Applied Materials, Inc. (AMAT) Earnings

Management highlights

### AI-Driven Industry Dynamics - AI is identified as the largest consequential technology inflection of the current era, driving a global supply-demand gap for advanced semiconductors that supports sustained multiyear growth. Two concurrent industry races are fueling Applied's opportunities: a technology leadership race focused on improving AI compute performance and energy efficiency, and a capacity race to add new manufacturing capacity and optimize output of existing facilities. - Leading-edge foundry logic, DRAM, and advanced packaging are expected to represent ~80% of wafer fab equipment (WFE) growth in 2026 and 2027, the fastest growing segments where Applied holds clear market leadership. ### Product and Segment Strategic Progress - Advanced packaging is a high-growth priority: Applied is the overall market leader with strong positions in HBM and 3D chiplet stacking, and expects full calendar 2026 packaging revenue to grow >70%. The company has built a full portfolio of next-generation technologies for emerging larger-size panel-level packaging, including digital lithography, deposition, etch, and e-beam review. - AGS (advanced services) is expected to grow >20% in calendar 2026, with a long-term sustainable annual growth target of mid-teens. Over 37 thousand installed chambers are connected to Applied's proprietary AIx AI-powered monitoring and predictive analytics software, which delivers customer yield improvements and drives margin expansion. - Process diagnostics and control is expected to grow >50% in calendar 2026, fueled by rising demand for e-beam and optical inspection tools required for advanced AI chip manufacturing. - The company is developing a new line of output innovation products that increase wafer processed per unit of clean room space, addressing customer constraints on factory capacity; multiple products are currently in customer qualification. ### EPIC Center Strategic Update - The EPIC co-innovation strategy is designed to accelerate R&D and commercialization velocity via early deep collaboration with customers and partners. To date, Applied has announced 11 EPIC engagements spanning system companies, leading chipmakers, top research universities, and innovation partners including Broadcom, SCREEN, and UC Berkeley. - The new EPIC Center in Silicon Valley will move its first R&D tool into the clean room the week after the call and is on track to start operations in the coming months. The center will enable early customer access to next-generation technology and improve Applied's R&D productivity and long-term demand visibility. ### Operational Capacity Expansion - The company has nearly doubled its global manufacturing space over the past several years, including the official opening of a new manufacturing center in Singapore this quarter. It is on track to double quarterly system output from current levels by 2028, having added over 1,500 new employees in manufacturing and AGS customer support this quarter alone. Planning is already underway for additional expansion to support potential demand growth through 2030. ### Pricing and Margin Strategy - A systematic value-based pricing strategy, implemented three years ago, has allowed Applied to capture a share of the value it creates for customers, driving consistent gross margin expansion. The company has achieved 13 consecutive quarters of year-over-year gross margin expansion, with corporate gross margins now exceeding 50% and semiconductor system gross margins exceeding 55%. - Operational efficiency improvements from AI use across R&D, supply chain, and corporate functions have driven G&A as a percentage of operating expenses to the lowest level in company history, and operating expenses as a percentage of total revenue to the lowest level in nearly four years.

Guidance

- **Fiscal Q4 26 Guidance**: Total company revenue is expected to be $10.25 billion ± $500 million, up 51% year over year. Non-GAAP EPS is expected to be $4.02 ± $0.20, up 85% year over year. Semiconductor Systems revenue is projected at ~$7.9 billion (up 62% year over year), AGS revenue at ~$1.84 billion (up 22% year over year), and other revenue at ~$510 million. Non-GAAP gross margin is expected to be ~50.4%, up 32 basis points year over year, with non-GAAP operating expenses projected at ~$1.58 billion. - **Long-Term Growth Guidance**: Calendar 2026 semiconductor systems growth is now expected to exceed the prior guidance of >30%, with Applied on track to outgrow the overall WFE market and gain share in 2026. Management expects 2027 to be another strong growth year, with a similar growth profile to 2026 where leading-edge foundry logic, DRAM, and advanced packaging represent ~80% of overall WFE growth. - **Other Long-Term Projections**: Average other (display) revenue is expected to be ~$400 million per quarter through 2027. The non-GAAP tax rate is projected to be ~11% in fiscal Q4, rising to ~13% in 2027 due to the global minimum tax. The company expects to continue delivering slow sequential gross margin improvement over the long term, after near-term ramp costs weigh on margins in the coming quarter. Capital expenditures as a percentage of revenue is expected to decline in 2027, even with higher absolute spending on capacity expansion and EPIC Center equipment.

Segment performance

Applied Materials generated total record Q3 26 revenue of $9.1 billion, up 15% sequentially and 25% year over year. Non-GAAP gross margin for the company was 50.4%, with a 34% non-GAAP operating margin and non-GAAP EPS of $3.50, up 22% sequentially and 41% year over year. 1. **Semiconductor Systems**: Record revenue of $7 billion (76.9% of total revenue), up 18% sequentially and 27% year over year. Segment non-GAAP gross margin hit 55.4%, up 190 basis points year over year, and non-GAAP operating profit grew 45% year over year to a record $2.7 billion. Within the segment: foundry logic revenue hit a record on GAA and FinFET capacity additions; DRAM revenue (including HBM packaging) grew 52% year over year to a record; deposition (including PVD, CVD, epitaxy), materials modification (thermals/treatments), materials removal (etch/CMP), and process diagnostics and control all set quarterly revenue records, with process diagnostics and control growing faster than the overall systems business in 2026. 2. **Applied Global Services (AGS)**: Record revenue of $1.8 billion (19.8% of total revenue), up 22% year over year, driven by growing subscription services and high transactional parts demand. Non-GAAP gross margin was 35.6% (up 180 basis points year over year) and operating margin reached 30.1% (up 280 basis points year over year). 3. **Other Revenue**: $294 million (3.3% of total revenue), in line with expectations, consisting primarily of display business revenue. Regionally, China represented 26% of combined semiconductor systems and AGS revenue.

Risks & headwinds

- Near-term gross margin growth is tempered by ramp costs associated with rapidly expanding manufacturing and customer support capacity to meet surging demand, as well as mix impact from the lower-margin display business growing sequentially in the coming quarter. - Future growth is constrained by customer availability of clean room manufacturing space, which will ultimately determine the level of tool shipments in 2027 and beyond. - All forward-looking results are subject to general market and macroeconomic risks, which are detailed in the company's SEC filings and could cause actual results to differ materially from management projections.

Analyst Q&A

• Q: After raising calendar 2026 semiconductor systems growth guidance to >30% last quarter, what is the current growth outlook, and how should we frame 2027 expectations? /

  A: Demand strengthened further this quarter, with customers announcing multiple new fab projects and increasing capital expenditure forecasts, so 2026 growth will be higher than the prior >30% guidance. The fastest growing WFE segments in 2026 (leading-edge logic, DRAM, advanced packaging, which make up ~80% of total 2026 WFE growth) will see a similar strong growth profile in 2027. Applied holds leadership positions in all three segments, expects to continue gaining share, and sees very strong multiyear demand supported by customer 8-quarter rolling forecasts.

• Q: How does long-term customer demand visibility beyond 8 quarters look, and what is Applied's positioning in the fast-growing DRAM segment? /

  A: Applied has 5-year roadmap visibility for its largest customers, with detailed 8-quarter forecasts shared with the supply chain, plus longer-dated purchase orders and contractual terms like cancellation and expedite charges that improve planning visibility. AI has created massive, sustained demand growth for DRAM, and Applied is the largest process equipment provider for DRAM with leading positions in epitaxy, HBM packaging, etch, and e-beam technologies. The company has gained significant DRAM share in recent years, expects strong second-half 2026 DRAM growth, and is well-positioned for future DRAM architecture innovations including 3D DRAM.

• Q: Why is Q4 gross margin guided flat sequentially despite strong revenue growth and value-based pricing, and what is the long-term margin trajectory? /

  A: Flat near-term margins reflect two main factors: mix impact from growing lower-margin display revenue, and near-term ramp costs from adding large numbers of new manufacturing and customer support employees to support growth. The company still expects slow, steady long-term gross margin improvement, as ramp headwinds will recede as revenue grows and the higher-margin semiconductor systems segment continues to expand.

• Q: How should we interpret the plan to double manufacturing capacity by 2028 – does this imply $14 billion in quarterly revenue by 2028? /

  A: Doubling capacity is not a revenue forecast, but a long-term investment to ensure Applied has sufficient manufacturing clean room space to meet a wide range of potential demand levels through 2028 and beyond. The company is communicating capacity plans to suppliers to align their own production with expected future demand, rather than guiding to a specific revenue level for 2028.

• Q: What is the outlook for panel-level packaging and hybrid bonding, two key advanced packaging technologies? /

  A: Advanced packaging is one of the most important growth areas for AI, with Applied expecting >70% calendar 2026 packaging growth and strong growth in 2027 and beyond. Panel-level packaging will see significant growth in 2027 and ramp further in subsequent years, and Applied holds a strong competitive position with a full portfolio of panel-specific technologies. Hybrid bonding is a critical inflection across all AI chip segments to improve performance and power efficiency, and Applied has strong integrated technology for hybrid bonding and adjacent process steps, positioning it to capture meaningful long-term growth from this trend.