Applied Materials, Inc. (AMAT) Q1 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reveals strong growth prospects driven by AI and leading-edge technologies, with a 20% growth target for semiconductor equipment in 2026. Despite some management ambiguity, high gross margins and strategic focus on high-growth segments like DRAM and advanced packaging are promising. The Q&A section highlights confidence in sustaining growth through innovation and market leadership. Overall, the sentiment is positive, likely leading to a stock price increase in the short term.
Key Financial Performance
Revenue $7 billion, down 2% year-over-year. Revenue in China declined 7% year-over-year and represented 27% of combined semi equipment and AGS sales and 30% of overall sales. Reasons for decline include changes in market dynamics and regional demand.
Non-GAAP Gross Margin 49.1%, grew 20 basis points year-over-year. Reasons for growth include value-based pricing and manufacturing cost improvements.
Non-GAAP Operating Profit $2.1 billion, declined 4% year-over-year. Reasons for decline include increased R&D investments and changes in operational costs.
Non-GAAP Earnings Per Share (EPS) $2.38, flat year-over-year. Reasons for stability include balanced operational performance and cost management.
Applied Global Services Revenue $1.56 billion, grew 15% year-over-year. Reasons for growth include increased demand for advanced services and innovations in service delivery.
Semiconductor Systems Revenue $5.14 billion, declined 8% year-over-year. Reasons for decline include market conditions and shifts in customer demand.
Free Cash Flow $1 billion, reasons include elevated capital investments in R&D and manufacturing capacity expansion.
Cash Distribution to Shareholders $702 million, reasons include dividends and stock buybacks.
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Operating Highlights
New product launches: In 2026, Applied Materials plans to launch more than a dozen new products, including three for advanced logic and DRAM. These include the Viva radical treatment system, Sym3 Z Magnum etch platform, and spectral ALD system, which enable advancements in gate-all-around transistors and logic contact formation.
Cold field emission eBeam technology: Revenues from this technology are expected to double in 2026 to over $1 billion, supporting process diagnostics and control.
AI-driven semiconductor market growth: Global semiconductor industry revenues are projected to reach $1 trillion in 2026, driven by AI adoption. Applied expects its semiconductor equipment business to grow by more than 20% this year.
Advanced packaging and DRAM demand: High-bandwidth memory DRAM and 3D chiplet stacking are the fastest-growing segments in 2026. Applied holds strong market positions in these areas.
Operational capacity expansion: Applied has nearly doubled its system manufacturing capacity and increased inventory by $500 million year-over-year to meet rising demand.
AIx software and robotic systems: AIx software connects over 30,000 chambers, improving response times by 30%. Automated distribution centers enhance parts delivery speed and inventory optimization.
EPIC co-development platform: Applied launched its first EPIC co-development agreement with Samsung Electronics, aiming to accelerate R&D and technology transfer into high-volume manufacturing.
Focus on energy-efficient AI architectures: Applied is collaborating with customers to develop energy-efficient AI architectures, driving growth in leading-edge logic, memory, and advanced packaging.
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Risk or Challenges
Export Controls Compliance Matter: The company accrued $252.5 million related to an export controls compliance matter disclosed in its 2022 10-K and later filings. This issue has been resolved with the U.S. Department of Commerce Bureau of Industry and Security, but it represents a significant financial impact.
Supply Chain Operations: The company has proactively increased inventory by nearly $500 million year-over-year to meet increasing demand. However, this highlights potential risks related to supply chain disruptions or inefficiencies in managing inventory levels.
Customer Cleanroom Space Availability: The demand profile for semiconductor equipment is weighted towards the second half of the calendar year, with the availability of customer cleanroom space being a key factor pacing the rate of investment. This could delay revenue realization.
Geopolitical Risks in China: Revenue in China declined 7% year-over-year and represented 27% of combined semi equipment and AGS sales. This indicates potential risks related to geopolitical tensions or regulatory changes in a key market.
R&D and Operational Costs: Non-GAAP operating expenses increased due to an 8% rise in R&D investments. While this supports innovation, it also increases operational costs, which could pressure margins if revenue growth does not keep pace.
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Guidance & Outlook
AI-driven semiconductor market growth: The global semiconductor industry revenues are projected to potentially reach $1 trillion in 2026, driven by accelerated growth in AI end markets.
Semiconductor equipment business growth: Applied Materials expects to grow its semiconductor equipment business by more than 20% in 2026, with demand weighted towards the second half of the year.
Customer visibility and growth momentum: Increased long-term visibility from customers is expected to support strong growth momentum into 2027.
Advanced packaging and DRAM demand: High-bandwidth memory DRAM and 3D chiplet stacking are expected to be the fastest-growing market segments in 2026, driven by AI computing needs.
New product launches: Applied Materials plans to launch more than a dozen new products in 2026, including innovations for advanced logic and DRAM.
Service business growth: The service business is expected to grow at a double-digit rate, supported by advanced services and AI-powered monitoring systems.
Q2 2026 revenue and earnings guidance: Company revenue is expected to be $7.65 billion, plus or minus $500 million, with non-GAAP EPS of $2.64, plus or minus $0.20.
R&D investments: Increased R&D co-development projects with customers and partners are planned to accelerate innovation and growth.
Capacity expansion: Applied Materials has nearly doubled its system manufacturing capacity and increased inventory by $500 million year-over-year to meet growing demand.
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Shareholder Return Plan
Cash Dividends Distributed: $702 million distributed to shareholders in cash dividends and stock buybacks in Q1.
Free Cash Flow Distribution: Over the past year, more than 85% of free cash flow was distributed to shareholders.
Stock Buybacks: $702 million distributed to shareholders in cash dividends and stock buybacks in Q1.
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Key Q&A
Q:How does Applied Materials view the WFE market for 2026 and what are the drivers of share growth?
A:Applied Materials expects to grow its semiconductor equipment business by more than 20% in 2026, driven by AI fueling growth in energy-efficient computing enabled by leading-edge foundry logic, DRAM (including HBM), and advanced packaging. These are expected to be the fastest-growing WFE segments in 2026, 2027, and beyond. Applied holds strong #1 positions in these markets and is positioned to extend its leadership and gain share.
Q:What is Applied Materials' outlook on gross margins and how does it plan to sustain growth?
A:Applied Materials has achieved its highest gross margins in 25 years, up 700 basis points since the CEO's tenure began. The company plans to sustain growth through inflection-focused innovation targeting high-value markets like AI data center computing, DRAM, and packaging. It is leveraging its EPIC platform for co-innovation with customers, improving R&D productivity, and accelerating cycles of learning with AI-enabled software.
Q:How has the view on China and global ICAPS WFE evolved over the last three months?
A:Applied Materials initially expected China and global ICAPS WFE to decline in 2026 due to capacity digestion but now sees them as flattish overall. The company believes the ICAPS semiconductor market will grow in mid- to high single digits in the longer term, which is lower than AI-driven markets like leading-edge foundry/logic and DRAM.
Q:What is the growth outlook for advanced packaging in 2026?
A:Advanced packaging WFE spending is increasing in 2026, driven by HBM and 3D chiplet stacking. Applied Materials is #1 in these markets and expects advanced packaging to be one of its highest growth businesses this year. The company anticipates continued high growth in this segment due to innovations in packaging substrates and architectures for AI energy-efficient computing.
Q:What is the trajectory for Applied Materials' semiconductor equipment growth in 2026 and beyond?
A:Applied Materials expects greater than 20% growth in its semiconductor equipment business in 2026, with the second half of the year being stronger. Growth is constrained by cleanroom capacity, but new factories are expected to come online in 2027, supporting continued growth. The company anticipates strong demand for AI data center-related technologies to drive high compound annual growth rates.
Q:What is Applied Materials' perspective on WFE intensity and its growth framework?
A:Applied Materials notes that WFE intensity has grown to around 15% of the semiconductor industry. However, the company is shifting its growth framework to focus on outperforming in the largest and fastest-growing markets, such as leading-edge foundry/logic, DRAM, and advanced packaging, driven by AI data center growth. These segments are expected to grow significantly larger than ICAPS and other memory segments.
Q:What is the outlook for Applied Materials' AGS (Applied Global Services) business?
A:The AGS business is expected to grow at low double digits or better, driven by a 55,000-tool installed base, new product launches, and high-value services. The company has a strong service innovation pipeline, including AIx servers connected to 30,000 chambers, which enhances service engineer productivity and customer value.
Q:What is the growth outlook for Applied Materials' process diagnostics and control (PDC) business?
A:The PDC business is one of the fastest-growing segments for Applied Materials in 2026, driven by leadership in eBeam technology and high-resolution imaging. The company expects strong growth in this segment to continue in 2027 and beyond, supported by new product innovations and increasing demand for material characterization in advanced process nodes.
Q:What is driving the second-half acceleration in Applied Materials' growth for 2026?
A:The second-half acceleration in 2026 is driven by increased cleanroom availability for DRAM and leading-edge foundry/logic. Customers are accelerating factory projects, and new factories are expected to come online in 2027, supporting continued growth.
Q:What is the outlook for NAND and DRAM markets in 2026?
A:NAND spending is expected to grow modestly and remain less than 10% of total WFE, with most investments focused on upgrades rather than new capacity. DRAM, including HBM, is expected to see strong growth, driven by increased wafer starts and innovations in stacking technologies. Applied Materials is confident in maintaining and growing its market share in DRAM.
Q:Review of Unclear Management Responses
A:Management avoided providing specific numerical details or direct answers to certain questions, such as the exact growth rates for leading-edge foundry/logic versus DRAM, the specific contribution of advanced packaging to the 20% growth target, and the precise impact of cleanroom constraints on 2026 growth. Additionally, they did not provide a clear breakdown of WFE intensity changes or the exact size of the PDC business in 2026.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI computing
ALD
Brice
DRAM packaging
Department
San
Semiconductors heart
Sym
Today
Tuesday
adoption
calendar
conductor etch
contact
control
diagnostics
eBeam technology
edge logic
equipment provider
etch eBeam
event
expansion
heart AI
industry revenue
innovator
inquiry
level precision
manufacturing capacity
material deposition
matter
output
person
process equipment
productivity
ramp
stack AI
support
technology volume
treatment
volume manufacturing
webcast
wiring
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