Applied Is Confident On Retaining The Strong Growth Momentum In Fiscal 2015

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AMAT: Applied Materials logo
AMAT
Applied Materials

Applied Materials (NASDAQ:AMAT), a leading semiconductor equipment manufacturer, reported its Q4 2014 and fiscal year 2014 earnings on November 13. At $2.3 billion and $0.29, its Q4 2014 revenue and non-GAAP earnings per share (EPS) were in line with company guidance, respectively. For full year 2014, the company reported revenues of $9.1 billion, which (excluding solar) was the highest company revenue in seven years, driven by strong growth momentum in semiconductor, display and Applied’s global services (AGS) segments. Applied also saw its non-GAAP gross margin reach a seven year high, at 44.1%. Additionally, the company achieved a three year high in both operating margin and net income and boosted its EPS by more than 80%, to $1.07 per share. Despite the strong earnings, Applied’s stock price initially declined marginally as its Q1 2015 guidance (mentioned below) failed to meet analyst expectations. That said, it is now up on the day, as investors ponder the bright outlook for 2015.

The year 2013 was transformative for Applied.  The company has aligned its business around discreet vectors:  1) developing its precision materials engineering; 2) increasing its focus on areas that have the biggest impact for customers;  3) shifting spending from low-growth businesses and corporate functions to field resources and product development; and, 4) and investing a strong pipeline of new products. The company increased its market share by 1.4 points in calendar 2013.

Applied points to how it has accelerated its progress towards building a strong financial model.  And management believes it can retain or even increase market share in almost all its business segments. It anticipates its largest gains in the areas of the market that are growing the fastest. It believes that, in calendar year 2014, it will gain at-least 3 percentage points of share in CVD and generate 2.5 times the sales (compared to 2012) in etch. Its expects its revenue in etch and CVD, combined with the revenue of Tokyo Electron (see below), to grow by almost 50% in calendar 2014. For fiscal 2015, Applied expects the industry growth to be driven by the technology transitions to FinFET and 3D NAND. The company believes that its unique position in precision materials engineering will help it outgrow the industry. Despite the weak guidance for Q1 2015, Applied expects to increase revenue across all of its segments, gain share in SSG and further improve operating margin, in fiscal 2015.

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Our price estimate of $22 for Applied Materials is slightly lower than the current market price of $23. We are in the process of updating our model for the Q4 2014 earnings.

See our complete analysis of Applied Materials here

Mobile Is The Primary Growth Driver For The Semiconductor Industry

Consumer demand for new and better mobile devices with more features and longer battery life remains the primary driver for the semiconductor industry. Applied’s SSG revenue (~ $6 billion) grew 25%, reaching the highest level in seven years. Applied continues to estimate that Wafer Fab Equipment (WFE) spending will increase 10% to 20% in calendar year 2014. It forecasts 2015 WFE spend to be even higher, driven by the transition to FinFET by TSM and Samsung, more customers investing in 3D NAND, and increasing DRAM spending. As its customers aggressively push factory output, the company also expects expanded opportunities for its AGS business (which was also at a seven year high in fiscal 2014).

Foundry – The robust mobile market and rising competition in the same is fueling strong foundry investment in leading-edge technology. According to Applied, foundry spending in calendar 2014 is on track for 20% to 25% growth. The company claims that the FinFET technology adoption is the most attractive opportunity in foundry spending, and will continue to provide a catalyst for the new wave of investment in 2015, as customers start to ramp this technology into production. In 2014, almost half of the foundry spending was focused on 20 nm, and the build-out of this node is nearly complete at the leading customers. The year 2015 is shaping up as the year of battle for FinFET leadership behind the years-ahead Intel between TSM and Samsung, who by no coincidence vie to manufacture Apple’s iPhone and iPad processors.  Applied anticipates strong investment from all of its customers as they focus on winning this critical transition. Intel (NASDAQ:INTC) has already adopted the technology and is a node or more ahead.  TSMC and Samsung (OTC:SSNLF) have aggressive road maps  to achieve the same feat, albeit at different geometries.

Memory – Memory spending was robust in 2014 and Applied expects even higher investment levels next year. The company sticks to its estimate of 40% NAND bit growth in calendar 2014, driven by increasing bits per box for new mobile devices and strong demand for solid-state storage. A majority of the incremental supply is currently being provided by by advanced planar technology, but the company expects larger investment in 3D NAND in 2015, and expects the same to surpass planar investment in 2016. In fiscal 2014, Applied saw stronger DRAM investment than it initially expected, with growth being driven by mobile and an enterprise-led PC replacement cycle. The company expects DRAM bit growth of around 30% in 2014. For 2015, it anticipates supply to remain tight with strong potential for new capacity additions.

Display Business Was At A Three Year High In Q4’14

At $190 million, Applied’s display revenue was at a three year high in Q4 2014. For fiscal 2014, display orders achieved a six year high as the business took advantage of technology inflections and panel-size increases in the TV and mobile display markets. Applied gained share and increased its operating margin to its highest level since 2011. Growing TV demand and mobile investments are two key factors driving growth in the display segment.

Applied claims that the attractive price points for 4K TVs are driving a TV refresh cycle, while average screen sizes are growing around twice as fast as historic rates, 1.2 to 2 inches annually. 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.

Additionally, demand for higher-resolution, lower-power screens for mobile devices is also a key growth driver for the display segment. Applied claims to be getting strong orders for this market. 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.

Applied believes it is on track to gain share in its served available display market this year.

Merger With Tokyo Electron To Close In Q1’15

Applied announced its merger with Tokyo Electron in an all-stock deal valued at more than $7 billion in September last year. While the transaction was expected to close later this year, Applied suggested the completion may occur in Q1 2015 now. The joint integration team is working closely together to make the merger a success and are working hard to obtain the remaining approvals.

Both Applied and Tokyo Electron supply equipment used to manufacture semiconductors, flat-panel displays and solar photovoltaic products. U.S.-based Applied Materials is the world’s largest maker of semiconductor equipment by sales, followed by ASML Holding NV and Tokyo Electron. [1] With an estimated combined WFE market share of 34%, Applied believes that its merger with Tokyo Electron will help form a stronger entity. Though both companies are among the largest in the industry, they have little overlap in their product offerings. Applied will also benefit from a broader product portfolio, shared R&D costs and lower cost of developing chips.

Q1 2015 Outlook

– Net sales to be flat to up 5% sequentially. SSG net sales to be approximately flat, AGS net sales down a couple of points, display net sales up by about 40% and EES net sales up by about $20 million.

– Non-GAAP gross margin of 43%.

– Non-GAAP operating expenses in the range of $560 million, +/- $10 million.

– Non-GAAP EPS in the range of $0.25 to $0.29.

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Notes:
  1. RPT-UPDATE 2- Applied Materials to buy Tokyo Electron, create $29 bln company, Reuters, September 24, 2013 []