Detailed narrative
AI demand accelerating and diversifying into agentic and physical AI
Management framed the quarter around a rapid, broadening AI build-out: publicly available data indicates global token generation increased more than threefold in just the past three months. Since the start of the year there has been a meaningful increase in agentic applications layering on top of generative-AI training and inference.
Agentic models plan, reason and execute autonomously, requiring more CPU-intensive architectures while also increasing demand for DRAM and NAND — an additional tailwind for wafer fab equipment. Management is modeling incremental CPU, DRAM and NAND demand on top of prior forecasts, with physical AI seen as a further future layer.
WFE mix shifting to Applied's strengths; supply is the constraint, not demand
Most leading-edge logic and DRAM fabs are running at full capacity, and clean-room space availability had been pacing industry investment. As customers reallocate or create space, Applied is seeing incremental 2026 equipment-delivery requests and now expects its semiconductor-equipment business to grow more than 30% in calendar 2026.
Applied is tracking over 100 factory projects globally, adding more than 10 in the last quarter alone, most of them greenfield. Largest customers now provide rolling 8-quarter forecasts, giving the clearest and longest visibility Applied has ever had, extending confidence into 2027, 2028 and beyond (one customer worried about supply into 2030).
Leading-edge foundry logic, DRAM and advanced packaging are expected to drive more than 80% of 2026 WFE YoY growth.
Record financials and best gross margin in 25+ years
Applied delivered record revenue of $7.91B (+13% seq, +11% YoY), record non-GAAP EPS of $2.86 (+20% YoY), and its highest gross margin in more than 25 years. Non-GAAP gross margin reached 50% (+80bps YoY) driven by value-based pricing on differentiated products plus manufacturing cost innovation; non-GAAP operating margin expanded to 32.1% (+140bps YoY).
Management noted non-GAAP gross margin has risen 800 basis points since Gary Dickerson became CEO in 2013, now crossing 50% at the company level and approaching 55% in Semiconductor Systems (54.8% in Q2). Pricing works via 2-3 year project-based long-term contracts, so it moves slowly; gross-margin gains come from gradual portfolio enrichment as each new solution is more valuable.
New products strengthening the gate-all-around, DRAM and packaging portfolios
Applied announced two new gate-all-around products: the Trillium ALD integrated material solution, which precisely deposits metals in complex GAA gate stacks with angstrom-level thickness control to tune threshold voltages; and a precision PECVD system using an industry-first selective bottom-up deposition process for shallow-trench isolation to reduce parasitic capacitance and leakage.
In etch, the Sym3 platform is the fastest-ramping product in Applied's history, and the new Sym3 Z platform has seen strong adoption with more than 250 chambers and multi-hundreds of millions of dollars of growth. In DRAM, Applied cited leadership in wiring, patterning, peripheral logic, conductor etch and e-beam across 6F², 4F² and future 3D DRAM, with materials intensity expected to rise.
Conductor etch and process control (PDC, led by Cold Field Emission e-beam) were cited as among the fastest-growing businesses this year.
EPIC platform and collaboration model
Applied is building a new collaboration model via its global EPIC platform, designed to shorten the time to commercialize breakthrough technologies from research to full-scale manufacturing. The centerpiece EPIC Center in Silicon Valley remains on track to begin operations in the fall.
Applied announced eight founding partners — customers TSMC, Samsung, SK Hynix and Micron; test partner Advantest; and universities ASU, RPI and Stanford — with additional agreements to be announced. EPIC is expected to give Applied greater multi-node visibility, higher R&D productivity, value sharing, and accelerated design-ins for equipment and services, with more partners to be added.
AI adoption inside Applied and in services
Applied now has more than 35,000 AI users across its global workforce, deploying AI for scientific breakthroughs, R&D acceleration, factory and supply-chain optimization, and workflow automation — allowing it to grow the business significantly faster than headcount. In services, Applied has more than 35,000 chambers connected to its proprietary AIx software for AI-powered monitoring, diagnostics and analytics, most connected remotely so experts can support them instantly.
With customers focused on output and yield to squeeze more good die from existing fabs while adding floor space, these advanced-service innovations are lifting the AGS growth rate above prior expectations.
Manufacturing capacity and supply-chain scaling
Applied has nearly doubled its manufacturing capacity with expansions in the U.S. and Europe and a new manufacturing center in Singapore; floor space is ready and available, requiring fit-out and hiring to ramp. Management said output could roughly double from current levels, with the constraint being the supply chain (about 2,000 direct suppliers and many components per tool) responding at the same speed.
Applied is systematically translating its 8-quarter customer demand forecast into a consolidated signal to suppliers, and has increased its build plan, inventory positions and logistics capacity. Some customers require deposits, though not across the board.