Applied Materials Q3 Results Hint At A Further Slowdown In Equipment Spending
Applied Materials (NASDAQ:AMAT), a leading semiconductor fabrication equipment supplier, announced its Q3 2012 earnings on Wednesday, August 15. The uncertain economic environment in Europe and slowing growth in China and the U.S. put additional downward pressure on the seasonally down quarter. While the 8% sequential decline in revenues was something that we expected, the company’s outlook for a 25% to 40% decline in net sales for Q4 did not go down too well with investors as the stock registered a decline in after-hours trading yesterday.
The company reported net sales of $2.3 billion and net income of $218 million for the quarter. While the applied global services and display segments posted a marginal sequential increase, silicon systems and energy and environmental solutions businesses registered a slowdown. At $1.5 million, net sales for silicon systems group was down 13% compared to last quarter as a persisting slowdown in the semiconductor industry resulted in Applied’s customers further delaying their investment plans.
We believe that amid tough conditions in semiconductor, display and solar markets, Applied Materials performed relatively well in Q3 2012. However, with a substantial decline in orders this quarter for all the three segments, it looks like the company is yet to hit its bottom.
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See our complete analysis of Applied Materials here
Continued Slowdown in Semiconductor Capital Equipment Spending
With a contribution of over 57% to our price estimate, the Silicon Wafer Fab equipment business remains the most important division in Applied’s portfolio. Plagued by a dynamic market and rapidly changing demand profile in the semiconductor equipment business, Applied registered 0ver 40% decline in silicon system orders.
Demand for wafer fabrication equipment has softened significantly since the first half of 2012, with a sharp decline in foundry and NAND investments. Additionally, lower-than-expected PC sales held back DRAM growth and thus investments in capacity enhancements remain at low levels. Though the growing sales of mobile devices remain the main driver for growth in the semiconductor industry, Applied claims that the increasing popularity of these devices contribute to a more pronounced seasonal buying behavior.
The drastic decline in silicon system group orders was led by foundry customers. Foundries represented about 45% of the wafer fab equipment spending in 2012. [1] Thus, the investment pattern of these customers are an important factor for determining Applied’s future business outlook.
Positive Outlook for 2013
The wafer fab equipment (WFE) market saw the spending increase by 13.3% in 2011. This year, Gartner forecasts it to total $33 billion, registering a 8.9% decline from last year’s spending. It expects capacity utilization to decline to 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 favorable trends in mobility provide a good platform to generate strong long-term growth. In addition, ultrabooks and the upcoming Windows 8 Operating system have the potential to spur the PC growth rate and drive resurgence in demand for both DRAM and flash memory.
However, on account of the soft macroeconomic conditions combined with the dynamic industry factors, we believe that the weak business environment will further slow down growth in the next quarter. We consider the pullback in demand to be a temporary phase and expect the industry to pick up in 2013. Meanwhile, Applied seems focused on controlling its spending during the slowdown while ensuring that it keeps investing in key areas to support future growth.
We are in the process of updating our current price estimate of $14.83 for Applied Materials, post the Q3 2012 earnings release.
Understand How a Company’s Products Impact its Stock Price at Trefis
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 end-user demand. The condition is likely to persist in the first half of 2012. However, with stability in the economic condition and a rebound in the global PC market, we are likely to witness an increase in utilization levels to meet the growing demand. As the downward pressure on utilization rates ease, DRAM and foundry manufacturers will begin to increase spending.
- Applied Materials Management Discusses Q3 2012 Results – Earnings Call Transcript, Seeking Alpha, August 15, 2012 [↩]
- Gartner Says Worldwide Wafer Fab Equipment Spending to Decline 8.9 Percent in 2012, Gartner Press Release, June 25, 2012 [↩]