Applied Materials FY2025: AI Demand Surges as China Sales Cool

Applied Materials (AMAT) serves as a critical bellwether for the global semiconductor industry. As the world's largest supplier of semiconductor manufacturing equipment, they do not produce the chips found in smartphones or data centers; rather, they engineer the complex, high-precision machinery that fabrication plants (fabs) use to manufacture those chips. Consequently, their financial results offer a leading indicator for the broader tech hardware ecosystem.

We are going to dig into the income statement from their latest 10-K filing to see how the company navigated a fiscal year defined by an AI infrastructure boom on one side and tightening geopolitical trade restrictions on the other.

To visualize how their revenue translates into profit, take a look at this flow diagram of their fiscal 2025 income statement:

The Bottom Line: Operational Efficiency vs. Tax Headwinds

For the fiscal year ended October 26, 2025, Applied Materials posted $28.37 billion in net revenue, a 4% increase over the previous year. More impressively, the company improved its efficiency, with Gross Margin climbing to 48.7% (up 1.2 percentage points from 2024). This expansion suggests strong pricing power and effective cost management despite complex global supply chains.

However, a glance at the bottom line might be confusing. Despite higher revenue and operating income ($8.29 billion vs. $7.87 billion), Net Income actually fell to $7.0 billion from $7.18 billion in the prior year.

The primary driver was not operational weakness, but a significant shift in tax liability. The company's effective tax rate more than doubled, jumping from 12.0% in 2024 to 24.5% in 2025. This increase was largely attributed to changes in tax incentives, specifically regarding conditional reduced rates in Singapore. For investors, it is crucial to distinguish between this statutory increase in tax expense and the operational performance of the business, which remained robust.

The Great Geographic Rotation

The most compelling narrative in this filing is the dramatic shift in where the money is coming from. For several years, China has been the dominant driver of equipment spending. While China remains the largest single region by revenue, contributing $8.53 billion, that figure is down 16% year-over-year.

In stark contrast, sales to Taiwan exploded, surging 71% to reach $6.86 billion. Similarly, sales to Korea saw a healthy increase of 25% to $5.61 billion.

This data illustrates a clear bifurcation in the market. Heavy investment in advanced nodes—cutting-edge chips manufactured primarily in Taiwan (home to TSMC) and Korea (home to Samsung and SK Hynix) for High Bandwidth Memory (HBM) and AI applications—is accelerating rapidly. Meanwhile, the spending frenzy in China is cooling off, likely influenced by a combination of market saturation in legacy nodes and ongoing U.S. export controls.

Segment Strength and Backlog

Applied Materials reports in three main segments, with the bulk of revenue coming from two:

1. Semiconductor Systems: This core business, which sells the actual manufacturing hardware, generated $20.8 billion in revenue. Roughly 67% of this segment is driven by "Foundry, logic and other" customers, highlighting the demand for processors used in AI and high-performance computing.
2. Applied Global Services (AGS): This segment provides integrated services, spares, and software to support the installed base of machines. Revenue here grew 3% to $6.4 billion, providing a steady stream of recurring cash flow that helps smooth out the cyclicality of equipment sales.

The company ended the year with a substantial backlog of $15.0 billion. A backlog represents orders received but not yet fulfilled. With over $7.1 billion of this attributed to semiconductor systems, demand appears sticky despite broader economic uncertainties.

Risks and the Road Ahead

While the financial metrics are strong, the filing highlights non-trivial risks. Management explicitly notes ongoing subpoenas and inquiries from the U.S. Department of Justice, the Commerce Department, and the SEC regarding shipments to China and compliance with export controls. In the highly regulated environment of semiconductor technology, these regulatory hurdles pose potential operational and reputational risks.

In summary, Applied Materials is successfully capturing the upside of the AI infrastructure build-out, evidenced by the massive surge in Taiwan revenue. However, they are achieving this while navigating a heavier tax burden and a geopolitical landscape that requires a delicate balancing act between capturing global demand and adhering to strict trade regulations.