Applied Materials, Inc. (AMAT) Q4 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary presents a mixed outlook with both positive and negative elements. The company anticipates lower revenue and earnings due to uncertainties in China and market concentration. However, there are growth opportunities in AI, advanced packaging, and power electronics. The Q&A section reinforces these mixed signals, with concerns about China revenue and management's unclear responses. Despite strong positions in leading-edge and DRAM, the lack of specific guidance and mixed performance in certain segments contribute to a neutral sentiment.

Key Financial Performance

Annual Revenue for Fiscal 2025 $28.4 billion, a 4% increase year-over-year. Growth was achieved across all segments despite trade restrictions reducing market access in China.

Semiconductor Systems Revenue for Fiscal 2025 4% growth year-over-year. Growth occurred even with significant trade restrictions impacting the China market.

Applied Global Services (AGS) Revenue for Fiscal 2025 $6.4 billion, a 3% increase year-over-year. Double-digit growth in recurring parts, services, and software revenue offset a decline in the 200-millimeter equipment business.

Display Revenue for Fiscal 2025 20% growth year-over-year.

Non-GAAP Gross Margin for Fiscal 2025 48.8%, an increase of 120 basis points year-over-year. Achieved through a richer mix of advanced systems and broad price increases, offsetting cost increases.

Non-GAAP Operating Expenses for Fiscal 2025 5% increase year-over-year, driven by a 10% increase in R&D investments.

Non-GAAP Earnings Per Share for Fiscal 2025 9% increase year-over-year.

Cash from Operations for Fiscal 2025 Nearly $8 billion.

Free Cash Flow for Fiscal 2025 $5.7 billion, including $2.3 billion in capital spending, over half of which was allocated to the EPIC Center construction.

Shareholder Returns for Fiscal 2025 $6.3 billion distributed, including $1.4 billion in cash dividends (15% increase in quarterly dividend per share to $0.46) and $4.9 billion in share repurchases, reducing shares outstanding by more than 3%.

China Revenue for Fiscal Q4 2025 29% of total company revenue, down from a peak of 45% in Q1 fiscal 2024.

Display Revenue for Fiscal Q4 2025 68% increase year-over-year.

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Operating Highlights

Xtera epitaxy system: Enables higher-performance gate-all-around transistors for 2-nanometer and beyond, with a 40% improvement in uniformity and 50% lower gas usage.

Kinex die-to-wafer bonder: First integrated system for hybrid bonding, improving performance, power consumption, and costs for multi-chip packages and die stacking.

PROVision 10: Enhances yield in 3D devices with 50% higher image resolution and 10x imaging speed using cold field emission technology.

China market: Declined to 28% of total systems and service revenues in fiscal 2025 due to trade restrictions. Wafer fab equipment spending in China expected to be lower in 2026.

DRAM market: Strong process technology leadership with revenues from leading-edge customers growing by more than 50% over the past year.

NAND market: Revenue approximately doubled in 2025, though it remains a small portion of the wafer fab equipment market.

AI-driven semiconductor growth: AI computing is driving a compound annual growth rate of 10%-15% in the semiconductor industry over the next 5 years.

EPIC Center: Construction on track to open in 2026, enabling advanced semiconductor equipment and process innovation.

Service revenue: Core service business delivered double-digit growth, with over two-thirds of revenue from subscriptions.

Operational efficiency: Adopted AI and digital tools to streamline organization and improve productivity.

Inflection-focused innovation strategy: Focus on co-innovation with customers to address critical challenges and create differentiated solutions.

Shift in market mix: Positioned to benefit from growth in leading-edge foundry logic, DRAM, and advanced packaging as AI adoption accelerates.

R&D investments: Increased by 10% to target faster and more energy-efficient transistors, chips, and systems.

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Risk or Challenges

Trade Restrictions: Increased trade restrictions have reduced the size of the accessible market in China, significantly impacting revenue. The impact of these restrictions was equivalent to around 10% of the China market in fiscal 2024 and more than double that amount in fiscal 2025. This trend is expected to continue into 2026.

Market Mix: An unfavorable market mix tempered growth in fiscal 2025. Applied has lower market share in some of the fastest-growing areas outside of China, such as NAND, which remains a relatively small portion of the wafer fab equipment market.

Customer Demand Alignment: The company is preparing for higher demand beginning in the second half of calendar 2026, but this requires significant alignment of supply chain and manufacturing slots, which could pose operational challenges.

Cost Management: Non-GAAP operating expenses grew 5%, driven by a 10% increase in R&D investments. While these investments are strategic, they increase cost pressures.

China Revenue Decline: China revenue declined to 29% of total company revenue in Q4 fiscal 2025, down from a peak of 45% in Q1 fiscal 2024. This decline is attributed to trade restrictions and market access issues.

Operational Efficiency: Changes in reporting and operational structures, such as moving the 200-millimeter equipment business and fully allocating corporate support costs, aim to improve efficiency but may initially disrupt operations.

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Guidance & Outlook

Wafer Fab Equipment Spending in China: Expected to be lower in 2026 with no significant changes to market restrictions anticipated.

Market Growth Areas: Leading-edge foundry logic, DRAM, and advanced packaging are expected to be the fastest-growing areas in 2026.

AI Computing and Semiconductor Industry Growth: AI computing is driving a compound annual growth rate of 10%-15% in the semiconductor industry over the next 5 years, leading to increased wafer fab equipment spending.

Revenue Growth in 2026: Expected to be weighted toward the second half of the calendar year.

Technology Inflections: Major inflections in leading-edge logic, high-performance DRAM, high-bandwidth memory, advanced packaging, and power electronics are reshaping the semiconductor roadmap.

New Product Launches: Products like Xtera epitaxy system, Kinex die-to-wafer bonder, and PROVision 10 eBeam metrology system are expected to drive growth by addressing critical technology challenges.

EPIC Center Operations: The EPIC Center in Silicon Valley is on track to begin operations next year, enhancing co-innovation and process technology development.

Customer Demand and Supply Chain Alignment: Operations and service organizations are being prepared to support higher demand starting in the second half of 2026.

Q1 Fiscal 2026 Guidance: Revenue expected to be $6.85 billion, plus or minus $500 million, with non-GAAP EPS of $2.18, plus or minus $0.20.

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Shareholder Return Plan

Cash Dividends Paid: $1.4 billion

Quarterly Dividend Increase: 15% increase to $0.46 per share

Share Repurchase Program Allocation: $4.9 billion

Reduction in Shares Outstanding: More than 3%

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Key Q&A

Q:How have conversations with clients evolved in the last few months regarding AI infrastructure spending, and how is Applied Materials preparing its supply chain for growth?

A:Gary Dickerson stated that AI is the biggest focus for all customers, driving the WFE mix to segments like leading-edge foundry logic and DRAM, where Applied has strong positions. He highlighted high visibility and co-innovation relationships with customers over four technology nodes, extending a decade into the future. He also noted a major improvement in customer demand visibility, with some customers providing 1-2 years of visibility to ensure supply chain readiness for significant factory ramps in the second half of 2026.

Q:What are the implications of the announced headcount reduction on gross margins and OpEx into the first half of calendar 2026?

A:Brice Hill explained that the Q1 spend guide reflects no uplift from annual pay raises and share-based compensation increases. The headcount reduction was part of a long-term program to increase velocity and productivity. Gary Dickerson added that the changes were aimed at optimizing future performance while ensuring readiness for major customer ramps in the second half of 2026.

Q:How is Applied Materials addressing competition in leadership products like PVD, CVD, CMP, and etch, especially with increasing domestic China competition?

A:Gary Dickerson emphasized strong positions in gate-all-around, backside power, DRAM, and advanced packaging. He noted that trade restrictions have impacted their ability to serve parts of the China WFE market, but where they can compete, they are performing well. He highlighted innovations in PVD for low-resistance wiring and integrated systems for transistors and wiring, expressing confidence in growth and share gains in 2026 and beyond.

Q:What is the impact of the 200-millimeter movement from AGS to semi, and how does it affect Q1 and FY '25?

A:Brice Hill stated that the movement is approximately $125 million for Q1 and a similar amount for Q4. The change is intended to simplify management and investor understanding of the two reportable segments.

Q:What is the outlook for WFE growth in 2026, and how is Applied positioned to outperform the market?

A:Brice Hill expects strong growth in 2026, led by leading-edge and DRAM segments, despite some digestion in China and ICAPS. Gary Dickerson highlighted Applied's strong positions in gate-all-around and DRAM, with high visibility and confidence in share gains as advanced factories ramp in the latter half of 2026.

Q:What is the potential WFE allocation for AI data center build-outs, and how does it align with Applied's strengths?

A:Brice Hill estimated that 15% of leading-edge and DRAM wafer starts are allocated to AI data center solutions, growing at a mid-30% CAGR. Gary Dickerson noted that leading-edge foundry logic and DRAM are the fastest-growing segments, with Applied positioned to capture more than 50% of its served market in gate-all-around and DRAM.

Q:What is the expected revenue trajectory for the first and second halves of 2026, and how will it impact gross margins?

A:Brice Hill indicated that semi business revenue will be flattish in the first half, with significant growth expected in the second half, driven by leading-edge and DRAM. Gross margins are expected to improve with added volume and ongoing pricing and cost programs.

Q:How is Applied Materials addressing concerns about PVD being impacted by ALD, and what is the outlook for PVD growth?

A:Gary Dickerson dismissed concerns about ALD impacting PVD, emphasizing strong visibility and leadership in wiring innovation. He highlighted PVD's role in enabling low-resistance wiring for advanced chips and noted strong demand and growth prospects for PVD in 2026 and beyond.

Q:What is the outlook for China revenue in 2026, and how is Applied managing the impact of trade restrictions?

A:Brice Hill expects China revenue to be lower during the year due to digestion, offset by growth in leading-edge and DRAM. Gary Dickerson noted that Applied is maintaining share where it can compete, despite restrictions impacting over 20% of the China WFE market. He highlighted new ICAPS products to address cost-sensitive markets in China and worldwide.

Q:What is the size and growth outlook for the advanced packaging business?

A:Brice Hill stated that the advanced packaging business was slightly lower in FY '25 compared to FY '24 due to high-bandwidth memory (HBM) shipments. Gary Dickerson noted that Applied is #1 in HBM and expects to double the advanced packaging business to $3 billion or more over the next few years.

Q:How is Applied Materials performing in DRAM, and what are the expectations for 2026?

A:Brice Hill noted that DRAM revenue was flat year-over-year, with significant growth from international customers offsetting the loss of China DRAM business. Gary Dickerson highlighted strong positions in high-bandwidth memory, capacitor scaling, and etch, with expectations for share gains as new DRAM technologies ramp in 2026.

Q:How is Applied Materials addressing the performance gap in foundry logic revenue compared to U.S. peers?

A:Gary Dickerson clarified that foundry logic includes both leading-edge and ICAPS customers. He noted record revenue in Taiwan and Korea, with strong growth in leading-edge revenue, despite mixed performance in ICAPS.

Q:Which segment, leading-edge logic or DRAM, is expected to grow stronger in 2026, and when will the recovery start?

A:Brice Hill expects leading-edge logic to grow stronger than DRAM in 2026, with significant growth starting in the second half of the year.

Q:What initiatives are being undertaken to improve gross margins in 2026?

A:Brice Hill highlighted ongoing pricing process improvements and cost reduction programs. He noted that gross margins improved by 120 basis points in FY '25 due to pricing improvements and expects further improvements with added volume and continued initiatives in 2026.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the linearity of the $600 million BIS headwind throughout 2026, the exact split of AGS in the China entity list, and the precise timing of DRAM and leading-edge logic recovery in 2026. Additionally, they did not fully address the performance gap in foundry logic revenue compared to U.S. peers, offering only general explanations about mixed ICAPS performance.

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Earnings Word Cloud

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