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Finding the Stable Source of Applied Materials’ Revenue Stream

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Applied Global Services

As machines grow more complex, Applied Materials (AMAT) has begun designing new services to help customers improve the performance, yield, and costs of their equipment. In fiscal 2Q16, revenue from the company’s Service segment rose by 0.3% YoY (year-over-year) to $648 million, and its operating margin rose slightly, from 26.3% in fiscal 2Q15 to 26.4% in fiscal 2Q16. The company expects the segment’s revenue to grow by 5%–8% in fiscal 3Q16.

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Among the company’s four business segments, Service is the only segment where the operating margin showed growth. The segment, in fact, has remained a stable revenue stream for AMAT without many fluctuations, just as licensing has for Qualcomm (QCOM), because these types of businesses earn revenue from fees.

Finding the Stable Source of Applied Materials' Revenue Stream

Energy and Environmental Solutions

AMAT earns a small portion of its revenue from Energy and Environmental Solutions. In fiscal 2Q16, revenue from this segment fell by 34.2% YoY to $48 million, while its non-GAAP (generally accepted accounting principles) operating margin narrowed from -5.5% in fiscal 2Q15 to -2.1% in fiscal 2Q16.

On the order front, new orders more than doubled to $108 million, accounting for 3% of the company’s new orders in fiscal 2Q16. The company expects the segment’s revenue to remain flat, however, in fiscal 3Q16.

Notably, the second and third fiscal quarters are often seasonally strong for AMAT, and the company has some strong revenue drivers in fiscal 2016. Geographically, there should be strong growth in China, Southeast Asia, and Europe (IEV), and product-wise, there has strong growth from memory and display as companies like Intel (INTC) and TSMC (TSM) invest in new manufacturing technologies.

In the next part of the series, we’ll look at AMAT’s profit scenario.

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