Applied Mat (NASDAQ:AMAT) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call.
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Summary
Applied Mat reported record revenue and earnings in the second quarter of fiscal 2026, driven by strong demand in AI computing infrastructure and leadership in Foundry Logic, DRAM, and Advanced Packaging.
The company is forecasting over 30% growth in its semiconductor equipment business for 2026, with continued expansion expected through 2027 and beyond, supported by increased clean room capacity and customer demand.
Strategic initiatives include the expansion of AI-driven service solutions, the upcoming launch of the EPIC center to enhance customer collaborations, and recent acquisitions to strengthen packaging technologies.
Management highlighted improved gross margins, reaching 50% due to value-based pricing and cost innovations, with a forecast of $8.95 billion in revenue and $3.36 non-GAAP EPS for Q3.
Applied Mat is investing in scaling manufacturing capacity, with a focus on long-term growth in AI, Foundry Logic, and DRAM, while maintaining a positive outlook on future industry growth and technological advancements.
Full Transcript
OPERATOR
Welcome to the Applied Materials, Inc. second quarter of fiscal 2026 earnings call. During the presentation, all participants will be in a listen only mode. Afterwards, you will be invited to participate in a question and answer session. I would now like to turn the call over to Mike Sullivan, Corporate Vice President, Investor Relations. Please go ahead.
Mike Sullivan (Corporate Vice President of Investor Relations)
Good afternoon everyone and thank you for joining today’s Call. With me are Gary Dickerson, our President and CEO, and Bryce Hill, our Chief Financial Officer. Before we begin, I’d like to remind you that today’s call includes forward looking statements which are subject to risks and uncertainties that could cause our actual results to differ. Information concerning these risks and uncertainties is discussed in our most recent Form, 10Q and other filings with the SEC. Today’s call also includes non GAAP financial measures. Reconciliations to GAAP measures can be found in today’s earnings press release and in our quarterly earnings materials which are available on our [email protected] in addition, any comments regarding calendar 2026, refer to Q2 of this fiscal year through Q1 of fiscal 2027 which will be a 14 week quarter. Next I’ll share some calendar items. I’m pleased to announce the second event in our 2026 Masterclass Series. We’ll cover DRAM and Advanced packaging on a live webcast on Thursday, June 25th at 9:00am Pacific Time. Next, I’d like to remind you about our two special events during SEMICON west on Monday afternoon, October 12th, we invite you to the unveiling of the new EPIC center in Sunnyvale, California. And on Tuesday morning, October 13th, we hope you’ll join Gary Bryce and our Business Unit leaders for our Investor Breakfast presentation at the Yerba Buena Center in San Francisco. You can join us in person or on a live webcast and with that introduction, I’d now like to turn the call over to Gary Dickerson.
Gary Dickerson (President and CEO)
Thank you Mike. In our second fiscal quarter, Applied Materials delivered record revenue and earnings, along with our highest gross margin in more than 25 years. With rising demand and increasing long term visibility from customers, we see an exceptionally strong foundation for sustained multi year revenue and profit growth. The momentum in our business is being driven by three key factors. First, the rapid global build out of AI computing infrastructure. Second, applied leadership positions in the most enabling and highest value areas of the market, particularly Leading Edge Foundry Logic, DRAM and Advanced Packaging and third, strong execution across our operations and supply chain. In my prepared remarks, I will provide an update on how our markets are evolving. Explain how Applied is enabling the AI roadmap with our differentiated technology and exciting pipeline of new products and outline how we’re transforming the way we work with customers, partners and across the company to drive higher velocity, increase operating leverage and scale more efficiently. Over the past several months, global AI adoption has continued to accelerate as improvements in the performance and cost of AI computing are translating into real world applications that deliver compelling returns for users. If I look at our own company as an example, today we have more than 35,000 AI users across our global workforce. We are deploying AI to drive new scientific breakthroughs, accelerate research and development programs, optimize factory and supply chain operations, increase innovation and productivity and services, and automate workflows across our corporate functions. This enables us to redirect resources towards higher value work and grow the business significantly faster than our headcount. Similar dynamics are playing out across a broad range of industries and organizations. Publicly available data indicates that global token generation has increased more than threefold in just the past three months. Importantly, AI demand is not only growing rapidly, it’s also diversifying. Since the beginning of the year, there’s been a meaningful increase in agentic applications, which layer on top of the continued growth in generative AI training and inference workloads. AI computing architectures are workload specific and optimized for different generative, agentic or physical AI models. Agentic AI models do more than respond to queries. They plan, reason and execute tasks autonomously. They therefore require a computing architecture that is more CPU intensive while also increasing demand for DRAM and NAND. As Agentic AI applications grow, they provide an additional tailwind for wafer fab equipment. Last quarter we said the availability of clean room space was a key factor pacing the rate of industry investment as customers find new ways to reallocate or create space. We are seeing incremental requests for equipment deliveries in 2026 and we now expect our semiconductor equipment business will grow more than 30% this calendar year. Given the unprecedented demand environment, we are working closely with our customers on longer range planning. Our largest customers are providing rolling eight quarter forecasts so we can prepare the required manufacturing capacity and service resources for their ramps. With this improved visibility, we see continued growth across this extended planning horizon into 2027 and beyond and we are investing to support our customers. Expansion plans for AI computing, Leading Edge, Foundry Logic, DRAM and advanced packaging have the greatest impact on overall system performance, power efficiency and cost. As a result, we expect these three areas to account for more than 80% of the year on year growth in total wafer FAB equipment spending in 2026 and see a similar profile in 2027. These are also the areas where Applied has strong leadership positions and an innovative pipeline of next generation technologies. In leading edge foundry logic, Applied is the clear number one process equipment provider with highly differentiated solutions in materials, deposition, modification and treatments, conductor etch and E beam technologies Gate-all-around nodes grow our available market considerably while also providing a catalyst for multiple points of market share gain. This quarter we announced two new products that further strengthen our gate all around portfolio to meet the requirements of different AI workloads in the data center and at the edge. Chipmakers provide designers with a range of transistor options with some tuned for peak performance and others tuned to use the lowest amount of power. This tuning is achieved through precise optimization of the materials in the metal gate stack. Our new Trilium ALD integrated materials solution precisely deposits metals in the most complex gate all around transistor gate stacks by integrating multiple metal deposition steps in a single platform. Trillium ALD provides angstrom level thickness control of metal gate stack layers, giving chip makers maximum flexibility to tune threshold voltages across different transistors. In advanced foundry logic, shallow trench isolation or STI is used to electrically separate neighboring transistors. These narrow isolation trenches are some of the smallest structures in a gate all around device. Our new precision PECVD system uses an industry first selective bottom up deposition process to place material exactly where it’s needed and protect the STI structure from damage during subsequent processing steps. By preserving the original shape and height of the isolation trench, our new PECVD solution reduces parasitic capacitance and lowers leakage to boost device performance in advanced packaging. Applied is also the overall leader with strong positions in high bandwidth memory and 3D chiplet stacking. We expect to grow our packaging revenues more than 50% in calendar 2026 and are very well positioned at upcoming packaging inflections. We recently announced our intent to acquire NEXT to further strengthen Applied’s portfolio of panel level technologies which are designed to enable larger body packages for AI accelerators in dram. AI computing is driving incredibly strong demand and customers are aggressively adding capacity at 6F squared nodes while accelerating their development of next generation device architectures. Applied is the number one process equipment provider in memory today. Thanks to our very strong position in DRAM wiring patterning and peripheral logic steps. We expect to gain additional DRAM market share at upcoming transistor and device architecture inflections. We will provide more details at our next Master class in June which will cover both our DRAM and advanced packaging technology roadmaps to accelerate the industry’s roadmap. Further, we are changing the way we work with our customers and partners by creating a new model for collaboration and innovation. Applied’s global EPIC platform is designed to significantly reduce the time it takes to commercialize breakthrough technologies all the way from early stage research to full scale manufacturing for chipmakers. EPIC provides earlier access to Applied’s R&D portfolio and faster cycles of learning through the co location of key innovators from Customers, Partners and Applied. In addition, EPIC Co innovation programs will provide us with greater multi node visibility to guide R and D investments and resource allocation, increase R and D productivity and value sharing, and accelerate design wins for Applied equipment and services. The centerpiece of the platform is the new EPIC Center in Silicon Valley which remains on track to begin operations in the fall. Earlier this week we announced our EPIC co development engagement with tsmc, who joined as a founding partner together with Micron, Samsung and SK Hynix. We’re also excited to announce our first three EPIC University partnerships with asu, RPI and Stanford, as well as a development partner agreement with Advantest. We are finalizing additional EPIC agreements that we will publicly announce in the coming months to accelerate the transfer of new technologies from Applied labs to customers. Fabs we are also driving new innovations in service. Service is another important growth driver for Applied as we increase the revenue we generate per tool on top of a growing installed base. As a result, we expect Applied Global Services to deliver a sustainable annual growth rate in the mid teens and potentially higher this year. Our advanced service solutions enable customers to accelerate production ramps and optimize output, yield and cost in their high volume manufacturing environment. Today we have more than 35,000 chambers connected to our proprietary AIX software capabilities that use AI powered monitoring, diagnostics and analytics. Before I hand it over to Bryce, let me briefly summarize. AI adoption is accelerating and diversifying, fueling broad and durable demand for for semiconductors and semiconductor equipment. Leading Edge Foundry Logic, DRAM and Advanced packaging are the most critical drivers of performance, power efficiency and cost for AI computing. As a result, we expect these three areas to account for more than 80% of the year on year growth in total wafer fab equipment spending in 2026 and see a similar profile in 2027. These are areas where Applied has strong market leadership today and a high value pipeline of next generation products, providing us with an exceptionally strong foundation for sustained multi year revenue and profit growth. Finally, through epic, our Advanced Services portfolio and rapid AI adoption across our operations, we are transforming how we work with customers, partners and inside Applied Materials, driving higher velocity, improving value capture and efficiently scaling the company as the industry grows. Bryce, over to you.
Bryce Hill (Chief Financial Officer)
Thanks Gary. AI is driving Wafer fab equipment spending to the areas where Applied has been investing the most and we see the positive mix continuing in the second half of the calendar year and well beyond as the market shifted to our areas of strength. In Q2 we delivered double-digit, sequential and year-over-year growth across revenue, operating profit and earnings per share. I’d like to thank our teams and partners for making these results possible by meeting strong customer demand for our AI enabling materials engineering technologies and systems. On today’s call, I’ll provide an update on the demand environment, discuss several strategic priorities, summarize our Q2 results and provide our Q3 guidance. Since we spoke February, the demand outlook has strengthened across almost every leading indicator we track. Cloud service providers continue to increase capital investments. Most Leading Edge Logic and DRAM fabs are running at full capacity. Our customers have announced more fab projects and are giving us the clearest and longest visibility we’ve ever had. Customers have been using a variety of techniques to increase clean room capacity this year, which is growing the market and our revenue expectations and based on our latest discussions with them, we expect 2027 will be another strong record year for the industry. Next, I’ll summarize several of our strategic priorities. Our top priority is increasing output to serve our customers growing demand. We’ve nearly doubled our manufacturing capacity to support them. With expansions in the US and Europe and an additional new manufacturing center in Singapore, we’ve increased our build plan, inventory positions and logistics capacity. We are systematically translating our eight quarter customer demand forecast into a consolidated signal to our suppliers, ensuring they have the visibility they need to make their own capacity and resource additions. Next, I’ll share how this translates to profitability. Funding Our collaborative R&D process helps us identify the highest value technology challenges and gives us line of sight to the most compelling solutions. As we bring newly developed tools to market, our portfolio becomes more valuable and our gross margins expand. In fact, our non-GAAP gross margin has increased 800 basis points since Gary became CEO in 2013. It is now crossing 50% at the company level and approaching 55% in semiconductor systems. In addition, we are focused on driving higher operating profit and leverage with productivity tools and plans being deployed across the company while fully investing in the R&D that grows our business and gross margins. We also expect to increase spending more slowly than revenue and deliver increasing operating profit. Next, I’ll summarize our Q2 results we generated record revenue of $7.91 billion which is up 13% sequentially and 11% year over year. Non GAAP gross margin reached 50% in the quarter, increasing 80 basis points year over year driven by value based pricing from our most differentiated products coupled with ongoing manufacturing cost innovations. Non GAAP operating margin expanded to 32.1%, up 140 basis points year over year and we delivered record non-GAAP earnings per share of $2.86 which was up 20% year over year. Turning to the segments, Semiconductor Systems delivered record revenue of $5.97 billion which was up 16% sequentially and up 10% year over year. The transition to gate all around nodes along with capacity additions at leading edge FinFET nodes drove record foundry revenue as well as record revenue across ALD, Epitaxy and materials treatments. DRAM revenue of $1.7 billion grew 18% year over year. Advanced packaging revenue is accelerating this calendar year within both foundry logic and DRAM, and investments are shifting toward our leadership positions in 3D stacking segment. Gross margin and operating margin both increased year over year. Applied Global Services delivered record revenue of $1.67 billion which was up 17% year over year, reflecting the benefit of higher FAB utilizations. Services growth remains strong as our installed base expands and customers choose our most advanced services to boost output and yield. AGS also generated year over year increases in gross margin and operating margin. Other revenue of $280 million was in line with our expectations. China represented 24% of our semiconductor systems plus AGS revenue. We expect our business in China and our ICAPS business worldwide to be flat to slightly higher in the calendar year. Cash from operations was $845 million. Capital expenditures were $635 million, resulting in free cash flow of $210 million. We distributed $765 million to shareholders, including $365 million in dividends and $400 million in stock repurchases. In March, we announced a 15% increase to the quarterly cash dividend and achieved a goal we set several years ago to double the dividend per share. Now I’ll share our guidance for Q3. We expect company revenue of $8.95 billion plus or minus $500 million, which is up nearly 23% year over year. We expect non-GAAP EPS of $3.36 plus or minus $0.20, which is up nearly 36% year over year. Within this outlook, we expect Semiconductor Systems revenue of around $6.9 billion, AGS revenue of about $1.75 billion and other revenue of around $300 million. We expect non-GAAP gross margin to increase modestly to approximately 50.1% and we expect non-GAAP operating expenses of around $1.485 billion. Finally, we’re modeling a non-GAAP tax rate of around 11%. In summary, the growth in AI that we’ve been investing for is now in full force. As a result, the industry spending mix has shifted to leading edge, Foundry Logic, DRAM and Advanced Packaging where Applied has built the number one process equipment market positions. We are investing with confidence to support the strong long term growth our customers are giving us visibility into and ensuring our suppliers do the same. Finally, we are using the benefits of the AI technologies we enable to accelerate innovation and revenue generation and increase operating leverage and shareholder returns. Now, Mike, please begin the Q and A session.
Mike Sullivan (Corporate Vice President of Investor Relations)
Thank you, Bryce. To help us reach as many people as we can on today’s call, please ask just one question and no more than one brief follow up. Operator, let’s please begin.
OPERATOR
Certainly. And our first question for today comes from the line of CJ Muse from Kenter Fitzgerald.
CJ Muse (Equity Analyst at Kenter Fitzgerald)
Yeah, good afternoon. Thank you for taking the question. You talked about eight-quarter rolling visibility with customers and I’m curious how that might be causing order patterns to change, perhaps upfront payments, a change in the pricing environment. Would love to hear how you’re thinking about your relationship with customers given how tight equipment is and will likely be for years to come.
Bryce Hill (Chief Financial Officer)
Hi CJ, it’s Bryce. Thanks for the question. So yes, for the large customers, we’re definitely working on an eight-quarter rolling visibility with them. That helps us primarily plan the supply chain. Our supply chain needs that kind of lead time in order to make their investments and expansions across the large group of suppliers. We’ve said before we have on the scale of 2,000 direct suppliers and a large number of components for each tool. So that’s the primary reason from a payments perspective. As you know, some of our customers we do require deposits, but that’s not across the board. On the pricing side of things, our pricing generally works as long term contracts with customers based on projects. So you can picture it as, you know, a two to three year pricing contract for a particular project. So pricing moves relatively slowly in the environment. What has been driving our pricing up over the past couple of years and helping us grow our gross margin over the past couple of years has been the gradual enriching of the portfolio. So every time we launch a new solution, it’s typically a more important solution in terms of its value to customers. Solving complex problems, that makes the portfolio stronger and we price accordingly for that. And that’s why you’ve seen our systems gross margins improve over the last two years. So I’ll leave it at that at this point in time, no change in the Overall model.
Gary Dickerson (President and CEO)
Yeah. C.J. this is Gary. I would say relative to pricing, we’re really in a great position in the industry in that the most critical innovations for AI computing are in the sweet spot for applied in leading edge foundry logic, DRAM, and advanced packaging and really applied innovations or enabling these architecture inflections that are providing tremendous improvements in computing. So that puts us in a good position with tailwinds to drive pricing in the near term. And then also as we’re creating more value for our customers, it creates an opportunity for us to capture more value from applied materials. So I have high confidence that the margin progress that we’ve seen over the last few years is going to continue as we go forward.
CJ Muse (Equity Analyst at Kenter Fitzgerald)
As a quick follow up, just on the gross margin side, you know, great guide with I’m assuming depressed China, how should we think about gross margins beyond the July quarter, particularly as it appears as silicon will continue to grow sequentially, you know, well into 20, 27 and beyond.
Bryce Hill (Chief Financial Officer)
Hi. Yep. CJ, thank you. So we guided 50.1% for the company level gross margin. I’ll just remind investors that we’re now reporting our gross margin for each operating segment. So they’ll be able to see that our semi systems Gross margin is 54.8% in Q2. And you know, that represents the improvements we’re talking about. And on the systems to your point, we expect to continue to make improvements. That’s really driven by the gradual strength in portfolio as we launch new equipment. So the improvement will be slow, but we expect continued improvement in the gross margins. And that’s really where you get that guide of 50.1. So a slight increase for Q3 from Q2 and we would expect to be able to continue that process going forward as we launch new tools and solutions.
CJ Muse (Equity Analyst at Kenter Fitzgerald)
Thank you.
OPERATOR
Thank you. And our next question comes from the line of Stacy Raskin from Birdsee Research. Your question please.
Stacy Raskin (Equity Analyst at Birdsee Research)
Hi guys. Thanks for taking my question. So for a 30% year-over-year equipment growth. So that looks like you’re suggesting something like $14.5 billion, $15 billion in the second half of the calendar year for equipment. And I guess I just want to verify that’s true and I guess what are your thoughts Maybe it’s too early about calendar 27, but I mean given 26 is still a constrained year, I guess. What are your thoughts on wafer fab equipment (WFE) growth versus your own growth in 26 and is there any reason to think that 27 couldn’t be even better as cleaners become more available? I guess. Just how do we think about the trajectory of growth into 27 as the clean rooms come online relative to what you’re suggesting as we see into the
Bryce Hill (Chief Financial Officer)
back half of this year? Yes. Hi Stacy, good to hear from you. So on the 30% year over year equipment growth, it does suggest, you know, a second half on the order that you described. We do think that the demand signal is very strong. Our customers increased orders, you know, in the last 90 days as Gary described, as customers are finding new for floor space and clean room solutions. And I think investors should think about, you know, when they think about the roadmap of capacity. You know we’ve said before we’re tracking over 100 factory projects globally. We added more than 10 just in the last quarter. So you should expect a pipeline of new clean room coming on board so customers can continue to grow the wafer starts across the end markets the that we’re talking about. So we do expect growth in wfe, we do expect growth in wafer starts overall and we think that’s headlined by the AI demand function.
Gary Dickerson (President and CEO)
Yeah, Stacey, again, as Bryce indicated, 27 still looks like strong growth year for us. And I can tell you that I’m having constant conversations with customers and they’re looking at 27 and they’re looking at 28 again because the compute demand is growing so quickly. Earlier on the call we talked about agentic AI on top of what we’ve been seeing and that we’re modeling incremental CPU demand, incremental DRAM and nand. That’s a meaningful increase on top of what we had been forecasting previously. And then you go beyond that with physical AI coming in the future. We think this demand environment is going to continue strong for a number of years and certainly as I’m having many conversations with customers, that is a major focus for them.
Stacy Raskin (Equity Analyst at Birdsee Research)
Got it. That’s helpful. Thank you for my follow up. I wanted to ask about your manufacturing capacity. So you see you doubled it. So is it all ready to go? Like how much revenue? I guess how full is it? Maybe the question I’m asking is if it was full, how much revenue capacity could you actually support and is there actually more margin upside as that capacity
Bryce Hill (Chief Financial Officer)
that you brought online actually starts to Fill up, Stacey. Yes. So on the first part, from a floor space perspective, it’s ready to go and available. We would have to fit that up and hire people and as we ramp, so we have the capability of significantly expanding the output. Last quarter I said we could double as we’re growing. It eats into that a little bit, but that’s a rough approximation. So we have significant capacity available.
Bryce Hill (Chief Financial Officer)
Our job is to work with the supply chain and have the supply chain work at the same speed we are.
Stacy Raskin (Equity Analyst at Birdsee Research)
Thank you guys.
OPERATOR
Thank you. And our next question comes from the line of Vivek Arya from Bank of America securities. Your question please.
Vivek Arya (Equity Analyst at Bank of America Securities)
Thanks for taking my questions. You know, if we look at WFE growth this year, it’s very strong, but it is still below semiconductor industry growth, mainly because semiconductors are being driven more by pricing rather than units. So Gary, I’m curious that as you look over the next, you know, one to three years, do you think that semiconductor industry growth comes more from units or it still continues to be reliant on pricing?
Gary Dickerson (President and CEO)
Yeah, thanks for the question, Vivek. Again, when I’m talking to our customers or customers, customers, I think everyone sees tremendous increase in computing demand going forward. And I talked about all these layers of demand that are increasing as we go forward. So you know, I think that. And as I mentioned also with customers, the focus is, I was just with a customer two days ago, they were worried about the supply all the way into 2030. So again, the computing demand I think is increasing. I’m not going to speculate on pricing. What we do see again is a broadening in terms of the customers that we’re working with because everyone sees this increase in compute demand. And that is really great for Applied because all of the markets that are growing the fastest, the leading edge foundry logic, we’re seeing a broadening of demand, very strong demand for DRAM and high bandwidth memory, the ecosystem working on new packaging architectures that drive major improvements in performance and power tokens per second per watt. So again, all of this is great for Applied. I’m not going to speculate on, you know, the units versus pricing, but what I would say is that the market environment for Applied has never been better and our positions in the market have never been better.
Vivek Arya (Equity Analyst at Bank of America Securities)
And for my follow up, if your system sales are growing over 30% and there’s a lot of discussion that maybe growth accelerates next year, how should we think about growth in ags given that level of growth? Is there some kind of correlation? Is there some kind of lagging growth that we can start to see acceleration even in AGS at some point.
Bryce Hill (Chief Financial Officer)
Thank you. Hi Vivek, it’s Bryce. Yeah, thanks for that question. So we had previously communicated low double digits growth expectation for ags, our services business. And to your point, as the systems business is running higher and we’ve raised expectations for the systems business, that means the AGS installed base will grow. So the service opportunity for AGS grows and as well as the spare parts as factory utilizations have improved. So we are going to raise our expectations for AGS to mid-teens for sort of the normal environment. And we think this year we’ll end up being a little bit higher than that because we have so many, so much utilization improvement across the industry and so many new factories that that gives extra bump. So I would say, you know, mid-teens from a medium term modeling perspective and higher than that this year.
Gary Dickerson (President and CEO)
Yeah, the other thing I would say on ags, there’s never been a time where output yield innovation is more valuable than today. And I mentioned earlier on the call that we have over 35,000 chambers connected to our AIX servers. So we’re also driving service innovations with AI enabled applications, predictive models to improve wafer fab output, yield and cost. So I think in addition to the growing equipment business that will help accelerate AGS growth, we’re also driving higher value service innovations that will also support that growth.
Timothy A.R. Curry (Equity Analyst at UBS)
Thank you. Thank you. And our next question comes from the line of Timothy A.R. curry from UBS. Your question please. Thanks a lot, Bryce. I wanted to go back to this. Up 30, at least 30 this year as well. So if I just do the math, I mean it sort of implies that you barely grow off of the July levels, which doesn’t seem possible given that you’re booked out for at least a year. So I would think you can probably grow at least the same number of dollars in systems that you’ve been growing the last two to two quarters. So that would put you like more above 40. So I’m surprised you said above 30 and not above 40. So are you just being conservative or is there something like in the back half of the year where the sequential can’t grow as fast from an absolute systems level? Can you just talk about that?
Bryce Hill (Chief Financial Officer)
Sure. Just to reiterate, we’re saying 30% growth year over year in our systems business. And Tim, I think we’re not giving explicit linearity for the out quarters, but we’d be comfortable if you just assumed it was linear from Q3 to Q4 to our fiscal Q1. Okay. So it’s going to grow about the same on a dollar basis. Bryce, is that. Sorry, just to clarify, on a dollar basis, I would just draw a line and say it grows linearly from our Q3 guide through Q1.
Timothy A.R. Curry (Equity Analyst at UBS)
Okay, got it. And then Gary, can I ask you about the Huawei story? I mean, how do you think about, I mean, you know, that letter by itself is not like it doesn’t really hurt you at all. But how do you think about the risk of that broadening? Because there’s a lot of examples of these fabs being commingled in these clusters, some of which you can ship to and some of which you can’t. So, you know, is there risk that this spreads and maybe, you know, it sort of encaptures more in the net where you can’t ship to these fab complexes that, that have stuff that’s allowed and stuff that’s not allowed commingled in the same complex. Can you just talk about that? Thanks.
Gary Dickerson (President and CEO)
Yeah, thanks, Tim. Let me just clarify, you know, relative to our semiconductor equipment business, we’ll grow 30% or more in the year and it’s really supply chain. You know, that’s one thing that is, I think, an issue for everybody. As Bryce mentioned earlier, our operations can scale significantly beyond where we’re at right now. But it takes time for the supply chain to respond. And certainly we’re working that as rapidly as we can. And I really do believe we’ve made tremendous improvements in our supply chain and our operations over the last several years. So I feel really good about that. Relative to restrictions, I don’t really want to comment on that. All of that has been factored into our guide for the quarter and our viewpoint on growth in the calendar year. And again, what I would say if you look at the mix of business going forward, the AI compute innovations are really going to drive in 26, 27 and going forward, leading edge foundry logic, DRAM, high bandwidth memory and advanced packaging. And those are the areas where Applied has tremendous strength and we are absolutely positioned to gain shareholders as these inflections happen in all of those different markets.
Timothy A.R. Curry (Equity Analyst at UBS)
Thanks a lot, Gary.
Harlan Sir (Equity Analyst at JP Morgan)
Thank you. And our next question comes from the line of Harlan sir from JP Morgan, your question please. Yeah, good afternoon. Thanks for letting me ask a question. In addition to technology migration and greenfield capacity buildouts, your customers are looking at their existing capacity footprints. They’re trying to figure out how they can squeeze more wafers out of their fabs,, more good dice per wafer,. So focusing essentially on throughput and or Focusing on yield or both ways. Is the applied team seeing this? And is this an incremental driver of growth? More tool sales to alleviate bottlenecks, maybe upgrades to improve tool throughput, or maybe advanced services and analytics adoption to improve productivity and yields. Is this driving some of the incremental growth?
Gary Dickerson (President and CEO)
Yeah, thanks for the question, Harlan. Yeah, absolutely. And I mentioned this a little bit earlier. Output and yield innovation is really a key focus for all of our customers. Again, it takes time for them to create more floor space to ramp their factories. So there is a huge focus in engagements,. And this is really helping us to drive our service growth rate at a higher pace than we’ve seen in the past, or even that we were anticipating in the past. And that’s where I would also come back to how we’re implementing AI inside applied Materials. We have all of these connected chambers. Most of them are connected remotely. So we can have instantaneous experts connected into all of those different chambers. And again, this is elevating increasing our expectations for our service growth rate going forward.
Harlan Sir (Equity Analyst at JP Morgan)
Yeah, thank you for that. And then maybe for Bryce, in addition to the strong growth in AGS, gross margins improved 30 basis points sequentially, 120 basis points year over year. Operating margins grew 100 basis points sequentially to 29%. I think that’s like the highest level in like the past two or three years. On the gross margin improvements, how much of this is just more attached of some of the higher value added services like your AIX software suite, remote tool monitoring solutions, which I assume are all gross margin accretive. And then on the strong operating margins, I did notice that your OPEX for that segment was down about 8% sequentially. Was that just cost efficiency activities or does that delta come back this quarter?
Bryce Hill (Chief Financial Officer)
Thanks for the question. So on the gross margins there, I think the mix to more transactional and more spare parts in the quarter have helped us. So that’s one of the drivers. You’re right. The new service products that we’re providing also help from a margin perspective. So I think those are the major drivers. And I think on the expense side, we did some restructuring that helped us with expenses. So. But I would expect that we’re continuing to invest in that business. We’re building a training center, we’re adding to our customer engineers and essentially expanding for the ramp at this point. So no change in expectations from a spending perspective. I think the margins are at a healthy spot at this point.
Harlan Sir (Equity Analyst at JP Morgan)
Agree. Thank you very much.
OPERATOR
Thank you. And our next question comes from the line of Atif Malik From Citi. Your question please.
Atif Malik (Equity Analyst at Citi)
Hi, thank you for taking my questions. Gary, with your acquisition of NEXT in panel level packaging, can you help us understand how does that fit with your JV with BSEE? And what is the adoption timeline for large panel packaging?
Gary Dickerson (President and CEO)
Thanks for the question, Atif. So I would say that we are the leader in packaging. I mentioned earlier on the call we’re going to grow that business over 50% this year. And I would say that in the entire semiconductor industry, this is one of the most exciting areas driving compute architecture innovation. So how you connect computing components together in large body sizes is an enormous focus for everybody. So at Applied we have been investing. You mentioned the hybrid bonding technology and the acquisition of next that’s a leading supplier of large area packaging electroplating. There are a number of different innovations that we’re driving and this acquisition fits into that overall strategy where we also have a full flow packaging epicenter. That is the only one in the industry. We’re engaged with all of our existing customers. And then also there are a number of people working on new large body size architectures again to really drive tremendous improvements in performance and power, the tokens per second per watt. So this is all part of that overall strategy that we’ve been investing in the last few years. You see again over 50% growth this year in our packaging business. Next year we anticipate also strong growth and the timing for those architectures. I would say that there is a tremendous amount of focus to bring those architectures to market as fast as possible. I’d really rather not comment on specific timing. I would just say that Applied, we have deep connectivity across the entire ecosystem with all of those people that are driving those new architectures. We have the broadest packaging portfolio in the industry and we are really at the foundation of the key innovations needed to enable those new architectures.
Atif Malik (Equity Analyst at Citi)
Great. Let’s follow up. Bryce. I understand you guys do not comment on a particular project, but you said there are 10 new projects in the pipeline and there’s a lot of investor interest in terrafab. Will that be a project that will be in the pipeline or is that more like next year?
Bryce Hill (Chief Financial Officer)
Well, just to correct the record, I said more than 10 and you’re right, I can’t name any. I can’t be specific about any of those.
Atif Malik (Equity Analyst at Citi)
Thank you. Sorry.
OPERATOR
Thank you. And our next question comes from the line of Krish Senkar from TD Cowan. Your question please.
Krish Senkar (Equity Analyst at TD Cowan)
Thanks for taking my question, Gary. The first one for you. Applied had an interesting slide at spie that showed dram1 delta node to be more litho intensive compared to one-gamma and obviously you have 4F² coming after that which is more dependent intensive. So I’m wondering do you expect one delta to be a big node and if so could that slow down the depth and H intensity in DRAM on an interim basis?
Gary Dickerson (President and CEO)
Yeah, thanks Krish for the question. So let me from an overall standpoint, DRAM we are the number one process equipment provider and there’s innovation happening at 6F², 4F squared and certainly you know, going forward to 3D DRAM. So if I look at applied in terms of near term innovation periphery CMOS logic being upgraded for higher performance and lower power transistors is a strong driver for our DRAM business, including very strong growth in epi. Of course in dram. high-bandwidth memory (HBM) packaging is a huge focus for everyone. Stacking more chips vertically and then you know, for applied materials deposition with wiring and patterning. And we have very strong positions leadership in conductor etch and E beam technologies in dram. So what I would say is that there is a lot of innovation happening in 6F² that really extends our process equipment leadership and is contributing to the growth that we’re talking about on the call here today. And we’re even better positioned for 4F² and 3D dram. I think if you remember over the last little more than 10 years we gained 10 points of overall share in WFE and DRAM. We’ve been really performing incredibly well over the last few years and then this year is another great year for our DRAM business. So I think for applied we’re in a great position and relative to litho intensity I believe that going forward for sure materials intensity will increase especially with 3D DRAM. And we’re in a great position with 6F² innovation, 4F² and 3D DRAM.
Krish Senkar (Equity Analyst at TD Cowan)
Thanks for that Gary. And this is a quick follow up either for you or Bryce. I understand your customers are giving visibility into 2028. I understand for your capacity and personal planning purposes there are also some new greenfield in NAND scheduled for 2028. Is it fair to assume 2028 could be a growth year for WFE after impressive 26 and 27 or is it too early to make that call?
Bryce Hill (Chief Financial Officer)
We don’t think it’s too early Chris. I think we think it’s secular growth. You know AI is the headline workload that’s driving the secular growth. So we think you’ll see more and more capacity plans from customers. That’s the expectation is right now it is factory limited as we’ve said, but we expect customers to continue adding projects to grow the outlook.
Krish Senkar (Equity Analyst at TD Cowan)
Thanks Bryce.
OPERATOR
Thank you. And our next question comes to the line of Shane Brett from Morgan Stanley. Your question please.
Shane Brett (Equity Analyst at Morgan Stanley)
Thank you for letting me ask a question. My first question is so the Gartner data showed that your conductor etch market share picked up about 300 basis points in 2025 despite weaknesses in other areas of your portfolio. Apologies, this is a bit of a trailing backwards looking question, but how should we think about where those share gains came from? How should we think about your path towards being a market leader in this space? And where are those sort of incremental share gains going forward going to come from for your conductor edge business? Thank you.
Gary Dickerson (President and CEO)
Yeah, Shane, thanks for the question. So let me talk about going forward and then I’ll talk about the overall market environment. So this year Etch will be one of our fastest growing businesses this calendar year. And Applied is number one in conductor etch for leading edge Foundry logic gate all around nodes and number one in conductor etch for dram. And both of those areas I talked about earlier on the call are some of the fastest growing certainly in 2016 and going forward. So you know we’ve been building a stronger position in leading edge foundry logic. We’ve always been very strong in DRAM and in our product. Sim 3 is the fastest ramping product in Applied’s history. We recently talked in one of our master classes about our new Sim 3Z platform. We’ve seen strong adoption there with more than 250 chambers multi hundreds of millions of dollars of growth in etching. So I think we’re really, really in a great position. As I said, one of the fastest growing businesses this calendar year. The other thing is really the opportunity for us to co optimize across our whole portfolio. So when we’re working with our customers on new architectures, whether it’s gate all
Shane Brett (Equity Analyst at Morgan Stanley)
around or wiring or new DRAM architectures, really that opportunity to co optimize helps us. We have great technology but also we have great integration capabilities that’s helping us grow this business at a high rate. Great, thank you. And for my follow up, this may be a little bit critical but your process control market share continues to decline. Contrary to conductor etch, you are seeing share gains. My question is just how do you see the strategic importance of your process control business within your broader franchise?
Gary Dickerson (President and CEO)
Thank you. Well, I believe this is one of our best opportunities overall within applied materials. So last year we grew this business at a high rate. This year PDC is going to be one of our fastest growing businesses and I’m very, very positive on the growth in 26 and I’m even more positive about our growth going forward. We have clear leadership in eBeam and with our cold field emission technology that gives us the highest resolution and the fastest imaging this year. Our optical inspection business is also on track for strong growth. We have a great pipeline of new technologies that we’re going to introduce over the next couple years that will also drive significant growth in pdc. So one of our fastest growing businesses this year positioned for strong growth in 27 and, and as we go forward. And the other thing I would add is there’s great synergy with our E beam leadership with the rest of applied materials in accelerating learning rate. So our process equipment teams, they’re using this leadership in E beam imaging to optimize processes at a faster pace. So that is helping us to drive growth in our process equipment business on top of PDC being a great growth business in and of itself. So again I don’t share your view on the perspective on the business. I think this is a great business, one of our fastest growing this year and I’m very optimistic we’re going to keep this growth going going forward.
Shane Brett (Equity Analyst at Morgan Stanley)
Great, thank you very much.
OPERATOR
Thank you. And our next question comes from the line of Joe Quatrocchi from Wells Fargo. Your question please.
Joe Quatrocchi (Equity Analyst at Wells Fargo)
Yeah, thanks for taking the questions. I was wondering if you could talk about just applies position for greenfield versus upgrade. I would assume given your portfolio of debts and just the number of new greenfield fab projects, you know, expanding into next year. How do we think about just the accelerating growth opportunity for applied relative to peers?
Bryce Hill (Chief Financial Officer)
Hi Joe, it’s Bryce. Yeah, I think most of the projects we track are greenfield projects. Especially on the logic side. You know we do very well on greenfield. That’s probably the best intensity from applied perspective. We also do well on upgrades. The one place that that’s different is nand. We don’t participate as much in upgrades but I think what you’re seeing in the environment is just a continued search for more and more floor space and more equipment being put in place. You see that in DRAM, you see that in LeadingLogic. And of course that’s been the case in ICAPS as new significant new capacity has been added over the last several years. So I think a lot of that investment is greenfield.
Joe Quatrocchi (Equity Analyst at Wells Fargo)
Thanks. And then as a follow up increasing the AGS long term growth expectation. Can you help us just kind of bridge the gap? I think the prior target had included the 200 millimeter business that’s now moved into systems. So I guess how do we think about the impact of that to the increase in the growth expectation?
Bryce Hill (Chief Financial Officer)
Yeah, Joe. So that should be a clean look at this point. So we’ve moved the 200 millimeter equipment business and restated our financials or recast our financials. So that’s all in our systems business at this point. So when we look forward on ags we’re only talking about the services business. And you may have heard I just updated our outlook for that and said mid teens for the AGS business is sort of a good multi year growth rate assumption. And then we expect to be higher this year because we have an increase in utilization across the ecosystem and an increase in the number of new fabs ramping relative. So there’s a step up this year that helps that business be higher than the mid teens.
OPERATOR
And operator, we have time for two more questions today please.
Jim Schneider (Equity Analyst)
Certainly. And our next question comes from the line of Jim Schneider from Goldman Sachs. Your question please.
Bryce Hill (Chief Financial Officer)
Good evening. Thanks for taking my question. Your mix of business this quarter pivoted quite strongly again to Foundry Logic. I’m curious as you look into the back half of this year whether you see more of a return to spending in greater concentration to dram. And then on a preliminary basis as you look into 2027, which do you expect to be the fastest growing technology area? Thanks, Jim. Yes, in the second half it goes back to the theme that we’ve been describing. You’re going to see strong growth in Leading Edge Logic, in dram, in advanced packaging and actually NAND also. So you’re seeing a poll really from the headliner AI across the entire end market grouping with the exception of icaps. So ICAPS goes back to, there’ll be some digestion with all the capacity that’s been put in place the past couple of years. And we didn’t call, you know, we didn’t call a fast grower between DRAM and leadinglogic. I think both of those will be accelerating in the second half.
Jim Schneider (Equity Analyst)
And then as you. Thank you. And then as you look at your customers longer term plans, can you maybe share where they are seeing the greatest upside to the longer term forecast across those same areas? Thank you.
Bryce Hill (Chief Financial Officer)
That’s a good question. I think we haven’t answered which one between DRAM and Leading Logic will be the most growth across the multi year horizon? We think both of those will be very strong and actually advanced packaging goes right with it on the nand. You know, we see we did raise our bit growth forecast for nand, so probably a few percentage points and at least our view is it will still be satisfied by upgrades. So we don’t expect a lot of new wafer starts on the NAND side, but we do think the demand forecast for bits has gone up on nand.
Gary Dickerson (President and CEO)
Yeah, Jim, just also part of the question you asked earlier. We see a similar profile in 27 to what we’re seeing in 26 and really that’s being driven by AI computing. The markets that are growing the fastest in 26, we think they continue to grow at that same rate as a percentage of the mix in 27 and going forward.
Jim Schneider (Equity Analyst)
Thank you.
OPERATOR
Thank you. And our final question for today then comes from the line of Melissa Weathers from Deutsche Bank. Your question please.
Melissa Weathers (Equity Analyst at Deutsche Bank)
Hi, thank you so much. I just want to touch really quickly on the ICAP side that Bryce, you kind of just talked about. But I think if we look at a lot of the analog reports this earnings season, it does seem like inventories are starting to lean out and maybe utilizations of those fabs are starting to get better. So I realize it’s not the fastest growing part of your business, but any updated outlook you guys have on, maybe when we could see some more material spending on that core ICAPS business going forward.
Bryce Hill (Chief Financial Officer)
Hi Melissa, good question. And that’s a great point. There are some strong areas in ICAPs. I think analog and photonics power chips are all areas that we’re seeing that are very strong. So that makes sense to us. I would just encourage investors to think ICAPS is still a very strong market. It’s one of our largest markets. I think this is the first year in a few years where leading logic is actually ahead of icaps. But ICAPS is still plugging along, still adding capacity at a significant rate. It’ll just be, you know, it just won’t grow a lot year over year until we digest the capacity. The utilizations have improved in ICAPs. So to your point, I think 300 millimeter utilizations are in a very healthy range at this point. So when we look forward, we expect ICAPS from an equipment perspective to eventually start growing at the same rate the devices are, which is mid to high single digits. We just have to get past this period where utilizations catch up with the installed capacity.
Melissa Weathers (Equity Analyst at Deutsche Bank)
Got it. Thank you. If I can squeeze one last one in at the end of the call, just the epic center. I know you guys are a couple months away from, from unveiling that. So just any last couple statements you can make on what that could do to drive innovation and I don’t know if it would be share gains or competitive advantage, but anything on the epicenter we should look forward to.
Gary Dickerson (President and CEO)
Yeah, thanks Melissa. I’m really excited about the epicenter. I mean again, all of our customers and the entire ecosystem really is in a race for leadership for AI computing that is really driving our businesses in leading edge, foundry, logic, dram, high bandwidth memory and advanced packaging. And really when you think about architecture innovation, applied material innovations are really at the foundation of all of those architecture innovations across all of those fast growing segments. So having our customers and partners co located with these technologies that are enabling the architecture innovations here in our EPIC center and co located with our innovators is going to be an acceleration for Applied and for the entire industry. We’ve announced eight partners that we talked about earlier. Tsmc, Samsung, Hynix, Micron, Adventest, asu, rpi, Stanford, and we will be adding more soon for Applied. It gives us better multi node visibility because again we’re working many generations out in the future with all of these different companies and really co innovating. We are working with them to create these new architectures in the epicenter and it also enables us to be designed in with our equipment and our advanced services for those new architectures. So I’m really excited about the EPIC Center. I think this is the right strategy at the right time and it’s going to be an accelerator for our customers and for applied materials.
Melissa Weathers (Equity Analyst at Deutsche Bank)
Thank you.
Mike Sullivan (Corporate Vice President of Investor Relations)
Well, thank you Melissa for your questions.
Bryce Hill (Chief Financial Officer)
And now Bryce, would you like to give us your closing thoughts? Excellent, thanks Mike. We’re really pleased with the investments we’ve made. Puts us in a great position as AI drives incremental demand across the industry. We’re in a strong position to grow revenue, expand margins and increase operating leverage. We have a number of upcoming events to call to your attention. Next week Tim Dean from our services business will be at the J.P. morgan Conference in Boston. The following week, Gary will be at the Bernstein Conference in New York. And the week after that I’ll be at the BofA conference in San Francisco. We hope to see many of you at those events. Mike, please go ahead and close the call.
Mike Sullivan (Corporate Vice President of Investor Relations)
All right, great. Thank you Bryce. And we’d like to thank everybody for joining us today. A replay of the call is going to be available on the Investor Relations page of our website by 5 o’clock Pacific time. And we would now like to thank you for your continued interest in Applied Materials.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
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