Applied Materials Inc Earnings - Q3 2026 Analysis & Highlights
Applied Materials delivered record Q3 2026 results driven by unprecedented AI infrastructure demand, with the company raising full-year guidance and positioning for sustained multi-year growth through strategic investments in advanced packaging, services, and manufacturing capacity expansion.
Key Financial Results
Record revenue of $9.1 billion, up 15% sequentially and 25% year-over-year, representing the highest quarter-on-quarter revenue growth in company history.
Non-GAAP gross margin increased to 50.4%, up 40 basis points sequentially and 150 basis points year-over-year.
Non-GAAP operating margin expanded to a record 34%, up 190 basis points sequentially and 330 basis points year-over-year.
Record non-GAAP earnings per share of $3.50, up 22% sequentially and 41% year-over-year.
Record operating cash flow of over $3 billion with capital expenditures of $707 million, resulting in free cash flow of $2.3 billion.
13th consecutive quarter of year-over-year gross margin expansion, demonstrating value creation from products and services in the AI ecosystem.
Business Segment Results
Semiconductor Systems delivered record revenue of $7 billion, up 18% sequentially and 27% year-over-year.
DRAM revenue, which includes HBM packaging, grew by 52% year-over-year to record levels.
Record revenues in deposition including PVD, CVD, and epitaxy, with epitaxy being one of the fastest-growing businesses this year.
Record sales in thermals and treatments within materials modification.
Record revenue in both etch and CMP within materials removal.
Record revenue in process diagnostics and control, growing faster than overall systems business this year.
Segment non-GAAP gross margin increased 190 basis points year-over-year to 55.4%.
Non-GAAP operating profit increased 45% year-over-year to a record $2.7 billion.
Applied Global Services delivered record revenue of $1.8 billion, up 22% year-over-year, reflecting subscription services growth and high transactional parts demand.
AGS gross margin of 35.6%, up 180 basis points year-over-year, and operating margin of 30.1%, up 280 basis points year-over-year.
China represented 26% of semiconductor systems plus AGS revenue, with expectations for China revenue to increase this calendar year led by 28 nanometer foundry-logic investments.
Capital Allocation
Distributed $860 million to shareholders, including $420 million in dividends and $440 million in stock repurchases.
$12.8 billion remaining in share buyback authorization with continued expectation to distribute 80% to 100% of free cash flow to shareholders.
Nearly doubled manufacturing space over the past several years with official opening of newest manufacturing center in Singapore during the quarter.
Added more than 1,500 people this quarter in worldwide manufacturing and AGS customer support.
Planning next manufacturing capacity expansion to support further increases in demand by 2030.
Industry Trends and Dynamics
Rapid global build-out of AI infrastructure combined with Applied's leadership in enabling and highest value technologies for AI computing provides exceptionally strong foundation for multi-year revenue and profit growth.
Large gap between demand and supply for advanced chips as AI computing drives unprecedented demand for semiconductors.
Customers finding new ways to address clean room space constraints and significantly increasing demand for tool deliveries.
Most leading-edge logic and DRAM fabs running at full capacity with utilization levels rising across the board, including in ICAPS where strong demand exists in AI-related markets like power and optical chips.
Customers announced more than 10 new fab projects just this quarter.
Leading-edge foundry-logic, DRAM, and advanced packaging expected to represent around 80% of wafer fab equipment growth in 2026 and 2027.
Advanced packaging is one of the most important areas for AI-compute innovation with very strong multi-year growth expected for Applied.
Overall packaging revenues expected to grow more than 70% in calendar 2026.
Competitive Landscape
Applied is the overall leader in advanced packaging with strong positions in high-bandwidth memory and 3D chiplet stacking.
Applied is the number one process equipment provider in DRAM and leader in CMOS periphery logic to upgrade transistors for higher performance and power.
Applied is the leader in eBeam technology with unique eBeam technology in a growing market for advanced logic and DRAM devices.
Applied has strong leadership positions in leading-edge foundry-logic, DRAM, and advanced packaging where the company identified key AI inflections early and shifted investments to build innovative pipeline of next-generation solutions.
Company expects to gain share during the year across its focus markets.
Applied has the most enabling technologies in the fastest growing parts of the market with most broad, most connected, and most unique portfolio to enable new transistors, wiring, DRAM architectures, and new packaging architectures.
Macroeconomic Environment
Cloud service providers continue to increase investments in AI infrastructure with many already generating positive returns on their investments.
AI is reshaping the global economy and becoming fundamental to relative competitiveness of companies.
Performance and cost of AI computing improving, with many new applications becoming technically viable and economically attractive.
Intense global competition for AI leadership described as two concurrent races: technology leadership and capacity race.
Growth Opportunities and Strategies
EPIC strategy designed to increase innovation and commercialization velocity by creating earlier and deeper engagements with customers and partners and co-locating key innovators.
EPIC provides chipmakers much earlier access to Applied's new product innovations at the foundation of future AI compute architectures.
11 announced EPIC engagements spanning system companies, leading chipmakers, top research universities, and innovation partners, including recent announcements with Broadcom, SCREEN, and UC Berkeley.
Brand new EPIC Center in Silicon Valley with first R&D tool moving into clean room next week and operations expected to start in coming months.
Six new products announced in past quarter including Centura Prime epitaxy system for high-performance DRAM, Producer Avila for higher performance and layer count HBM, Nokota VMax plating system, Opta Quad CMP for advanced packaging, and two new eBeam systems for advanced packaging.
Advanced service solutions enabling customers to better optimize performance of high-volume manufacturing operations with more than 37,000 chambers in field connected to proprietary AIx software capabilities.
Advanced Global Services expected to grow more than 20% in calendar 2026 and deliver sustainable long-term annual growth rate in mid-teens.
Process Diagnostics and Controls business expected to grow more than 50% in calendar 2026 with strong pipeline of new products fueling growth in 2027 and beyond.
New portfolio of output innovation products increasing wafers processed per square foot of clean room space, with new epitaxy system for DRAM using 20% less clean room space than earlier products.
Multiple output innovation products in qualification at customer sites providing significant increases in output per unit area.
Systematic approach to value-based pricing implemented three years ago with benefits reflected in strong revenue growth and gross margins.
Increased R&D in every year since Gary joined company in 2012, broadening from equipment innovations to materials engineering solutions and advanced packaging innovations.
Investments in technologies enabling better fab economics as company accelerates ramps and boosts output and yields.
Financial Guidance and Outlook
Q4 company revenue guidance of $10.25 billion, plus or minus $500 million, up 51% year-over-year.
Q4 non-GAAP EPS guidance of $4.02, plus or minus $0.20, up 85% year-over-year.
Q4 semiconductor systems revenue expected around $7.9 billion, up 62% year-over-year.
Q4 AGS revenue expected about $1.84 billion, up 22% year-over-year.
Q4 other revenue expected around $510 million, composed primarily of display revenue.
Other revenue expected to be approximately $400 million per quarter on average through 2027.
Q4 non-GAAP gross margin expected approximately 50.4%, up 230 basis points year-over-year.
Q4 non-GAAP operating expenses expected around $1.58 billion.
Non-GAAP tax rate modeled around 11% and tax rate around 13% in 2027 as company absorbs effect of global minimum tax.
Semiconductor systems growth greater than 30% for calendar year, with company saying it's greater than that at this point.
Expect 2027 to be another strong growth year based on unprecedented visibility from customers.
Very significant increase in DRAM revenues expected in second half of calendar year as customers begin to expand cleanroom capacity.
Expect to double quarterly system output from current levels by 2028 based on longer-term demand signals from customers.
Customers giving longer visibility than ever before, with some conversations extending to 2030.
Expect continued record performance in second half of calendar year with sizable increase in DRAM and leading-edge foundry-logic revenue.
Based on unprecedented visibility from customers, expect another strong record year in 2027 and making substantial investments to ramp to higher levels beyond next year.
ICAPS expected to return to growth for calendar 2026 and 2027.
NAND expected to grow but will be slower grower in out year compared to leading-edge logic, DRAM, and advanced packaging.
CapEx expected to be higher than normal but decline as percentage of revenue going into 2026.
Customer Relationships and Visibility
Largest customers giving longer-term commitments and rolling eight-quarter forecasts to ensure supply chain and field teams can support ramps.
Increased demand visibility gives high confidence that 2027 will be another strong growth year for Applied Materials.
Customers have visibility to roadmap with perspective on approximately five years of visibility for largest customers.
Longer lead time POs from customers with details agreed from longer lead time perspective.
Cancelation charges and expedite charges helping navigate current environment.
Visibility has significantly increased from prior periods.
