Applied Materials Inc Earnings - Q3 2025 Analysis & Highlights
Key Takeaways
Byline: Applied Materials' Q4 2025 earnings call highlighted a record year, tempered growth due to trade restrictions, and a strategic focus on AI-driven opportunities in leading-edge foundry-logic, DRAM, and advanced packaging. The company anticipates growth in 2026, driven by these segments, with revenue weighted towards the second half of the year.
Key Financial Results:
Revenue grew by 4% to $28.4 billion in fiscal year 2025.
Non-GAAP gross margin increased by 120 basis points to 48.8%.
Non-GAAP earnings per share increased by 9%.
Generated nearly $8 billion in cash from operations.
Free cash flow of $5.7 billion, including elevated capital spending of $2.3 billion.
Q1 2026 Guidance: Revenue expected to be $6.85 billion, plus or minus $500 million, and non-GAAP EPS of $2.18, plus or minus $0.20.
Business Segment Results:
Semiconductor Systems revenue was up 4%.
Applied Global Services (AGS) revenue grew 3% to a record $6.4 billion.
Display revenue grew by 20%.
Display business is being reported in Corporate and Other as of Q4 fiscal 2025.
200-millimeter equipment business is moving from Applied Global Services to Semiconductor Systems as of Q1 fiscal 2026.
Applied Global Services will consist entirely of recurring revenue.
Semiconductor Systems revenue for Q1 2026 is expected to be around $5.025 billion.
AGS revenue for Q1 2026 should generate revenue of $1.52 billion.
Corporate and Other revenue for Q1 2026 should be around $305 million, composed primarily of Display revenue.
Capital Allocation:
Distributed approximately $6.3 billion to shareholders.
Paid $1.4 billion in cash dividends, with the quarterly dividend per share increased by 15% during the year to $0.46.
Allocated $4.9 billion to share repurchase program, reducing shares outstanding by more than 3%.
Elevated capital spending of $2.3 billion, over half of which was used in building the new EPIC Center in Silicon Valley.
Industry Trends and Dynamics:
AI computing is fueling secular growth in semiconductors and wafer fab equipment.
Semiconductor industry is predicted to grow at a compound annual rate between 10% to 15% over the next five years.
Major technology inflections are underway in five key areas: leading-edge logic, high-performance DRAM, high-bandwidth memory or DRAM stacking, advanced packaging for heterogeneous integration, and power electronics.
Wafer fab equipment spending is likely to accelerate beginning in the second half of calendar 2026.
Leading-edge foundry-logic, DRAM and high-bandwidth memory will be the fastest-growing areas of the semiconductor equipment market.
Competitive Landscape:
Maintaining market share in areas where they can operate despite trade restrictions.
Strengthened leadership position in DRAM, growing revenues from leading-edge customers by more than 50% over the past four fiscal quarters.
Process tool of record positions established over the past several years give confidence that they will extend their strong leadership position in logic, DRAM and packaging as advanced technology nodes ramp in volume production.
Macroeconomic Environment:
Increased trade restrictions and an unfavorable market mix tempered growth rate in fiscal 2025.
Multiple trade rule changes have reduced the size of accessible market in China.
China declined to 28% of total systems and service revenues in fiscal 2025, and to 25% for the fourth quarter.
In 2026, wafer fab equipment spending in China is expected to be lower, and significant changes to market restrictions are not anticipated.
Growth Opportunities and Strategies:
Inflection-focused innovation strategy enables them to extend leadership in the most valuable and fastest-growing areas of the market.
Partnering with customers to see technology inflections early.
Creating highly differentiated solutions by connecting broad portfolio of capabilities and technologies.
Expanding deep, multiyear, co-innovation engagements that focus on system technology co-optimization.
Adopting AI and digital tools to drive higher velocity and productivity.
Preparing operations and service organizations to be ready to support higher demand beginning in the second half of calendar 2026.
Financial Guidance and Outlook:
Expects 2026 to be another growth year, with revenue being weighted toward the second half of the calendar year.
Non-GAAP gross margin is expected to be approximately 48.4% in Q1 2026 and remain at that level until volumes ramp up in the second half of the calendar year.
Non-GAAP operating expenses should be around $1.33 billion for Q1 2026.
Modeling a tax rate of around 13%.
Customers are indicating that wafer fab equipment spending is likely to accelerate beginning in the second half of calendar 2026.
