Applied Expects To Retain Its Growth Momentum For The Rest Of 2014

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AMAT: Applied Materials logo
AMAT
Applied Materials

Applied Materials (NASDAQ:AMAT) reported net sales of $2.3 billion (15% annual growth) and non-GAAP earnings per share of $0.28 (56% annual increase) in Q3 2014, which was at the high end of company guidance. At 45.5%, Applied’s Q3 2014 non-GAAP gross margin was at a six-year high, while both operating margin and operating cash flow were at a three-year high. Despite increased investment in research and development, the company’s operating margin grew for the seventh consecutive quarter. Applied’s continuous top line growth and improving financial performance  is backed by renewed demand in the semiconductor and display segments, which together account for over 60% of Applied’s valuation in our estimate.

The company claims that, enabled by materials innovation, the industry is witnessing the biggest changes in semiconductor and display technologies in decades. The trend benefits Applied owing to its unique capability in precision materials engineering supported by sustained investment in capacity and new technology by customers. The merger with Tokyo Electron (expected to close in the second half of the year) accelerates Applied’s strategy to focus on improving execution, alignment and speed, by bringing together both companies’ complementary strengths to create an expanded set of capabilities.

Though Applied’s net orders in the quarter were down 6% sequentially, as Q3 is a seasonally down quarter, the same increased 24% annually. The company believes that its growth momentum will continue throughout 2014, backed by stronger investment from its semiconductor and display customers. It has made significant changes in its service organization to deliver to its customers the ability to achieve better device performance and yield, as well as more competitive cost structures, as they ramp-up complex, new device technology. The company is focusing on creating a differentiated products pipeline to enable customers to successfully make unprecedented technology transitions.

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Our price estimate of $19 for Applied Materials is at a marginal discount to the current market price. We are in the process of updating our valuation for the company.

See our complete analysis of Applied Materials here

Positive mobility and connectivity trends continue to drive significant growth and accelerate technology innovation in both semiconductor and display markets. In both segments, new materials innovations are enabling key inflections by providing customers with solutions that improve device performance, yield and cost. Applied believes that ramps in FinFET, 3D NAND and new display technology will fuel the next wave of investment by its customers. The company has increased its resource allocation in the two segments, which it believes offer it superior opportunities to grow revenues and margin.

Improving Semiconductor Demand

Applied continues to estimate that Wafer Fab Equipment (WFE) spending will increase 10% to 20% in 2014. It also expects 2015 to be stronger than 2014 as the foundries ramp FinFET, more customers invest in 3D NAND and DRAM spending increases.

– Foundry: The increasing spending this year and the build-out of the 28 and 20 nanometer nodes is fueling record performance for Applied’s transistor businesses. Applied claims that the FinFET technology adoption is the most attractive opportunity in foundry spending, and will provide a catalyst for the new wave of investment in 2015, as customers start to ramp this technology. Intel (NASDAQ:INTC) has already adopted the technology and TSMC and Samsung (OTC:SSNLF) have aggressive road maps  to achieve the same, albeit at different geometries. As transistors decrease in size, FinFET technology provides better circuit performance, power efficiency and processing speed, important features for today’s computing devices.

– Memory : Applied expects NAND bit growth to be around 40% this year. While it expects the bulk of this incremental demand to be met by investments in advanced planar technology, it claims that customers are now publicly discussing their road map for 3D NAND to achieve cost parity with planar NAND. The transition to 3D NAND will expand Applied’s existing market by 35% to 50%. Applied expects DRAM shipments to grow 60% this year. It is seeing indications that an enterprise-driven PC refresh cycle is underway which will increase investments in DRAM. The company anticipates overall memory spending to be up approximately 30% in calendar 2014. It is confident of growing its share with memory customers by more than 2 points this year.

Applied has increased its focus on products which are most enabling to customers and provide great opportunity to grow such as Epi, CVD, etch, inspection and PVD. It claims to be gaining share in both etch and CVD and expects the combined revenue in these markets to grow by approximately 40% in calendar 2014.

Strong Investment In Display Capacity & New Technology

Applied claims that its display business is shaping up as expected, driven by strong investment in capacity addition and new technology. In the past two quarters, Applied booked over $600 million of display orders, which is over $100 million higher than its expectation. Growing TV demand and mobile investments are two key factors driving growth in the display segment. Higher resolution displays are becoming a major battleground for smartphones and tablets. In TVs, average screen sizes are growing significantly faster than historic norms.

Applied claims that the average TV size is growing 1.2 to 2 inches annually, which is significantly higher than historical norms. This trend is driving area growth in the 15% range which the company believes is sufficient to support investment in three new Gen 8.5 factories, which are being built in China as its customers compete to meet the growing TV demand.

Q4 2014 Outlook

– Net sales to be flat, +/- 3%. SSG net sales to be down 1% to 7%. AGS net sales flat to up 4%. Display net sales to be up over 60%, and EES net sales to be down approximately 35%.

– Non-GAAP gross margin of 44%.

– Non-GAAP operating expenses to be in the range of $550 million.

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