Applied’s Q3 Earnings Indicate A Drastic Decline In Solar Revenues This Year

August 22nd, 2012 by Trefis Team
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AMAT: Applied Materials logo
AMAT
Applied Materials

Applied Materials (NASDAQ:AMAT), a leading semiconductor fabrication equipment supplier, announced its Q3 2012 earnings on August 15. As we expected, the earnings indicated a continued slowdown in equipment spending and, with orders declining by 35% for the quarter, it looks like Applied is yet to mark its bottom. (Read: Applied Materials Q3 Results Hint At A Further Slowdown In Equipment Spending) Macroeconomic headwinds combined with unfavorable industry dynamics contributed to the weak business environment. While the applied global services and display segments posted marginal sequential increases, the silicon systems group registered a significant dip and the energy and environmental solutions (EES) business was relatively flat sequentially.

In Q2 2012,  most of Applied Materials’ divisions registered sequential growth which helped the company post a 16% q-o-q increase in revenues.  However, the EES division was a concern as its revenues declined 62% sequentially. In Q3 2012, the EES net sales were flat at $77 million with solar sales largely reflecting the deferred revenue. Though we think that Applied is in a strong fundamental position to weather the sluggish solar market presently, the decrease in orders to $35 million in Q3 point toward a slower revival in the coming quarters. We estimate Applied’s solar revenues to decline by as much as 80% in the current year.

See our complete analysis of Applied Materials here

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Solar Market Adjusts to Excess Manufacturing Capacity

The solar industry is currently struggling to cope with excess manufacturing capacity in the market.  The equipment market is dependent on the sales of solar PV and thin-film products to solar energy companies. We believe the current year will see lower demand for solar PV as macro headwinds push down demand growth, making it more difficult to plug the demand-supply gap. Hence, we forecast the solar PV equipment market to decline to almost half its current size in 2012.

However, we remain optimistic on the long-term prospects of this segment as there is bound to be an increase in demand for solar power use with growing awareness about the benefits of renewable energy combined with declining costs .

According to the findings of Applied Materials’ fourth annual solar energy survey conducted in China, India, Japan and the United States, we could see higher-than-expected growth in demand  for solar power in the future. This means there could be a marginal upside to our price estimate if the solar PV equipment market crosses $10 billion by the end of our forecast period.

Applied Focuses On Cutting Costs  & Improving Efficiency

Having witnessing a steep decline in orders at the start of the year, Applied announced a restructuring plan for its EES business to lower its cost structure and the operating breakeven level to approximately $500 million. The company claims that the much needed consolidation within the industry is occurring at a slower pace than expected. So, as the overall industry continues to cope with excess capacity, Applied has moved its solar equipment plant to China to cut down costs and tap into the growing appetite for clean energy in Asia. Additionally, it is scaling back its development program at the LED unit.

We believe that the fundamental trends in solar energy adoption provide a solid long-term platform, although the timing of solar equipment recovery still remains uncertain. Applied expects to see a 10%-30% drop in sales next quarter as the industry continues on the downward trajectory. However, we think the recent steps taken by Applied can improve profitability across cycles while  allowing it to invest in products that are critical enablers for customers and for the long-term growth of its business. We forecast Applied Materials to retain its market share for the rest of our review period.

Our current price estimate of $14.99 for Applied Materials stands at a premium of over 20% to the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

Weak market conditions in the second half of 2011 caused pullbacks in expansion plans throughout the industry, as manufacturers adjusted their production levels to match end-user demand. The condition is likely to persist in the first half of 2012. However, with stability in the economic condition and a rebound in the global PC market, we are likely to witness an increase in utilization levels to meet the growing demand. As the downward pressure on utilization rates ease, DRAM and foundry manufacturers will begin to increase spending.