Applied Materials Q3 Earnings To Reflect A Continued Slowdown In Equipment Spending

Applied Materials (NASDAQ:AMAT), a semiconductor fabrication equipment supplier, is set to announce its Q3 2013 results on Wednesday, August 15. After a spectacular 2010, the 2011 revenues took a hit primarily on account of the slowdown in the global semiconductor industry. Though reduced capital spending persisted during the first three months of 2012, the company witnessed growth in orders for silicon systems, applied global services and the display segments, which contributed to a 16% increase in revenues last quarter.

We do not expect Applied to post a spectacular Q3 as the industry continues to be plagued by reduced capital equipment spending. However, the improving economic scenario and a consequent revival in demand for consumer products raise hope for a better performance in the latter part of the year.

As we  overcome the deterioration in silicon wafer and fabrication equipment market, we expect to witness a pick-up in pace in the second half of the year. Additionally, new application processors for smartphones and tablets and an extended portfolio due to the Varian acquisition provide a positive outlook for the years ahead. Overall, we expect to witness a decline in revenues in the current year and forecast double digit growth in revenues for 2013.

Here, we discuss certain factors that determine the company’s performance in the current quarter as well as for the rest of 2012.

See our complete analysis of Applied Materials here

Persisting Slowdown in Semiconductor Capital Equipment Spending

According to research firm Gartner, the worldwide semiconductor manufacturing equipment spending is expected to total 38.9 billion in 2012, a 11.6 % decline from 2011 spending of $44 billion. ^[1]

Weak market conditions in the second half of 2011 caused pullbacks in expansion plans throughout the industry as manufacturers adjusted their production levels to match the end-user demand. The conditions persisted throughout the first half of 2012. However, with increasing stability in economic conditions and a rebound in the global PC market, we expect to witness an increase in utilization levels to support the growing demand.

The wafer fab equipment (WFE) market saw spending increase by 13.3% in 2011. This year, Gartner forecasts it to total $33 billion, registering a 8.9% decline from 2011 spending. It expects capacity utilization to decline into the low 80% range by mid 2012, before slowly increasing to about 87% by the end of the year. However, Gartner forecasts the market to return to growth in 2013 with WFE spending crossing the $35 billion mark. ^[2]

The silicon wafer fab equipment market contributes close to 58% to our price estimate of $14.83 for Applied Materials, making it the most valuable segment in AMAT’s portfolio.

Weakness in Energy & Environmental Solutions Division

Net sales from the energy & environmental solutions division was down 62% last quarter, reflecting excessive manufacturing capacity in the solar industry. As the solar market remains sluggish, Applied plans to lower its cost and reduce the annual breakeven level for the energy & environmental division to approximately $500 million. Recently, the company also moved its solar equipment plants to China to cut down costs. (Read: Applied Moves its Solar Equipment Plant to China to Tackle Costs Amid Slowdown)

While we believe that the current year will be a tough one for solar PV demand with the global market declining to almost half its current size in 2012, we remain optimistic about the long-term prospects of this segment. With growing awareness about the benefits of renewable energy combined with declining costs, there is bound to be an increase in demand for solar power use. Additionally, the company would benefit from its acquisition of Varian Semiconductors, as Varian’s technology has a great potential in solar cell manufacturing.

As per the findings of the International Solar Energy survey conducted by Applied Materials recently, we could see higher-than-expected growth in demand  for solar power in the future. Hence, after a substantial drop this year, we estimate the solar PV equipment market to once again cross the $10 billion mark before the end of our forecast period. (Read: Applied’s Solar Energy Survey Indicates Solar Power Adoption Is Taking Off)

Growing Demand for Smartphones & Tablets

With the current slowdown in growth of global PC shipments, the increasing adoption of smartphones and tablets is expected to fuel future growth in the semiconductor industry. Additionally, the global appetite for mobile devices with new features, longer battery life and brighter, higher resolution displays continues to strengthen. As these devices drive demand for leading-edge foundry capacity, the market leaders are aggressively accelerating ramps at advanced nodes.

Foundry investments have contributed close to 60% of Applied’s revenue in the last two quarters, and we expect the company to gain from the favorable trends in smartphones and tablets, going forward.  Applied Materials has a significant presence in the smartphone and tablet market. It expects to generate more than $250 million revenue from products that serve new applications in this area. 

We have a current price estimate of $14.83 for Applied Materials, a premium of above 20% to the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Gartner Says Worldwide Semiconductor Manufacturing Equipment Spending to Decline 11.6 Percent in 2012, Gartner Press Release, March 21, 2012 [↩]
2. Gartner Says Worldwide Wafer Fab Equipment Spending to Decline 8.9 Percent in 2012, Gartner Press Release, June 25, 2012 [↩]