Applied Materials, Inc.

Welcome to the Applied Materials second 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 10Q 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. In addition, Any comments regarding calendar 2026 refer to Q2 of this fiscal year through Q1 of fiscal 2027, which will be a 14-week quarter. Next, I'll share some calendar items. I'm pleased to announce the second event in our 2026 Masterclass Series. We'll cover DRAM and advanced packaging on a live webcast on Thursday, June 25th at 9 a.m. Pacific Time. Next, I'd like to remind you about our two special events during Semicon West – On Monday afternoon, October 12th, we invite you to the unveiling of the new Epic Center in Sunnyvale, California. And on Tuesday morning, October 13th, we hope you'll join Gary, Bryce, and our business unit leaders for our investor breakfast presentation at the Yerba Buena Center in San Francisco. You can join us in person or on a live webcast. And with that introduction, I'd now like to turn the call over to Gary Dickerson.

Thank you, Mike. In our second fiscal quarter, Applied Materials delivered record revenue and earnings, along with our highest gross margin in more than 25 years. With rising demand and increasing long-term visibility from customers, we see an exceptionally strong foundation for sustained multi-year revenue and profit growth. The momentum in our business is being driven by three key factors. First, the rapid global build-out of AI computing infrastructure. Second, applies leadership positions in the most enabling and highest value areas of the market, particularly leading edge foundry logic, DRAM, and advanced packaging. And third, strong execution across our operations and supply chain. In my prepared remarks, I will provide an update on how our markets are evolving explain how Applied is enabling the AI roadmap with our differentiated technology and exciting pipeline of new products, and outline how we're transforming the way we work with customers, partners, and across the company to drive higher velocity, increase operating leverage, and scale more efficiently. Over the past several months, global AI adoption has continued to accelerate as improvements in the performance and cost of AI computing are translating into real-world applications that deliver compelling returns for users. If I look at our own company as an example, today we have more than 35,000 AI users across our global workforce. We are deploying AI to drive new scientific breakthroughs, accelerate research and development programs, optimize factory and supply chain operations, increase innovation and productivity and services, and automate workflows across our corporate functions. This enables us to redirect resources towards higher value work and grow the business significantly faster than our headcount. Similar dynamics are playing out across a broad range of industries and organizations. Publicly available data indicates that global token generation has increased more than threefold in just the past three months. Importantly, AI demand is not only growing rapidly, it's also diversifying. Since the beginning of the year, there's been a meaningful increase in agentic applications, which layer on top of continued growth in generative AI training and inference workloads. AI computing architectures are workload-specific and optimized for different generative, agentic, or physical AI models. Agentic AI models do more than respond to queries. They plan, reason, and execute tasks autonomously. They therefore require a computing architecture that is more CPU-intensive while also increasing demand for DRAM and NAND. As agentic AI applications grow, they provide an additional tailwind for wafer fab equipment. Last quarter, we said the availability of clean room space was a key factor pacing the rate of industry investment. As customers find new ways to reallocate or create space, we are seeing incremental requests for equipment deliveries in 2026, and we now expect our semiconductor equipment business will grow more than 30% this calendar year. Given the unprecedented demand environment, we are working closely with our customers on longer-range planning. Our largest customers are providing rolling eight-quarter forecasts so we can prepare the required manufacturing capacity and service resources for their ramps. With this improved visibility, we see continued growth across this extended planning horizon into 2027 and beyond, and we are investing to support our customers' expansion plans. For AI computing, leading-edge Foundry logic, DRAM, and advanced packaging have the greatest impact on overall system performance, power efficiency, and cost. As a result, we expect these three areas to account for more than 80% of the year-on-year growth in total wafer fab equipment spending in 2026 and see a similar profile in 2027. These are also the areas where Applied has strong leadership positions and an innovative pipeline of next-generation technologies. In leading-edge foundry logic, Applied is the clear number one process equipment provider with highly differentiated solutions in materials deposition, modification, and treatments, conductor etch, and EV technologies. Gate-all-around nodes grow our available market considerably while also providing a catalyst for multiple points of market share gain. This quarter, we announced two new products that further strengthen our gate-all-around portfolio. To meet the requirements of different AI workloads in the data center and at the edge, chip makers provide designers with a range of transistor options, with some tuned for peak performance and others tuned to use the lowest amount of power. This tuning is achieved through precise optimization of the materials in the metal gate stack. Our new Trillium ALD integrated material solution precisely deposits metals in the most complex gate all around transistor gate stacks. By integrating multiple metal deposition steps in a single platform, Trillium ALD provides angstrom level thickness control of metal gate stack layers giving chip makers maximum flexibility to tune threshold voltages across different transistors. In advanced foundry logic, shallow trench isolation, or STI, is used to electrically separate neighboring transistors. These narrow isolation trenches are some of the smallest structures in a gate all-around device. Our new precision PECVD system uses an industry-first selective bottom-up deposition process to place material exactly where it's needed and protect the STI structure from damage during subsequent processing steps. By preserving the original shape and height of the isolation trench, our new PECVD solution reduces parasitic capacitance and lowers leakage to boost device performance. In advanced packaging, Applied is also the overall leader with strong positions in high bandwidth memory and 3D chiplet stacking. We expect to grow our packaging revenues more than 50% in calendar 2026 and are very well positioned at upcoming packaging inflections. We recently announced our intent to acquire Next to further strengthen Applied's portfolio of panel-level technologies which are designed to enable larger body packages for AI accelerators. In DRAM, AI computing is driving incredibly strong demand, and customers are aggressively adding capacity at 6F-squared nodes while accelerating their development of next-generation device architectures. Applied as the number one process equipment provider in memory today, thanks to our very strong position in DRAM wiring, patterning, and peripheral logic steps. We expect to gain additional DRAM market share at upcoming transistor and device architecture inflections. We will provide more details at our next master class in June, which will cover both our DRAM and advanced packaging technology roadmaps. To accelerate the industry's roadmap further, we are changing the way we work with our customers and partners by creating a new model for collaboration and innovation. Applied's global EPIC platform is designed to significantly reduce the time it takes to commercialize breakthrough technologies all the way from early stage research to full-scale manufacturing. For chip makers, Epic provides earlier access to Applied's R&D portfolio and faster cycles of learning through the co-location of key innovators from customers, partners, and applied. In addition, Epic co-innovation programs will provide us with greater multi-node visibility to guide R&D investments and resource allocation increase R&D productivity and value sharing, and accelerate design wins for applied equipment and services. The centerpiece of the platform is the new EPIC Center in Silicon Valley, which remains on track to begin operations in the fall. Earlier this week, we announced our EPIC co-development engagement with TSMC, who joined as a founding partner together with Micron, Samsung, and SK Hynix. We're also excited to announce our first three EPIC university partnerships with ASU, RPI, and Stanford, as well as a development partner agreement with Advantest. We are finalizing additional EPIC agreements that we will publicly announce in the coming months. To accelerate the transfer of new technologies from applied labs to customers' fabs, We're also driving new innovations in service. Service is another important growth driver for Applied as we increase the revenue we generate per tool on top of a growing installed base. As a result, we expect Applied Global Services to deliver a sustainable annual growth rate in the mid-teens and potentially higher this year. Our advanced service solutions enable customers to accelerate production ramps and optimize output, yield, and cost in their high-volume manufacturing environments. Today, we have more than 35,000 chambers connected to our proprietary AIX software capabilities that use AI-powered monitoring, diagnostics, and analytics. Before I hand it over to Bryce, let me briefly summarize. AI adoption is accelerating and diversifying, fueling broad and durable demand for semiconductors and semiconductor equipment. Leading edge foundry logic, DRAM, and advanced packaging are the most critical drivers of performance, power efficiency, and cost for AI computing. As a result, we expect these three areas to account for more than 80% of the year-on-year growth in total wafer fab equipment spending in 2026 and see a similar profile in 2027. These are areas where Applied has strong market leadership today and a high-value pipeline of next-generation products, providing us with an exceptionally strong foundation for sustained multi-year revenue and profit growth. Finally, through Epic, our advanced services portfolio, and rapid AI adoption across our operations, we are transforming how we work with customers, partners, and inside applied materials, driving higher velocity, improving value capture, and efficiently scaling the company as the industry grows.