Applied Materials on Tuesday said its solar equipment revenues grew significantly for the fiscal third quarter, even as its overall business suffered a 65 percent drop in profits because of a sluggish semiconductor market.

The company also reported that the European Patent Office recently issued a provisional decision in favor of its customer, Sunfilm. Sunfilm had filed a complaint with the European Patent Office in March 2007 to dispute the validity of an Oerlikon Solar patent. Oerlikon, an Applied Materials rival in Switzerland, filed a patent-infringement claim against Sunfilm in a German court in June& this year, contending that Sunfilm in Germany was starting to make thin-film solar panels using the same Oerlikon patent without permission (see Oerlikon Solar Sues Sunfilm).

Although the patent office’s decision isn’t final, it’s a step toward removing a serious threat to Applied Materials, which began selling its thin-film equipment only last year. Even though Oerlikon didn’t sue Applied Materials, its legal action raised questions about Applied Materials’ technology and business prospects (See Incentives, Tech to Spark Debate at Intersolar: Thin Film).

“Our unique and proprietary structure doesn’t infringe that patent in the first place,” said Applied Materials CEO Mike Splinter in a conference call with analysts Tuesday.

The Santa Clara, Calif., company develops and sells equipment for making chips, flat panels, solar cells and panels. As the world’s largest maker of chip-manufacturing equipment, Applied Materials entered the solar business in 2006. It started by selling machines for making solar cells and panels using crystalline silicon. It launched thin-film equipment, called SunFab, in 2007 and has lined up four customers.

The company reported $165 million in net income, or 12 cents per share, for the third fiscal quarter, compared with $474 million, or 34 cents per share, from the year-ago period. It generated 1.85 billion in revenue for the third fiscal quarter, a 28 percent decline from $2.56 billion for the same quarter in 2007.

The company’s Energy and Environmental Solutions (EES) group, which includes equipment for making solar cells and panels as well as coating systems for flexible electronics, saw its sales grow five folds to $174 million in the third fiscal quarter from $29 million a year ago. It posted $85 million in sales for its second fiscal quarter of this year.

The EES segment also reported $322 million in new orders for the third fiscal quarter, up from $53 million in the year-ago period and $257 million from the second fiscal quarter of this year.

The demand for its solar equipment has helped boost sales for the company’s Applied Global Services segment, which sells equipment parts and services to help chip, flat-panel display and solar customers improve their factory operations. The segment reported a 1.3 percent increase in revenue to $607 million for the fiscal third quarter from $599 million from the same period in 2007.

The company expects the solar equipment business to grow in the fourth fiscal quarter while other business segments remain flat, said Chief Financial Officer George Davis. For fourth fiscal quarter, the company expects the revenue to go up 2 percent to 10 percent.

“Demand is significantly higher than supply at current time. Right now [Applied’s] customers are able to completely selling out their factories,” Splinter said.

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