Applied Materials, Inc. (AMAT) Earnings

Management highlights

AI Market Dynamics - Global AI adoption is accelerating and diversifying, with rapid growth in both generative AI and emerging agentic AI applications. Agentic AI, which requires more CPU-intensive architectures alongside higher DRAM and NAND demand, provides an additional tailwind for wafer fab equipment. - Public data indicates global token generation has increased more than threefold in just the past three months, with growing demand across broad industry segments. - Customers are increasingly providing 8-quarter rolling demand forecasts, giving management greater long-term visibility and supporting more efficient capacity and supply chain planning. Product and Technology Leadership - Leading-edge foundry logic, DRAM, and advanced packaging are expected to account for more than 80% of year-on-year growth in total wafer fab equipment spending in 2026, with a similar growth profile projected for 2027. Applied Materials holds leading market positions in all three of these high-growth areas. - Two new products were launched this quarter to strengthen the company's gate-all-around portfolio: Trillium ALD, an integrated material solution that delivers angstrom-level thickness control for metal gate stacks, and a new precision PECVD system with an industry-first selective bottom-up deposition process for shallow trench isolation that improves device performance. - Advanced packaging revenue is on track to grow more than 50% in calendar 2026, and the company announced its intent to acquire NEXX to expand its panel-level packaging portfolio for large AI accelerator packages. Applied is the overall market leader in advanced packaging, with strong positions in high-bandwidth memory and 3D chiplet stacking. - In DRAM, Applied is the #1 process equipment provider, with strong positions in wiring, patterning, and peripheral logic steps, and is positioned to gain additional market share at upcoming transistor and device architecture inflections. Conductor etch is one of the company's fastest-growing businesses in calendar 2026, driven by leading-edge gate-all-around and DRAM demand. Operational and Strategic Initiatives - The company has nearly doubled its global manufacturing capacity via expansions in the U.S. and Europe, and a new manufacturing center in Singapore, to meet growing customer demand. Management is systematically sharing long-term customer forecasts with its ~2,000 direct suppliers to enable aligned capacity expansion. - The EPIC co-innovation platform, centered on the new EPIC Center in Silicon Valley scheduled to open in fall 2026, is designed to reduce time-to-commercialization for new technologies via close collaboration with customers, partners, and universities. Founding partners include TSMC, Micron, Samsung, and SK Hynix, with initial university partnerships with ASU, RPI, and Stanford. - Applied Global Services (AGS) is expected to deliver a sustainable mid-teens annual growth rate (possibly higher in 2026), supported by a growing installed base, higher fab utilization, and AI-enabled advanced services. Over 35,000 chambers are currently connected to the company's proprietary AIx software for AI-powered monitoring, diagnostics, and analytics.

Guidance

- For the third quarter of fiscal 2026, the company guides total revenue of $8.95 billion (±$500 million), representing nearly 23% year-over-year growth. Non-GAAP EPS is guided at $3.36 (±$0.20), up nearly 36% year-over-year. - Within the Q3 guidance, Semiconductor Systems revenue is expected to be ~$6.9 billion, AGS revenue ~$1.75 billion, and other revenue ~$300 million. Non-GAAP gross margin is expected to increase modestly to ~50.1%, with non-GAAP operating expenses projected at ~$1.485 billion and a non-GAAP tax rate of ~11%. - The semiconductor equipment business is expected to grow more than 30% year-over-year in calendar 2026, an upward revision from prior outlooks, driven by incremental customer demand from new clean room space reallocation and expansion. - AGS long-term annual growth guidance is raised from low double-digits to mid-teens, with 2026 growth expected to come in above this mid-teens baseline due to higher industry fab utilization and growing new factory ramps. - 2027 is expected to be another strong record year for the industry and the company, with the same high-growth concentration in leading-edge foundry logic, DRAM, and advanced packaging expected in 2026. Long-term demand visibility extends into 2028, with management expecting continued secular growth driven by AI.

Segment performance

1. Semiconductor Systems: Delivered record revenue of $5.97 billion, up 16% sequentially and 10% year-over-year. DRAM revenue within the segment grew 18% year-over-year to $1.7 billion. The segment accounts for approximately 75.5% of total company revenue. Non-GAAP gross margin for the segment reached 54.8% in Q2, with both gross margin and operating margin increasing year-over-year. Growth was driven by transition to gate-all-around nodes, capacity additions at leading-edge FinFET nodes, and accelerating advanced packaging investments. 2. Applied Global Services (AGS): Delivered record revenue of $1.67 billion, up 17% year-over-year, accounting for approximately 21.1% of total company revenue. The segment saw year-over-year increases in both gross margin and operating margin, with growth supported by expanding installed base, higher fab utilizations, and growing customer adoption of advanced high-value services. 3. Other: Generated revenue of $280 million, in line with company expectations, accounting for approximately 3.4% of total company revenue. Geographically, China represented 24% of combined Semiconductor Systems plus AGS revenue.

Risks & headwinds

- Supply chain scaling is the primary near-term constraint on meeting customer demand, as it takes time for the extensive network of ~2,000 direct suppliers to expand capacity aligned with growing customer forecasts, even though Applied has sufficient in-house manufacturing floor space available. - U.S. export restrictions on semiconductor equipment sales to certain Chinese entities remain a known risk, though management has stated that existing restrictions are already factored into current guidance and growth outlooks. - Co-mingling of restricted and permitted production activities within shared Chinese fab complexes could potentially broaden the scope of restricted sales in the future, though management has not provided additional detail on the magnitude of this risk.

Analyst Q&A

• Q: How does 8-quarter rolling customer visibility change order patterns, pricing, and customer relationships amid tight equipment supply?

  A: 8-quarter visibility primarily enables better supply chain planning, which is critical given long lead times for supplier capacity expansions across Applied's ~2,000 direct suppliers. There is no material change to the existing pricing or payment model: pricing is mostly set via 2-3 year long-term project contracts, and deposits are not required across all customer orders. Ongoing gross margin growth is driven by portfolio enrichment, where each new generation of tools is more valuable to customers, allowing Applied to capture more value, and this dynamic is expected to continue. Given Applied's leading position in all high-growth AI-focused semiconductor segments, management is confident in continued margin progress.

• Q: With 30% year-over-year 2026 equipment growth implying roughly linear sequential growth from Q3 through fiscal Q1 2027, is the 30% figure conservative due to supply chain constraints?

  A: The 30% year-over-year growth guidance for the semiconductor equipment business is a minimum, with upside possible as supply chain scales. Supply chain response time is the primary limiting factor, even though Applied's internal manufacturing capacity can support significantly higher output. Management reaffirmed that linear sequential growth from the Q3 guidance level through Q1 2027 is a reasonable assumption. All existing export restrictions are already factored into the current guidance, and Applied is well-positioned to gain share across all high-growth AI-focused market segments regardless of the macro environment.

• Q: Is customer focus on squeezing more output/yield from existing fabs an incremental driver of growth for tools, upgrades, and services?

  A: Yes, this is a meaningful incremental driver of growth, particularly for Applied Global Services. With new clean room space taking time to come online, all customers are heavily focused on improving throughput, yield, and productivity from existing capacity. This dynamic, combined with the growing installed base of equipment and new AI-enabled high-value services (such as the AIx connected chamber platform), has led management to raise AGS's long-term growth outlook to mid-teens. AGS gross margin expansion has been driven by a higher mix of higher-value spare parts and new service products, alongside ongoing cost efficiency initiatives.

• Q: How does the NEXX acquisition fit into Applied's existing packaging strategy, and what is the adoption timeline for large panel packaging?

  A: The NEXX acquisition aligns with Applied's broader strategy to expand its advanced packaging portfolio, which is already growing over 50% in 2026. NEXX adds leading large-area electroplating capabilities for panel-level packaging, which enables the larger body packages required for high-performance AI accelerators. This complements existing packaging investments, including hybrid bonding and the industry-only full-flow packaging EPIC co-development center. Large panel packaging is a top industry focus for enabling AI performance improvements, but management declined to provide specific commercial adoption timings.

• Q: What is the strategic importance of the process control business, and how should investors view its recent market share trends?

  A: Process Control (PDC) is one of Applied's fastest-growing businesses in calendar 2026, contrary to bearish market share narratives. The company holds clear leadership in eBeam technology with its Cold Field Emission platform that delivers industry-leading resolution and imaging speed, and its optical inspection business is also on track for strong growth this year. A robust pipeline of new technologies coming to market over the next two years is expected to drive continued growth. Additionally, PDC has meaningful synergies with the broader Applied business: eBeam imaging capabilities help accelerate process optimization for Applied's core process equipment lines, boosting growth across the entire portfolio.