Business Context and Reporting Period
Company: Applied Materials, Inc. (AMAT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended July 26, 2026
Business Overview: Applied Materials provides equipment, services, and software to the semiconductor and related industries. The company operates through two reportable segments: Semiconductor Systems and Applied Global Services (AGS). Effective in the first quarter of fiscal 2026, the 200mm equipment business was moved from AGS to Semiconductor Systems, and corporate support costs are now fully allocated to segments.
Key Financial Metrics
| Metric (in millions) | Three Months Ended July 26, 2026 |
Nine Months Ended July 26, 2026 |
Nine Months Ended July 27, 2025 |
|---|---|---|---|
| Revenue | $9,115 | $24,037 | $21,568 |
| Gross Profit | $4,586 | $11,968 | $10,543 |
| Gross Margin | 50.3% | 49.8% | 48.9% |
| Operating Income | $3,075 | $7,429 | $6,577 |
| Operating Margin | 33.7% | 30.9% | 30.5% |
| Net Income | $2,538 | $7,370 | $5,101 |
| Diluted EPS | $3.17 | $9.22 | $6.29 |
| Cash from Operations (9mo) | $5,568 | ||
| Total Debt (Short + Long Term) | $6,544 (as of July 26, 2026) | ||
| Cash & Investments | $14,501 (as of July 26, 2026) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 25% year-over-year for the quarter and 11% for the nine-month period. Semiconductor Systems revenue grew 27% (quarter) and 10% (nine months), driven by stronger demand for leading-edge manufacturing technologies and DRAM transitions. AGS revenue grew 22% (quarter) and 18% (nine months) due to higher service agreement revenue and spare parts spending.
- Margin Expansion: Gross margin improved by 1.5 percentage points for the quarter and 0.9 points for the nine months, driven by higher revenue, increased average selling prices, and lower material/manufacturing costs.
- Legal Settlement: A one-time charge of $253 million was recorded in the nine months ended July 26, 2026, related to a settlement with the U.S. Commerce Department Bureau of Industry and Security (BIS) regarding export controls compliance. This was paid in full in the second quarter of fiscal 2026.
- Investment Gains: Interest and other income (expense), net, increased significantly in the nine-month period ($1,237 million vs. $625 million prior year) primarily due to higher net unrealized gains on equity investments.
- Effective Tax Rate: The effective tax rate decreased to 12.9% for the nine months ended July 26, 2026, compared to 27.2% in the prior year. This reduction was primarily due to a remeasurement of deferred tax assets from new tax incentive agreements in Singapore and the recognition of a valuation allowance against deferred tax assets related to corporate alternative minimum tax (CAMT) credits in the prior year.
Guidance, Outlook, and Risks
- Capital Allocation: The company repurchased $1.1 billion of common stock in the nine months ended July 26, 2026. Approximately $12.8 billion remains available under the current repurchase program. Quarterly dividends of $0.53 per share were declared in June 2026.
- Outlook: Management anticipates continued demand driven by AI, data centers, and technology transitions. However, results are subject to volatility in customer spending and global economic conditions.
- Key Risks:
- Geopolitical & Trade: Ongoing export regulations and trade disputes, particularly regarding China, limit market access and create uncertainty. The company faces risks from tariffs and retaliatory measures.
- Customer Concentration: Two customers accounted for approximately 20% and 14% of revenue in the first nine months of fiscal 2026. Geographic concentration remains high in Asia Pacific (84% of revenue).
- Tax Legislation: New global minimum tax regimes and U.S. tax reforms (e.g., One Big Beautiful Bill Act) may impact future tax provisions and the utilization of tax credits.
- Supply Chain: Risks include shortages of critical materials, logistics disruptions, and reliance on a complex global supply chain.
Investor Verification Checklist
- Export Compliance: Verify the long-term impact of the $253 million BIS settlement and the suspended denial order on future sales to China.
- Tax Rate Sustainability: Assess whether the 12.9% effective tax rate is sustainable given the one-time nature of the Singapore tax incentive remeasurement and CAMT valuation allowance adjustments.
- Customer Concentration: Monitor the financial health and order patterns of the top two customers, which represent 34% of recent revenue.
- Inventory Levels: Review the increase in inventories ($6.56 billion vs. $5.92 billion prior year-end) to ensure it aligns with demand forecasts and does not signal future write-downs.
- AI Demand Drivers: Evaluate the durability of the revenue growth attributed to AI and data center buildouts versus cyclical memory market fluctuations.