Applied Materials (AMAT) — Earnings Preview Memo
Key Points
- Q3 FY2026 Guidance:
- Revenue guidance: $8,950M ± $500M (+23% YoY at midpoint)
- Non-GAAP EPS guidance: $3.36 ± $0.20 (+36% YoY at midpoint)
- Non-GAAP gross margin guidance: 50.1% (modest sequential increase)
- Segment revenue guidance: Semiconductor Systems ~$6,900M, AGS ~$1,750M, Other ~$300M
- Consensus Estimates for Q3 FY2026:
- Revenue: $9,007M
- Gross margin: 50.1%
- EBITDA: $3,192M - Net income: $2,703M - GAAP EPS: $3.46
- Q2 FY2026 Actuals (Most Recent Reported):
- Revenue: $7,910M (+11% YoY)
- Non-GAAP gross margin: 50.0% (+80 bps YoY)
- Non-GAAP EPS: $2.86 (+20% YoY)
- Semiconductor Systems revenue: $5,965M (+10% YoY)
- AGS revenue: $1,665M (+17% YoY)
- DRAM revenue: $1,700M (+18% YoY)
- China revenue: 24% of Semi Systems + AGS
- FY2025 Actuals (Prior Year):
- Revenue: $28,368M (+4% YoY)
- Non-GAAP gross margin: 48.8% (+120 bps YoY)
- Non-GAAP EPS: $9.42 (+9% YoY)
- Key Watch Items for Q3 FY2026:
- Execution on >30% YoY growth in Semiconductor Systems - Sustainability of 50%+ gross margins as mix shifts to leading-edge logic, DRAM, and advanced packaging - AGS (Services) growth rate—raised to mid-teens, with potential for upside - Visibility and order trends: 8-quarter rolling forecasts, customer cleanroom constraints, and greenfield project pipeline - Advanced packaging revenue growth (>50% YoY expected in 2026)
- DRAM share gains and content uplift from HBM/4F-squared/3D DRAM inflections - China/ICAPS business stability (flat to slightly up YoY)
- Operating leverage as OpEx grows slower than revenue
Forward Guidance and Consensus vs. Prior Year
Q3 FY2026 Guidance vs. Consensus
| Metric | Company Guidance | Consensus Estimate | YoY Growth (Guidance Midpoint) | Notes |
|---|---|---|---|---|
| Revenue ($M) | 8,950 ± 500 | 9,007 | +23% | Guidance midpoint vs. Q3 FY25 actual $7,100M |
| Non-GAAP EPS | $3.36 ± $0.20 | +36% | Guidance midpoint vs. Q3 FY25 actual $2.47* | |
| Non-GAAP Gross Margin | 50.1% | 50.1% | +90 bps | Q2 FY26 actual was 50.0% |
| Semiconductor Systems ($M) | ~6,900 | Up from $5,965M in Q2 FY26 | ||
| AGS ($M) | ~1,750 | Up from $1,665M in Q2 FY26 | ||
| Other ($M) | ~300 | Up from $280M in Q2 FY26 |
*Q3 FY25 non-GAAP EPS not explicitly stated; Q2 FY25 was $2.39.
Q2 FY2026 Actuals vs. Q2 FY2025
| Metric | Q2 FY2026 Actual | Q2 FY2025 Actual | YoY Growth | Notes |
|---|---|---|---|---|
| Revenue ($M) | 7,910 | 7,100 | +11% | Record quarterly revenue |
| Non-GAAP Gross Margin | 50.0% | 49.2% | +80 bps | Highest in 25+ years |
| Non-GAAP EPS | $2.86 | $2.39 | +20% | Record EPS |
| Semiconductor Systems ($M) | 5,965 | 5,401 | +10% | Record foundry revenue |
| AGS ($M) | 1,665 | 1,420 | +17% | Record services revenue |
| DRAM Revenue ($M) | 1,700 | 1,440 | +18% | Record DRAM revenue |
| China Revenue (%) | 24% | 25% | -1 ppt | Of Semi Systems + AGS |
FY2025 Actuals (Restated)
| Metric | FY2025 Actual | FY2024 Actual | YoY Growth | Notes |
|---|---|---|---|---|
| Revenue ($M) | 28,368 | 27,176 | +4% | Record annual revenue |
| Non-GAAP Gross Margin | 48.8% | 47.6% | +120 bps | Highest in 25 years |
| Non-GAAP EPS | $9.42 | $8.65 | +9% | Record EPS |
| Free Cash Flow ($M) | 5,698 | 7,487 | -24% | Capex elevated for EPIC Center |
| Dividend per Share | $0.46 (Q4) | $0.40 (Q4) | +15% | Quarterly dividend |
What to Watch This Quarter
1. Semiconductor Systems Growth and Mix
- Guidance implies >30% YoY growth for the full year; Q3 guide is +23% YoY.
- Mix is shifting toward leading-edge logic, DRAM (especially HBM), and advanced packaging—these are now >80% of incremental WFE growth.
- Management commentary: "We now expect our semiconductor equipment business will grow more than 30% this calendar year." (Q2 FY26 call)
2. Gross Margin Expansion
- Non-GAAP gross margin guided to 50.1% for Q3 FY26, up from 50.0% in Q2 FY26 and 49.2% in Q2 FY25.
- Margin drivers: value-based pricing, higher-value product mix, manufacturing cost improvements, and operating leverage.
- Commentary: "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." (Q2 FY26 call)
3. AGS (Applied Global Services) Growth
- AGS revenue up 17% YoY in Q2 FY26; long-term growth outlook raised to mid-teens CAGR, with 2026 expected to be above that due to high utilization and new fab ramps.
- Attach rates, contract length (2.9 years avg.), and renewal rates (>90%) are key metrics.
- AIx and other service innovations are driving higher value capture per tool.
4. Advanced Packaging Acceleration
- Advanced packaging revenue expected to grow >50% YoY in 2026, driven by HBM and 3D chiplet stacking.
- Recent NEXX acquisition expands panel-level packaging capabilities.
- Management: "We expect to grow our packaging revenues more than 50% in calendar 2026, and are very well positioned at upcoming packaging inflections." (Q2 FY26 call)
5. DRAM Share Gains and Technology Inflections
- DRAM revenue up 18% YoY in Q2 FY26; management claims 10 points of DRAM WFE share gained over the last decade.
- Content uplift from HBM (3x–4x wafer starts vs. standard DRAM), 4F-squared, and 3D DRAM inflections.
- Management: "We expect to gain additional DRAM market share at upcoming transistor and device architecture inflections." (Q2 FY26 call)
6. China/ICAPS Stability
- China revenue as % of Semi Systems + AGS stable at 24% in Q2 FY26.
- ICAPS (mature nodes) and China business expected to be flat to slightly up YoY.
- Commentary: "We expect our business in China, and our ICAPS business worldwide, to be flat to slightly higher in the calendar year." (Q2 FY26 call)
7. Operating Leverage and Capacity
- OpEx expected to grow slower than revenue; focus on productivity and margin expansion.
- Manufacturing capacity nearly doubled; supply chain visibility improved with 8-quarter rolling customer forecasts.
- Cleanroom space remains a gating factor for further upside.
Last Year’s Results and Comparables
- Q3 FY2025 (YoY Comparable):
- Revenue: $7,100M - Non-GAAP gross margin: 49.2%
- Non-GAAP EPS: $2.39 - Semiconductor Systems revenue: $5,401M - AGS revenue: $1,420M - DRAM revenue: $1,440M
- YoY Comparison for Q3 FY2026:
- Revenue guidance midpoint ($8,950M) is +$1,850M or +26% vs. Q3 FY2025 actual.
- Non-GAAP EPS guidance midpoint ($3.36) is +$0.97 or +41% vs. Q3 FY2025 actual.
- Gross margin guidance (50.1%) is +90 bps vs. Q3 FY2025 actual.
- Conclusion: The company is coming off a relatively easy YoY comparable, as Q3 FY2025 was a period of slower growth (+4% YoY for FY2025), with the current year seeing a significant acceleration in both top-line and bottom-line metrics.
Summary and Conclusions
- Applied Materials enters Q3 FY2026 with strong momentum, record gross margins, and robust demand visibility.
- Key focus areas for the upcoming print:
- Delivery on >30% YoY growth in Semiconductor Systems, with particular attention to leading-edge logic, DRAM, and advanced packaging.
- Sustaining and expanding 50%+ gross margins as the mix continues to shift toward higher-value segments.
- AGS (Services) growth, with mid-teens or better expected for 2026, supported by high utilization and new fab ramps.
- Execution on advanced packaging growth (>50% YoY expected), with new product launches and acquisitions (NEXX) broadening the portfolio.
- Continued DRAM share gains, especially as HBM and 4F-squared/3D DRAM inflections ramp.
- Monitoring China/ICAPS business for stability amid ongoing trade restrictions.
- Operating leverage as OpEx grows slower than revenue, and manufacturing/supply chain capacity scales to meet demand.
- The company is coming off a relatively easy YoY comparable, setting up for strong reported growth.
- Risks: Cleanroom/fab space constraints, supply chain execution, China/trade policy changes, and competitive dynamics in mature nodes.
Upcoming Catalysts
- Q3 FY2026 earnings report (watch for upside to guidance, segment mix, and margin progression)
- EPIC Center opening (October 2026) and further customer/partner announcements- Master Class events (June 25: DRAM and advanced packaging)
- Additional product launches and M&A integration (NEXX, x-ray inspection, etc.)
Appendix: Quarterly Financials — Actuals and Consensus
Quarterly Results and Consensus (Latest Periods)
| Quarter | Revenue ($M) | Gross Margin (%) | EBITDA ($M) | Net Income ($M) | GAAP EPS | Non-GAAP EPS | FCF ($M) |
|---|---|---|---|---|---|---|---|
| Q3 FY2026E | 9,007 | 50.1 | 3,192 | 2,703 | 3.46 | ||
| Q2 FY2026A | 7,910 | 50.0 | 2,534 | 2,138 | 2.69 | 2.86 | 210 |
| Q1 FY2026A | 7,012 | 49.1 | 2,133 | 1,751 | 2.15 | 2.38 | 1,040 |
| Q4 FY2025A | 6,670 | 48.1 | 2,016 | 1,671 | 2.06 | 2.17 | 2,043 |
| Q3 FY2025A | 7,212 | 48.3 | 2,275 | 1,909 | 2.35 | 2.48 | 2,050 |
In summary: Applied Materials is set up for a strong Q3 FY2026 print, with expectations for >30% YoY growth in its core equipment business, continued gross margin expansion, and robust demand visibility into 2027. The most important factors to watch are execution on growth and margins, sustainability of AGS/services outperformance, and the ability to capitalize on secular AI-driven demand in leading-edge logic, DRAM, and advanced packaging. The company is coming off a relatively easy YoY comparable, amplifying the importance of delivery against elevated expectations.
