How Does Applied Materials Make its Money?
Applied Materials is the world’s largest semiconductor equipment company by revenue, providing the machines and materials that chipmakers use to manufacture integrated circuits. If ASML is the king of lithography (printing circuit patterns), Applied Materials is the king of everything else — deposition (adding material layers), etching (removing material), ion implantation, inspection, and chemical mechanical planarization (polishing).
Nearly every semiconductor chip manufactured anywhere in the world touches Applied Materials equipment at multiple points during the fabrication process. The company’s customers include TSMC, Samsung, Intel, SK Hynix, Micron, and dozens of other chipmakers and display manufacturers. Applied Materials benefits from the growing complexity of advanced chips — as chipmakers add more layers and process steps, they need more equipment.
Revenue Breakdown
| Segment | FY2024 (Oct) | FY2023 (Oct) | YoY Growth |
|---|---|---|---|
| Semiconductor Systems | $19.5B | $18.6B | +4.8% |
| Applied Global Services | $6.2B | $5.9B | +5.1% |
| Display & Adjacent Markets | $1.4B | $1.3B | +7.7% |
| Total Revenue | $27.2B | $26.5B | +2.6% |
Semiconductor Systems — 72% of Revenue
The core business. Applied Materials designs and manufactures equipment used in wafer fabrication:
- Deposition — PVD (physical vapor deposition), CVD (chemical vapor deposition), and epitaxy systems that deposit thin films of materials onto wafers. These are the most critical tools for building 3D chip architectures (gate-all-around transistors, high-bandwidth memory stacking, advanced packaging).
- Etch — Plasma etch and selective etch systems that carve patterns into materials. Etch becomes more important and complex as chips move to smaller nodes.
- Ion Implantation — Tools that implant ions into silicon to modify electrical properties.
- CMP (Chemical Mechanical Planarization) — Polishing systems that flatten wafer surfaces between process steps.
- Process Diagnostics & Control — Inspection and metrology tools that measure and verify manufacturing quality.
Revenue grew modestly as demand from AI-related semiconductor capital spending offset China export restrictions and softness in mature node (non-AI) chipmaking.
Applied Global Services — 23% of Revenue
Service agreements, spare parts, equipment upgrades, and refurbished equipment for the ~45,000 Applied Materials tools installed in fabs worldwide. This is a high-margin, recurring revenue business that grows as the installed base expands. Service revenue carries gross margins above 70%.
Display & Adjacent Markets — 5% of Revenue
Equipment for manufacturing flat panel displays (LCD, OLED) and other adjacent applications. A smaller, cyclical business that rises with waves of display factory investment.
Income Statement Overview
| Metric | FY2024 | FY2023 |
|---|---|---|
| Total Revenue | $27.2B | $26.5B |
| Cost of Revenue | $15.0B | $14.9B |
| Gross Profit | $12.2B | $11.6B |
| Operating Expenses | $4.0B | $3.7B |
| Operating Income | $8.2B | $7.9B |
| Net Income | $7.2B | $6.9B |
Key Financial Metrics
- Gross Margin: 44.9% — Strong for a capital equipment company. The shift toward advanced, higher-ASP tools and growing services revenue supports margins.
- Operating Margin: 30.1% — Excellent, reflecting Applied Materials’ technology leadership and operating leverage. The company is consistently one of the most profitable semiconductor equipment firms.
- Revenue Growth: +2.6% — Modest in FY2024, but expected to accelerate as AI-driven fab investments ramp globally. Revenue growth was constrained by China export controls.
- Free Cash Flow: ~$7.5B — Robust cash generation supports aggressive buybacks ($5B+), dividends, and R&D investment.
- Backlog: $7.9B — Strong order backlog provides near-term revenue visibility.
What to Watch
- AI-driven wafer fab equipment (WFE) spending — The AI boom is driving a multi-year wave of semiconductor factory investment. Applied Materials benefits as chipmakers build leading-edge logic and HBM fabs. The WFE market could exceed $100B annually.
- Gate-all-around transistor transition — The industry is transitioning from FinFET to gate-all-around (GAA) transistor architecture at the 2nm node. GAA requires more deposition and etch steps, expanding Applied Materials’ content per wafer.
- China export restrictions — U.S. government restrictions on semiconductor equipment exports to China directly impact Applied Materials’ revenue (China was ~25-30% of revenue). Tighter or looser restrictions materially affect the growth outlook.
- Advanced packaging — Chiplet architectures and 3D stacking (used in HBM and AI processors) require new equipment categories that Applied Materials is well-positioned to supply.
- Services growth — As the installed base of equipment grows, the high-margin services business should scale predictably. Applied Materials’ ability to grow services revenue as a percentage of total revenue would improve margin quality.