it calls subscription-like. Product sales swing with customers' capital budgets; service revenue swings much less, because a factory running at any level still needs its tools working. _(analysis)_

### Fixed engineering cost, variable revenue

Most of KLA's cost of staying ahead is engineering, set by the product roadmap rather than by the number of tools sold in a quarter. When demand rises, revenue grows faster than research and overhead, and a large part of each extra dollar of sales reaches profit. The same leverage cuts the other way in a downturn, and the filing says the company must keep making "substantial and focused investments" in research regardless. _(analysis)_

### Light capital needs, cash returned

KLA's tools are high-value, low-volume products built partly from precision parts bought from suppliers. That keeps the company's own capital spending small next to its sales, so most profit can become free cash. The company returns much of it through buybacks and dividends, which shrinks the share count and lets earnings per share grow at least as fast as net income. _(analysis)_

## Member research

Signed-in members read, on the page: what KLA's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- KLA 10-Q for the period to 2026-09-30: https://www.sec.gov/Archives/edgar/data/319201/000031920126000034/ (2026-10-29)
- KLA Corporation Reports Fiscal 2027 First Quarter Results: https://ir.kla.com/news-events/press-releases/detail/523/kla-corporation-reports-fiscal-2027-first-quarter-results (2026-10-28)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02