Q1 2025 Earnings Summary
- Applied Materials is poised to benefit from major technology inflections such as gate-all-around transistors and backside power delivery, which increase the total available market for materials engineering by more than 15% to around $14 billion for every 100,000 wafer starts per month of capacity. The company expects revenue from gate-all-around nodes to exceed $2.5 billion in 2024, with the potential to double in 2025.
- Advanced packaging presents a significant growth opportunity, with Applied Materials' revenue in this segment reaching $1.7 billion in 2024, up 3x in four years. The company expects to double this business over the next few years, supported by volume orders from multiple leading-edge customers and strong positioning in innovative packaging solutions.
- Applied Materials has consistently outperformed the market over the past four years in key areas such as leading-edge foundry logic, DRAM (including high-bandwidth memory), advanced packaging, and ICAPS markets outside of China. They have gained 10 points of DRAM market share and are well-positioned for future growth due to their strong product pipeline and focus on major device architecture inflections critical to energy-efficient AI.
- Export controls on China are expected to create a revenue headwind of approximately $400 million in fiscal 2025, with nearly half impacting Q2. This limits Applied Materials' ability to serve certain customers, particularly affecting the Applied Global Services (AGS) segment, which anticipates a step back in Q2 revenue.
- Decreased investment in the ICAPS (IoT, Communications, Automotive, Power, Sensors) market, especially in China, may lead to lower sales in this segment. Following significant build-outs in previous years, the ICAPS market is lower in Q2, and forecasts continue to evolve, potentially offsetting growth in other areas.
- Gross margins may decline from recent highs due to less favorable mix. While non-GAAP gross margin was 48.9% in Q1, the company expects margins to normalize to approximately 48% in the second half of the fiscal year, assuming the mix does not remain as favorable, which could impact profitability.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +6.8% YoY ($7,166M vs. $6,707M) | Total Revenue increased due to strong gains in key segments, with Semiconductor Systems rising by 9% and AGS by 8%; this growth was bolstered by a significant rebound in Taiwan revenue (+111%) despite a 25% decline in China revenue compared to Q1 FY2024. |
Semiconductor Systems Revenue | +9% YoY ($5,356M vs. $4,909M) | The 9% increase is driven by enhanced customer investments in leading-edge manufacturing technologies and an improved product mix, building on previously lower investment levels observed in Q1 FY2024. |
Applied Global Services Revenue | +8% YoY ($1,594M vs. $1,476M) | The 8% growth reflects increased revenues from long-term service agreements and higher customer demand for spares, a continuation of incremental improvements from the prior period. |
Display Segment Revenue | -25% YoY ($183M vs. $244M) | A 25% decline in Display revenue is primarily due to weakening customer demand and reduced investments in display fabrication equipment, particularly in segments like TVs and mobile, reversing the modest performance seen in Q1 FY2024. |
Taiwan Revenue | +111% YoY ($1,183M vs. $559M) | Revenue from Taiwan more than doubled as customer investments in semiconductor equipment surged in Q1 FY2025, reversing prior period declines that were due to lower investments and reduced spending on spares. |
China Revenue | -25% YoY ($2,243M vs. $2,997M) | The 25% drop in China revenue is attributed to lower investments in semiconductor equipment and export control headwinds in FY2025, contrasting with higher levels of activity in Q1 FY2024. |
Operating Income | +10.7% YoY ($2,175M vs. $1,967M) | Operating Income improved by 10.7% driven by a strong 14% increase in Semiconductor Systems (up by $242M) and a 7% rise in AGS, although gains were partially offset by weaker performance in the Display segment and higher corporate and other losses, building on last period’s performance. |
Net Income & Diluted EPS | Net Income -41% ($1,185M vs. $2,019M); Diluted EPS -40% ($1.45 vs. $2.41) | The sharp decline in Net Income and diluted EPS is mainly due to a significant income tax expense increase ($644M tax charge) that raised the effective tax rate from 12.3% to 44.1%, overwhelming the revenue growth and positive operating income changes observed previously. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Total Revenue | Q2 2025 | $7.15 billion ±$400M | $7.1 billion ±$400M | lowered |
Non-GAAP EPS | Q2 2025 | $2.29 ±$0.18 | $2.30 ±$0.18 | raised |
Semiconductor Systems Revenue | Q2 2025 | ~$5.3 billion, up 8% | ~$5.3 billion, up 8% | no change |
AGS Revenue | Q2 2025 | ~$1.65 billion, up 12% | ~$1.55 billion, up 1% | lowered |
Display Revenue | Q2 2025 | ~$175 million | ~$250 million | raised |
Non-GAAP Gross Margin | Q2 2025 | ~48.4% | ~48.4% | no change |
Non-GAAP Operating Expenses | Q2 2025 | ~$1.33 billion | ~$1.3 billion | lowered |
Tax Rate | Q2 2025 | ~14% | ~13% | lowered |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Total Revenue | Q1 2025 | $7.15B ± $400M | $7,166M | Met |
Semiconductor Systems Revenue | Q1 2025 | ~$5.3B | $5,356M | Beat |
Applied Global Services (AGS) | Q1 2025 | ~$1.65B | $1,594M | Missed |
Display Revenue | Q1 2025 | ~$175M | $183M | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Gate-all-around transistor technology | Mentioned in Q2, Q3, and Q4 2024 as a major growth driver with over 50% process equipment spend capture and revenue potential doubling. | Continues to be a key focus, with revenue expected to exceed $2.5B in 2024 and the potential to double by 2025. Seen as a critical architecture inflection. | Recurring, bullish outlook |
Backside power delivery | Highlighted in Q2, Q3, and Q4 2024 as an important device architecture inflection, expected to add $1B+ to interconnect market and enable energy-efficient computing. | Cited as critical for AI and combined with GAA to expand TAM by 15% to ~$14B per 100k WSPM. Touted for significant energy and area scaling benefits. | Recurring, increasing momentum |
Advanced packaging | Consistently mentioned in Q2, Q3, and Q4 2024 for strong growth, driven by HBM, 3D stacking, and heterogeneous integration. Revenue of $1.7B in 2024 with potential to double. | Continues to play a pivotal role in AI and next-gen architectures. Applied aims to double packaging revenue over several years, focusing on integrated hybrid bonding and substrate innovations. | Recurring, robust growth driver |
High-bandwidth memory (HBM) | Repeatedly mentioned in Q2, Q3, and Q4 2024 as a fast-growing segment, with revenues exceeding $600M and then $700M, driven by AI data centers and die-stacking technologies. | Demand remains strong but at a slower rate, with ~ $700M in prior-year revenue. Still a strategic focus tied to AI workloads and advanced packaging. | Recurring, strong but moderating growth |
DRAM share and capacity expansion | Highlighted consistently since Q2 2024, with a 10-point share gain over a decade. Growth linked to 4F² and 3D DRAM, and HBM requiring 3x wafers. | Demand slightly reduced in Q1 2025 vs. prior quarter, partially offset by HBM’s wafer intensity. Still optimistic about long-term DRAM share gains. | Recurring, slightly weaker near term, positive long-term outlook |
ICAPS | Noted in Q2, Q3, and Q4 2024 as a steady-growth market (mid- to high single digits), driven by automotive, power, sensors, and IoT, especially in China. | Down slightly year-over-year and flat Q/Q. China remains largest ICAPS market despite new export controls. Long-term growth trajectory remains intact with annual capacity additions. | Recurring, stable to slightly softer near term |
China export controls and revenue exposure | Discussed each quarter (Q2–Q4 2024) as limiting access to leading-edge tech, focusing on ICAPS nodes. China normalized around 30% of revenue. | New rules reduce FY25 revenue by ~$400M, mostly in services. China mix ~5 points lower in Q2 vs. Q1, below historical 30% level. | Recurring, slightly more bearish due to updated trade rules |
AI and energy-efficient computing | Emphasized in Q2, Q3, and Q4 2024 as a major driver for advanced nodes, HBM, GAA, and advanced packaging, requiring 10,000x performance/watt improvements over 15 years. | Still central to growth strategy, seen as transformative. GAA, backside power, and HBM are all cited for improved power/performance. AI data center architectures expected to change significantly. | Recurring, bullish, cornerstone of future demand |
Gross margin fluctuations | Q2, Q3, and Q4 2024 showed improvements toward ~47–48% from cost reductions, favorable mix, and value-based pricing. | Highest quarterly GM since FY2000 at 48.9%, aided by integrated solutions and mix. Guidance near 48.4%, with China mix a slight headwind. | Recurring, trending higher |
Operating margins in the services business | Q2, Q3, and Q4 2024 operating margins in AGS rose from ~28% to 30%. Record operating income in Q4. | Non-GAAP operating margin of 28% in Q1, down 30bps YoY. | Recurring, slightly down from Q4 highs |
Value-based pricing | Mentioned in Q4 2024, helping margin improvements through capturing the value of integrated platforms. | Continues to support gross margin expansion. Positioned as an ongoing initiative, with progress cited as being in the “third inning.” | Recurring, actively driving margin upside |
CapEx cuts at key customers | Addressed in Q3 2024, specifically mentioning that outlook remained unchanged despite Intel’s cuts. | No mention in Q1 2025. | No current mention |
NAND business slowdown | Q2, Q3, and Q4 2024 highlighted low exposure from oversupply, with partial recovery in Q3/Q4. Mostly an upgrade market vs. new capacity. | “Growing from historically low levels,” offset by DRAM softness. Remains constrained vs. DRAM. | Recurring, modest improvement off a low base |
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China Impact on Growth
Q: How do China sanctions affect AGS growth?
A: The China sanctions impact AGS by approximately $200 million for the year, with half taken in Q2 and continued impact in following quarters. Despite this, AGS is expected to grow at a low double-digit rate as new customers and services are added. Excluding the $200 million, core AGS is growing at low double digits or higher. -
2025 Outlook and Outperformance
Q: How is 2025 shaping up and what drives outperformance?
A: Leading-edge is growing strongly due to AI demand in DRAM, advanced logic, and HBM, expected to accelerate through the year. ICAPS investment in China is lower in Q2. Applied has outperformed by capturing over 50% share in gate-all-around and backside power, gaining 10 points of DRAM share, and tripling packaging revenue to $1.7 billion in 2024, with plans to double it in coming years. -
Gross Margins and Pricing
Q: How will value-based pricing affect gross margins in 2025?
A: Gross margins were 48.9% in Q1 and are guided at 48.4% for Q2, with strong mix in both quarters. The underlying normalized rate is around 48%. Value-based pricing and investment in valuable customer solutions are expected to maintain margins, with execution key to capturing this value in the marketplace. -
China Market Outlook
Q: Will China return to 30% revenue share despite export restrictions?
A: Long-term, China is expected to represent about 30% of Applied's revenue, driven by the ICAPS market, which is forecasted to grow mid- to high single digits. Despite current restrictions and lower investment rates, China remains a significant growth opportunity. -
DRAM Growth Excluding China
Q: How is DRAM growth expected without China spending?
A: After two record years of DRAM, continued momentum is expected due to demand for HBM solutions in advanced computing systems. Applied anticipates ongoing investment in DRAM outside of China, and HBM requires 3x the wafers to produce the same number of bits, boosting equipment demand. -
Materials Engineering vs. Lithography
Q: Will materials engineering gain share over lithography in WFE?
A: Major inflections like gate-all-around, backside power, 3D DRAM, and advanced packaging increase materials engineering intensity. Applied expects the relative spending on materials engineering to rise, capturing growth opportunities as chip architectures evolve for AI and energy-efficient computing. -
Advanced Packaging WFE Mix
Q: How significant is advanced packaging in WFE mix for 2025?
A: Applied's packaging revenue was $1.7 billion in 2024 and is expected to double in the coming years. Advanced packaging is growing significantly due to demand for performance in AI servers and GPUs, becoming a larger portion of WFE as innovation continues. -
GAA Opportunity and EPI Market Share
Q: Can you discuss EPI market share in gate-all-around?
A: Applied remains confident in capturing over 50% of the incremental spending for gate-all-around. In EPI, Applied has a strong position, with 85% of the epi steps being selective epi where they excel, and new innovations are being introduced. -
2nm Node Outlook
Q: How big will the 2nm node transition be?
A: The 2nm node is expected to be a large node due to significant performance benefits and the industry's focus on energy-efficient computing for AI. Applied anticipates substantial capacity additions as customers advance to this node. -
Customer Forecast Confidence
Q: What's your confidence level in customer forecasts across segments?
A: Confidence is high with larger customers in leading logic and memory due to longer perspectives and visibility. In ICAPS, visibility is lower, especially with newer customers in China, making forecasts more volatile in that segment. -
Backlog Trends in SSE and AGS
Q: When will SSE backlog grow, and how does China impact AGS backlog?
A: SSE backlog normalization continues post-COVID, and exact timing for growth is not specified. AGS backlog appears larger due to multi-year contracts averaging 2.9 years, with the $200 million China impact being a small portion, reflecting the long-term nature of AGS backlog. -
GAA Revenue Projections
Q: Any changes to GAA revenue expectations for '25 and beyond?
A: Revenue expectations remain unchanged, with over $2.5 billion in 2024 and potential to double in 2025. Applied expects the ramp to continue beyond 2025 as capacity increases for gate-all-around and backside power nodes. -
Silicon Systems Growth Outlook
Q: Will silicon systems return to sequential growth in Q3?
A: Applied will "wait and see" on semiconductor systems growth. Leading-edge logic is expected to accelerate due to gate-all-around and backside power nodes, while ICAPS market dynamics continue to evolve. -
Advanced Packaging Applications
Q: What device applications are driving advanced packaging orders?
A: Advanced packaging revenue growth is broad-based across different architectures, including HBM. Significant innovation in the space is anticipated, with future architectures differing notably from today's, driven by energy-efficient computing needs. -
Tax Asset Revaluation
Q: Can you explain the tax asset revaluation and its implications?
A: The revaluation of the tax asset resulted from renewing incentive rates in Singapore, which lowered the tax rate and thus decreased the value of existing tax assets. This caused a $674 million revaluation, but there are no anticipated future impacts on the remaining deferred tax assets.