Applied Materials, Inc.

Welcome to the Applied Materials first quarter of fiscal 2026 earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question and answer session. 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 Bryce 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-K and other filings with the SEC. Today's call also includes non-GAAP financial measures. Reconciliations to gap 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. Before we begin, I have several calendar announcements. On Tuesday morning, February 24th, Applied will host new product briefings at the SPIE Lithography and Patterning Conference in San Jose, and you're welcome to join us in person. We are also very pleased to announce the first event in our 2026 Masterclass Series, We plan to cover transistors and wiring on Wednesday, April 8th at 9 o'clock in the morning Pacific time and we'll host a live webcast. Finally, we're excited to announce two special events during Semicon West. On Monday afternoon, October 12th, we plan to host an investor open house event at the new Epic Center in Silicon Valley, California. We hope you'll join us there. And on Tuesday morning, October 13th, we plan to host an investor breakfast in San Francisco. We hope to see you in person or on the webcast. And with that introduction, I'd now like to turn the call over to Gary Dickerson.

Thank you, Mike. In our first fiscal quarter of 2026, applied materials delivered revenue and earnings above the midpoint of our guided range. Our strong performance and outlook for 2026 and beyond are fueled by the acceleration of investments in AI computing. AI is at a tipping point where improvements in performance and cost translate to real-world applications that deliver 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. Today, the most critical and fastest growing markets are leading-edge logic, high bandwidth memory DRAM, and advanced packaging. These are areas where Applied has strong leadership positions as well as an innovative pipeline of solutions to enable next generation technologies. In my prepared remarks, I will provide my perspective on how our markets are evolving, explain the role we are playing to enable the AI roadmap, and describe how we're turning the opportunities ahead of us into sustainable, profitable growth for Applied. Semiconductors are the heart of the AI technology stack. With the accelerated growth of AI in markets, we believe that global semiconductor industry revenues can potentially reach $1 trillion in 2026, several years earlier than prior predictions. For Applied, we expect to grow our semiconductor equipment business more than 20% this calendar year. We see the demand profile weighted towards the second half of the calendar year, with availability of customer cleanroom space being a key factor pacing the rate of investment. Our largest customers are giving us increased longer-term visibility to ensure we have operational capacity and service support in place for their ramps. Based on this visibility, we expect strong growth momentum to be carried into 2027. Improvements in AI data center performance and cost directly impact AI adoption rates. By increasing the number of tokens generated per second and lowering the total cost of ownership, which is dominated by energy consumption, more AI applications become economically viable. This need for higher performance and more energy efficient AI computing is reshaping semiconductor industry investments and driving high growth rates for applied in leading-edge logic, HBM DRAM, and advanced packaging. In leading-edge logic, our customers are adding capacity at FinFET nodes while simultaneously ramping gate all-around nodes. Applied is the clear number one process equipment provider in leading-edge logic with strong leadership positions across materials deposition, modification, and treatment, as well as in conductor etch and e-beam technologies. Gate-all-around nodes grow our available market considerably while also providing a catalyst for multiple points of market share gain. In DRAM, customers are aggressively adding capacity at six F squared nodes while in parallel developing next generation DRAM device architectures. AI computing is driving significant demand for high bandwidth memory DRAM, which has larger die sizes and requires three to four times more wafer starts per delivered bit than standard DRAM. In addition, The number of dies in the HBM stacks is increasing from 12 today to 16 and then 20 or more in the future. This further grows demand for wafer starts and advanced packaging. Applied as the number one process equipment provider in memory today, thanks to our very strong position in DRAM, where we are the clear leader in materials deposition for both wiring and patterning, as well as conductor etch and E-beam technologies. In advanced packaging, the mix of customer investments is changing. We expect the fastest-growing market segments in 2026 to be HBM and 3D chiplet stacking. Applied has very strong market share in both of these areas thanks to our leadership in materials deposition and removal technologies which is enabling us to extend our overall leadership in advanced packaging. In NAND, we are forecasting modest growth in equipment demand in 2026, and we expect NAND to remain less than 10% of wafer fab equipment spending. In ICAPS, customers who serve the IoT, communications, automotive, power, and sensor markets, we expect wafer fab equipment to be approximately flat year on year, both globally and in China. At Applied Materials, our strategy is inflection-focused innovation. By focusing our R&D resources on the development of high-value solutions to enable major device architecture inflections, we are accelerating our customers' roadmaps and driving sustainable value capture and margin expansion for applied. Our innovators have generated an expansive pipeline of next generation products. Products we have released over the past several years are significantly contributing to our growth in 2026. One example of this is our unique cold field emission e-beam technology, where we expect revenues to double this calendar year to more than a billion dollars and support process diagnostics and control being one of our fastest growing businesses in 2026. In addition, our leadership in CFE eBeam Imaging accelerates learning rates for next generation chip architectures and adoption of applied process equipment portfolio. In 2026, we are planning to launch more than a dozen new products including three for advanced logic and DRAM, which we announced earlier this week. Our VIVA radical treatment system delivers Angstrom-level precision engineering of nanosheet surfaces, which enables higher-speed, next-generation, gate-all-around transistors. SIM3Z Magnum, which is the newest variant of our SIM3 etch platform, enables Angstrom-level precision for critical etch steps in gate all-around transistors, and advanced DRAM. This extends our conductor etch market leadership in advanced logic and DRAM. And our 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. As transistor counts and wiring layers increase, copper PVD steps will continue to grow significantly, remaining an order of magnitude larger than ALD moly. This week, we also announced our first EPIC co-development agreement with Samsung Electronics. Applied's global EPIC platform is designed to support high velocity co-innovation with our customers and R&D partners. For chip makers, EPIC will provide 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. For applied, Epic will give us better multi-node visibility to guide our R&D investments while improving R&D productivity, value sharing, and our ability to be designed in with our products and advanced service technologies. As our customers ramp complex new devices in high-volume manufacturing, we see accelerating demand for our advanced services, supporting a double-digit growth rate for our service business. We have many valuable service innovations that accelerate the transition of new technologies from lab to fab and then accelerate ramps to enable increased yield and output in high-volume production. Several years ago, we launched Applied's proprietary AIX, or Actionable Insight Accelerator, software capabilities. Today, we have more than 30,000 chambers connected to AIX servers using AI-powered monitoring, diagnostics, and analytics. Across these connected tools, we are seeing 30% faster response times, enabling increased wafer output for customers and better service engineer productivity for applied. In addition, we now have automated all are major distribution centers with state-of-the-art AI-enabled robotic systems, significantly improving our parts delivery speed and accuracy, as well as inventory optimization. Before I hand over to Bryce, let me briefly summarize. Semiconductors are the heart of the AI technology stack, and as AI adoption accelerates, we see industry revenues potentially reaching $1 trillion in 2026. Our inflection-focused innovation strategy is generating an expansive pipeline of higher value products that are extending applied leadership in leading-edge logic, memory, and advanced packaging, and enabling us to grow our semiconductor business more than 20% in 2026. We are driving deeper co-innovation engagements with our customers to enable energy efficient AI architecture inflections and accelerate the transfer of new technologies into high volume manufacturing. Epic will come online later this year, bringing together key innovators from our customers and applied to significantly increase value creation velocity. Bryce, over to you.

Thank you, Gary, and thanks everyone for joining us today. I'm pleased that Applied delivered strong first quarter results, and I'd like to thank our global teams and partners for their contributions. Looking ahead to Q2, we anticipate strong growth in our semiconductor systems business, along with healthy gross margin and increasing profitability for the company. As Gary described, Our business is strengthening with positive demand indications throughout the ecosystem. We are tracking higher levels of planned CapEx from cloud service providers. Semiconductor factory utilization is rising across all device types. Leading edge Foundry logic and DRAM capacity is essentially full and prices have increased. These dynamics are driving significantly longer visibility from our own customers who are increasing the number of new factory projects and fab expansions scheduled to be completed over the next several years. As the largest supplier of process equipment in leading-edge foundry logic, DRAM, and advanced packaging, a major priority for us is ensuring we have the capacity to support our customers over this period. Over the past several years, we've nearly doubled our system manufacturing capacity and strengthened our supply chain operations. In recent quarters, we've given our direct suppliers longer visibility into our requirements, which has allowed them to proliferate the demand signal throughout the supply chain to secure the materials and labor needed to support growth. At Applied, we've proactively increased our inventory by nearly $500 million year over year to meet the increasing bill plans. As a result, we are well positioned to meet the increasing demand we are seeing from our customers. Next, I'll briefly summarize our Q1 results. Revenue of $7 billion was in the upper end of our guidance range and down 2% 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 gross margin was 70 basis points above the midpoint of our expectation and grew 20 basis points year-over-year to 49.1%. Non-GAAP OPEX was in line with our expectation and grew 2% year-over-year to $1.34 billion with an 8% increase in R&D investments largely offset by G&A spending reductions. 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. Included in our GAAP results is an accrual of $252.5 million related to an export controls compliance matter we disclosed in our 2022 10-K and later filings. The Department of Justice and SEC have closed their inquiries into this matter with no enforcement actions. We issued a press release and filed an 8K related to the settlement we reached with the U.S. Department of Commerce Bureau of Industry and Security to resolve its inquiry, and you can find all of our comments related to the matter in these documents. Next, I'll summarize our segment results. As a reminder, beginning in Q1, our 200-millimeter systems business has moved from the applied global services segment to the semiconductor systems segment. Corporate support costs previously reflected in corporate and other are now being fully allocated to our businesses. And display business results are now included in other. To help with your models, today's earnings press release and slide presentation include tables that provide a recast for these changes. Semiconductor systems revenue exceeded our expectation 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%, driven by our continued focus on value-based pricing, along with manufacturing cost improvements. Non-GAAP operating margin declined 80 basis points to 32.9%. Applied Global Services delivered record revenue of $1.56 billion, which exceeded our expectations and grew 15% year-over-year. Non-GAAP gross margin increased 210 basis points and non-GAAP operating margin grew 320 basis points. Turning to the balance sheet, we generated $1.69 billion in cash from operations. Free cash flow of $1 billion included elevated capital investments as we made continued progress building the Epic R&D Center in Silicon Valley and further expanded our systems manufacturing capacity. Finally, we distributed $702 million to shareholders in cash dividends and stock buybacks. Over the past year, we've distributed over 85% of free cash flow to shareholders. Now I'll share our guidance for Q2. We expect company revenue of $7.65 billion, plus or minus $500 million, which would be up around 9% sequentially. We expect non-GAAP EPS of $2.64, plus or minus 20 cents. Within this outlook, we expect semiconductor systems revenue of around $5.8 billion, AGS revenue of about $1.6 billion, and other revenue of around $250 million. We expect non-GAAP gross margin to increase to approximately 49.3%. We expect non-GAAP operating expenses of around $1.415 billion. Given increased visibility and confidence in the industry's growth outlook, we are accelerating R&D co-development projects with our customers and partners. We remain highly focused on growth, productivity, and margins. Finally, we are now modeling a non-GAAP tax rate of around 11%. In summary, the investments we've made over the past several years have put us in a terrific position for profitable growth. The global expansion of AI infrastructure is translating to accelerating demand for our most enabling products in leading-edge Foundry logic DRAM and advanced packaging, along with advanced services that help our customers accelerate ramps and yields. Working closely with our customers, we're increasing the energy-efficient performance of logic chips, compute memory, and systems and we are sharing in the value we create. Applied is the materials engineering leader in the fastest-growing segments of the semiconductor market, and we are driving our operations teams and supply chain partners to increase capacity and output as our customers ramp in 2026 and 2027. Thank you for listening, and now, Mike, let's begin the Q&A.

Thanks, Bryce. To help us reach as many people as we can on today's call, please ask just one question and no more than one brief follow-up question. Operator, let's please begin.

Certainly. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. Our first question comes to the line of CJ Muse from Cantor Fitzgerald. Your question, please.

Yeah, good afternoon. Thank you for taking the question. Gary, we've heard a wide range of WFE guides for 2026 from your peers, ranging from low teens to as high as 22%. I know you don't like to guide to WFE, but how does your view stand for 2026 versus these comments? In particular, the 20% that you talked about, vis-a-vis what you think WFE will be. And if you kind of talk to where you think the drivers of share growth will be.

All right. Thanks for the question, CJ. And yes, we haven't talked about WFE for a very long time. And as you mentioned, what we said earlier on the call is we expect to grow our semi-equipment business more than 20% this calendar year, being second half weighted. And we also see limited clean room capacity pacing the rate of growth which means 27 is shaping up to be another strong year. What's driving the business is really AI. AI is fueling the growth for the most profitable companies in the world, and energy efficient computing is enabled by leading edge foundry logic, DRAM, including HBM, and advanced packaging. And we expect these will be the fastest growing WFE segments in 26, 27, and for the next several years. In all of these high-growth markets, Applied has strong number one process equipment positions, and we're positioned to extend our leadership and gain share. And then, you know, giving color into these markets, in leading-edge foundry logic, we're number one and on track to gain share and capture more than 50% of our served market in gate-all-around and wiring, including backside power, and we're number one in deposition, conductor etch, and packaging. In DRAM, we're number one in standard DRAM, HBM DRAM, and HBM packaging. And I think many of you know that HBM wafers are growing as our customers need to start three to four times more wafers to deliver the same number of bits. We are the leader in materials deposition for wiring and patterning with rapid growth in conductor etch and e-beam. We expect strong growth in 26 and we're positioned to gain share going forward in 6F squared and 4F squared. We're also number one in advanced packaging overall and number one in HBM. Packaging will be a high growth business for us in 26 and for the next several years. The highest growth segments in 26 are HBM and 3D chiplet stacking where Applied has high share Thanks to our leadership and materials deposition and removal technologies and then today NAND and ICAPS spending are less driven by AI high performance computing. And we see NAND up this year, but growing slower and remaining less than 10% of total WFE and the ICAPS market being flattish this year, both overall and in China. following elevated spending in recent years. So bringing all of this together, CJ, as you said in your question, and we expect to grow our semi-equipment business more than 20% this calendar year, and our number one positions in these fast-growing markets creates a great setup for applied in 27 and for the next several years.

That's very helpful. And I guess, Bryce, how are you thinking about your gross margins into the sub-cycle, particularly when we consider rising volumes, your value-based pricing, as well as significantly better margins downstream at your customers?

Thanks, CJ. I'll take the question on the margins. What I'd like to say is that we made progress in gross margins, up 700 basis points since I became CEO, and we're now at the highest level in 25 years And I strongly believe we're driving the right actions to sustainably increase the value we create for customers and for applied to share in the value we're creating. Our strategy, as I've talked about many times, is inflection-focused innovation, targeting the fastest-growing value pools that enable data center AI computing, especially Foundry Logic, DRAM, including HBM, and packaging. These are the fastest growing WFE segments where Applied has clear leadership and we're positioned to drive strong revenue growth and margin growth. We have a great pipeline of even higher value products and we're taking high velocity co-innovation with our customers to the next level with our Epic platform. For Applied, Epic gives us better multi-node visibility to guide our R&D investments while improving our R&D productivity, value sharing, and our ability to be designed in with our products and advanced service technologies. In Epic, top customer R&D innovators will be co-located with our innovators, and our customers will have earlier access to key innovations that will enable them in the race to be first to market with high-value chip and packaging technologies. And we're innovating not just in process equipment, but also with our eBeam and AIX AI-enabled software platform to accelerate cycles of learning to bring innovations to market much faster. In short, as we enable our customers to deliver more valuable wafers, chips, and packaging technologies to their customers, we'll share in the value we create as we sell more high-value systems and services.

And CJ, I'll just make one note for investors. You'll see in our disclosures this quarter that we have gross margin disclosed for both the equipment business and the services business. And you'll see the equipment business at approximately 54%, a little bit higher than that. And I think we expect we can continue to make improvements in that as the portfolio shifts to more valuable products. Thank you, Jay. Thank you.

And our next question comes from the line of Krish Sankar from TD Cowen. Your question, please.

Yeah, thanks for taking my question, and congrats on the strong results. Gary O'Brice, my first question is also on WFE. You kind of mentioned that both China and global ICAPS will be flat this year. I'm kind of curious, how has the view evolved over the last three months? Since three months ago, the consensus view was that China would be down. in 2026, but now it looks like it's going to be flat. So I'm kind of curious what changed, and then add a quick follow-up.

Hi, Chris. Thanks for the question. Last quarter, we said we expected 2026 to be a strong year led by AI-driven markets, which includes leading-edge foundry logic and DRAM, including HBM, and that's still our view. We thought China and ICAPS WFE would be down a little this calendar year, particularly due to the ongoing capacity digestion, we now see ICAPS, as I just mentioned, flattish overall, both globally and in China. And we continue to believe that in the longer term, that the ICAPS semiconductor market will grow in mid to high single digits, which is significantly lower than what we see for markets being driven by AI data center growth, which include leading edge foundry logic, DRAM, and advanced packaging.

Got it. Got it. Thanks. And then just to follow up on advanced packaging, Gary, you mentioned HBM packaging and 3D chiplet stacking is strong. Is that a way to quantify or look at advanced packaging this year versus last year, how it looks? And also the 20% growth you mentioned, or greater than 20% growth for applied semis, how does advanced packaging stack within that framework? Thank you.

Yeah, Krish, yeah. So this year, advanced packaging, WFE spending is increasing, as I said earlier, in HBM and 3D chiplet stacking. And these are markets where applied is number one with very high share. And this is driving advanced packaging to be one of our highest growth businesses this year and extending our overall leadership. And I'd say, you know, looking forward to the future for AI energy efficient computing, our customers want new packaging substrates as large as possible to connect more GPUs, memory, and high-speed I.O. at the highest density so they can deliver higher performance and lower power. There are innovations in new substrates and new architectures that will ramp in the next few years, and with our strong innovation pipeline and these inflections, I expect Applied Packaging business to continue to lead the industry and grow at a high compound annual growth rate for many years into the future.

Thanks a lot, Gary.

Thank you. Our next question comes to the line of Stacy Raskin from Bernstein Research. Your question, please.

Hi, guys. Thanks for taking my questions. First, I wanted to touch on the more than 20% equipment growth. So you just guided $5.8 billion in equipment, I guess, for calendar Q1. So if I did my math right, I guess for the last three quarters of the calendar year, that 20, just even dead on 20% would give me something like $6.5 billion run rate. for calendar Q2 through calendar Q4. And it sounds like it's even getting stronger through the year. So the exit rate sounds like it ought to be like larger than that. I guess what I'm asking is, is that math correct? And how are you thinking about the trajectory of achieving that 20% growth as we get through the year? Like how should we be thinking about an exit rate given that sort of like implied average?

Brian Cina, City of Boulder, I Stacy it's price, you have the right pieces were signaling 20% greater than 20% for the calendar year we're also signaling that the second half will be higher. Brian Cina, City of Boulder, And so you've got our Q2 guide we're not you know we're not filling in the blanks in the middle, because frankly we're still working on what that schedule will look like. Brian Cina, City of Boulder, But we know we have that that level of demand to signal the 20% so I think you're. in the ballpark with your thinking, but we don't have the exact track.

Got it. That makes sense. But I guess it also sounds like you think that momentum continues as we get into 20, into 27. So I guess is the limiter on that growth right now simply just clean room space? I guess if the clean rooms were there, would that run rate be even higher? And does that suggest that as we get into 27, I mean the beginning of 27 sounds like it ought to be even lower than like the end of 27. if that plays out as planned. Is that how you guys are thinking about it?

Yeah, it's certainly metered by clean room this year in leading edge and DRAM. And so that is putting a cap on what can be done this year. Just to the benefit of the whole ecosystem, we've obviously raised our outlook for this year. That's what you're hearing in this call. So there was space to add more capacity this year in DRAM and leading logic than we had planned a quarter ago. So that's good news. But I think the customers have exhausted most of that space now. For investors, all of our customers, I looked at the schedule. There's a number of factories coming online in 27. So we expect capacity to continue to be added every quarter. That will open up new opportunities for next year. And we'll go into next year with still in a constrained position.

Yeah, Stacey, the other thing I would add is, you know, I've had many discussions with our largest customer CEOs and R&D leaders, and I think this demand for AI data center is a significant wave that's going to last over a longer period of time. So when I talk to them, you know, and when they're communicating also externally, they're talking about extremely high compound annual growth rates. We talked about data center passing PCs and eventually smartphones in terms of total wafer starts. So I think it's too early to say exactly what the shape of 27 is going to look like. But as I said earlier, based on the customer conversations, I would expect 27 is also going to be a very strong year.

Got it. That's helpful. Thank you, guys.

Thank you. And our next question comes from the line of Mark Lipakis from Evercore ISI. Your question, please.

Hi, thanks for taking my questions. Gary, I want to ask a bigger picture question based on your observation that the $1 trillion bogey for the semi-industry is hitting a lot earlier than most people expected. I believe you used to suggest that the WFE intensity would be around 15% of this industry, and that would support a $150 billion industry. But with the revenue accelerating and data center AI revenues, you know, kind of being the driver here, is 15%, is that still the right way to think about WFE intensity in your view?

Yeah, thanks for the question, Mark. So, you know, WFE intensity has grown to around 15%, but really for me, when I'm thinking about applied materials and what I'm driving is to focus on, and winning every segment, but to really make sure we outperform in the largest and fastest growing markets. The semiconductor industry growth we envisioned is arriving sooner because of the AI data center growth. And as I said earlier, the fastest equipment markets growing are leading edge Foundry logic, DRAM, and including high bandwidth memory and advanced packaging because they enable energy efficient AI data center performance. This is where Applied has been investing for many years to create strong leadership positions. And that's where we're seeing the fastest in market growth this year. And I see that going many years into the future. And then back to the WFE intensity, you know, our longer term composition model is different than what we had talked about before. Before we talked about a third leading edge foundry logic, a third ICAPS, a third memory. And when those growth rates in those segments were roughly the same, this single capital intensity number was helpful in forecasting future growth. But now we're seeing a significant divergence in the end market growth rates. And I think it's time for a new growth framework. And then for applied, again, we're in a great position in those fastest growing markets. And if you look at Leading Edge Foundry Logic and DRAM, those segments are going to be significantly larger than ICAPS and other memory segments is a part of the total mix.

Gotcha. And a follow-up, if I may, based on that, does that necessarily put you in a position to to, as you said, capture more value. And from our standpoint, capturing more value is the code word for higher gross margin. So does the expansion of those markets get you to that point in time?

Yeah, I mean, again, our focus is really, and we've been focused on this for many years. I think I go back to 2019 when we first talked about this coming AI wave. And we've made tremendous investments inside Applied. We formed our integrated material solutions group in anticipation of this shift in WFE spending. And our focus is to create very high value solutions for our customers. AI is a race for everyone to bring these new architectures to market. And as I said, in those segments, that are enabling the AI data center, we're in a very strong position to bring very high-value solutions to our customers, and we'll be sharing in that value as we go forward. And certainly, again, we've driven margin growth over the last many years. I have very high confidence that we'll be able to sustain that margin growth going forward.

Very helpful. Thanks, Gary. Appreciate the thoughts.

Thank you. And our next question comes from the line of Timothy O'Curry from UBS. Your question, please.

Thanks a lot. So I had a first question on AGS. So the optics are that it's not really growing much, but I have to believe that on a pro forma basis that actually is growing because you're taking the 200 millimeter equipment business and you're putting that now into SSG. So can you give us a sense of how big that is?

Hi, Tim. This is Bryce. What you'll see in our numbers, you know, we provided the recast numbers in our press release for that reorganization that moves 200 millimeter from our services business to our equipment business. You'll be able to see crystal clearly in our numbers that Q1 has 15% year over year growth for AGS. And our Q2 guide should be, you know, approximately over 12%, almost 13% year over year for AGS. So what we're signaling for AGS, you know, along the lines of your question is that it should grow at low double digits or better going forward. And, you know, that's based on having a 55,000 tool installed base. We'll grow that installed base every year at 5 plus percent. I think you heard Gary talking about we're launching new products in AGS, including our AIX, the actionable insights accelerators products. And so, you know, high confidence in that business. It's all recurring revenue right now. Two-thirds of it is under contract. The average contract, 2.9 years, 90% renewal rate. And then you probably heard me talk about, you know, when we think about our dividend, we look at the cash profitability of our services business and it can afford our dividend payment at this point. And we like to make that connection since it's a highly recurring revenue.

Thanks a lot, Bryce. And then you said something, Bryce, I think you said you've doubled the systems manufacturing capacity over the past, I think you said a few years or maybe it was several years. So if I look back, like you were doing 5 billion a quarter and SSG back in like 23 and just kind of I'm not sure if that's the base you're using but So is the message that you could do like 10 billion dollars in system sales that the you know when you say that you've doubled the your your you know SSG Capacity is that like is that the right number that you've gone from kind of five to ten now?

Thanks I think the thought is fair. We're not going to put a number on it, but we have significant upside from a manufacturing perspective we had pre-positioned space available and We've built out a portion of that pre-positioned space now to help with the ramp that we're seeing and we have more pre-positioned space available. So we, you know, yes, we can comfortably scale much higher. And of course the real job for us, we have approximately 2000 suppliers. We've got to work with our suppliers. We're working to give them a strong signal. You know, Gary talked about working with the customers to get two years visibility and we're working with them to get specific bill of materials so that the suppliers know exactly what we need with as much lead time as possible. So that's where the big lift is. And yes, we have plenty of upside in our output capabilities.

Yeah, Tim, the only thing I would add is that in the discussions with customers, it's not so much the clean room capacity, as Bryce said, it's supply chain, train service engineers, all of those things. So that's where the visibility for us has improved dramatically, because customers understand that, you know, the supply chain takes some time, train service engineers take some time. And that's where we're getting significantly longer term visibility with specific configurations better than we've ever had.

Thank you both.

Thank you. And our next question comes from the line of Vivek Arya from Bank of America Securities. Your question, please.

Thanks for taking my question. I'm curious, what is driving the second half acceleration? Because the conventional thinking is that a lot of this, you know, clean room for memory is constrained to the second half of next year. So if it's not memory clean room, is it, you know, more space and boundary or logic. I'm just curious, what is specifically driving the second half acceleration in 2026?

Well, I think, Vivek, it's Bryce. I think it is clean room. We had an inkling of this last quarter. We had expected the second half to be higher based on availability of space for DRAM and leading edge. And the good news is customers have been able to increase their expectations for this year, but I think that is metering both DRAM and leading edge. We saw a number of new factory projects announced during this quarter, so our tracking of the number of factory projects globally keeps ticking up each quarter, as you would expect with a growing number of wafer start outputs. And, you know, I looked at the next year's schedule. There's a number of factories in DRAM and Leading Logic that are scheduled to come online next year. So there's, you know, customers are working to accelerate that as quickly as possible.

Got it. And for my follow-up, what proportion of WSE do you think right now is being driven by data center and AI? And what was it last year? Just so that we get a sense for you know, what is kind of the growth portion of WFE versus what is exposed to the non-growth areas? Thank you.

Yeah, it's a good question. I think in the recent past, we've said more than 20% of leading-edge wafer starts have been directed towards data center, and that has shifted, obviously, since that's growing much faster. So this year, it's passing PCs from a consumption perspective of leading-edge wafer starts. We've moved up our forecast. We think data center will surpass smartphones in 2029. And the way I think of it, this may not be perfect, but the way I think of it is the, you know, the sort of traditional data center, the racks and file servers and those sorts of things are growing between 10 and 20%. And the AI related components are growing between 30 and 40%. at this point, which gives you something, you know, north of 20% at this point from a growth rate perspective.

Thank you, Bryce.

Yep.

Thank you. And our next question comes to the line of Harlan Cerf from JPMorgan Chase. Your question, please.

Good afternoon, and congrats on the strong execution. I've got a follow-up on AGS. You know, on the solid growth outlook for this year in the systems business, combined with the strong and increasing utilizations of your customers, As you guys mentioned, you know, you're attaching more value added services and we've got this huge installed base. So it just kind of all bodes well for the systems business. If I look at the trend over the past six calendar years, AGS has grown like at about 11% CAGR, right in the middle of your target of kind of low teams growth. But given the dynamics that I just outlined, right, do you see AGS growing faster than that 10 to 12% sort of historical CAGR this calendar year? I mean, you're already entering this year. trending higher than that, right? You're at like 13, 15% year-over-year growth. Any reason for us not to believe that this type of growth sustains through the calendar year?

It's a good question, Harlan. As you point out, our Q1 year-over-year grew 15%, and you've got all the right dynamics. I think those are additive. The installed base grows. The number of new products grows. And the value of those products grows. So that's what, uh, allows that business to grow faster typically than our, than our semi business. Um, so, so, you know, we also have some headwinds as we've lost some of that business. You know, when you quote the historical rate there, uh, with the trade restrictions that we had, we had accounts that we lost, which, uh, you know, kept the growth rate a little bit smaller. than the types of, you know, rates we're seeing this quarter. So I think when we look at our forecast, we feel that we're confident with low double digits. And then, you know, there'll obviously be a range around that. We can have quarters with high utilization that it does better than, you know, the low double digits.

Yeah, Harlan, the other thing I would add is I'm very excited about our service innovation pipeline. I mean, the 30,000 chambers that are connected to AIX servers gives us an ability To deliver more valuable services to our customers increase our service engineer productivity and you know, again, the pipeline for us there is very strong. And our customers are ramping these new very complex factories gate all around in the future backside power and you've got. You know these complex memory architectures that they're ramping we're we're seeing more integrated platforms more integrated steps. As you said, I mean, I feel very good about our growth in AGS going forward, and I think there's a really good opportunity for it to grow faster going forward.

Got it. No, I appreciate that. And, Gary, you know, your process, diagnostics, and control business is a smaller part of the portfolio and revenue mix, right? But nevertheless, it's so important to your customers, and as you articulated earlier, The supply team has a very strong position in EV metrology, defect review, EV wafer inspection, CDFM. I mean, absolutely critical for advanced process nodes of the RS3 and market drivers, DRAM, advanced foundry logic, advanced packaging. Like, where are you seeing the strongest pull for your PDC solutions? And you articulated a very strong demand profile for this year. Is your PDC franchise approaching or exceeding that sort of $2 billion kind of annualized run rate? this year, potentially?

Yeah, thanks for the question. I'm not going to give a specific number, but it is one of the fastest growing businesses for us this calendar year. And we have leadership in eBeam technology, eBeam imaging. And, you know, one thing I believe is you can't fix what you can't see. You know, with that technology, we have the highest resolution, 10 times faster imaging. And you mentioned, you know, this is very important for our process equipment business and for our customers to drive faster learning rates so that they can bring those innovations to market at higher velocity. So, Harlan, we'll be announcing new technologies and new products that are really, really important for material characterization for our customers. The growth rate this year is going to be one of the fastest across all of applied materials. And I have very, very high confidence this growth is going to continue at a high rate in 27 and going forward.

Thanks, Gary. Thanks, Bryce. Thank you. And our next question comes in the line of Jim Schneider from Goldman Sachs. Your question, please.

Good afternoon. Thanks for taking my question. I was wondering if you could maybe just give us a sense, in calendar 26 and 27, could you rank order the relative growth rates you expect for both Foundry Logic and DRAM, and do you expect one to be sustainably higher than the other in the next several quarters?

Hi, Jim. It's Bryce. You know, we can't really do that, and the reason is, When we look at the you know request from customers it's metered by factory availability, so I think it's it's difficult to see what's. happening in the market from a demand perspective, so the way we're communicating it and the way we're thinking about it greater than 20% growth for the semi business. We highlighted that there's a couple of businesses that are growing more slowly, which is NAND and then ICAPS, which will be Flattish. And then we have a group of faster growing businesses, which is the leading edge DRAM and advanced packaging. And I think our perspective is the pull on those from AI is very similar across all of those. So those are in the fast lane. Those are a higher growth rate. You know, you can tell by the math that you would do that there's a portion of our business that's slower or no growth. And there's those three portions that are much faster. So you can sort of get a sense of what the growth rates would be. But it's very hard to differentiate between them because, you know, customers have fabs coming on at different times. So we just don't think about it that way.

Thank you. And then, Bryce, I think you previously indicated that you would expect gross margins to potentially step up in the back half of the calendar of 26 as you get more revenue absorption on that. Are you still expecting that to be the case, even without any help from China? And what will it take to kind of get gross margins at or above the 15% rate without help from China? Thank you.

Yes, I think mechanically we expect some modest improvements in gross margin, and there's a tailwind and there's a headwind. The tailwind is with greater than 20% growth in our semi-business. Typically, that grows slower than our AGS business. AGS has a slower margin. So with the faster growth in semi, that's a tailwind for us. The flip side is we've highlighted that we expect a flattish China. So as the mix to smaller customers recedes as we go through the course of the year, that's a headwind on gross margins. So we do think we have the opportunity to continue to improve gross margins. We think the progress will be, I'll say, very slow through the course of the year.

Thank you. And our next question comes from the line. Melissa Weathers from Deutsche Bank. Your question, please.

Hi there. Thank you for the question. And Mike, I'm looking forward to those master classes coming back. I think that'll be very interesting. I guess I wanted to ask, in the next couple quarters before we get a lot of the Greenfield ads in memory, it does seem like a lot of the focus is going to be on node conversions and trying to squeeze out more bits out of the existing wafer capacity. So can you remind us how to think about your opportunity in a node upgrade scenario versus greenfield capacity ads? And is this mostly an AGS story, or is there something else that we should appreciate?

Melissa, I think if you're thinking about DRAM, I'm thinking most of the DRAM investments you know, that are being made are greenfield. So we should see, you know, that level of investment. And then on the NAN side, there is a number of upgrades. We think of the NAN business as mostly conversion and upgrades, as you're suggesting. And, you know, we participate less in that from a share perspective. So it's a smaller business for us.

Yeah, the other thing I would add is, you know, I mentioned this earlier, with HBM DRAM, you're starting three times more wafers. And as you go from HBM3 to HBM4, that goes from three times to four times. So again, that's a very powerful driver in terms of the overall DRAM business. And, you know, people are also wanting to stack more chips going from 12 to 16 to 20. So that's another powerful driver for the DRAM business.

Got it. Thank you. And then, Bryce, really quick, you flagged, I think, $500 million of inventory that you guys are building up ahead of these ramps. So is there any update to how we should be thinking about days inventory that you guys are comfortable holding on the books or any working capital changes?

The days right now are approximately 153 days. I don't think that will go up very much. But yes, over the last year, we built $500 million of additional inventory. And what I'm signaling there is we have been prepping for a larger amount of output, and we feel like we're well-prepared to deliver the revenue that we're forecasting. But Melissa, I'm not anticipating that that will get out of hand because, of course, the revenue is going up each quarter, so I think the days will stay, you know, fairly tight to that zone.

Got it. Thank you. Thank you.

All right, and operator, we have time for two quick questions, please. Thank you.

Certainly. Our next question comes in line of Blaine Curtis from Jefferies. Your question, please.

Hey, thanks for squeezing me in. Sorry to keep it quick. Just a quick one on the model, Bryce. I'm just kind of curious on OpEx. Obviously, you're seeing a barrier of growth path, so I would expect you to ramp up X. Were you able to get all that in this quarter, and how do you think about it for the year?

Yes, thanks, Blaine. You see for the Q1, investors will see that we were very controlled on our OpEx, not much growth year over year. For Q2, we do have approximately 6% growth sequentially in Q2, and T. We are funding growth projects that we have throughout the portfolio and some of the some of those will be early projects that are related to the epic lab that's. T. coming aboard as we get to the end of this year so as you know, most of our growth is is caused by organic investments, so we will be growing our investment level, especially as epic comes on board. but our expectation is we'll grow the spending more slowly than revenue grows.

Thanks. And then I want to ask you on gross margin. I appreciate the detail between systems and AGS. I'm just kind of curious. I think you said 54 for systems. I mean, it had kind of popped up to that level. So as we think about playing around with that blend as systems grows faster, I just want to understand, I think you said it, but 54 is the right level. I mean, it was actually 54 and a half, like, And I guess when you see modest improvement, is it on that 54 or just overall?

I think just overall, you'll see modest improvement as we continue to move forward. And I mentioned the headwind. The headwind is the customer mix as we go through the year. But the way we think about it is the portfolio continues to get more valuable. Every day we complete an R&D project, we're tuning that portfolio to the most valuable inflection. So we do think there's opportunity long-term to continue to improve gross margin.

Thank you. Thank you. And our final question then for today comes from the line of Atif Malik from Citi. Your question, please.

Great. Thank you. And thank you for providing the full-year semiconductor equipment growth outlook. I have two quick ones. First, on DRAM, you talked about your customers are developing 4S Square. Can you talk about your confidence in maintaining your market share and at that inflection, and when will the decisions come out? And the second one on NAND, Bryce, you mentioned the NAND modest growth, less than 10% of WFE. Are you expecting any capacity additions in NAND this year?

Yeah, I'll start off on the DRAM market share. We've grown DRAM market share significantly over the last decade. It's our strongest business. We're going to grow share in 6F squared. And we're also in very strong position, and I have very high confidence that we're going to continue to grow share in 4F squared.

OK. And Atif, I think if you're thinking about wafer output, NAND hasn't increased wafer output in several years. So we are shipping product, and we expect most of it to be upgrades. And the reason is the technology, you know, is so good at providing, you know, greater and greater bit density every node that is just able to meet demand with the, you know, with the number of starts that are in place.

Thank you. Okay. Thanks, Atif. And before we close, Bryce, would you like to give us a little summary?

Thank you, Mike. I'm excited that our business is accelerating and that the R&D investments we've made give us a broad portfolio of highly enabling products for the fastest growing areas of the market. Prabhu Raja will be at the Morgan Stanley Conference in San Francisco on March 2nd. I look forward to seeing many of you at the Cantor Conference in New York on March 10th. Now, Mike, let's close the call, please.

All right. Well, thank you, Bryce. And a replay of today's call is going to be available on the Investor Relations page of our website by 5 o'clock Pacific time today. And we would like to thank you for your continued interest in Applied Materials.

Thank you, ladies and gentlemen, for your participation in today's session and today's talk. This does conclude the program. You may now disconnect. Good day.