AMAT · Applied Materials, Inc.

Period Performance

Period Performance

In Q2 fiscal 2026, Applied Materials reported revenue of $7.91B, up 11% from $7.10B in the prior-year quarter. Gross margin expanded 80 basis points to 49.9%, driven by higher revenue and increases in average selling prices. Operating income rose 16% to $2.52B, with operating margin improving 140 bps to 31.9%. Net income surged 31% to $2.81B, and diluted EPS increased to $3.51 from $2.63, significantly outpacing revenue growth due to higher other income and lower taxes. For the first six months, revenue grew 5% to $14.92B, while net income jumped 45% to $4.83B, reflecting a $1.1B swing in interest and other income and a lower effective tax rate (13.0% vs. 25.2%).

Segment Dynamics

Semiconductor Systems segment revenue increased 10% to $5.97B in Q2, driven by foundry/logic spending on leading-edge technologies and increased DRAM investments. Memory mix shifted slightly, with DRAM at 29% (up from 27%) and NAND at 4% (down from 7%). Operating margin improved 2.3pp to 35.1%, benefiting from higher revenue and ASPs, partially offset by increased RD&E. AGS segment revenue grew 17% to $1.67B, supported by higher long-term service agreement revenue and spares, with operating margin up 2.6pp to 29.2% on favorable mix. The Other segment posted an operating loss of $56M, compared to a $21M profit a year ago, due to corporate cost allocations.

Forward View

Management highlighted strategic priorities including continued RD&E investments in materials engineering and expanding served markets. While no explicit numerical guidance was provided, the company noted ongoing headwinds from U.S. export regulations affecting China and new tariff measures. The CHIPS Act and the One Big Beautiful Bill Act are expected to provide benefits, including a 35% investment tax credit for domestic semiconductor manufacturing starting in fiscal 2026. However, implementation of global minimum tax regimes in Singapore and other jurisdictions is anticipated to materially increase foreign taxes beginning in Q1 fiscal 2026. Cash flow remains strong, with $2.5B from operations in H1, supporting $737M in share repurchases and $730M in dividends. The company maintains ample liquidity with $13.4B in cash and investments and $4.1B in undrawn credit facilities.

Notes & Operating Detail

Balance Sheet & Liquidity

Cash and cash equivalents totaled $6.301B, supplemented by $7.082B in marketable securities (short-term and long-term investments). Total liquidity (cash + investments) reached $13.383B, slightly up from $12.900B at fiscal year-end. Shareholders' equity grew to $23.909B from $20.415B, driven by net income and offset by share repurchases and dividends. Inventory increased to $6.343B, reflecting investment in customer service spares and raw materials.

Commitments & Contractual Obligations

Contract liabilities were $2.570B, nearly flat sequentially. Unsatisfied performance obligations with original duration of at least one year were $1.2B, with 77% ($924M) expected to be recognized within 12 months. The company also has standby letters of credit and guarantee instruments with a maximum potential payment of $327M, though no material liability is recorded.

Capital Allocation (buybacks, dividends, debt, capex)

• Buybacks: $737M in repurchases during H1 2026 (2M shares at avg $302.69). Remaining authorization of $13.2B under the $10B program approved in March 2025 (supplementing prior $10B).
• Dividends: Declared $0.53 per share in Q2 2026 (up from $0.46 in Q2 2025, +15.2%). Total dividends paid in H1 were $730M.
• Debt: Total debt was $6.455B, down $100M from fiscal year-end due to net commercial paper repayments. No new senior notes issued; the $1.2B 3.300% notes due 2027 were reclassified to current.
• Capex: $1.281B in H1 2026, or 8.6% of revenue, up from $891M a year ago. Capital expenditure related incentives reduced gross PP&E by $1.6B, with $1.1B in investment tax credits recorded.

Segment / Geographic Mix

• Semiconductor Systems: Revenue $11.106B (+1% YoY), operating income $3.519B (31.7% margin). Gross margin improved 110bps to 54.5%. Revenue by market: Foundry/logic 65%, DRAM 31%, NAND 4%.
• Applied Global Services (AGS): Revenue $3.224B (+16% YoY), operating income $925M (28.7% margin). Gross margin 34.5%, up 160bps.
• Other: Revenue $592M, operating loss of $90M reflecting $253M legal settlement with BIS and $12M restructuring.
• Geographic Revenue: China 28%, Korea 20%, Taiwan 26%, Japan 8%, USA 11%, Europe 4%. Asia Pacific remained dominant at 85%.

Cash Flow Quality

Cash Flow Quality

Operating cash flow of $2.5B was nearly flat year-over-year (up 1.4%), despite net income rising 45% to $4.8B. The divergence reflects significant non-cash adjustments: a $1.1B gain on investments reduced cash flow from operations, while deferred taxes added $74M. Working capital consumed $1.8B, driven by accounts receivable ($1.2B) and inventory ($0.4B) build-ups, partly offset by income taxes payable ($0.3B).

Capital Intensity

Capex surged 44% to $1.3B, representing 51% of CFO, signaling increased investment in capacity. Free cash flow is not explicitly stated but would be negative around -$0.2B after capex and before financing.

Capital Returns

Share repurchases of $0.7B (down 75% from prior year) and dividends of $0.7B (up 12%) totaled $1.5B, fully covering CFO. Financing cash flow was -$1.7B due to buybacks, dividends, and net commercial paper repayments.

Anomalies

A one-time $1.1B gain on investments (non-cash) depressed operating cash flow relative to net income. Restructuring charges of $12M had minimal impact. Cash taxes paid decreased to $650M from $833M.