Semiconductor industry equipment maker Applied Materials Inc. posted higher-than-expected fiscal third-quarter revenue and profit today, driven by demand from artificial intelligence chipmakers.

The company reported earnings before certain costs such as stock compensation of $2.12 per share, beating the analysts’ forecast of $2.03 by a comfortable margin. Revenue rose 5.5% from a year earlier, to $6.78 billion, ahead of the $6.68 billion estimate.

All told, Applied Materials delivered a net profit of $1.705 billion, rising from the $1.56 billion profit it recorded in the same period one year earlier.

Chief Executive Gary Dickerson (pictured) said the $6.78 billion in revenue was a new company record for the third quarter, toward the high end of its own guidance range. “The race for AI leadership is fueling demand for our unique and connected portfolio of products and services, positioning Applied to outperform our markets over the longer term,” he said.

Applied Materials is a supplier of sophisticated chipmaking equipment that’s used at the facilities of chipmakers such as Intel Corp., Samsung Electronics Co. Ltd. and Taiwan Semiconductor Manufacturing Co. It’s this status that positions the company as a key barometer of future demand in the chipmaking industry.

Its customers generally order machinery from it well in advance of the opening of new chipmaking factories and upgrades to existing lines, which can take more than a year to outfit for production. Both Intel and TSMC are constructing enormous new plants in the U.S. in the expectation that demand for domestic chip production there will increase.

Rising demand for AI chips has increased the need for the expensive wafer fabrication equipment sold by Applied Materials. The company has also benefited from growing demand in the high-performance computing and cloud data center segments.

Looking deeper, Applied Materials’ semiconductor systems business unit delivered revenue of $4.92 billion, up 5% from a year earlier. Sales in the global services segment rose 8%, to $1.58 billion, while the smaller display-and-adjacent markets unit posted $251 million in sales, up 7%.

The company’s prospects look good, but investors may have one or two concerns, the most notable of which is that its sales in the China region accounted for a smaller portion of its overall revenue than analysts had projected. That indicates sales to Chinese chipmakers are normalizing faster than anticipated.

Like its market peers such as the Dutch chipmaking specialist ASML Holding NV, Applied Materials has been hit by restrictions on what it can and can’t ship to China. The U.S. government has pressured chipmaking equipment manufacturers to stop supply China with the most advanced technology they build, citing national security concerns.

Yet China has a rapidly growing domestic chipmaking industry, which is mostly focused on less advanced semiconductors, and this market has become a source of rapid growth for Applied Materials.

In November, reports emerged that the U.S. Justice Department was investigating the company over its dealings with China’s biggest semiconductor maker, Semiconductor Manufacturing International Corp. It has not yet been accused of any wrongdoing, but in May, the company received a second subpoena, this time from the U.S. Department of Commerce. It’s a development that suggests the company could yet get into hot water regarding violations of the U.S. sanctions on Chinese chipmakers.

Despite those potential future pitfalls, Applied Materials is optimistic for the coming quarter. The company said it expects fourth-quarter sales to come in at around $6.93 billion, plus or minus $400 million, just slightly ahead of the consensus estimate of $6.92 billion.

In terms of earnings, Applied Materials is forecasting a profit at a fairly wide range of $2 to $2.36 per share, the midpoint of which comes in just ahead of the Street’s target of $2.14 per share.

Holger Mueller of Constellation Research Inc. told SiliconANGLE that Applied Material’s latest results show that not every chip company is benefiting from the red-hot AI boom that has helped the likes of Nvidia Corp.

“With its pedestrian growth rate of just 5%, Applied Materials has its feet in the water but it’s certainly not swimming,” the analyst said. “It did well to achieve record revenue for the quarter, but investors will want to see better from the company. There is not much of a future at just 5% growth in the chip making industry.”

The chip fab machine maker’s stock had risen more than 5% prior to today’s results, but wavered between slight gains and losses after-hours. At the time of writing, it was down just over 2% in extended trading.

Running Point Capital analyst Ashley Schulman told Reuters the after-market pullback was probably due to the earlier gains in the regular trading session.

“The mixed sales report from China and the wide variance in its fourth-quarter forecasts may have caused concern,” Schulman said. “Some analysts may have been looking for a more robust next quarter forecast.”

Applied Materials’ stock has gained more than 30% in the year to date.

Photo: Berkeley Engineering/YouTube