) fiscal first quarter pro forma earnings of 6 cents beat the
Zacks Consensus Estimate by 3 cents. Revenues were also slightly
ahead, beating by 1.5%.
Applied reported revenue of $1.57 billion, which was down 4.4%
sequentially and 28.1% year over year, at the high end of the
guided range of flat to down 15%. The outperformance versus
expectations was on account of better-than-expected results in
the SSG segment.
Revenue by Segment
segment revenue grew 11.4% sequentially, which was however down
27.9% from the year-ago quarter. Strength at foundries drove the
outperformance in the last quarter that was partially offset by
softness in the NAND segment. Management stated that there was
great revenue concentration in the last quarter with most of the
revenue coming from the top three customers.
) Ultrabook partners and
) Windows 8 adopters may be expected to help demand through 2013.
Applied generally sees seasonal strength in the second and third
quarters of its fiscal year, with weakness in the fourth and
The second largest segment was
with a 30% revenue share. Segment revenue was down 24.2%
sequentially and 11.8% year over year, at the low end of
Applied's expectations of a 15-25% sequential decline.
The sequential comparison was more difficult because of the
$10 million contribution from the thin film line in the preceding
quarter. Segment weakness was related to lower wafer starts and
lower utilization rates at semiconductor fabs for the second
straight quarter, as customer spending patterns remained
The 6.5% sequential and 16.3% year-over-year declines in the
segment was within management's very broad guidance range of a
sequential decline of 0-30%. Segment contribution remained at 6%.
Demand for mobile devices (high-resolution mobile displays for
tablets and touch panels for ultrabooks) continues to increase,
which is the main reason that the rate of revenue decline is
Management also stated that there was evidence of TV demand
coming back. Applied's expanding product line is partly
responsible for the increased total available market (TAM), which
will spur growth in following quarters.
segment accounted for 3% of total quarterly revenue, down 25.8%
sequentially, 77.8% from last year and better than management's
guidance of at least a 30% sequential decline. The weakness in
solar (due to overcapacity and weaker-than-expected demand)
continued in the last quarter, while other parts of the business
Revenue by Geography
Around 67% of Applied's quarterly revenue came from the
Asia/Pacific region, with the largest contribution from Taiwan,
which generated 36% and followed by China, which generated 11%.
Applied saw double-digit sequential declines in South East Asia,
China and Japan. Taiwan and Korea were up strong double-digits
due to the strength at foundries. The U.S. also grew though not
as strongly. Europe disappointed.
Total orders were up 44.2% sequentially and 5.2% year over
year. Orders grew across all except the AGS segment (in line with
normal seasonality). SSG and Display were up 83.9% and 66.3%,
respectively on a sequential basis with EES growing 4.6% and AGS
declining 5.6%. Display and EES jumped 245.0% and 106.1%,
respectively from last year, with AGS growing 5.2% and SSG down
The net result was a positive BTB across all segments, with
Display coming in strongest, followed EES, SSG and then AGS.
Orders grew very strongly across all Asian countries except
Japan. They were down, however, in Japan, the U.S. and
Applied generated a gross margin of 39.8%, up 140 basis points
(bps) from the previous quarter's 38.4%, as a higher mix of SSG
revenue offset the impact of weaker volumes. The gross margin was
down 86 bps from the year-ago quarter.
Applied's operating expenses of $514 million were flattish
with the Sep 2012 quarter, which helped the 19 bp sequential
expansion in the operating margin. The operating margin was still
well below the 15.7% level posted in the year-ago quarter. Lower
volumes impacted results, with all expenses increasing as a
percentage of sales.
On a pro forma basis, Applied Materials had a net income of
$69 million, or a 4.4% net income margin compared to $70 million,
or 4.3% in the previous quarter and $240 million, or 11.0% in the
first quarter of fiscal 2012.
The fully diluted pro forma earnings were 6 cents a share
compared to earnings of 6 cents in the previous quarter and 18
cents in the comparable prior-year quarter. Our pro forma
estimate excludes restructuring and acquisition-related, as well
as tax adjustments in the last quarter. Our pro forma estimate
may not match management's presentation due to the
addition/exclusion of some items not considered by
On a fully diluted GAAP basis, the company recorded a net
income of $34 million ($0.03 per share) compared to loss of $525
million ($0.43 per share) in the previous quarter and income of
$117 million ($0.09 per share) in the year-ago quarter.
Inventories increased just 0.5% during the quarter, with
inventory turns dropping from 3.2X to 3.0X. Days sales
outstanding (DSOs) went from 67 to 64. The cash and short term
investments balance was $1.75 billion at quarter-end, having
dropped $184 million during the quarter. Goodwill was 30.0% of
total assets in the last quarter.
The company generated $16 million of cash from operations,
spent $49 million on capex, $48 million on share repurchases and
$108 million on dividends. At quarter-end, Applied had $1.95
billion of debt on its balance sheet, with a net debt position of
$193 million. The debt cap ratio including long term liabilities
and short term debt was just 26.8%.
Applied expects a stronger second quarter. It currently
expects SSG revenue to be up 20-25% sequentially, AGS to be up
0-10%, Display to be up 0-25% (due to strength in mobile
platforms and TV capacity additions) and EES to be relatively
flat. The net effect will be a 15-25% sequential increase in
The non-GAAP EPS (excluding 4 cents of acquisition-related
charges) is expected to come in at 9-15 cents a share. The Zacks
Consensus Estimate for the Apr 2013 quarter was 11 cents when the
company provided guidance, within the guided range.
Applied's results in the last quarter were better than
expected, with both revenue and earnings projections for the next
quarter more or less in line with expectations. Order growth was
also encouraging and it appears that the company is past the
However, Applied's results have been impacted by caution at
customers stemming from a weak demand environment. Since Applied
is a company with significant fixed costs, the bottom line has
also taken a beating. Therefore, the strength in mobility
platforms and increased TV capacity will have a positive impact
on its profitability going forward.
Applied shares currently have a Zacks Rank #3 (Hold), similar
to other equipment suppliers, such as
) and Lam Research.
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