Applied Materials Inc Earnings - Q4 2025 Analysis & Highlights
Applied Materials' Q1 2026 earnings call highlighted strong financial performance, driven by accelerating investments in AI computing, leading to increased demand in leading-edge logic, high-bandwidth memory DRAM, and advanced packaging. The company provided optimistic guidance for 2026 and 2027, emphasizing its leadership in key market segments and strategic initiatives like the EPIC platform and AIx software to drive sustainable growth and margin expansion.
Key Financial Results
Revenue: Applied Materials delivered revenue of $7 billion, which was in the upper end of its guidance range and down 2% year-over-year.
Non-GAAP Gross Margin: The non-GAAP gross margin was 49.1%, 70 basis points above the midpoint of expectations and grew 20 basis points year-over-year.
Non-GAAP Operating Profit: Non-GAAP operating profit declined 4% year-over-year to $2.1 billion.
Non-GAAP Earnings Per Share (EPS): Non-GAAP EPS of $2.38 was at the top of the guidance range and flat year-over-year.
Accrual: Included in GAAP results is an accrual of $252.5 million related to an export controls compliance matter.
Business Segment Results
Semiconductor Systems: Revenue exceeded expectations in Q1 and included record DRAM revenue. On a year-over-year basis, revenue declined 8% to $5.14 billion. Non-GAAP gross margin increased 100 basis points to more than 54%. Non-GAAP operating margin declined 80 basis points to 32.9%.
Applied Global Services (AGS): Delivered record revenue of $1.56 billion, exceeding expectations and growing 15% year-over-year. Non-GAAP gross margin increased 210 basis points, and non-GAAP operating margin grew 320 basis points.
Display Business: Results are now included in the "other" segment.
Capital Allocation
Cash from Operations: Generated $1.69 billion in cash from operations.
Free Cash Flow: Free cash flow of $1 billion included elevated capital investments for building the EPIC R&D center and expanding systems manufacturing capacity.
Shareholder Distributions: Distributed $702 million to shareholders in cash dividends and stock buybacks. Over the past year, over 85% of free cash flow has been distributed to shareholders.
Industry Trends and Dynamics
AI-driven Growth: AI is at a tipping point, driving unprecedented spending on semiconductors, manufacturing capacity, and R&D.
Market Growth: The most critical and fastest-growing markets are leading-edge logic, high bandwidth memory DRAM, and advanced packaging.
Semiconductor Industry Revenue: Global semiconductor industry revenues could potentially reach $1 trillion in 2026, several years earlier than prior predictions, fueled by AI end markets.
WFE Segments: Leading-edge foundry-logic, DRAM (including HBM), and advanced packaging are expected to be the fastest-growing WFE segments in 2026, 2027, and for the next several years.
HBM Demand: AI computing is driving significant demand for high-bandwidth memory DRAM, which requires three to four times more wafer starts per delivered bit than standard DRAM. The number of dies in HBM stacks is increasing from 12 today to 16, and then 20 or more in the future.
NAND Market: Modest growth in equipment demand in 2026 for NAND, expected to remain less than 10% of wafer fab equipment spending.
ICAPS Market: Wafer fab equipment for ICAPS (IoT, communications, automotive, power, and sensor markets) is expected to be approximately flat year-on-year, both globally and in China.
Competitive Landscape
Leadership in Leading-Edge Logic: Applied Materials is the clear number one process equipment provider in leading-edge logic, with strong leadership across materials deposition, modification, treatments, conductor etch, and e-beam technologies.
Leadership in Memory: Applied Materials is the number one process equipment provider in memory, particularly in DRAM, leading in materials deposition for wiring and patterning, conductor etch, and e-beam technologies.
Leadership in Advanced Packaging: Applied Materials has very strong market share in HBM and 3D chiplet-stacking, extending its overall leadership in advanced packaging due to leadership in materials deposition and removal technologies.
Market Share Gains: Gate-all-around nodes are expected to grow the available market considerably and provide a catalyst for multiple points of market share gain. The company is on track to gain share and capture more than 50% of its served market in gate-all-around and wiring, including backside power.
DRAM Market Share: Applied Materials expects to grow share in 6F-squared and 4F-squared DRAM.
Macroeconomic Environment
Semiconductor Factory Utilization: Semiconductor factory utilization is rising across all device types.
Foundry Logic and DRAM Capacity: Leading-edge foundry logic and DRAM capacity is essentially full, and prices have increased.
Cleanroom Space: Limited cleanroom capacity is pacing the rate of investment and growth.
Growth Opportunities and Strategies
Inflection-Focused Innovation: Applied Materials' strategy is inflection-focused innovation, concentrating R&D on high-value solutions for major device architecture inflections to accelerate customer roadmaps and drive sustainable value capture and margin expansion.
New Products: Planning to launch more than a dozen new products in 2026, including three for advanced logic and DRAM.
Viva radical treatment system: Delivers angstrom-level precision engineering for nanosheet surfaces, enabling higher speed next-generation gate-all-around transistors.
Sym3 Z Magnum: Newest variant of the Sym3 etch platform, enabling angstrom-level precision for critical etch steps in gate-all-around transistors and advanced DRAM.
Spectral ALD system: Enables selective deposition of monocrystalline moly, reducing contact resistance in advanced logic devices by up to 15%.
EPIC Platform: The global EPIC platform supports high-velocity co-innovation with customers and R&D partners, providing earlier access to R&D portfolios and accelerating technology transfer into high-volume manufacturing.
Advanced Services: Accelerating demand for advanced services, supporting a double-digit growth rate for the service business.
AIx Software: Over 30,000 chambers connected to AIx servers using AI-powered monitoring, diagnostics, and analytics, resulting in 30% faster response times and increased wafer output.
Cold Field Emission (CFE) e-beam technology: Revenues expected to double this calendar year to more than $1 billion, supporting Process Diagnostics and Control as one of the fastest-growing businesses in 2026.
Financial Guidance and Outlook
Q2 2026 Revenue: Expects company revenue of $7.65 billion, plus or minus $500 million, which would be up around 9% sequentially.
Q2 2026 Non-GAAP EPS: Expects non-GAAP EPS of $2.64, plus or minus $0.20.
Q2 2026 Segment Revenue:
Semiconductor Systems: Around $5.8 billion.
AGS: About $1.6 billion.
Other: Around $250 million.
Q2 2026 Non-GAAP Gross Margin: Expected to increase to approximately 49.3%.
Q2 2026 Non-GAAP Operating Expenses: Expected to be around $1.415 billion.
Non-GAAP Tax Rate: Modeling a non-GAAP tax rate of around 11%.
Semiconductor Equipment Business Growth: Expects to grow its semiconductor equipment business more than 20% this calendar year, with demand weighted towards the second half.
2027 Outlook: Expects strong growth momentum to be carried into 2027.
