Applied To Close 2014 On A Strong Note With Renewed Demand In Semiconductor & Display

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AMAT: Applied Materials logo
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Applied Materials

Applied Materials (NASDAQ:AMAT), which provides manufacturing equipment for semiconductors, flat panel liquid crystal displays (LCDs) and other electronic devices, will report its Q4 2014 earnings on November 13th. (Fiscal years end with October.)  Having seen a steep decline in its fiscal 2013 revenues, the company has witnessed strong growth so far this year. It reported a 39%, 19% and 15% annual growth in revenues in Q1 2014, Q2 2014 and Q3 2014, respectively, and expects to retain the growth momentum in Q4 2014 as well. Applied’s continuing top line growth and improving financial performance are backed by renewed demand in the semiconductor and display segments.

Applied claims that, enabled by materials innovation, the industry is witnessing the biggest changes in semiconductor and display technologies in decades. The trend benefits the company owing to its unique capability in precision materials engineering supported by sustained investment in capacity and new technology by customers. The pending merger with Tokyo Electron 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. The company had expected to close the transaction this year, though management more recently suggested completion may not occur until 2015. [1]

The company 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. Applied 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 $22 for Applied Materials is slightly lower than the current market price of $23. We will update our valuation after the Q4 2014 earnings release.

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

An uncertain macro environment last year combined with soft demand for consumer devices forced many chip manufacturers to reduce or postpone their expansion plans. Global semiconductor capital equipment spending declined by 16.1% annually, reaching $37.8 billion in 2012 and research firm Gartner estimates the same to have declined further (by 8.5%) in 2013. [2]

However, the accelerated changes in device technology and the adoption of new materials in the industry are expected to re-accelerate demand for semiconductor equipment in the next two years. Gartner estimates capital equipment spending in the semiconductor industry will increase by 16% and 17% in 2014 and 2015, respectively. Rising mobile shipments, a recovering DRAM market, growing NAND demand and the pending technology transitions (22nm and 16 nm, FinFET, and 3D NAND) are key factors driving demand for semiconductor equipment

Applied remains focused on creating a strong pipeline of new, highly differentiated products to enable future inflections in logic, memory and display. In calendar 2013, it gained 1.4 points of wafer fab equipment market share, ending the year at its highest level since 2006. [3] The company estimates 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.

Strong Investment In Display Capacity & New Technology

Though Applied expects its display revenue pattern to be uneven due to shipment timings, its overall outlook for the display segment remains positive. The company claims that its display business is shaping up as expected, driven by strong investment in capacity additions 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. The screen resolution is becoming an important differentiator and is leading to significant growth in high definition screens. Applied expects multiple Gen 6 LTPS factories to be built in the next 12 to 18 months to support this demand. High definition screens are driving demand for low temperature polysilicon backplanes The company expects multiple new Gen 6 factories to be built in the next two years to meet the growing market demand.

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.

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Notes:
  1. Tokyo Electron: Merger with Applied Materials Could Be Delayed until Next Year []
  2. RPT-UPDATE 2- Applied Materials to buy Tokyo Electron, create $29 bln company, Reuters, September 24, 2013 []
  3. Applied Materials’ (AMAT) CEO Gary Dickerson on F2Q 2014 Results – Earnings Call Transcript, Seeking Alpha, May 16, 2014 []