Applied’s Q1’15 Earnings Review: Growth Driven By Rising Semiconductor & Display Demand

Leading semiconductor equipment manufacturer, Applied Materials (NASDAQ:AMAT) reported its Q1 2015 earnings on February 11th. (Fiscal years end with October.) Net sales of $2.4 billion were at the high end of company guidance, increasing 4% sequentially and 8% year to year. Orders of $2.3 billion were up 1% sequentially, with increase in the Silicon Systems Group (SSG) and Energy and Environmental Solutions (EES)  offsetting a decline in the Applied Global Services (AGS) and Display segments. Although AGS orders were down sequentially, they were the second highest ever and up 16% compared to Q1 2014. Non-GAAP EPS of $0.27 was at the midpoint of company guidance.

Major technology transitions in semiconductor and display are creating strong growth opportunities for Applied. Major inflections like FinFET, 3D NAND and new displays represent unprecedented technology advances that are enabled by materials innovation. Applied claims that the industry is still in the early stages of these inflections and as they play out over the next several years, they create great, long-term growth opportunities for the company. It believes that its unique position in precision materials engineering will help it outgrow the industry in the future.

In the last few quarters, Applied has focused on strengthening its R&D and field teams, while increasing investment in product development. The company has created a strong pipeline of new differentiated products that accelerate its growth when customers move new technology into high-volume production. While the company admits that there are risks related to the timing of customer investments, it believes that 2015 will be a year of solid market growth, driven by robust memory spending in the first half and foundries ramping FinFET production in the second half.

Our price estimate of $21 for Applied Materials is approximately 10% lower than the current market price. We are in the process of updating our model for the Q1 2015 earnings.

See our complete analysis of Applied Materials here

Merger With Tokyo Electron Expected To Close Soon

Applied announced its merger with Tokyo Electron in an all-stock deal valued at more than $7 billion in September 2013. While the transaction was expected to close towards the end of fiscal 2014, it got pushed out to 2015. In its Q1 2015 earnings call, the company announced that it is making progress with regulators around the world on a coordinated proposal that would allow it to move forward with the merger. It is working to secure the remaining approvals and complete the merger as soon as possible.

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 Wafer Fab Equipment (WFE) market share of 34%, Applied believes that its merger with Tokyo Electron will help form a stronger entity.

Semiconductor Business To Be Driven By Memory In The First Half Of 2015; Foundry To Be Higher In The Second Half Of The Year

The SSG net sales of $1.4 billion came in above the midpoint of company guidance, and increased 0.8% sequentially. Orders for the segment during the quarter were up 7%, with an increase in memory offsetting the lower orders from foundry and logic.

Applied believes that the semiconductor industry growth is fuelled by evolving trends in mobility, connectivity, video and wearable devices. This is accelerating innovations in mobile processors, solid-state storage and interactive displays. Applied customers are focused on winning share through these inflection points and this is resulting in a period of sustained investment by semiconductor customers. According to Applied, WFE spending for calendar 2014 was approximately 15% higher than 2013. The company believes the market could grow another 5% or more in calendar 2015.

In 2013, Applied gained 1.4 percentage points of share in WFE while delivering innovative solutions and enabling new products to customers. In 2014, the company consolidated its new product positions and strengthened its product pipeline. It is confident that it gained share or held share in almost all its businesses. Based on its current view of customer spending, it expects to grow its overall WFE share again in 2015.

Applied is making its largest gains in areas where the market is growing rapidly, including CVD and Etch. In calendar year 2014, memory spending drove the growth of the Etch and CVD markets at a higher rate than overall WFE, and the company believes it won at-least 3 points of share in CVD and 5 points of share in conductor etch. Applied claims that its combined Etch and CVD businesses grew more than 50% in calendar 2014, which is 1.5 times the rate of the Etch and CVD markets and over 2 times the rate of its largest competitor in these segments.

New wins in the memory market combined with its traction in foundry, helped Applied deliver its highest Etch quarterly revenues in orders since 2007, in Q1 2015. The company’s latest generation Etch system has one of the fastest adoption rates of any new Applied product in recent years. Applied shipped three times more chambers in Q1 2015 as compared to Q4 2014, and expects to double shipment volumes again in the current quarter.

In foundry, Applied expects investment to be maintained at the same healthy levels seen in 2014, with the potential to be slightly higher than last year. Its current view is that spending for advanced nodes will be heavily biased towards the second half of the year. In Q1 2015, Applied’s memory orders were higher than the foundry and logic orders for the first time in 5 years, and its expects to see a similar mix in the current quarter.

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