Applied Materials Inc Earnings - Q4 2025 Analysis & Highlights
Applied Materials reported strong Q1 2026 results driven by accelerating AI infrastructure investments, with revenue and earnings exceeding guidance, while projecting greater than 20% semiconductor equipment growth for calendar 2026 supported by leading-edge logic, DRAM, and advanced packaging demand.
Key Financial Results
Q1 2026 revenue of $7.0 billion was at the upper end of guidance and declined 2% year-over-year.
Non-GAAP gross margin of 49.1% grew 20 basis points year-over-year and was 70 basis points above the midpoint of expectations.
Non-GAAP operating profit declined 4% year-over-year to $2.1 billion.
Non-GAAP earnings per share of $2.38 was at the top of the guidance range and flat 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.
Non-GAAP OpEx grew 2% year-over-year to $1.34 billion, with an 8% increase in R&D investments largely offset by G&A spending reductions.
The company recorded a $252.5 million accrual related to an export controls compliance matter, with the Department of Justice and SEC closing their inquiries with no enforcement actions.
Business Segment Results
Semiconductor Systems revenue exceeded expectations at $5.14 billion, declining 8% year-over-year, with record DRAM revenue included in the results.
Semiconductor Systems non-GAAP gross margin increased 100 basis points to more than 54%, driven by value-based pricing and manufacturing cost improvements.
Semiconductor Systems non-GAAP operating margin declined 80 basis points to 32.9%.
Applied Global Services delivered record revenue of $1.56 billion, exceeding expectations and growing 15% year-over-year.
AGS non-GAAP gross margin increased 210 basis points and non-GAAP operating margin grew 320 basis points.
Capital Allocation
The company generated $1.69 billion in cash from operations in Q1 2026.
Free cash flow of $1.0 billion included elevated capital investments for the EPIC R&D center in Silicon Valley and expanded systems manufacturing capacity.
The company distributed $702 million to shareholders in cash dividends and stock buybacks.
Over the past year, the company distributed over 85% of free cash flow to shareholders.
Applied increased inventory by nearly $500 million year-over-year to meet increasing build plans and support customer demand.
Industry Trends and Dynamics
Global semiconductor industry revenues can potentially reach $1 trillion in 2026, several years earlier than prior predictions.
AI is at a tipping point where improvements in performance and cost translate to real-world applications delivering meaningful productivity gains and return on investment for users.
The race to build-out AI infrastructure is driving unprecedented spending on semiconductors, semiconductor manufacturing capacity, and research and development.
The most critical and fastest growing markets are leading-edge logic, high bandwidth memory DRAM, and advanced packaging.
Semiconductor factory utilization is rising across all device types, with leading-edge foundry logic and DRAM capacity essentially full and prices increased.
Data center AI-related components are growing between 30% and 40%, with data center expected to surpass smartphones in 2029 for leading-edge wafer starts.
HBM DRAM requires three to four times more wafer starts per delivered bit than standard DRAM, and the number of dies in HBM stacks is increasing from 12 today to 16, then 20 or more in the future.
NAND is forecasted to have modest growth in equipment demand in 2026 and remain less than 10% of wafer fab equipment spending.
ICAPS (IoT, communications, automotive, power, and sensor markets) wafer fab equipment is expected to be approximately flat year-on-year, both globally and in China.
Competitive Landscape
Applied is the clear number one process equipment provider in leading-edge logic with strong leadership positions across materials deposition, modification and treatments, conductor etch, and e-beam technologies.
Applied is the number one process equipment provider in memory with clear leadership in materials deposition for both wiring and patterning, conductor etch, and e-beam technologies.
Applied has very strong market share in HBM and 3D chiplet-stacking, the fastest growing market segments in advanced packaging in 2026.
Applied expects to capture more than 50% of served market in gate-all-around and wiring, including backside power, in leading-edge foundry-logic.
Applied is number one in standard DRAM, HBM DRAM, and HBM packaging, and is positioned to gain share in 6F-squared and 4F-squared nodes.
Applied has grown DRAM market share significantly over the last decade and maintains very strong positions in 4F-squared development.
Macroeconomic Environment
Cloud service providers are tracking higher levels of planned CapEx, indicating strong demand signals throughout the ecosystem.
Cleanroom space availability is a key factor pacing the rate of investment in leading-edge logic and DRAM in 2026.
Customers are working to accelerate factory projects as quickly as possible, with a number of new factory projects and fab expansions scheduled for completion over the next several years.
Growth Opportunities and Strategies
Applied's strategy is inflection-focused innovation, focusing R&D resources on high-value solutions to enable major device architecture inflections.
Applied is planning to launch more than a dozen new products in 2026, including three for advanced logic and DRAM announced earlier in the week.
The Viva radical treatment system delivers angstrom-level precision engineering of nanosheet surfaces enabling higher speed next-generation gate-all-around transistors.
Sym3 Z Magnum enables angstrom-level precision for critical etch steps in gate-all-around transistors and advanced DRAM.
The Spectral ALD system enables selective deposition of monocrystalline moly, a new material that can reduce contact resistance in advanced logic devices by up to 15%.
Applied is leading the transition from ALD tungsten to ALD moly in logic contact formation.
Applied announced its first EPIC co-development agreement with Samsung Electronics, designed to support high-velocity co-innovation with customers and R&D partners.
EPIC will provide chipmakers significantly earlier access to Applied's R&D portfolio, enabling faster cycles of learning and accelerated transfer of next-generation technologies into high-volume manufacturing.
Applied has more than 30,000 chambers connected to AIx servers using AI-powered monitoring, diagnostics, and analytics, seeing 30% faster response times.
Applied has automated all major distribution centers with state-of-the-art AI-enabled robotic systems, improving parts delivery speed, accuracy, and inventory optimization.
Applied's Cold Field Emission e-beam technology revenues are expected to double in calendar 2026 to more than $1 billion, supporting Process Diagnostics and Control as one of the fastest growing businesses.
Applied's service business is supporting a double-digit growth rate as customers ramp complex new devices in high-volume manufacturing.
Financial Guidance and Outlook
Applied expects to grow its semiconductor equipment business more than 20% in calendar 2026, with demand weighted towards the second half of the year.
Strong growth momentum is expected to be carried into 2027 based on customer visibility and longer-term commitments.
Q2 2026 company revenue is expected to be $7.65 billion, plus or minus $500 million, representing approximately 9% sequential growth.
Q2 2026 non-GAAP EPS is expected to be $2.64, plus or minus $0.20.
Q2 2026 Semiconductor Systems revenue is expected to be around $5.8 billion, AGS revenue about $1.6 billion, and other revenue around $250 million.
Q2 2026 non-GAAP gross margin is expected to increase to approximately 49.3%.
Q2 2026 non-GAAP operating expenses are expected to be around $1.415 billion.
Applied is modeling a non-GAAP tax rate of around 11%.
Applied expects modest improvements in gross margin through the course of 2026, with tailwinds from faster semi business growth offset by headwinds from flattish China mix.
Applied Global Services is expected to grow at low-double digits or better going forward, based on a 55,000 tool installed base growing 5-plus percent annually.
Process Diagnostics and Control is expected to be one of the fastest-growing businesses in 2026 with very high confidence in continued high growth rates in 2027 and beyond.
