Applied Materials (AMAT)

Applied Materials sold more and retained a larger share of revenue as operating profit in the July-ended fiscal third quarter than in the same fiscal quarter of the prior year. Revenue and operating margin also improved against the preceding fiscal quarter.

Reported diluted earnings per share rose against the same fiscal quarter of the prior year but declined against the preceding fiscal quarter. The operating result was therefore stronger than the sequential movement in earnings per share suggests.

Applied Materials makes equipment used to manufacture semiconductor chips.

We like Applied Materials because it sits at the heart of how chipmakers turn new materials into working devices. Its leadership in deposition—the layering of materials onto semiconductor wafers—is a powerful foundation. The exciting opportunity is to help customers master more complex chip structures with a broad toolkit, then keep that equipment productive throughout its working life.

The business earns money beyond new equipment sales. Its Applied Global Services operation sells transactional and subscription services, spare parts and factory automation software that help customers optimize an extensive global installed base. Customers include TSMC, Intel and Samsung.

Revenue in the July-ended fiscal third quarter increased against the same fiscal quarter of the prior year and the preceding fiscal quarter. The consolidated figures establish stronger sales, but they do not identify which products, customers or regions drove the increase.

Growth depends on where chipmakers direct their investment. Applied Materials has particular exposure to general-purpose logic manufacturing. Its annual filing explains that customer spending can also flow toward lithography, which it does not serve, or toward areas where its products have a smaller presence.

Operating margin measures how much revenue remains after operating costs. It improved in the July-ended fiscal third quarter against both the same fiscal quarter of the prior year and the preceding fiscal quarter. That means the stronger sales were accompanied by better operating profitability.

Keeping that performance requires continued technical investment. The annual filing identifies research and development costs associated with new materials and more complex chip structures. Manufacturing also depends on timely component deliveries, while tariffs can add costs and substantial competition can pressure the business.

The reported diluted earnings-per-share measure reflects profit allocated across the weighted-average diluted share count. Its decline against the preceding fiscal quarter contrasts with the improvement in operating margin over that period. The available statement fields do not establish the full cause of that divergence.

The July-ended fiscal third quarter included a reported non-operating loss. This sits outside operating income and matters when interpreting bottom-line profit. The figures discussed here are reported consolidated results, not adjusted earnings.

For the reported July-ended fiscal third quarter, operating cash flow increased against the same fiscal quarter of the prior year. Gross cash purchases of property, plant and equipment also increased against that same period. Cash remaining after those gross purchases was higher than in the same fiscal quarter of the prior year.

For the trailing twelve months ended at the July quarter-end, operating cash flow also exceeded gross cash purchases of property, plant and equipment. This calculated remainder is not an issuer-defined free-cash-flow measure. It excludes equipment-sale proceeds, intangible investments, leases and noncash commitments, so it should not be treated as cash freely available for distribution.

At the July quarter-end, cash and short-term investments together exceeded reported current borrowings and noncurrent debt and capital lease obligations. That provides a useful financial cushion without implying that every investment is immediately available cash.

The annual filing notes that debt-funded transactions can add interest costs and reduce financial flexibility. Dividends and share repurchases also depend on capital availability and board decisions. The current balance sheet does not establish a new financing transaction or capital-return commitment.

The current analyst targets and SPY comparison are shown in Our verdict.

Watch whether subsequent results sustain operating profitability as customers move complex chip designs into volume production. More detailed disclosures on equipment demand and installed-base services would help explain the sources of growth.

Customer concentration deserves close attention: the prior fiscal year's annual filing says major customers account for a substantial portion of revenue. Export controls have already limited some products and services sold into China. Local competition, supplier delivery and tariff costs are also concrete developments to follow.