The semiconductor industry giant Applied Materials Inc. beat expectations on earnings and revenue today as it delivered its fiscal first-quarter results, but its guidance for the current quarter came up short.

The company said trade restrictions threaten to limit its exports to China, impacting its revenue, and its stock went backwards in extended trading.

The warning came on the back of strong results, with the company reporting earnings before certain costs such as stock compensation of $2.38 per share, surpassing Wall Street’s estimate of $2.28. Revenue for the period rose 7% from a year earlier, to $7.17 billion, also surpassing the Street’s target of $7.15 billion.

All told, the company delivered a net profit of $1.19 billion in the quarter, down from a profit of $2.01 billion in the year-ago quarter.

Applied Materials supplies sophisticated machinery that’s used to manufacture advanced semiconductors to major chipmakers such as Samsung Electronics Co. Ltd., Intel Corp., GlobalFoundries Inc. and Taiwan Semiconductor Manufacturing Co. Its sales are seen as a key barometer of future demand in the chipmaking sector, as its customers generally order machinery in advance of opening new production lines or upgrading existing ones.

No doubt those chipmakers will already have a sense that its latest forecast wouldn’t look good. The company said it’s expecting second-quarter sales of about $7.1 billion, give or take $400 million. That’s lower than expected, with Wall Street analysts having pegged the company’s sales at $7.21 billion.

In addition, the company said it’s expecting earnings of about $2.30 per share, plus or minus 18 cents, which is in line with the Street’s guidance.

On a conference call with analysts, Applied Materials Chief Executive Gary Dickerson (pictured) said the lower forecast stems from the U.S. government’s decision to impose tighter restrictions on chipmaking equipment sales to Chinese companies.

He estimates that the company will take a hit of about $400 million in sales during fiscal 2025, with half of this being felt in the current quarter. That amounts to 1.4% of the $29.18 billion that analysts have forecast the company to deliver this year.

The latest restrictions on China were announced in December by U.S. President Joe Biden’s outgoing administration, and pertain to the export of semiconductor manufacturing machines that are used to produce advanced-node chips.

“The ability of U.S. companies to serve the China market is constrained and has been further limited by the updated trade rules,” Dickerson told analysts.

Half of the revenue impact will be felt in Applied Materials’ services business, which is responsible for optimizing and providing maintenance for the machinery it sells to its customers. Dickerson said the company will no longer be able to serve these customers, even though they’ve already purchased its equipment.

In the first quarter, sales to Chinese companies amounted to about 31% of its total revenue, down from 45% in the year-ago period. That decline stems from older restrictions on its ability to serve that market.

The chipmaking industry could yet feel more sanctions-related pain, as new President Donald Trump today announced that he has asked his economics team to draft a plan for imposing reciprocal tariffs on any country that places duties on U.S. imports. Analysts say he’s specifically targeting China, along with Japan and South Korea, which are also key markets for the company.

Applied Materials says the trade restrictions have substantially offset the boost it has received from rising demand for powerful processors for artificial intelligence workloads.

Holger Mueller of Constellation Research Inc. said shareholders will likely be wondering why the company’s revenue growth has slowed to such a pedestrian pace at a time when companies are investing record amounts of money into their AI infrastructure.

“The single-digit growth is hard to reconcile with current AI investment levels,” the analyst said. “Applied failed to alter its cost structure, and its profitability has shrunk as a result of that. With more China restrictions on the way, the company is going to struggle to turn things around, and it looks like there will be some tough quarters ahead.”

The company’s stock was down more than 5% in after-hours trading, though it’s still up 13% in the year to date. The broader S&P Global Semiconductor Index has risen just 4% in the same period.

Photo: Berkeley Engineering/YouTube