# How Applied Materials makes money

CXProWealth Business Lens · Applied Materials (AMAT) · Q3 FY2026

Read from the 10-Q for the period 2026-04-27 to 2026-07-26, filed 2026-08-20 with the SEC (accession 0001628280-26-058235): https://www.sec.gov/Archives/edgar/data/6951/000162828026058235/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $9.1B (+24.8% on the year)
- Operating income: $3.1B (operating margin 33.7%)
- Net income: $2.5B (net margin 27.8%)
- Gross margin: 50.3%
- Free cash flow: $2.3B (25.6% of revenue)
- Cash conversion (operating cash flow / net income): 1.20x
- Capital expenditure: 7.8% of revenue

## Where the money goes (Q3 FY2026)

- Revenue → Cost of products sold: $4.5B
- Revenue → Gross profit: $4.6B
- Gross profit → Total operating expenses: $1.5B
- Total operating expenses → Research, development and engineering: $1.1B
- Total operating expenses → Marketing and selling: $249.0M
- Total operating expenses → General and administrative: $162.0M
- Gross profit → Income from operations: $3.1B
- Income from operations → Interest expense: $68.0M
- Income from operations → Interest and other income (expense), net: $100.0M
- Income from operations → Income before income taxes: $2.9B
- Income before income taxes → Provision for income taxes: $369.0M
- Income before income taxes → Net income: $2.5B

## Where the revenue comes from

### Segments (Industry Segment Operations - Schedule of Reportable Segment Information (Details))

| Member | Value | Share |
|---|---:|---:|
| Semiconductor Systems | $7.0B | 77.2% |
| Applied Global Services | $1.8B | 19.5% |

The members do not sum to total revenue.

### Regions (Industry Segment Operations - Summary of Net Sales and Long-lived Assets (Details))

| Member | Value | Share |
|---|---:|---:|
| Asia Pacific | $7.3B | 79.7% |
| Europe | $483.0M | 5.3% |
| Southeast Asia | $374.0M | 4.1% |

The members do not sum to total revenue.

### ConsolidationItems (Industry Segment Operations - Schedule of Reportable Segment Information (Details))

| Member | Value | Share |
|---|---:|---:|
| Operating Segments | $7.0B | 77.2% |
| Other | $294.0M | 3.2% |

The members do not sum to total revenue.

## Income statement, as filed

| Line | Q3 FY2026 | Of revenue |
|---|---:|---:|
| Revenue | $9.1B | 100% |
| Cost of products sold | $4.5B | 49.7% |
| **Gross profit** | $4.6B | 50.3% |
| Research, development and engineering | $1.1B | 12.1% |
| Marketing and selling | $249.0M | 2.7% |
| General and administrative | $162.0M | 1.8% |
| Legal settlement | $0 | 0.0% |
| Restructuring charges | $0 | 0.0% |
| **Total operating expenses** | $1.5B | 16.6% |
| **Income from operations** | $3.1B | 33.7% |
| Interest expense | $68.0M | 0.7% |
| Interest and other income (expense), net | -$100.0M | 1.1% |
| **Income before income taxes** | $2.9B | 31.9% |
| Provision for income taxes | $369.0M | 4.0% |
| **Net income** | $2.5B | 27.8% |
| Basic (in dollars per share) | $3 | 0.0% |
| Diluted (in dollars per share) | $3 | 0.0% |
| Basic (in shares) | 794,000,000 |  |
| Diluted (in shares) | 800,000,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2007 | $9.7B | $2.4B | $1.7B | $2.2B | $264.8M | $1.9B |
| FY2008 | $8.1B | $1.4B | $960.7M | $1.7B | $287.9M | $1.4B |
| FY2009 | $5.0B | -$394.0M | -$305.0M | $333.0M | $249.0M | $84.0M |
| FY2010 | $9.5B | $1.4B | $938.0M | $1.7B | $169.0M | $1.6B |
| FY2011 | $10.5B | $2.4B | $1.9B | $2.4B | $209.0M | $2.2B |
| FY2012 | $8.7B | $411.0M | $109.0M | $1.9B | $162.0M | $1.7B |
| FY2013 | $7.5B | $432.0M | $256.0M | $623.0M | $197.0M | $426.0M |
| FY2014 | $9.1B | $1.5B | $1.1B | $1.8B | $241.0M | $1.6B |
| FY2015 | $9.7B | $1.7B | $1.4B | $1.2B | $215.0M | $948.0M |
| FY2016 | $10.8B | $2.2B | $1.7B | $2.6B | $253.0M | $2.3B |
| FY2017 | $14.7B | $3.9B | $3.5B | $3.8B | $345.0M | $3.4B |
| FY2018 | $16.7B | $4.5B | $3.0B | $3.8B | $622.0M | $3.2B |
| FY2019 | $14.6B | $3.4B | $2.7B | $3.2B | $441.0M | $2.8B |
| FY2020 | $17.2B | $4.4B | $3.6B | $3.8B | $422.0M | $3.4B |
| FY2021 | $23.1B | $6.9B | $5.9B | $5.4B | $668.0M | $4.8B |
| FY2022 | $25.8B | $7.8B | $6.5B | $5.4B | $787.0M | $4.6B |
| FY2023 | $26.5B | $7.7B | $6.9B | $8.7B | $1.1B | $7.6B |
| FY2024 | $27.2B | $7.9B | $7.2B | $8.7B | $1.2B | $7.5B |
| FY2025 | $28.4B | $8.3B | $7.0B | $8.0B | $2.3B | $5.7B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +4.4% (year before +2.5%): steady
- Operating income: +5.4% (year before +2.8%): accelerating
- Net income: -2.5% (year before +4.7%): slowing
- Free cash flow: -23.9% (year before -1.4%): slowing

## Operating figures stated in the filing

- Days sales outstanding: 77 days (as of 2026-07-26). "Days sales outstanding of our accounts receivable at July 26, 2026 and July 27, 2025 were 77 days and 72 days, respectively." (Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations)
- Days sales outstanding: 72 days (as of 2025-07-27). "Days sales outstanding of our accounts receivable at July 26, 2026 and July 27, 2025 were 77 days and 72 days, respectively." (Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations)
- DRAM share of Semiconductor Systems revenue: 26.0% (as of 2026-07-26). "Dynamic random-access memory (DRAM) 26 % 22 % 29 % 25 %" (Item 1. Financial Statements)
- DRAM share of Semiconductor Systems revenue: 22.0% (as of 2025-07-27). "Dynamic random-access memory (DRAM) 26 % 22 % 29 % 25 %" (Item 1. Financial Statements)
- Foundry, logic and other share of Semiconductor Systems revenue: 67.0% (as of 2026-07-26). "Foundry, logic and other 67 % 69 % 65 % 68 %" (Item 1. Financial Statements)
- Foundry, logic and other share of Semiconductor Systems revenue: 69.0% (as of 2025-07-27). "Foundry, logic and other 67 % 69 % 65 % 68 %" (Item 1. Financial Statements)
- NAND share of Semiconductor Systems revenue: 7.0% (as of 2026-07-26). "Flash memory (NAND) 7 % 9 % 6 % 7 %" (Item 1. Financial Statements)
- NAND share of Semiconductor Systems revenue: 9.0% (as of 2025-07-27). "Flash memory (NAND) 7 % 9 % 6 % 7 %" (Item 1. Financial Statements)
- China share of revenue: 28.0% (as of 2026-07-26). "China $ 2,506 28 % $ 2,548 35 % (2) % $ 6,688 28 % $ 6,565 30 % 2 %" (Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations)
- China share of revenue: 35.0% (as of 2025-07-27). "China $ 2,506 28 % $ 2,548 35 % (2) % $ 6,688 28 % $ 6,565 30 % 2 %" (Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations)
- Largest customer share of revenue: 20.0% (as of 2026-07-26). "Two customers accounted for approximately 20 % and 14 %, respectively, of our revenue for the nine months ended July 26, 2026." (Item 1. Financial Statements)
- Second-largest customer share of revenue: 14.0% (as of 2026-07-26). "Two customers accounted for approximately 20 % and 14 %, respectively, of our revenue for the nine months ended July 26, 2026." (Item 1. Financial Statements)

## Key insights

### Price and cost, not just volume, widened the margin

Gross margin rose to 50.3% from 48.8%, which the filing credits to higher prices and lower material costs; operating income rose 37.7% against revenue's 24.8%.

Revenue rose 24.8% to $9.12B from $7.30B a year earlier, while gross profit rose 28.8% to $4.59B from $3.56B. Gross margin reached 50.3% against 48.8%. The filing attributes the gain to "higher revenue, increases in average selling prices, and lower material and manufacturing costs," and for this quarter also to "favorable changes in product mix." _(from the filing)_
Below gross profit, costs grew more slowly than sales. Total operating expenses rose 13.7% to $1.51B, 16.6% of revenue against 18.2% a year earlier. Research, development and engineering rose 22.1% to $1.10B, while general and administrative fell 20.6% to $162M from $204M, which the filing puts down to "lower corporate support costs." Operating margin reached 33.7% against 30.6%. _(from the filing)_
The quarter also stands out within the last year. Operating income was $1.71B on $6.80B of revenue in Q4 FY2025, an operating margin of 25.2%, against $3.08B on $9.12B now, a margin of 33.7%. _(from the filing)_
Analysis: a margin built on price and material cost is more durable if the higher prices reflect new tool generations that customers pay more for, and less durable if they reflect a tight market for tools. The filing does not split the gain between price, cost and mix, so quarters of flatter revenue will show which it was. _(analysis)_

### Equipment earns 86.4% of operating profit on 77.2% of sales

Semiconductor Systems earned $2.66B of $3.08B operating income at a 37.7% margin, above the 30.1% that services earned, so new-tool demand drives profit.

Semiconductor Systems brought in $7.04B, 77.2% of the quarter's $9.12B revenue, and earned $2.66B of operating income, 86.4% of the $3.08B total, a margin of 37.7% on its own revenue. Applied Global Services brought in $1.78B, 19.5% of revenue, and earned $536M, 17.4% of the total, a 30.1% margin. The segment shares add to more than the whole because the smaller businesses grouped as Other ran at an operating loss. _(from the filing)_
The filing ties equipment growth to two sources: foundry and logic spending that reflected "stronger demand for leading-edge manufacturing technologies," and memory spending driven by "increased customer investments in DRAM technology transitions." DRAM rose to 26% of Semiconductor Systems revenue from 22%, while foundry, logic and other eased to 67% from 69% and NAND to 7% from 9%. _(from the filing)_
Analysis: services are often assumed to be the higher-margin line in an equipment company. Here the reverse holds. Services are steadier, tied to how hard customers run tools they already own, but the equipment segment sets the profit level, so company profit follows customers' spending on new tools more than the size of the installed base. _(analysis)_
Segment figures are not fully comparable with older reports. From the start of FY2026 one equipment business moved from Applied Global Services to Semiconductor Systems, and corporate support costs are now fully allocated to the segments. The filing says prior periods were recast to match. _(from the filing)_

### Net profit outran pre-tax profit on a lower tax rate

Net income rose 42.7% while pre-tax income rose 13.4%, because the effective tax rate fell to 12.7% from 30.6% against a prior-year tax charge.

Pre-tax income rose 13.4% to $2.91B from $2.56B, far less than operating income's 37.7%, because interest and other income swung to a loss of $100M from a gain of $396M. The filing attributes the swing mainly to a "higher unrealized loss on equity investments," marks on shares the company holds rather than anything in its operations. _(from the filing)_
The tax provision fell to $369M from $784M, an effective rate of 12.7% of pre-tax income against 30.6%. The filing says the year-earlier rate was raised by a valuation allowance against deferred tax assets tied to corporate alternative minimum tax credits, recognized in FY2025. Net income rose 42.7% to $2.54B, and diluted earnings per share rose to $3.17 from $2.22. _(from the filing)_
The low rate may not last. The filing says the global minimum tax is expected to "materially increase our foreign taxes," mainly through its implementation in Singapore, and that the conditional reduced tax rates the company holds there begin to expire later this decade and may not be renewed. _(from the filing)_
Analysis: operating income is the cleaner read of the business this quarter. Both lines below it, the equity marks and the tax comparison, moved for reasons the filing ties to investments and tax accounting rather than to selling tools and services. _(analysis)_

### Cash rebounded, but capital spending has stepped up

Free cash flow returned to $2.33B after $210M last quarter, while capital spending rose to $2.26B in FY2025 from $1.19B in FY2024.

This quarter operating cash flow was $3.04B, 1.2 times net income of $2.54B, and free cash flow was $2.33B, 25.6% of revenue. In Q2 FY2026 operating cash flow was $845M and free cash flow $210M on $7.91B of revenue. Days sales outstanding rose to 77 from 72 a year earlier, which the filing attributes to "higher down payment invoices for which revenue has not yet been recognized" and "lower accounts receivable factoring." _(from the filing)_
Capital spending has climbed. It rose to $2.26B in FY2025 from $1.19B in FY2024, and free cash flow fell to $5.70B from $7.49B even as operating income rose to $8.29B from $7.87B. This quarter capital spending was $707M, 7.8% of revenue, against $584M a year earlier. _(from the filing)_
Analysis: the filing lists completing its new Equipment and Process Innovation and Commercialization Center and other major infrastructure projects "on schedule and on budget" among what it must do to compete. The step-up in capital spending fits a building phase, though the filing does not split capital spending by project. _(analysis)_
Analysis: tools are billed through down payments and installments and signed off over months, so a single quarter's cash says more about billing and collection timing than about that quarter's profit. Reading cash over a full year smooths out the timing. _(analysis)_

### Competitive edge

- **Engineering spent early wins the tool-selection stage** Research spending of $1.10B, 12.1% of revenue, is meant to put Applied's tools into customers' plans before demand arrives, when the choice of tool is made.
- **Every installed tool feeds a service business** Applied Global Services earned $536M on $1.78B of revenue, a 30.1% margin, from spares and service contracts tied to how hard customers run their tools.
- **Tools across many chipmaking steps, outside lithography** Applied sells etch, deposition, implant, polishing, thermal, inspection and packaging tools, so growth can come from memory or logic as customers shift spending.

### What to watch

- **China's share of revenue fell to 28% from 35%** China fell to 28% of revenue from 35%, and the filing says US export rules have limited what Applied may sell and service there.
- **Two customers account for 20% and 14% of revenue** Two customers took about 20% and 14% of nine-month revenue, and because tools are built to order, one cancellation can leave costs that cannot be recovered.
- **A fixed cost base magnifies a downturn too** In FY2019 revenue fell to $14.6B from $16.7B and operating income to $3.35B from $4.49B, taking operating margin to 22.9% from 26.9%.

## Operating income by segment

- Semiconductor Systems: $2.7B (86.4% of operating income)
- Applied Global Services: $536.0M (17.4% of operating income)

## Investor view

**Operating income rose 37.7% from a year earlier, faster than revenue, as prices rose, costs fell and the product mix improved**

### How it makes money

Applied Materials sells the machines that deposit, etch, implant, polish and inspect the layers of a chip, then services them for as long as they run. Semiconductor Systems, the equipment business, brought in $7.04B of the quarter's $9.12B revenue, or 77.2%. Applied Global Services, which sells services, spares and factory software to the fabs running those tools, brought in $1.78B, or 19.5%. _(from the filing)_
Equipment is where the profit is made. Semiconductor Systems earned $2.66B of operating income, 86.4% of the company's $3.08B total, on an operating margin of 37.7% of its revenue. Applied Global Services earned $536M, a 30.1% margin and 17.4% of the total. The segment shares add to more than the whole because the smaller businesses grouped as Other ran at a loss. _(from the filing)_
The company spends ahead of demand on purpose. Research, development and engineering cost $1.10B this quarter, 12.1% of revenue. The filing says this spending is "intended to enable us to deliver new products and technologies before the emergence of strong demand," so customers build the tools into their plans "during early-stage technology selection." _(from the filing)_
The customer base is narrow and Asian. Asia Pacific accounted for $7.27B, 79.7% of the quarter's revenue, with China alone at 28%. Two customers accounted for about 20% and 14% of revenue over the first three quarters of the fiscal year. Products are "sold primarily through a direct sales force" and configured to each customer's specifications. _(from the filing)_

### What shifted

Revenue rose 24.8% to $9.12B from $7.30B a year earlier, and gross margin widened to 50.3% from 48.8%. The filing credits "higher revenue, increases in average selling prices, and lower material and manufacturing costs," and for this quarter also "favorable changes in product mix." Price and cost, not only volume, carried the margin. _(from the filing)_
Costs below gross profit grew more slowly than sales. Total operating expenses rose 13.7% to $1.51B, falling to 16.6% of revenue from 18.2% a year earlier. Research, development and engineering rose 22.1% to $1.10B from $901M, while general and administrative fell 20.6% to $162M from $204M on "lower corporate support costs." Operating income rose 37.7% to $3.08B, and operating margin reached 33.7% against 30.6%. _(from the filing)_
Memory took a larger slice of equipment sales. DRAM was 26% of Semiconductor Systems revenue against 22% a year earlier, foundry, logic and other was 67% against 69%, and NAND 7% against 9%. The filing ties memory spending to "increased customer investments in DRAM technology transitions" and foundry and logic spending to "stronger demand for leading-edge manufacturing technologies." China fell to 28% of revenue from 35%. _(from the filing)_
Net income rose 42.7% to $2.54B, much faster than pre-tax income, which rose 13.4% to $2.91B. Interest and other income swung to a loss of $100M from a gain of $396M, "primarily driven by higher unrealized loss on equity investments." Against that, the tax provision fell to $369M from $784M, an effective rate of 12.7% against 30.6%, because a valuation allowance on alternative minimum tax credits had raised the charge in FY2025. Diluted earnings per share were $3.17 against $2.22. _(from the filing)_
Cash recovered sharply after a thin prior quarter. Free cash flow was $2.33B, 25.6% of revenue, after $210M in Q2 FY2026. Days sales outstanding rose to 77 from 72 a year earlier, which the filing attributes to "higher down payment invoices for which revenue has not yet been recognized" and "lower accounts receivable factoring." _(from the filing)_

### Risks in the filing

Demand is cyclical and hard to forecast. The company says its industries "have historically been cyclical," and that AI-related investment by customers "can change significantly" and is "difficult to forecast." It warns it may incur costs in anticipation of demand that is not realized, and that margins can suffer during periods of changing demand even with good cost control. _(from the filing)_
US export rules have limited what the company may sell and service in China, licenses may not be granted on time or at all, and Chinese domestic competitors may take the business. The company settled an inquiry by the Commerce Department's Bureau of Industry and Security over certain China shipments. The settlement includes a suspended denial order, and failing its audit and training terms could restore a ban on exporting certain products. _(from the filing)_
Tariffs raise the cost of imported parts and of customers importing Applied's tools, and trade uncertainty can lead customers to delay or cancel orders. The filing names China's export controls on rare earth minerals used in certain products, and other supply chain strains, as threats to cost and delivery schedules. Excess or obsolete inventory is a risk if forecast demand does not arrive. _(from the filing)_
A small number of customers, concentrated in China, Taiwan and Korea, account for much of revenue, so "the actions of even a single customer" can move results. Because tools are configured to order, a changed or cancelled order can leave non-recoverable costs. The filing also names tax risk: conditional reduced tax rates in Singapore begin to expire later this decade and may not be renewed. _(from the filing)_
Two of these risks are already visible in the period's numbers rather than only in the text. China's share of revenue fell while every other major region grew, which is what tightening export rules would look like. And the two largest customers each pass the threshold the filing uses for disclosure, so the concentration the company describes is concrete, not hypothetical. _(analysis)_

## Founder view: mechanisms

### Every tool sold becomes a service customer

A deposition or etch tool stays in a fab for many years and needs parts, upkeep and tuning the whole time. Applied Global Services sells that work against the fleet already installed, and the company is moving it to subscription agreements. Its revenue follows how hard customers run their existing tools, not how much they spend on new fabs, which makes it steadier than equipment sales. _(analysis)_

### Engineering spent before the demand arrives

Applied funds development ahead of each change in chipmaking technology so its tools are already in a customer's plan when the process is chosen. Being picked at that stage, the development and production tool-of-record positions the filing names, is what counts: once a tool is qualified for a step, replacing it means requalifying the process, so the position tends to hold through the volume ramp. _(analysis)_

### A fixed cost base magnifies the cycle

Much of Applied's cost base, engineering teams, field service and plants, is committed in advance. When revenue rises, profit rises faster; when it falls, profit falls faster. The filing adds that it must keep investing in research and development even when demand is lower, so the company deliberately keeps part of the cost base fixed through the cycle. _(analysis)_

### Big-ticket orders make cash lumpy

Tools are configured to order, shipped, installed and signed off over months, with down payments and installment billing along the way. Receivables build as shipments ramp and are collected later. So a quarter's cash reflects billing and collection timing more than that quarter's profit, and the right reading window is a year, not a quarter. _(analysis)_

## Member research

Signed-in members read, on the page: what Applied Materials's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Applied Materials 10-Q for the period to 2026-07-26: https://www.sec.gov/Archives/edgar/data/6951/000162828026058235/ (2026-08-20)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02