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Applied Materials (AMAT) Tops on Q1 Earnings, Lags Revenues

Zacks

Applied Materials Inc. AMAT reported mixed first-quarter fiscal 2017 results, with the top line missing estimates but the bottom line exceeding the same.

The company’s pro-forma earnings per share (EPS) of 67 cents in the first quarter beat the Zacks Consensus Estimate by a penny and came in at the higher end of the guided range.

Shares of Applied Materials have outperformed the Zacks Semiconductor Equipment – Wafer Fabrication industry over the last one year. While the stock returned 112.7%, the industry gained 69.1%.


This quarter Applied Materials’ orders and earnings were at an all-time high. The company’s inflection-focused innovation strategy was the main growth driver.

The company continues to see technological advancements in semiconductor and display areas. The ramp up of 3D NAND has led to significant market share gains.

Applied Materials has well-differentiated products and high market share and is efficiently delivering key enabling technology to logic and foundry customers. The company continues to expect strong products and services demand in the near future driven by continuous adoption of new technologies by semiconductor and display customers. It also sees significant opportunities in the patterning market.

Applied Materials remains strongly positioned in China where it continues to see strong growth in semiconductor and display. Growing investments from Chinese domestic manufacturers have been the main catalysts.

Notably, the company has gained considerable success in expanding beyond semiconductors, particularly in display. New displays technologies like OLED are opening up new market opportunities for Applied Materials. Rapid growth in large-format TVs has opened up opportunities to invest in new Gen 10.5 capacity and Applied Materials is currently tracking seven Gen 10.5 projects.

At the call, management seemed excited about emerging trends on the semiconductor and display fronts such as artificial intelligence, big data, 4K video, cloud infrastructure, Internet of Things (IoT), virtual reality and smart vehicles.

We believe that Applied Materials is in a great position to grow sustainably and profitably based on its strong pipeline of enabling technologies, supported by expanding opportunities on the semiconductor, service and display fronts.

Let’s delve deeper into the numbers.

Revenues

Applied Materials reported revenues of $3.28 billion, down 0.6% sequentially but up 45.2% year over year. Revenues marginally missed the Zacks Consensus Estimate of $3.29 billion but were above the guided range of $3.20 to $3.34 at the mid-point. The year-over-year revenue growth was backed by higher demand in the U.S., Europe, Taiwan, Korea, Southeast Asia and China and partially offset by lower demand in Japan.

Revenues by Segment

The Silicon Systems Group (SSG) contributed 66% of revenues, up 1.1% sequentially and 56.6% year over year.

The second-largest contributor was Applied Global Services (AGS) with 21% revenue share. Segment revenues were down 2.5% sequentially but up 8% year over year.

The Display segment was down 6.6% from the last quarter but up a massive 98.1% from the year-ago level, contributing 13% to revenues.

Revenues by Geography

Taiwan contributed 34% to revenues, Korea 20%, China 20%, U.S. 10% and Japan 7%. While Europe contributed 6%, Southeast Asia contributed 3%.

Southeast Asia and Europe were the weakest, declining 39.8% and 18.4%, respectively, on a sequential basis. China, the U.S. and Korea were up 46.7%, 9.7% and 6%, respectively. All the other regions decreased from the previous quarter.

Orders

The company generated record orders in the first quarter. Total orders of $4.24 billion were up 39.7% sequentially and a massive 86.2% year over year. Backlog for the quarter increased 12.2% sequentially to 5.5 billion.

Margins

Applied Materials generated gross margin of 45.4%, up 166 basis points (bps) from 43.71% reported in the previous quarter and 296 bps from 42.4% reported in the year-ago quarter.

Applied Materials’ adjusted operating expenses of $635 million increased 4.3% from the last quarter and 14.8% from the year-ago quarter. Operating margin of 26% increased 76 bps sequentially and 809 bps year over year.

Net Profit

On a pro-forma basis, Applied Materials reported net income of $732 million, or 67 cents per share compared with $722 million or 66 cents in the prior quarter. In the year-ago quarter, Applied Materials had reported net income of $302 million or 26 cents per share.

Our pro-forma calculation excludes restructuring, acquisition-related, impairment and other charges as well as tax adjustments in the reported quarter.

On a fully diluted GAAP basis, the company recorded a net profit of $703 million (65 cents per share) compared with $610 million (56 cents per share) in the previous quarter and $286 million (25 cents per share) a year ago.

Balance Sheet

At the end of fiscal first quarter, inventories increased to $2.28 billion from $2.05 billion in the previous quarter. Accounts receivables increased to $2.37 billion from $2.28 billion in the prior quarter.

Cash and short-term investments balance was $3.49 billion compared with $3.41 billion in the prior quarter. Goodwill was 21.8% of the total assets.

The company generated $646 million in cash from operations. The company spent $64 million on capex and returned $238 million through stock repurchases and cash dividends to shareholders.

Applied Materials, Inc. Price, Consensus and EPS Surprise

Guidance

Applied Materials also provided guidance for the second quarter of fiscal 2017. Revenues are expected between $3.45 and $3.60 billion, better than the Zacks Consensus Estimate of $3.23 billion. Non-GAAP EPS is expected to come in a range of 72 to 80 cents, much higher than the consensus mark of 62 cents.

Zacks Rank & Better Picks

Currently, Applied Materials has a Zacks Rank #3 (Hold). Better-ranked stocks in the broader technology sector include Xcerra Corporation XCRA, Advanced Energy Industries, Inc. AEIS and Texas Instruments Incorporated TXN, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

For the current year, the estimates for Xcerra stayed unchanged while the same for Advanced Energy and Texas Instruments went up 18.2% and 6.7%, respectively in the past 30 days.

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