Q3 2026 Applied Materials Inc Earnings Call Transcript
Key Points
- Record-breaking Q3 fiscal 2026 results with the highest quarter-on-quarter revenue growth in company history, driven by strong AI infrastructure demand.
- Raised calendar 2026 revenue growth forecast again, expecting to outgrow the overall semiconductor market.
- Strong demand visibility with customers providing rolling eight-quarter forecasts and commitments extending to 2030, supporting confidence in another strong growth year in 2027.
- Leadership in high-growth areas like leading-edge foundry logic, DRAM, and advanced packaging, which are expected to represent ~80% of WFE growth in 2026 and 2027.
- Advanced packaging revenues expected to grow over 70% in calendar 2026, with a strong portfolio for future inflections like panel-level packaging and hybrid bonding.
- Applied Global Services (AGS) expected to grow over 20% in 2026, with a sustainable long-term growth rate in the mid-teens, driven by AI-enabled services and a large installed base.
- Process Diagnostics and Control (PDC) business expected to grow over 50% in 2026, leveraging leadership in e-beam and new optical inspection products.
- Gross margins expanded for the 13th consecutive quarter, reaching over 50% company-wide and over 55% in semiconductor systems, with expectations for continued improvement.
- Record operating cash flow of over $3 billion and strong free cash flow of $2.3 billion, with a commitment to return 80-100% of free cash flow to shareholders.
- Expanding manufacturing capacity, including a new center in Singapore, to support doubling system output by 2028, and adding over 1,500 employees in manufacturing and customer support.
- Gross margin guidance for Q4 is flat sequentially despite strong revenue growth, due to ramp costs and a higher mix of display revenue.
- Ramp costs from hiring and training new manufacturing and customer support teams are expected to persist over the next few quarters, potentially pressuring margins.
- China revenue, while expected to grow, remains a significant portion (26% of semi systems + AGS revenue), exposing the company to geopolitical and regulatory risks.
- NAND market growth is expected to be slower in the out year, with wafer starts continuing to decline and projects primarily focused on upgrades rather than capacity additions.
- The company faces potential headwinds from a higher tax rate in 2027 due to the global minimum tax, which could impact net earnings.
- The 14-week quarter in Q1 fiscal 2027 will result in a higher-than-average step-up in operating expenses, potentially affecting profitability.
- The company is making substantial investments in capacity and R&D, which could lead to higher capital expenditures and operating expenses, potentially impacting near-term margins.
- The demand environment is subject to rapid changes, and the company's ability to meet customer demand is constrained by cleanroom space availability, which could limit growth if customers cannot add capacity fast enough.
- The company's display business, while expected to contribute ~$400 million per quarter, may have lower margins and could dilute overall profitability.
- The company's growth is heavily dependent on the continued expansion of AI infrastructure, and any slowdown in AI investment could negatively impact demand.
Welcome to the Applied Materials third quarter of fiscal 2026 earnings call. (Operator Instructions) I would now like to turn the call over to Mike Sullivan, Corporate Vice President of Investor Relations. Please go ahead.
Good afternoon, everyone, and thank you for joining today's call. With me are Gary Dickerson, our President and CEO and Brice 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 10-Q 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 website at ir.appliedmaterials.com.
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