Weak Foundry Spending Impacts Applied’s Q3’15 Earnings, Though Major Technology Inflections Will Drive Growth

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AMAT: Applied Materials logo
AMAT
Applied Materials

Applied Materials (NASDAQ:AMAT) reported its Q3 2015 earnings on August 13th. While the company continues to grow its topline, a weaker-than-expected growth rate, unpredictable near-term demand for nanomanufacturing equipment, and the lumpy Display segment have all weakened investor sentiment around the company. Applied reported a relatively decent Q3 2015, despite near-term headwinds. While the company’s non-GAAP earnings per share (EPS) of $0.33 was inline with analyst expectations (as per Thomson Reuters), its revenue of $2.49 billion fell marginally short of expectations. Nevertheless, Q3 2015 marked Applied’s highest quarterly earnings in the past three years, with revenue and non-GAAP EPS increasing 10% and 18% year on year, respectively. During the quarter, the company also reported its highest service revenue in its history, and a record of more than $2 billion of 300-millimeter semiconductor equipment orders. (Read Q3 2015 Earnings Press Release)

While Applied admits that changes in the business environment over the past few weeks have created some near-term headwinds, the company remains optimistic about its long-term growth potential. It intends to continue investing in development programs that support its strategic priorities to increase share in wafer fab equipment (WFE), grow its service business, and expand its total available market. To tackle the short-term weakness, Applied is focusing on reducing its operating costs and the complexity of its organization. The company has developed a deep pipeline of new disruptive products, which it believes gives it further opportunities for share gains and profitable growth as the semiconductor and display segments undergo major technology inflections.

We are in the process of updating our $22 price estimate for Applied Materials.

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See our complete analysis of Applied Materials here

Slowdown in Foundry Spending Impacts WFE Growth; Strong Memory Spending To Drive Growth In 2015 

Applied is seeing a slowdown in WFE spending this year. The WFE spending for calendar 2014 was approximately 15% higher than 2013, and Applied initially expected the industry to grow another 5% or more in calendar 2015. The company now believes that WFE spending will be approximately flat relative to 2014, with potential downside risk. The revised outlook is mainly on account of lower foundry spending, as customers are managing excess inventory, improving their yields, and reusing equipment, in light of the weak macro economic situation.

Despite the short-term pause in capacity additions, Applied claims that the leading foundries are still aggressively pursuing 1o nm technology and expects this to become a key battleground in 2016 with the buildout of pilot production. The 10 nm node expands the available market for Applied and plays to the strengths of its businesses.

While foundry remains weak in the short-term, Applied believes that 2015 will be a strong year of investment in memory capacity. The company believes that memory spending will make up for nearly 50% of WFE in 2015, compared to less than 25% in 2012. Over the same timeframe, Applied’s memory revenue is on track to grow by more than 150%. The company claims that it is significantly outpacing the memory market and has gained four points of market share in both DRAM and NAND.

For 2015, Applied anticipates DRAM spending to be around 20% higher than last year, driven by 20 nm upgrades and some capacity additions. The company also remains increasingly optimistic about the pace of the transition from planar to 3D NAND, with the buildout of the 3D NAND technology broadening and accelerating. It expects 3D NAND installed capacity to surpass 150,000 wafer starts per month by the end of calendar 2015. While this number is higher than anticipated at the start of the year, it only represents around 15% of total NAND capacity. Thus, 3D NAND offers tremendous opportunity of growth to Applied. As the adoption of 3D NAND accelerates, it will become a more meaningful driver of Applied’s growth. 3D NAND is also enabling the company to expand the available market for its Epitaxial products by 5% to 10%.

Applied’s focus on technology inflections and new products produce strong revenue and share growth opportunities for the company in the long-run. Major technology inflections, like FinFET circuit structures and 3D NAND in semiconductors and OLEDs in new displays, represent unprecedented technology advances that are enabled by materials innovation. Applied notes 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.

Q4 2015 Guidance

– Net sales to be flat to down 7% sequentially, with silicon system net sales down 6% to 12%, flat AGS net sales, display net sales up 25% to 35%, and EES net sales of approximately $55 million.

– Non-GAAP gross margin to be down by about two points sequentially.

– Non-GAAP operating expense of $555 million, +/- $10 million.

– Non-GAAP EPS in the range of $0.27 to $0.31.

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