KLA : 2023 Annual Report

2023 Letter to Stockholders

Fellow Stockholders:

Fiscal Year 2023 (FY23) Highlights

FY23 was a period of strong growth, profitability, and free cash flow for KLA, as the company successfully responded to increased demand and grew market leadership in many of the categories within the Wafer Fab Equipment (WFE) industry. KLA delivered solid performance in FY23 as customers maintained high levels of investment in Process Control to support their long-term product roadmaps, though the industry declined overall in the second half of the fiscal year as key semiconductor end markets weakened due to a pull forward of covid related electronics spending over the past couple of years and weaker overall consumer demand. KLA's relative strength demonstrates successful diversification and growth in adjacent markets, including Specialty Semiconductor Process and Service. Through it all, in FY23 KLA remained focused on delivering to customer requirements, executing the financial model, and driving strong returns to shareholders in a dynamic global industry demand environment.

Revenue grew 14% in FY23 to a record $10.5 billion, marking KLA's eighth consecutive year of growth. KLA's performance in FY23 was fueled by 18% growth in the Semiconductor Process Control segment, which accounts for 89% of KLA revenue, and was primarily due to strong demand across the inspection and metrology portfolios. KLA is benefitting from growth in investment in critical infrastructure markets such as mask inspection and the bare silicon wafer market. Revenue from our Specialty Semiconductor Process segment grew 19% in FY23 and was 5% of revenue. This business includes etch and deposition solutions for advanced packaging and specialty semiconductor markets. Growth in Specialty Semiconductor Process in FY23 was driven primarily by legacy node applications, including advances in the IC packaging technology roadmap and growth in demand for automotive power and radio frequency filters. Revenue from our PCB, Display and Component Inspection segment decreased in FY23, compared to the prior fiscal year, primarily due to market softening in smart phones and other consumer electronics.

Service revenue grew 11% in the year to $2.1 billion. KLA's Service business has been delivering consistent growth, nearly doubling over the past four years since first topping $1 billion in 2019. Due to the increase in the installed base of KLA systems, current plans indicate that services will climb to a $3 billion revenue run rate by fiscal year 2026. KLA's Service revenue is driven by growth in the installed base and the extension of system lifetimes due to growth in legacy semiconductor markets. Furthermore, over 75% of the revenue generated is from recurring "subscription-like" contracts, reflecting the growing value of advanced process control systems and Services in our product portfolio.

KLA also demonstrated strong operating leverage on our revenue growth in FY23, with non-GAAP operating income growing 11% in the year.

Free cash flow grew 11% in FY23 to a record $3.3 billion, and free cash flow margin or free cash flow as a percent of company revenue, was an impressive 32%, placing it within the top-tier of the S&P 500 according to our analysis. Consistent with long-term strategic objectives, KLA delivered on

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our ongoing commitment to return value to shareholders, including a 13th consecutive dividend increase announced in June 2022. Also in June 2022, we announced the Board of Directors had authorized an additional $6 billion share repurchase program, of which $3 billion was executed through an Accelerated Share Repurchase that was fully completed by the December 2022 quarter. Total returns to shareholders in FY23 (including dividends and share repurchases) were $2.0 billion, or approximately 61% of free cash flow. It is also worth noting that in September 2023, after fiscal 2023 ended, KLA continued to execute on its capital return program by announcing its 14th consecutive dividend increase and an additional $2 billion in share repurchase authorization.

KLA's balance sheet remains strong, with $3.2 billion in total cash, cash equivalents and marketable securities, $5.9 billion in debt, and an attractive bond maturity profile supported by investment-grade ratings from all three agencies. KLA's investment grade credit ratings underscore the strength of our balance sheet and the sustainability of our business and financial performance. We remain disciplined in executing our capital management strategy: investing at a high level to strengthen our competitive advantages, growing free cash flow, and targeting returns to stockholders of at least 85% of free cash flow over the long term.

Latest Industry Market Share Report Highlights Growth in Process Control, KLA's Market Leadership

The latest 2022 Gartner market share analysis published in April 2023 shows Process Control was the fastest-growing WFE market segment in calendar 2022, growing 30% year-over-year to $13.5 billion. Within Process Control, KLA increased market leadership in most major segments, resulting in an overall market share gain of roughly 300 basis points in 2022 to over 57%, or greater than 4x the nearest competitor. KLA's growth and market leadership demonstrate the success of our product and service strategy and the value of KLA's comprehensive portfolio, which offers a broad range of advanced technologies that address customers' most critical yield, productivity, and technology development challenges. Highlights of KLA's expanded market leadership in 2022 include:

• • Growth in the overall Optical Inspection market to approximately $3.5 billion, driven by KLA's market leadership and growing customer adoption of the flagship Broadband PlasmaTM Optical Inspection product portfolio.

• • In Reticle Inspection and Metrology, the market grew to over $1.6 billion in 2022, outpacing WFE growth by more than 5x, and KLA's share of this market increased to approximately 55%, while revenue share for the nearest competitor declined by 600 basis points.

• • Other highlights include share growth in Unpatterned Wafer Inspection, Overlay Metrology, and Macro Inspection.

KLA's sustained market leadership is underpinned by innovation and high levels of R&D investment to solve the most complex Process Control challenges facing the semiconductor industry today.

KLA's Priorities in Fiscal Year 2024 (FY24)

For KLA, we highlighted three key priorities that are the guideposts for us in FY24:

• • Continue to support our customers by meeting commitments for product delivery and support and through sustained high levels of investment in R&D to drive new innovation in KLA's product roadmap. Historically, downturns have been periods in which KLA has gained market share, and we are working hard to ensure the same result in the current environment.

• • Stabilize spending levels, which have grown over the past several years to scale with the rapid pace of industry growth. KLA is consolidating spending and moderating investment levels to reflect the changing business environment. KLA will continue to maintain R&D investments to drive market leadership and support technology and product development roadmaps. R&D investment is expected to increase in FY24.

• • Develop the workforce. KLA has been on a strong pace of hiring in the last couple of years, and total headcount has grown to approximately 15,000 employees. KLA will invest in these employees with training to optimize productivity worldwide.

As always, the KLA Operating model will inform and guide the company focus as we execute our strategic objectives. The KLA Operating Model positions us well for sustainable outperformance relative to the industry. It also guides our critical strategic objectives. These objectives fuel our growth, reliable operational excellence, and differentiation across increasingly diverse products and service offerings. Our strategic objectives also form the foundation for KLA's sustained technology leadership, wide competitive moat, leading financial performance, strong free cash flow generation, and consistent capital returns to shareholders.

Calendar 2026 Financial Targets Remain on Track

At KLA's June 2022 Investor Day, the company introduced new long-term financial targets for calendar 2026. Consistent with our stockholder return commitment, KLA also announced a series of capital return updates, including a significant share repurchase and dividend increase mentioned above. KLA's 9-11% revenue growth objective through calendar 2026 features strong relative growth in each major businesses segment over that period and includes the revised long-term revenue growth target of 12-14% CAGR in our Services business driven by growth in the installed base, and new value-added service offerings. KLA's long-term model assumes a baseline semiconductor industry growth CAGR of 6-7% through 2026 and ultimately for the size of the semiconductor industry to exceed $1 trillion by 2030.

Delivering Sustained Outperformance

In conclusion, KLA's FY23 was a success as the company continued to execute against our long-term strategic objectives and deliver strong growth against the backdrop of a down overall year for the Wafer Fabrication Equipment (WFE) market in calendar year 2023. Despite these headwinds, KLA outperformed to meet customer requirements while navigating a challenging market landscape.

Once again, the global KLA team persevered through dynamic and complex situations to produce record results. KLA's strength in adapting to deliver on commitments reflects the unique KLA culture, which is grounded in our value to Drive to be Better. Through this, KLA had record results, upon which the company will continue to build growth for customers, employees, stockholders, and partners.

As KLA continued to execute against our commitments to customers, we also made important strides in environmental, social and governance (ESG) initiatives, including publishing a new GIR report and submitting Scope 3 targets to SBTi.

KLA remains well positioned at the forefront of technology innovation, and investment in the long-term continues to be a critical priority, as we believe it is an essential ingredient in the recipe that drives our sustained success and outperformance. The semiconductor and electronics landscapes are constantly changing, and broadening customer interest is driven by more technology innovation than ever at the leading edge.