KLA Corporation reports robust fiscal fourth-quarter results, but investor focus shifts to the anticipated near-term growth deceleration and financial implications stemming from the company's strategic reduction in reliance on the Chinese market.

KLA Corporation Reports Robust Q4, Adjusts Strategy Amid Geopolitical Shifts

KLA Corporation (NASDAQ: KLAC), a leading provider of process control and yield management solutions for the semiconductor industry, announced strong financial results for its fiscal fourth quarter and full year ended June 30, 2025. Despite the impressive performance, the company's strategic pivot away from a heavy reliance on the Chinese market is signaling a period of near-term growth deceleration, prompting investor scrutiny.

Fiscal Fourth Quarter Highlights and Deceleration Concerns

For the fourth quarter of fiscal year 2025, KLA reported GAAP net income of $1.20 billion and GAAP diluted earnings per share (EPS) of $9.06 on total revenues of $3.175 billion. This revenue figure landed at the upper end of the company's guidance range, while non-GAAP diluted EPS reached $9.38, exceeding the upper end of the guidance. The company demonstrated robust cash generation, with cash flow from operating activities at $1.16 billion for the quarter, and free cash flow topping $1 billion for the first time, reaching $1.06 billion.

Rick Wallace, president and CEO of KLA Corporation, highlighted the company's performance:

"KLA delivered strong across-the-board results for the June quarter including generating record quarterly free cash flow. These results reflect the unique and compelling opportunity within semiconductor capital equipment for KLA's continued role in enabling and supporting the AI infrastructure buildout."

However, a notable deceleration in top-line growth was evident across all of KLA's segments. This trend is expected to continue into the first quarter of fiscal 2026, with guidance projecting total revenues in a range of $3.15 billion +/- $150 million, implying a year-over-year growth of just 10.84% — a significant drop from the 23.66% growth seen in Q4 FY2025. Similarly, adjusted EPS guidance for Q1 FY2026 stands at $8.53, representing a 16.37% year-over-year growth, considerably lower than Q4 FY2025's 42.12%.

The Cost of Reduced China Reliance

The primary driver behind the anticipated near-term growth slowdown is KLA's conscious effort to reduce its reliance on the Chinese market, a strategic recalibration influenced by escalating geopolitical tensions and U.S. export controls. China's contribution to KLA's total revenue is projected to decrease from approximately 40-41% in 2024 to around 30% in 2025, with Chinese revenue anticipated to fall 15-20% year-over-year in 2025.

This shift is not without financial implications. KLA estimates a revenue impact of approximately $500 million (plus or minus $100 million) in calendar 2025 due to U.S. export controls in China. Furthermore, the company anticipates a 100 basis point (1%) hit to gross margins per quarter, primarily from servicing contract tools in China and importing parts into the U.S., an impact already factored into its full-year guidance.

This strategic reassessment by KLA mirrors a broader trend among U.S. companies reducing investments in China. A survey indicated that only 48% of U.S. companies plan to invest in China in 2025, a substantial decrease from 80% in 2024, largely driven by rising tariffs and deteriorating U.S.-China relations.

Strategic Diversification and Analyst Outlook

To offset the China-related declines, KLA is leveraging robust growth in other sectors and geographies. The company has redirected resources to alternative markets, with Korea accounting for 15% of Q4 revenue and Taiwan 27%. A significant growth driver is advanced packaging, with revenue surging 85% year-over-year in 2025, and full-year guidance for this segment raised to $925 million, propelled by the strong demand for AI and high-bandwidth memory (HBM).

Despite the near-term headwinds, KLA reaffirmed its 2025 financial targets of 62.5% gross margin and over 43% operating margin, demonstrating resilience in its operational efficiency. Analysts remain largely positive on KLA's long-term prospects, noting its outperformance compared to peers like ASML and Tokyo Electron.

Citi analysts, led by Atif Malik, commented:

"KLA struck a confident tone and expects 2026 to be a growth year for the industry."

Needham analysts, Charles Shi and Ross Cole, echoed this sentiment, stating:

"Despite several peers expressing caution on 2026, KLAC sees next year to be another growth year, supported by a 'broadening' of leading-edge foundry/logic, HBM fueled DRAM strength, still constructive NAND, and a battered ex-China mature-node foundry/logic that can hardly go even worse."

Oppenheimer has also reiterated its Outperform rating on KLA and increased its price target, citing comfort in underwriting year-over-year growth into 2026 due to strength in existing drivers such as TSMC and DRAM, and lower exposure to areas of anxiety like Intel and China.

Looking Ahead

While KLA's reduced reliance on China presents near-term challenges in terms of revenue growth deceleration, its strategic pivot towards advanced packaging and other key markets, coupled with strong demand for AI-related semiconductors, positions the company for continued growth in the long term. Investors will be closely monitoring the execution of this strategic shift and the company's ability to expand market share in alternative regions to compensate for the adjusted China exposure. The ongoing geopolitical landscape and its impact on global supply chains will remain a critical factor for the broader semiconductor equipment sector. Overall, KLA appears to be navigating these complex dynamics with a focus on long-term stability and capitalizing on emerging technological demands.