Applied Materials looks beyond China, leans into AI and memory

Applied Materials sees 2Q25 strength amid China spending slowdown and rising competition from SiCarrier

Applied Materials reported strong second-quarter results even as it flagged reduced spending in China, a key revenue contributor. The company sees a slowdown in Chinese DRAM and mature-node logic investments but remains upbeat on global demand for AI-enabling technologies like high-bandwidth memory and advanced packaging to drive its long-term growth.

On May 15, Applied Materials reported robust financial results for the second quarter of fiscal 2025, driven by strong demand in the semiconductor sector and momentum in AI computing. Net sales reached US$7.10 billion, marking a 6.8% year-on-year increase. Net income surged 24.1% from a year ago to US$2.14 billion, fueled by growth across all major business segments.

Revenue from the company's Semiconductor Systems segment climbed 7.2% year-on-year to US$5.26 billion, continuing to anchor overall performance. Applied Global Services contributed US$1.57 billion, up 2.4% year-on-year, while Display and Adjacent Markets posted US$259 million in sales, soaring 45% year-on-year.

President and CEO Gary Dickerson credited the results to Applied's comprehensive product portfolio and strong customer partnerships. "High-performance, energy-efficient AI computing remains the dominant driver of semiconductor innovation, and Applied is working closely with our customers and partners to accelerate the industry's roadmap," Dickerson said.

Looking ahead to the third quarter, the company projects net sales in the range of US$6.70 billion to US$7.70 billion. It expects gross margin to come in at 48.3% and operating expenses of approximately US$1.34 billion. Segment forecasts include about US$5.4 billion in Semiconductor Systems revenue, US$1.55 billion from Applied Global Services, and around US$250 million from Display.

CFO Brice Hill highlighted Applied's ability to navigate macroeconomic and trade uncertainties. "Despite the dynamic economic and trade environment, we have not seen significant changes to customer demand and are well-equipped to navigate evolving conditions with our robust global supply chain and diversified manufacturing footprint," Hill said. He also noted record earnings per share and shareholder returns nearing US$2 billion for the quarter.

Outlook as a whole

In prepared remarks, Applied Materials sees investment in leading-edge foundry logic growing substantially in 2025 and also expects spending for leading-edge DRAM to increase significantly. It observes lower spending in China, with investments in both DRAM and mature logic decreasing for the year. Finally, the company notes an uptick in NAND investment, albeit from the very low levels seen over the past several years.

In 2025, the company expects its revenues from advanced DRAM customers to grow more than 40% as they ramp up investments in DDR-5 and high-bandwidth memory.

Applied Materials presented a confident outlook during its second-quarter fiscal 2025 earnings call despite ongoing trade restrictions, emerging competition in China, and shifting macroeconomic conditions. The company highlighted robust performance in key segments and reaffirmed its long-term growth trajectory, which is driven by innovation in AI, DRAM, and advanced packaging.

Trade restrictions against China and emerging Chinese competition

Hill acknowledged the impact of US trade restrictions on the company's Applied Global Services (AGS) segment in China but noted the core AGS business still delivered a record performance in the quarter. The full effect of trade limitations is now reflected in the company's fiscal third-quarter guidance. While China accounts for approximately 25% of Applied's semiconductor and AGS revenue, Hill emphasized that the company continues to perform well within the boundaries of regulatory compliance, especially in the fast-expanding 28nm segment.

Responding to investor concerns about the rise of new Chinese competitors such as SiCarrier, Hill downplayed the threat, highlighting Applied's strong market position and deep-rooted innovation through its ICAPS (Integrated Circuit and Advanced Packaging Solutions) group. Founded in 2019, ICAPS has helped the company expand into cost-sensitive and high-growth markets. Hill stressed that Applied's ability to innovate faster than competitors remains its key competitive edge.

Expects minimal tariff impact on margin; widened revenue forecast reflects uncerntainty

Tariff-related headwinds have had only a modest impact on Applied's margins so far. Hill explained that much of the fiscal second-quarter inventory was procured before the latest tariffs were enacted, and the company's global manufacturing footprint has proven highly resilient. For non-mitigated tariff exposure, Applied plans to make selective pricing adjustments. These considerations are factored into the company's fiscal third-quarter margin and cost guidance.

Applied Materials widened its revenue guidance range for the third quarter to US$6.7 billion to US$7.7 billion, citing increased macroeconomic, geopolitical, and trade-related uncertainties. Hill explained that the broader US$1 billion range, compared with the typical US$400 million variance, reflects the company's proactive approach in accounting for multiple potential market scenarios.

8-inch segment faces headwinds

One area of softness in the quarter came from 8-inch wafer equipment sales. Hill cited weaker-than-expected demand and flat utilization rates, particularly affecting spare parts revenue. Dickerson linked the short-term softness to the power electronics segment, which is largely built on 8-inch platforms. He expressed confidence in a mid-to high-single-digit long-term growth rate for this market and pointed to the company's service division — with about 8,000 connected tools in the field — as a strong growth engine, expected to expand at a low-double-digit rate.

DRAM strength, HBM leading the way

Applied remains optimistic about DRAM spending, buoyed by strong demand for high-bandwidth memory (HBM). Hill projected that HBM will account for 16% of DRAM wafer fab equipment (WFE) investment this year, growing at roughly 40% annually — in line with AI data center expansion. He noted that Applied saw record DRAM business last year and expects 2025 to match or exceed that performance.

Dickerson added that Applied has gained 10pp of market share in DRAM over the past decade, positioning the company strongly with leading-edge technologies like DDR5 and HBM. Among Applied's top three customers, these technologies are driving approximately 40% growth. He also highlighted the importance of the upcoming 4F-squared DRAM architecture, calling it a major inflection point where Applied is deeply engaged in early-stage development with customers.

Source: Applied Materials, May 2025

Source: Applied Materials, May 2025

Article edited by Joseph Chen