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Welcome to the Applied Materials Third Quarter of Fiscal 26 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 E. Dickerson, our President and CEO, and Brice A. Hill, our Chief Financial Officer. Before we begin, I would 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. In addition, any comments regarding calendar 2026 refer to Q2 of this fiscal year through Q1 of fiscal 27 which will be a 14-week quarter. Next, I would like to remind you about our two special events during SEMICON West. On Monday afternoon, October 12th, we will host an unveiling of the new EPIC Center in Silicon Valley, California. And on Tuesday morning, October 13th, we hope you will join Gary, Brice, 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. With that introduction, I would now like to turn the call over to Gary E. Dickerson.
Thank you, Mike. In our third fiscal quarter of 2026, Applied Materials delivered another set of record-breaking results including the highest quarter-on-quarter revenue growth in the company's history. The rapid global build-out of AI infrastructure combined with Applied's leadership position in the most enabling and highest value technologies for AI computing provide the company with an exceptionally strong foundation for multiyear revenue and profit growth. As 2026 has progressed, customers have found new ways to address clean room space constraints and significantly increase their demand for tool deliveries. In the past three months, we have again made upward revisions to our revenue growth forecast for the year and we are confident we will grow faster than the overall market. As AI computing drives unprecedented demand for semiconductors, there is a large gap between demand and supply for advanced chips. To ensure our supply chain and field teams can support their ramps, our largest customers are giving us longer-term commitments and rolling eight-quarter forecasts. This increased demand visibility gives us high confidence that 2027 will be another strong growth year for Applied Materials. As customers move quickly to bring new fab capacity online while simultaneously optimizing yield and output of their existing production facilities, we also see strong incremental demand for our advanced service solutions. In my prepared remarks, I will share my views on how AI is resizing and reshaping the semiconductor industry and its ability to realize the value of advanced technology. I will describe the increasing value Applied is delivering to our customers by accelerating their technology road maps, optimizing existing production capacity, and helping ramp new fabs faster. I will provide a brief update on our EPIC strategy as we prepare to start operations in our new EPIC Center in Silicon Valley. As I have said before, I strongly believe that AI is the biggest and most consequential technology inflection of our lifetimes. While we are still in the early innings of deployment, AI is reshaping the global economy and becoming fundamental to the relative competitiveness of companies. What I am seeing at Applied Materials is a great case study in AI's real-world impact. Our investments in AI are on track to deliver compelling returns by accelerating our revenue growth and operating profit margins. In R&D and services, we are using AI to create highly differentiated products, significantly speed up product development timelines, and create valuable new service solutions for customers. In operations, supply chain, and our corporate functions, AI is helping us ramp faster, drive meaningful improvements in productivity, and scale our revenue significantly faster than our headcount. Beyond Applied Materials, we see similar trends playing out across a wide variety of industries. As the performance and cost of AI computing improves, many new applications will become technically viable and economically attractive. These expansive opportunities for value creation are fueling an intense global competition for AI leadership which can be described as two concurrent races. The first race is for technology leadership. AI data center returns are determined by the number of tokens generated per second and the total cost of ownership, which is dominated by energy consumption. Improvements in tokens per second per watt are primarily driven by innovations in semiconductor devices and systems. This can be seen in the value the semiconductor and semiconductor equipment industries are generating from their most advanced technologies. The second race is for capacity as demand for advanced semiconductors to support AI infrastructure scaling far exceeds supply. As a result, chipmakers are intensely focused on increasing output and yields of their existing factories while rapidly building new ones. For Applied, the technology race and the capacity race are fueling new opportunities to create and capture value. In the race for technology leadership, leading-edge foundry logic, DRAM, and advanced packaging have the greatest impact on AI computing performance, power efficiency, and cost. Together, we expect these areas to represent approximately 80% of wafer fab equipment growth in 2026 and 2027. These three areas are also where Applied has strong leadership positions, where we identify the key AI inflections early, and where we have shifted our investments to build an innovative pipeline of next-generation solutions. In the past quarter alone, we have announced six new products, including our Sentura Prime epitaxy system designed specifically for high-performance DRAM, Producer Avila that enables higher performance and higher layer count high-bandwidth memory, Dakota VMAX, our next-generation plating system, and OptiQuad CMP for advanced packaging, and two new e-beam systems also for advanced packaging that expand on our e-beam leadership in the front end. Advanced packaging is one of the most important areas for AI compute innovation and we see very strong multiyear growth for Applied. Applied is the overall leader in this market with strong positions in high-bandwidth memory and 3D chiplet stacking and we now expect our overall packaging revenues to grow greater than 70% in calendar 2026. We are also well positioned for future packaging inflections as the industry moves to new architectures and larger size panel formats. We have built a broad portfolio of next-generation technologies for panel including digital lithography, deposition, etch, and e-beam review. In the global race to add semiconductor manufacturing capacity, our customers' ability to increase yield and output in their existing production fabs is incredibly valuable. This creates expanded opportunities for Applied to deliver new innovations in three key areas: services, process diagnostics and control, and new products that increase wafer output per area of fab space. Our advanced service solutions enable customers to better optimize performance of their high-volume manufacturing operations. We already have more than 37,000 chambers in the field connected to our proprietary AIx software capabilities, and we use AI-powered monitoring, diagnostics, and predictive analytics. Our advanced services are delivering yield improvements for customers and helping us drive higher growth rates in Applied Global Services. We now expect AGS to grow greater than 20% in calendar 2026 and to deliver a sustainable, long-term annual growth rate in the mid-teens. Our metrology and inspection product portfolio is also enabling customers to accelerate fab yields and output improvements. The most advanced logic and DRAM devices require more e-beam steps that can provide sub-nanometer resolution for high aspect-ratio structures. Applied has unique e-beam technology and is the leader in this growing market. In parallel, we are introducing new optical inspection products which enable us to increase application share in these markets as well. As a result, we expect to grow our process diagnostics and control business greater than 50% in calendar 2026. And we have a strong pipeline of new products that will fuel growth in 2027 and beyond. Finally, we are developing a new portfolio of output innovation products that increase the wafers that can be processed per square foot of clean room space. One example is our new epitaxy system for DRAM that not only increases device performance but also uses 20% less clean room space than our earlier products. We have multiple output innovation products in qualification at customer sites that will provide significant increases in output per unit area. With incredibly strong customer pull for next-generation technology and unprecedented demand for semiconductor manufacturing capacity, the value of time to market has never been greater. Our EPIC strategy is designed to increase innovation and commercialization velocity by creating earlier and deeper engagements with our customers and partners and colocating key innovators. For chipmakers, EPIC provides much earlier access to Applied's new product innovations that are at the foundation of future AI compute architectures. The output from EPIC will be more mature technology that can deliver high yields faster in volume manufacturing. For Applied, EPIC co-innovation programs will enable us to be designed into new chip and packaging architecture inflections, increase R&D productivity and value sharing, and provide better multi-node visibility to guide our investments and resource allocation. Since our last earnings call, we announced that Broadcom will join EPIC as an innovation partner to accelerate development of advanced chip packaging technologies for next-generation AI systems. We also signed EPIC partnership agreements with SCREEN and UC Berkeley. This brings our total number of announced EPIC engagements to 11, spanning system companies, leading chipmakers, top research universities, and innovation partners. The centerpiece of our EPIC platform is our brand-new EPIC Center in Silicon Valley. We will move the first R&D tool into the clean room next week and we are on track to start operations in the coming months. Before I hand over to Brice, let me briefly summarize. Demand for advanced semiconductors and semiconductor equipment continues to strengthen and as customers find new ways to address clean room space constraints we see higher demand for 2026 tool deliveries. With support from our supply chain, we have again increased our expectations for 2026 revenue, and we are confident we will grow faster than the overall market this calendar year. In the race for AI technology leadership, leading-edge foundry logic, DRAM, and advanced packaging have the greatest impact on AI computing performance, power efficiency, and cost. These are areas where Applied has strong leadership positions and an innovative pipeline of next-generation solutions supporting strong revenue and margin growth in 2027 and beyond. We are working closely with our customers to optimize yield, outputs, and fab ramp times with valuable new innovations in services, process diagnostics and control, and output innovation products. Brice, over to you.
Thanks, Gary. I am pleased to share that Applied delivered another quarter of double-digit sequential and year-over-year growth in revenue, operating profit, and non-GAAP earnings per share. Fiscal Q3 also marks our 13th consecutive quarter of year-over-year gross margin expansion, which demonstrates how we are benefiting from the tremendous value our products and services bring to our customers and the entire AI ecosystem. Our fiscal Q4 guidance demonstrates continued strong year-over-year momentum. In the second half of the calendar year, we expect particularly strong growth in DRAM as well as leading-edge foundry logic and advanced packaging for both. On today's call, I will update you on the demand environment, discuss how we are scaling our operations for continued growth, demonstrate how value creation is expanding our gross margins, summarize our Q3 results, and provide our Q4 guidance. Over the past quarter, the demand outlook has strengthened across all the leading indicators we track. Cloud service providers continue to increase their investments in AI infrastructure. Importantly, many of these companies are already generating positive returns on their investments, and so are their enterprise customers, including Applied. As Gary described, we are accelerating the pace of new product development, increasing revenue, and generating new efficiencies in our support functions. In fact, G&A as a percentage of operating expenses has declined to the lowest level in our history. Turning to our direct customers, most leading-edge logic and DRAM fabs are running at full capacity. Utilization levels are rising across the board, including in ICAPS where we see strong demand in AI-related markets like power and optical chips. As a result, our customers have announced more than 10 new fab projects just this quarter. Customers continue to give us longer visibility than we have ever had, with some conversations now extending to 2030. These communications are valuable to our company and our own supply chain partners, who are scaling with us to support our customers' growth forecast. During the quarter, we officially opened our newest manufacturing center in Singapore and combined with other expansions worldwide, have nearly doubled our manufacturing space over the past several years. Based on the longer-term demand signals from our customers, we are now hiring and training new manufacturing and customer support teams so that we have the capacity to double our quarterly system output from current levels by 2028. In fact, we added more than 1.5 thousand people this quarter in worldwide manufacturing and AGS customer support. We are also planning our next manufacturing capacity expansion ensuring we have the option to support further increases in demand by 2030. Next, I will discuss value creation and sharing. Applied is delivering value to our customers in the AI ecosystem in more ways than ever before. We have increased R&D in every year since Gary joined the company in 2012. The investments have broadened from equipment innovations to materials engineering solutions that result in better chips. More recently, we have significantly increased R&D in advanced packaging innovations that enable better systems, supplementing our R&D with two small acquisitions. Today, we are increasing investments in technologies that enable better fab economics as we accelerate ramps and boost output and yields. All of these technologies will be put to work at the EPICenter where we will co-innovate with our customers and partners to accelerate the AI roadmap. In short, we have broadened our focus from making better equipment to enabling better chips and systems for AI and better fab returns for our customers. These investments have made us a more valuable partner to our customers and enabled us to share in the value we create. Three years ago, we implemented a systematic approach to value-based pricing, and today you can see the benefits reflected in our strong revenue growth and gross margins, which have increased to greater than 50% for the company and greater than 55% in semiconductor systems. We have higher pricing and margins in both new and existing products. At the same time, we remain focused on cost improvements and use them aggressively to help offset higher input costs. As we look at the many opportunities we have to further increase the value of chips, systems, and fabs, we are confident we will continue to expand gross margins. Next, I will summarize our Q3 results. We generated record revenue of $9.1 billion, up 15% sequentially and 25% year-over-year. Non-GAAP gross margin increased to 50.4%, up 40 basis points sequentially and 150 basis points year-over-year. Non-GAAP operating margin expanded to a record 34%, up 190 basis points sequentially and 330 basis points year-over-year. We delivered record non-GAAP earnings per share of $3.50, which is up 22% sequentially and 41% year-over-year. Last quarter, I discussed our focus on increasing operating leverage. We grew revenue much faster than spending in Q3, on both a sequential and a year-over-year basis, and drove OpEx as a percentage of revenue to the lowest level in nearly four years. Turning to the segments, Semiconductor Systems delivered record revenue of $7 billion, which is up 18% sequentially and 27% year-over-year. The revenue mix was similar to last quarter as capacity additions in Gate-All-Around and FinFET drove record foundry logic revenue. DRAM revenue, which includes HBM packaging, grew by 52% year-over-year to record levels. As we look ahead to the second half of the calendar year, we expect a very significant increase in DRAM revenues as our customers begin to expand clean room capacity. Looking to our individual materials engineering business units, we had record revenues in deposition in Q3, including in PVD, CVD, and epitaxy, which is one of our fastest-growing businesses this year. In materials modification, we had record sales in thermals and treatments. In materials removal, we had record revenue in both etch and CMP. We also had records in process diagnostics and control which is growing faster than our overall systems business this year. Segment non-GAAP gross margin increased 190 basis points year-over-year to 55.4%. Non-GAAP operating profit increased 45% year-over-year to a record $2.7 billion. Applied Global Services delivered record revenue of $1.8 billion which is up 22% year-over-year reflecting both subscription services growth and high transactional parts demand. Ramp readiness is a major priority, and the team added more than 1,000 customer support engineers. AGS is using AI and warehouse automation to grow as efficiently as possible, which is reflected in a strong gross margin of 35.6%, up 180 basis points year-over-year and operating margin of 30.1%, up 280 basis points year-over-year. From a regional perspective, China represented 26% of our Semiconductor Systems plus AGS revenue. We now expect our China revenue to increase this calendar year led by investments in 28-nanometer foundry logic where Applied has strong technology differentiation and share. Other revenue of $294 million is in line with our expectations. We generated record operating cash flow of over $3 billion. Capital expenditures were $707 million, resulting in free cash flow of $2.3 billion. We distributed $860 million to shareholders, including $420 million in dividends and $440 million in stock repurchases. We have $12.8 billion remaining in our share buyback authorization and continue to expect to distribute 80% to 100% of free cash flow to shareholders. Now I will share our guidance for Q4. We expect company revenue of $10.25 billion, plus or minus $500 million which is up 51% year-over-year. We expect non-GAAP EPS of $4.02, plus or minus $0.20, which is up 85% year-over-year. Within this outlook, we expect Semiconductor Systems revenue of around $7.9 billion up 62% year-over-year, AGS revenue of about $1.84 billion up 22% year-over-year, and Other revenue of around $510 million composed primarily of display revenue. I have said previously that our display business includes new products that could help us drive higher quarterly revenue in future periods. For modeling purposes, we now expect Other revenue to be approximately $400 million per quarter on average through 2027. We expect non-GAAP gross margin to be approximately 50.4% in Q4, up 32 basis points year-over-year. And we expect non-GAAP operating expenses of around $1.58 billion. As a reminder, Q1 of fiscal 27 will be a 14-week quarter which will result in a higher-than-average step-up in our Q1 operating expenses. Finally, we are modeling a non-GAAP tax rate of approximately 11% and a GAAP tax rate of approximately 13% in 2027 as we absorb the effect of the global minimum tax. In summary, the rapid adoption of AI that we have been investing for is driving strong growth and record revenue and profitability for Applied Materials. We are enabling better chips, systems, and fab returns and systematically sharing in the value we create. We see continued record performance in the second half of the calendar year, with a sizable increase in DRAM and leading-edge foundry logic revenue. Based on the unprecedented visibility we are receiving from our customers, we expect another strong record year in 2027 and are making substantial investments to be able to ramp to higher levels beyond next year. Now, Mike, let's begin the Q&A session.
Thanks, Brice. 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.
分析師問答
Certainly. And our first question for today comes from the line of C. J. Muse from Cantor Fitzgerald. Your question, please.
Yes. A quarter ago, you quantified Semiconductor Systems growth of 30-plus percent. Curious if there is kind of a framework for thinking about what the growth outlook looks like now given your positive commentary. And is there any sort of framework that we should be thinking about into calendar 2027?
Hi, CJ. It is Brice. Thanks for the question. Our key comments there and the way that we are seeing the business is that demand strengthened again during the quarter. We see new projects being added by our customers on the factory side. We see CapEx forecasts going up by our customers, and we see strong CapEx from the cloud service providers all announced. The greater-than-30% that we highlighted last quarter we are saying now that it is greater than that at this point. We did not want to guide our outlook beyond this quarter at this point, so that is as much information as we are providing. When we look into 2027, we expect this whole demand function led by AI to continue. So we are saying 2027 at this point we expect another strong year.
CJ, this is Gary. I would add that the fastest-growing parts of the market are the leading-edge foundry logic, DRAM, and advanced packaging. We said that is approximately 80% of the growth in wafer fab equipment spending this year. We will see a similar profile in 2027. Those are the fastest-growing parts of the market. Those are areas where we have clear leadership and are very well positioned going forward. We increased guidance from greater than 20% in February to greater than 30% in May, and now we think it's stronger than that going forward. Demand in all customer conversations is very strong. What we are hearing from customers with these eight-quarter rolling forecasts is very strong multiyear demand. I really want to thank our supply chain teams and operations teams; they are doing a great job responding. Customers are being very creative in how they expand space and take tools earlier. Our teams are reacting quickly, and we are in a strong position to outperform this year. We also highlighted that we expect to gain share during the year.
Very helpful. As a follow-up on gross margins, you talked about value-based pricing, and I think we've heard from most companies around anything expedited, service, new tools. You talked about like-for-like pricing pushing higher. Could you speak directly to that and how we should be thinking about implications to your overall gross margins as we proceed into fiscal 27 and beyond? Thanks so much.
Sure. Over the last three years, we've had approximately a 300-basis-point increase in our company-level gross margins. One driver for that was our value-based pricing that we do for every single tool. When we came through COVID, the supply chain crisis and cost of inputs went up and we found ourselves needing to reprice every tool. So we put that value-based process in place. We examine the value of every single tool and put a new price on every tool. We think that is required in an environment where input costs change constantly. Looking forward, we expect to be able to continue to improve our gross margins. We are already greater than 55% at the Semiconductor Systems level, and value-based pricing will continue to be a part of that.
CJ, I would add that our ability to create value for customers has never been stronger. This race to bring new AI architectures to market is what every one of our customers is focused on. Applied has the most enabling technologies in the fastest-growing parts of the market. So we have a tremendous opportunity for creating value. Yield and output innovation are also important. All of our customers are racing to be first to market with new architectures and ramp as fast as possible while optimizing yield and output. That puts us in a position where our products and services are extremely valuable. That is driving the greater-than-20% service growth we are seeing. We talked about greater-than-50% growth in our PDC business related to yield optimization. Our pipeline of new products is very strong and many of those have higher margins, which will give us a tailwind going forward. 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. Many of your memory customers are saying that they have three- to five-year long-term agreements with good visibility into units and pricing. I know you mentioned you have eight quarters of visibility. As you look at customers who are signing up for greater alignment with their end customers, how is that translating into your longer-term visibility beyond eight quarters?
Hi, Vivek. It is Brice. For our largest customers, we actually have visibility to the road map and have a perspective on probably five years of visibility. We ask for detail at the detailed level for the eight quarters so we can aggregate and provide that to our supply chain. Other changes include longer lead-time purchase orders from customers so the details are agreed earlier. We also have commercial mechanisms like cancellation charges and expedite charges that help navigate the environment. Overall, visibility has significantly increased from prior periods.
Vivek, this is Gary. There is clearly a gap between supply and demand. DRAM, especially with AI as we expand from training to inference to agentic AI to physical AI, memory demand continues to go higher, especially DRAM. This will be a very strong growth year for Applied, more second-half weighted in terms of our DRAM growth, but very strong. We have expanded our DRAM share significantly over the last several years and continue to see strong growth going into 2027. Our conversations with customers reflect multiyear growth and significant demand and we are increasing our capacity to meet that demand. In DRAM, we are the number-one process equipment provider and the leader in adjacent enabling technologies including epitaxy, HBM packaging, materials deposition, conductor etch, e-beam technologies. We are in deep partnerships for future DRAM architecture innovations in 6F², 4F², and are well positioned for 3D DRAM in the future. I have high confidence we will continue to drive significant growth and gain share in this segment.
Got it. One more on gross margins. From 2021 to 2025, your gross margins and those of a US peer were about the same. In the near term they are about 150 basis points higher. I understand mix differences. How come gross margins were so aligned in prior years yet are diverging now? What is the prospect for expanding gross margins toward the industry level going forward?
Vivek, I do not have a perfect explanation for comparisons between companies. From our perspective, we have made tremendous progress in gross margin advancement. We discussed our value-based pricing and the strengthening of our portfolio as we target R&D and collaborations to the most valuable inflection solutions. Pricing demonstrates the value of that portfolio. We expect to continue to improve gross margins. We do have other elements in our portfolio like the display business, which, when it grows faster, affects corporate gross margin differently. So portfolios differ between companies, but we expect to continue improving margins and growing value over time.
I would add we have driven significant margin growth: 13 quarters of year-over-year growth and 190 basis points in our Semiconductor business in the last year. I have high confidence we will continue to drive margins higher and continue the growth seen over the last few years. Thank you.
And our next question comes from the line of Stacy Rasgon from Bernstein Research. Your question, please.
Hi, thanks for taking my questions. I have one more on gross margins. They are well above 50% and coming in higher than expected. But you are guiding them flat in the near term on sizable revenue increase. Given the commentary around portfolio and pricing, I am a little surprised. Why is that? Is it a function of the display business growing sequentially, or something else?
Hi, Stacy. Thanks. Display growth is certainly a factor in the mix. But it is also ramp headwinds. With growth we are ramping many customer service engineers and adding resources in the Semiconductor business. Yes, we get the benefit of strong segment mix with Semiconductor growing strongly and more volume, but we do have some ramp costs in the forecast. We feel good about a flattish company-level margin in the guided quarter and expect to continue improving margins over a longer horizon.
So how long do those ramp costs last? Are you still ramping more engineers into subsequent quarters, or are you all in this quarter? Last quarter you talked about something like 10 basis points sequentially; is that still the trajectory or could it be better?
The continued pace of improvement will be gradual. We do expect to improve over time. We will continue to add employees over the next few quarters, but that headwind will recede as revenues continue to grow.
And our next question comes from the line of Timothy Arcuri from UBS. Your question, please.
Thanks. Brice, I want to go back to systems guidance. You said up more than 30% last call and things have gotten better since then. Even if you go 40%, that implies a pretty big deceleration into December. You would go from 18% in July to 12% in October to then 6% in January, which gets to roughly 40%. WFE is being talked about up 38%—to outgrow, you have to be at least 40% if you believe those numbers. Would you commit to growing Systems 40% or more?
Hi, Timothy. Thanks. We are committed to outgrowing the market. That has already happened so far this year and we expect that to continue wherever we land from a growth perspective as we get through the year. We first guided greater than 20%, then raised to greater than 30%, and now say it is even higher. We are not providing a specific Systems growth percentage beyond the quarter guidance at this point. We do expect sequential growth in our Q1 calendar quarter but are not guiding that at this time.
Okay. Maybe asked a different way: you commented on manufacturing capacity doubling. Should I take that at face value that you are preparing to double quarterly system output by 2028? Does that imply revenue of roughly $14 billion sometime during calendar 2028 or is it more nuanced?
It is more nuanced. That comment was about capacity, not a revenue forecast for 2028. For long lead investments like clean room, we need to ensure we have the clean room in place aligned with profitable demand. We are communicating to suppliers and putting capacity in place to support a wide range of output requirements in 2028 and beyond. It is not an explicit revenue forecast, but an indication of what we will be prepared for.
And our next question comes from the line of Krish Sankar from TD Cowen. Your question, please.
Thanks. It seems like your customer conversations have shifted from annual pricing discussions to delivering and meeting requirements, time-to-market, and two-year visibility. Does this give you freedom on pricing or does it add more burden on expenses for setting up capacity and the supply chain for the upcoming ramp? If you have two-year visibility, why not give a January-quarter qualitative outlook?
Customers, especially large ones, are providing very strong visibility and are becoming more interested in scheduled delivery and hitting schedules. They collaborate on specificity of orders and eight-quarter visibility that we also share with suppliers. That dynamic has improved planning dramatically versus the prior year. It benefits us and our suppliers. We prefer not to provide quarterly guidance beyond what we've given today.
Got it. In your prepared comments you spoke about certain customers giving you visibility into 2030. Are those conversations about technology or about capacity to scale up and meet that demand?
They are definitely about technology. Especially with large or mature customers, we know the fab projects on the road map and the planned technology. Even for new technologies, we have a perspective on our position. We can plan in detail for five years. For eight quarters out, we get very specific about node and tool types needed so we can pass that to suppliers.
Krish, I am in many of those conversations with CEOs of our largest customers. They give detailed visibility for eight quarters, and beyond that they communicate expectations of strong multiyear demand. They want us ready to support that demand and it takes time for supply chain preparation. Technology discussions often go out ten years since Applied is a key enabler for many architecture inflections. Applied has the most enabling technologies across new transistors, wiring, DRAM architectures, and new packaging architectures. We have deep co-innovation relationships with customers and the technology visibility extends beyond five years in those deep engagements.
And our next question comes from the line of Harlan Sur from JPMorgan. Your question, please.
The team previously guided your global ICAPs business to be flat to slightly up this year. Outside China, we're seeing a cyclical recovery in automotive and industrial for analog, power, microcontroller customers and tight supply. Are global ICAPs customers starting to pick up spending, and do you see your total ICAPs business growing this year?
Harlan, we do see a change in the ICAPs dynamic. Increasing utilization across those customers is a positive. Our view is that China will grow this year and next year, which is a big part of our ICAPs portfolio. We do think ICAPs overall will grow this year and next. The digestion on the equipment side may be expiring and we can return to growth. For our non-China customers, we expect positive growth next year with bright spots in power and photonics.
Another quarter of strong revenue growth and AGS profitability—30% operating margin, possibly highest in two years. Given strong incremental margins the last couple of quarters above 40%, and strong incremental operating margins, could we see AGS gross margins approaching the 40% range and operating margins in the mid-thirties as AGS revenues scale higher?
Thanks, Harlan. We expect the opportunity to improve gross margins over time in the services business. Solutions like information products from AI allow us to develop new products and be more efficient in services. Combined with a growing installed base, that gives us good growth. This year, increased utilization boosted the spares business, which helps gross margin. That effect won't repeat indefinitely, but we do expect to continue improving margins over time in services.
Harlan, optimizing output and yield is incredibly important in a supply-constrained environment and that will persist for a period. The value of services that optimize yield is high, and we have new innovations: over 37,000 chambers connected to our AX servers, AI-enabled applications for preventative maintenance and chamber matching. Those services are incredibly valuable, driving top-line growth and service contract growth faster, and helping us capture value more quickly. I'm very positive on growth in the AGS business both top-line and bottom-line.
And our next question comes from the line of Blayne Curtis from Jefferies. Your question, please.
Good afternoon. I want to ask on NAND, it doubled in the quarter off a small base. What are you seeing in that market? You did mention it in Other. Is it continuing to grow?
Hi, Blayne. NAND is showing good percentage growth this year off a small base. We think this year is a strong year of growth for NAND. Looking forward, the dynamic is that AI-led growth will favor leading-edge logic, DRAM, and advanced packaging as the fastest growers. ICAPs should return to growth. NAND should grow but will be a slower grower in the out-year.
Thanks. On CapEx, you talked about expansion for 2030. Can you comment on what you expect CapEx to be in October and any perspective for next year? I think EPIC rolls off so prior commentary suggested CapEx decline; with business strength how are you thinking about spend?
Good question. With strength in the business there are more additions we want to do, including equipment inside EPIC as well as other investments. CapEx will still be a higher-than-normal CapEx year but it will decline as a percentage of revenue as we go into 2027. That is our perspective at this point.
And our next question comes from the line of Jim Schneider from Goldman Sachs. Your question, please.
Thanks. Given the strength you're seeing across your focus areas as you look into fiscal 27 or calendar 2027, would you rank where you see the incremental strength between foundry logic, DRAM spending, and advanced packaging?
Jim, we do not distinguish materially between them at the system level. The system-level pull AI provides is similar across these end markets. It will be strong for leading logic, DRAM, and advanced packaging. What is new is we also think ICAPs will grow next year, another difference from the prior 90 days.
Jim, we talked about roughly 80% of WFE growth coming from those three segments and we see a similar profile in 2027. Those three segments are the fastest-growing segments in 2026 and 2027 and over the next several years.
Given the first-half versus second-half dynamic in calendar 2026, is there any reason why in calendar 2027 you would not see accelerating growth for overall revenue? Anything on the horizon that would give you pause?
Many people ask what governs growth. From our perspective, it is clean room availability. Customers continue to add clean room projects, which is why we raised our forecast this year. Some of those add incremental clean room space next year and projects usually take several years. Clean room availability will determine what we can ship next year.
And our next question comes from the line of Mehdi Hosseini from Susquehanna International. Your question, please.
Thanks for taking my question. Forget about near-term trends; how are you thinking about targeted revenue growth and operating margin for a scenario where WFE is $150 billion to $175 billion? Any color would be great.
Mehdi, when we have our October investor event we will give more color relative to growth rates. Looking at compute demand going forward, we see a strong multiyear growth driver. The fastest-growing segments include leading-edge foundry logic, DRAM, and advanced packaging where we are number one and positioned to gain share. We have drivers enabling us to outperform in 2026 and expect strong growth going forward. The value we deliver is increasing with our connected portfolio creating tremendous customer value for new chip and packaging architectures, which positions us to continue driving margins higher. Innovations in yield and output address customers' focus on getting as many chips per square meter as possible, increasing the value of our services. I am optimistic on top-line and bottom-line growth and will give more color at our October investor meeting.
Mehdi, to add one point: you're describing the scenario people are discussing for this year. We have given the ingredients: greater than 20% services growth for the calendar year, something higher than 30% for the Semiconductor business, our gross margin outlook, and display guidance. We also expect to gain share. Those ingredients give you the perspective needed for the scenarios people are modeling.
Got it, thank you. One quick follow-up: NAND has been a relatively small part of semi and largely upgrades rather than wafer capacity adds. When do you think the industry would start adding capacity to offset losses due to migration to 300-plus layer counts?
Mehdi, wafer starts have continued to decline in NAND and projects are mostly for upgrades to add more layers. We expect that dynamic to continue for the next few years. One difference could be new projects in China, but for larger customers it is mostly increased space to accommodate layer upgrades.
And our final question for today comes from the line of Srini Pajjuri from Royal Bank of Canada. Your question, please.
Thanks for squeezing me in. Gary, a couple of technology questions. You talked about panel-level packaging. When do you see panel-level packaging becoming mainstream and compared to your current position in advanced packaging, what opportunities do you see in that market? Also, hybrid bonding seems to be happening; what opportunities are you seeing there?
Thanks, Srini. Packaging is one of the most important areas for improving AI compute performance and power. Multichip connectivity and data movement are huge focuses for customers innovating new architectures. We expect over 70% growth in packaging this year. We have by far the strongest portfolio of technologies and have made acquisitions that add to our strength. We will continue to drive significant growth for many years. For new substrates, customers are focused on connecting logic and memory at the highest performance and power; we are in deep co-innovation relationships and there is a race to bring these architectures to market because of the value in performance and power. We expect significant growth in panel revenue next year and a meaningful ramp thereafter. For hybrid bonding, every customer—leading-edge foundry logic, DRAM, HBM—wants to shorten wiring length to improve performance and power. Hybrid bonding is an important inflection and Applied has strong technology there and in adjacent steps. We have the only integrated R&D facility working with customers to enable these packaging architectures. Hybrid bonding will be a meaningful growth driver over time in addition to other advanced packaging technologies. I am very optimistic: over 70% growth this year and very strong growth in 2027 and beyond.
One quick follow-up for Brice. I understand you do not want to give FQ1 guidance, but Q1 will be a 14-week quarter. What sort of impact, if any, will that have on revenue sequentially?
When we have had a 14th week in prior years, the services side of the business tended to perform approximately ratably. The equipment side is generally planned on a quarterly basis so it does not ratably spread the same way. From a spending perspective, most spending occurs in the quarter as vendors and suppliers will want to be paid. That describes the typical pattern with a 14-week quarter.
Great. So thank you, Srini, for your questions. Brice, would you like to give a little summary before we close the call?
Thanks, Mike. We are excited that Applied's unique portfolio and strategy are enabling us to grow faster than the market and increase margins. We look forward to an even stronger second half and to seeing many of you at our upcoming events. I will be attending the Citi Conference in New York and Gary will be at the Goldman Conference in San Francisco. The whole team looks forward to seeing you at the EPIC Center in October and giving you our longer-term outlook at our investor breakfast at SEMICON West.
Alright. Well, thank you, Brice, and we would thank everybody for joining us today. A replay of today's call will be available on the IR page of our website by 5:00 PM Pacific Time. We would really like to thank you for your continued interest in Applied Materials.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.