What Applied Materials’ Stronger Guidance Means For The Semiconductor Industry
Applied Materials (NASDAQ:AMAT), one of the largest semiconductor capital equipment manufacturers, posted stronger than expected Q2 FY’19 earnings and provided guidance that exceeded street estimates. In this note, we provide some of the key takeaways from the results and what it could mean for the company and the broader semiconductor market.
View our interactive dashboard analysis on How Did Applied Materials Fare In Q2 FY’19 & What’s The Outlook Like For Q3? You can modify our key drivers to arrive at your own estimates for the company’s revenues and EPS.
How did Applied Materials fare in Q2?
- Revenues of $3.53 billion, down 23% year-over-year
- Adjusted EPS of $0.70, down 41% year-over-year
- Operating margins declined 6.3% to 21.9%
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How did the Semiconductor Systems business perform in Q2?
- Semiconductor Systems is Applied’s largest business segment (~63% of revenues in FY’18).
- Revenues declined 25% YoY to $2.2 billion; adjusted operating margins fell by 9% to 27%.
- The decline is primarily due to the memory segment, which saw sales drop 55%.
- Outlook for memory remains mixed, with NAND prices stabilizing but DRAM correction ongoing, with falling prices.
- Foundary and logic business fared well, with revenues up by about 45% YoY.
- Revenue was driven by capacity expansion in the 7-nanometer technology node and to a lesser extent in the 5-nanometers space.
How did the Display business perform?
- Display and Adjacent markets business accounted for about 14% of Applied’s revenues in FY’19.
- Segment revenues fell by over 50% YoY to $348 million.
- The segment has been weighed down by lower demand for consumer electronics and delays in some major TV factory projects.
- FY”19 revenues expected to decline by one-third from 2018 levels.
- Over the longer term, the company sees larger substrates as well as rigid and flexible OLED technologies as new opportunities for the display business.
What do Applied results mean for the semiconductor industry?
The company has guided fiscal third-quarter revenues of $3.525 billion, ±$150 million, projecting an EPS of $0.67 to $0.75 per share, ahead of market expectations. While the company noted that smartphones were the big driver of fab spending over the past five years, new areas such as cloud data centers, 5G networks, the Internet of Things (IoT), and automotive technologies are driving a more significant portion of wafer fab spending in 2019.
The positive outlook could be viewed as a good sign for the broader semiconductor industry, which has been underperforming over the last few quarters. The semiconductor manufacturing equipment that Applied sells costs several millions of dollars, with long installation lead times and companies typically curtail this capital spending during a downturn. The fact that Applied sees its demand picking up could be viewed as positive for the semiconductor space.
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