Applied’s Q2 2015 Growth Driven By Increasing Semiconductor Demand And Technological Innovation

Leading semiconductor equipment manufacturer, Applied Materials (NASDAQ:AMAT) reported its Q2 2015 earnings on May 14th. (Fiscal year ends with October.) At $2.44 billion, Applied delivered the highest quarterly revenue in the past 3 years, up 4% both quarter over quarter and year over year, driven by growth in Applied Global Services (AGS) and display. Other groups led the way with regard to orders. Company orders of $2.52 billion, were up 11% sequentially and 4% year over year, with increases in the Silicon Systems Group (SSG) and the Display Segment offsetting a decline in the Applied Global Services (AGS). Although AGS orders were down sequentially, they reported record net sales of $646 million, and were up 19% compared to Q2 2014. Non-GAAP EPS of $0.29 was at the high end of company guidance.

Major technology transitions in semiconductor and display manufacturing are creating strong growth opportunities for Applied. By increasing investment in key areas, Applied claims to have created a pipeline of differentiated products that will accelerate company’s growth. Major inflections, like FinFET and 3D NAND in semiconductors and OLEDs in new displays, represent unprecedented technology advances that are enabled by materials innovation. Applied notess 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. Management believes that its unique position in precision materials engineering will help it outgrow the industry in the future.

Going forward, Applied is focused on prioritizing three areas to further improve execution. First, the company wants to bring margin performance back in line through the new product pipeline. Second, Applied will continue to actively manage its product portfolio to ensure that the company is deploying its investments and resources towards the most promising growth opportunities. Third, Applied is focused on optimizing the company structure by ensuring that they have the right talent addressing the best opportunities.

Our price estimate of $22 for Applied Materials is approximately at a 10% premium to the current market price. We are in the process of updating our model for the Q2 2015 earnings.

See our complete analysis of Applied Materials here

Semiconductor Business Segment Driven by Memory and Foundry, Logic Remains Neutral

In Q2 2015, the SSG net sales of $1.6 billion came in above the high end of company guidance and increased 8% sequentially. Orders for the segment during the quarter were up 19%, with an increase in foundry and NAND offsetting the low orders from DRAM and logic.

Applied observes that semiconductor industry growth is fueled by evolving trends in mobility, connectivity, video and wearable devices. This is accelerating innovation 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, Wafer Fab Equipment (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.

Over the past two years, Applied has gained a share of 1.5 points 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 either gained share or held its 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. The company’s combined revenue in CVD and Etch was up 50% year over year, significantly outgrowing the market. The company has highly differentiated products in its pipeline that will expand Applied’s addressable market. Applied has shown one of the fastest rates of adoption for one of its products, for which the installed base for the latest generation etch system has grown from 10 chambers to more than 160 in the past two quarters. It believes that its technical position is getting stronger, and this provides a foundation for future share gains.

In foundry, Applied is engaged in a fierce battle to ramp FinFET technology by accelerating volume production and creating strong growth opportunity over the next few years. Applied is confident about its strong footprint in foundry with highly differentiated products. The company expects investment in foundry to be maintained at the same healthy levels seen in 2014, with the potential to be slightly higher than last year.

Display To Remain Lumpy In The Short Term; Though Long-Term Growth Potential Remain Strong

For fiscal 2014, Applied’s 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. Display orders of $120 million were up 12% in Q2 2015, as the market is undergoing significant changes from a technology standpoint. However, Applied’s display net sales declined to $163 million in Q2 2015, due to customer mix and the weak yen. Nevertheless, the company believes that the growing TV demand and mobile investments will drive long-term growth in the display segment. Applied claims that its display business is shaping up as expected, driven by strong investment in capacity additions and new technology.

The average TV sizes are growing faster than historic rates, and Applied is seeing a surge in unit sales fueled by consumer spending on new 4K and OLED models. The company recently received a large order for its OLED encapsulation tool, and in 2015 Applied expect to book about $200 million in this new application. The supply in TV and mobile remain tight, and customers continue to invest in new capacity and advanced technology.

Applied’s display business was the first one to fully deploy its product development engine best practices and received internal funding to capture share in CVD, PVD and new products based on large area precision materials engineering.

Q2 2015 Outlook

– Net sales to be up 2% to 6% sequentially. SSG net sales to be up by about 3% to 8%. AGS net sales to be up by about 2% to 7%. Display and EES net sales to be approximately flat and $50 million, respectively.

– Non-GAAP earnings per share in the range of $0.31 to $0.35.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research