Applied Materials, Inc. (AMAT) Q2 2026 Earnings Call Transcript
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Overview
The earnings call summary and Q&A indicate strong growth prospects driven by AI demand, new product launches, and strategic acquisitions. Despite some supply chain constraints and management's avoidance of Huawei-related risks, the overall sentiment remains positive. The expected 30% growth in equipment, improved margins, and strong customer engagement in AI markets bolster the outlook. The company's strategic focus on innovation and capacity expansion further supports a positive sentiment.
Key Financial Performance
Revenue $7.91 billion, up 13% sequentially and 11% year-over-year. Reasons for change: Driven by strong customer demand for AI enabling materials engineering technologies and systems.
Non-GAAP Gross Margin 50%, increased 80 basis points year-over-year. Reasons for change: Value-based pricing from differentiated products and ongoing manufacturing cost innovations.
Non-GAAP Operating Margin 32.1%, up 140 basis points year-over-year. Reasons for change: Higher revenue and productivity tools.
Non-GAAP Earnings Per Share (EPS) $2.86, up 20% year-over-year. Reasons for change: Record revenue and improved margins.
Semiconductor Systems Revenue $5.97 billion, up 16% sequentially and 10% year-over-year. Reasons for change: Transition to gate-all-around nodes and capacity additions at leading-edge FinFET nodes.
DRAM Revenue $1.7 billion, grew 18% year-over-year. Reasons for change: Strong demand driven by AI computing and capacity additions.
Advanced Packaging Revenue Growth accelerating in calendar year 2026. Reasons for change: Investments shifting toward leadership positions in 3D stacking.
Applied Global Services (AGS) Revenue $1.67 billion, up 17% year-over-year. Reasons for change: Higher fab utilizations and expansion of installed base.
China Revenue Contribution 24% of semiconductor systems plus AGS revenue. Reasons for change: Stable business in China and ICAPS worldwide.
Free Cash Flow $210 million. Reasons for change: Cash from operations of $845 million and capital expenditures of $635 million.
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Operating Highlights
Trillium ALD integrated material solution: This new product precisely deposits metals in complex gate-all-around transistor gate stacks, providing angstrom-level thickness control and enabling chip makers to tune threshold voltages across different transistors.
Precision PECVD system: This system uses a selective bottom-up deposition process to protect STI structures, reducing parasitic capacitance and boosting device performance.
AI computing infrastructure: Rapid global build-out of AI computing infrastructure is driving demand for Applied Materials' products.
DRAM and advanced packaging: These areas are expected to account for over 80% of the year-on-year growth in wafer fab equipment spending in 2026 and 2027.
EPIC platform: A new collaboration model designed to accelerate commercialization of technologies, with partnerships including TSMC, Micron, Samsung, and SK Hynix.
Manufacturing capacity expansion: Nearly doubled manufacturing capacity with expansions in the U.S., Europe, and a new center in Singapore to meet growing demand.
AI adoption: Applied Materials is leveraging AI across its operations to optimize R&D, factory operations, and workflows, enabling faster growth and efficiency.
Service innovation: Advanced service solutions are being deployed to optimize customer production ramps and yield, contributing to sustainable annual growth in the mid-teens for Applied Global Services.
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Risk or Challenges
Clean room space availability: The availability of clean room space is a key factor pacing the rate of industry investment. Customers are finding new ways to reallocate or create space, but this remains a challenge for meeting incremental equipment delivery requests.
Supply chain and manufacturing capacity: The company is working to double its manufacturing capacity and increase inventory positions to meet growing demand. However, ensuring suppliers have the visibility to make their own capacity and resource additions is a challenge.
Economic and market uncertainties: While the demand outlook has strengthened, there is a reliance on customer forecasts and long-term visibility, which could be impacted by broader economic or market uncertainties.
Geopolitical risks: China represents 24% of the company's semiconductor systems and AGS revenue. Any geopolitical tensions or regulatory changes affecting China could impact this revenue stream.
Technological innovation and R&D investment: The company is heavily investing in R&D to maintain leadership in advanced technologies. However, the ability to commercialize these technologies quickly and effectively remains a challenge.
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Guidance & Outlook
Semiconductor Equipment Business Growth: The semiconductor equipment business is expected to grow more than 30% in calendar year 2026, driven by incremental requests for equipment deliveries and improved visibility from customers.
AI Computing and Wafer Fab Equipment Spending: AI computing is driving demand for leading-edge foundry logic, DRAM, and advanced packaging, which are expected to account for more than 80% of the year-on-year growth in total wafer fab equipment spending in 2026 and maintain a similar profile in 2027.
Advanced Packaging Revenue Growth: Advanced packaging revenues are projected to grow more than 50% in calendar year 2026, supported by leadership positions in high-bandwidth memory and 3D chiplet stacking.
DRAM Market Share and Capacity Expansion: Strong demand for DRAM driven by AI computing is leading to aggressive capacity additions at 6F squared nodes and accelerated development of next-generation device architectures. Applied expects to gain additional DRAM market share at upcoming transistor and device architecture inflections.
EPIC Platform and Collaboration: The EPIC platform is expected to accelerate commercialization of breakthrough technologies, providing multi-node visibility and faster cycles of learning. The new EPIC Center in Silicon Valley is on track to begin operations in the fall of 2026.
Applied Global Services Growth: Applied Global Services is expected to deliver a sustainable annual growth rate in the mid-teens, with potential for higher growth in 2026, driven by advanced service solutions and AI-powered monitoring and diagnostics.
Q3 Fiscal 2026 Guidance: Revenue is projected at $8.95 billion, plus or minus $500 million, representing nearly 23% year-over-year growth. Non-GAAP EPS is expected to be $3.36, plus or minus $0.20, up nearly 36% year-over-year.
Long-Term Industry Growth: Based on customer discussions, 2027 is expected to be another record year for the industry, with continued strong demand and visibility into customer expansion plans.
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Shareholder Return Plan
Dividend Increase: In March, Applied Materials announced a 15% increase to the quarterly cash dividend.
Dividend Growth Goal: The company achieved its goal of doubling the dividend per share, which was set several years ago.
Stock Repurchase: Applied Materials repurchased $400 million in stock during the quarter.
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Key Q&A
Q:How does the 8-quarter rolling visibility with customers affect order patterns, pricing, and relationships?
A:Brice Hill explained that the 8-quarter rolling visibility helps in supply chain planning, requiring lead time for investments and expansions. Deposits are required from some customers, but not universally. Pricing is based on long-term contracts (2-3 years) and has been improving due to portfolio enrichment and new solutions. Gary Dickerson added that Applied is well-positioned in AI computing innovations, which supports pricing and margin growth.
Q:What are the expectations for gross margins beyond the July quarter?
A:Brice Hill stated that the company guided a 50.1% gross margin for Q3, with Semi Systems gross margin at 54.8% in Q2. Improvements are driven by portfolio strength and new equipment launches. Margins are expected to improve gradually over time.
Q:Is the company suggesting $14.5 billion to $15 billion in equipment revenue for the second half of the calendar year?
A:Brice Hill confirmed the 30% year-over-year equipment growth, implying the revenue range mentioned. Growth is supported by strong demand signals, increased orders, and over 100 factory projects globally. Gary Dickerson emphasized strong growth in AI-driven demand and customer focus on 2027 and beyond.
Q:What is the status of manufacturing capacity and its potential revenue impact?
A:Brice Hill stated that floor space is ready, but ramping requires fitting and hiring. The company has significant capacity available and can double output, though supply chain alignment is necessary.
Q:Will semiconductor industry growth in the next 1-3 years come more from units or pricing?
A:Gary Dickerson noted increasing compute demand and broadening customer engagement. He refrained from speculating on units versus pricing but emphasized Applied's strong market position and opportunities in leading-edge foundry logic, DRAM, and advanced packaging.
Q:How will AGS growth correlate with system sales growth?
A:Brice Hill raised AGS growth expectations to mid-teens for the medium term, with higher growth this year due to increased factory utilization and new fabs. Gary Dickerson highlighted AI-enabled service innovations driving AGS growth.
Q:Why is the company guiding 30% growth in Systems instead of a higher figure?
A:Brice Hill reiterated the 30% year-over-year growth guidance, suggesting linear growth from Q3 to Q1. Gary Dickerson mentioned supply chain constraints as a limiting factor but expressed confidence in operational improvements.
Q:What is the company's view on restrictions related to Huawei and their impact?
A:Gary Dickerson declined to comment on restrictions but stated that all factors are included in the company's guidance. He emphasized strong positions in AI-driven markets and growth opportunities in leading-edge foundry logic, DRAM, and advanced packaging.
Q:Is there incremental growth from customers optimizing existing capacity footprints?
A:Gary Dickerson confirmed that customers are focusing on output and yield innovation, which drives service growth. AI-enabled applications and predictive models are enhancing wafer fab output, yield, and cost efficiency.
Q:What is the impact of AIx software and cost efficiencies on AGS margins?
A:Brice Hill attributed gross margin improvements to transactional mix, spare parts, and new service products. Operating margin improvements were due to restructuring and cost efficiencies, though investments in training and customer engineers continue.
Q:How does the NEXX acquisition fit with the JV with Besi and panel-level packaging adoption?
A:Gary Dickerson explained that the NEXX acquisition complements Applied's leadership in packaging and aligns with the strategy to drive compute architecture innovation. The company anticipates strong growth in packaging, with over 50% growth this year.
Q:What is the outlook for WFE growth in 2028 and beyond?
A:Brice Hill and Gary Dickerson expressed confidence in secular growth driven by AI demand. Customers are planning capacity expansions into 2028, suggesting continued growth in WFE.
Q:What are the drivers of share gains in conductor etch and the outlook for process control?
A:Gary Dickerson highlighted strong growth in conductor etch, driven by leadership in leading-edge foundry logic and DRAM. He expressed optimism about process control growth, citing leadership in eBeam technology and a strong pipeline of innovations.
Q:What is the company's position in greenfield versus upgrade projects?
A:Brice Hill stated that most tracked projects are greenfield, especially in logic. Applied performs well in greenfield projects, which offer the best intensity, while upgrades are less significant in NAND.
Q:What is the updated outlook for ICAPS spending?
A:Brice Hill noted strong areas in ICAPS, such as analog, photonics, and power chips. While ICAPS is digesting capacity, utilizations have improved, and long-term growth is expected to align with device growth rates.
Q:What is the significance of the EPIC Center for innovation?
A:Gary Dickerson emphasized that the EPIC Center accelerates innovation by enabling co-location with customers and partners. It provides multi-node visibility, supports new architecture development, and strengthens Applied's market position.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the potential risks of restrictions related to Huawei and their broader implications. Gary Dickerson declined to comment on this topic, stating only that it was factored into guidance.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI adoption
AI computing
AI model
Brice
DRAM packaging
EPIC co
PECVD
STI
area Applied
area wafer
benefit
breakthrough
calendar
chip maker
computing architecture
cost AI
demand environment
deposition
development
equipment provider
equipment spending
foundation
gate stack
isolation trench
leverage
metal gate
month AI
output yield
packaging Applied
plan
power efficiency
priority
process equipment
productivity
profile area
resource
return
spending profile
workload AI
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