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KLA Corporation (KLAC +3%) crushes earnings and sales estimates in Q2 (Dec), reflecting another quarter of accelerating AI-related demand. The energetic pace of AI is not expected to slow in 2025 either, supporting KLAC's upbeat Q3 (Mar) guidance, projecting EPS and revenue above consensus for the first time in two years.

• KLAC posted adjusted EPS of $8.20 in Q2, a healthy 33% jump yr/yr. Gross margins ended 2024 at 61%, over 10 pts higher than some of the company's closest peers, such as ASML (ASML) and Lam Research (LRCX), reflecting sustained demand for KLAC's Services business. Revenue growth accelerated to 23.7% yr/yr to $3.08 bln from +18.5% in Q1 (Sep), illuminating the several growth drivers taking center stage in 2024, including increased investments in AI, high-performance computing, and advanced packaging.
• Part of Q2 took a hit from the most recent U.S. government-imposed export controls released in December. The restrictions targeted China, which KLAC estimated will have a roughly $400-600 mln impact on 2025 revenue. As KLAC looks at 2025, it anticipates sales contribution from China to move from 41% of overall revenue to around 27-31%.
• However, global AI demand offset this headwind, remaining a critical catalyst for KLAC. Management touched on the recent revelations of the China-based AI company DeepSeek, which touted performance on par with the best U.S.-based models despite training at a fraction of the cost. KLAC noted that its experience supports the theory that higher compute efficiency enables greater adoption of AI. As such, it sees no reason to believe that increased efficiency will adversely impact the demand environment for the foreseeable future.
• Investments in AI and high bandwidth memory, alongside a strengthening supply/demand backdrop, is positioning the wafer fab equipment (WFE) industry for growth in 2025. KLAC aligned its WFE spending forecast with LRCX, expecting modest growth from the mid-$90 bln reached in 2024. For reference, LRCX projected over $100 bln in WFE spending this year. As such, KLAC issued a bullish view of the first quarter in 2025, anticipating Q3 adjusted EPS of $7.45-8.65 and revs of $2.85-3.15 bln, a 27% improvement yr/yr at the midpoint.

KLAC's Q2 performance mirrored the DecQ numbers of its peers ASML and LRCX this week. As such, a lot of what KLAC reported was priced as shares moved around +5% higher over the past two days, keeping today's reaction less enthusiastic than the responses ASML and LRCX enjoyed. Also, KLAC has greater exposure to China than its semiconductor equipment counterparts. While normalizing revenue in the region was expected, as KLAC touched on this repeatedly over the past several quarters, investors may be hesitant to ignite a more aggressive rally in KLAC, given the lingering uncertainty surrounding possibly further trade restrictions.

Still, with AI prospects remaining white hot, KLAC is nicely positioned to continue extracting outsized benefits from numerous drivers tied to AI, including more complex designs, accelerating product cycles, and expanding advanced packaging demand.