) fiscal fourth quarter pro forma earnings of 19 cents beat the
Zacks Consensus Estimate by a penny, or 5.6%. Revenues were
particularly strong, beating by 16.2%.
There have been both upward and downward revisions to
estimates since the company reported, but the net impact has been
slightly negative to expectations for the next quarter.
It appears that Applied continues to benefit from the
proliferation of mobile devices, but is also impacted by slowing
sales in China.
Applied reported revenue of $1.99 billion, flat sequentially
and up 20.8% year over year, in line with the guidance.
Revenue by Segment
segment contributed 63% of revenue, down 2.3% sequentially and up
42.9% from the year-ago quarter. Segment revenue benefited from
growth in logic and DRAM that was partially offset by negative
seasonality in the foundry business. Foundries typically lower
spending to ramp production for the holiday season.
The second largest segment was
with a 27% revenue share. Segment revenue was up 8.2%
sequentially and down 13.4% year over year. AGS revenues are
correlated to system sales and benefited from stronger equipment
sales in the last quarter.
segment saw a 1.2% sequential and 75.3% year-over-year increase
in revenue, making it the only segment to have grown from both
periods. Segment contribution remained at 8%. Government
stimulus-driven spending in China slowed down, but other regions
grew, driven by demand for bigger TV screens.
Demand for mobile devices (high-resolution mobile displays for
tablets and touch panels for ultrabooks) continues to increase,
which is complementing the resurgence in the TV market. Applied's
expanding product line is partly responsible for the increased
total available market (TAM), which will spur growth in the
segment accounted for 2% of total quarterly revenue, down 2.2%
sequentially and 29.0% from last year. The weakness in solar (due
to overcapacity) is a prevailing condition in the market and
management continues to cut investment in the segment to align
the cost structure with sales.
Revenue by Geography
Around 70% of Applied's quarterly revenue came from the
Asia/Pacific region, with the largest contribution from Taiwan,
which generated 30% and followed by Japan, which generated 14%
and Korea with 12%. China and Japan were the weakest in the last
quarter, declining 25.3% and 17.1%, respectively on a sequential
Taiwan was the strongest region (up 65.4% sequentially), which
along with Europe (up 7.6%) were the only regions to have seen
positive growth. The revenue distribution by geography was as
follows: the U.S. 18%, Europe 12%, Taiwan 30%, Japan 14%, Korea
12%, China 10% and South East Asia 4%.
Total orders were up 4.9% sequentially and up 42.8% year over
year. SSG, AGS and EES orders were up 15.5%, 6.0% and 110.5%,
respectively. Display orders declined 55.5%, following a However,
the 7.5% and 31.3% sequential increases in AGS and Display
partially offset these 282% increase in the preceding
The net result was a BTB of 1.05, with SSG and AGS positive,
and Display and EES were negative.
Applied generated a gross margin of 40.0%, down 82 basis
points (bps) from the previous quarter's 40.8%. A lower mix of
EES sales were beneficial for the gross margin in the last
quarter and will likely remain so through 2014. However, the
gross margin was impacted by a $20 million charge for a customs
duty assessment in the AGS segment as well as a $10 million
inventory charge in the Display business. The gross margin was up
159 bps from the year-ago quarter.
Applied's operating expenses of $512 million were down 4.3%
from the Jun 2013 quarter. While all expenses declined year over
year as a percentage of sales, G&A alone declined
sequentially. As a result, the operating margin of 14.2% expanded
51 bps sequentially and 731 bps from last year.
Management has been diverting costs related to the solar
business to R&D expenses for SSG. Therefore, overall R&D
has been growing as a percentage of total opex, because of these
actions taken by management.
On a pro forma basis, Applied Materials had a net income of
$228 million, or a 11.5% net income margin compared to $223
million, or 11.3% in the previous quarter and $70 million, or
4.3% in the fourth quarter of fiscal 2012.
The fully diluted pro forma earnings were 19 cents a share
compared to earnings of 18 cents in the previous quarter and 6
cents in the comparable prior-year quarter. Our pro forma
estimate excludes restructuring, acquisition-related, impairment
and other charges as well as tax adjustments in the last
On a fully diluted GAAP basis, the company recorded a net
profit of $183 million ($0.15 per share) compared to income of
$168 million ($0.14 per share) in the previous quarter and loss
of $525 million ($0.43 per share) in the year-ago quarter.
Inventories increased 4.1% during the quarter, with inventory
turns flat at 3.4X. Days sales outstanding (DSOs) went from 54 to
75. The cash and short term investments balance was $1.89 billion
at quarter-end, having dropped $84 million during the quarter.
Goodwill was 27.4% of total assets in the last quarter.
The company generated $19 million of cash from operations,
spent $50 million on capex, $47 million on share repurchases and
$120 million on dividends. At quarter-end, Applied had $1.95
billion of debt on its balance sheet, with a net debt position of
$55 million. However, the debt cap ratio including long term
liabilities and short term debt was just 26.2%.
Applied provided guidance for the fiscal first quarter.
Revenue for the first quarter is expected to be up 3-10%, with
SSG increasing 15-20%, AGS down 5-10%, display down 15-30% and
EES roughly flat.
The non-GAAP operating expenses are expected to be $540
million (+/- $10 million) with the EPS (excluding 4 cents of
acquisition-related charges) coming in at 20-24 cents a share.
The Zacks Consensus Estimate for the Oct 2013 quarter was 23
cents when the company provided guidance, within the guided
The last quarter was a moderately good one for Applied.
Although SSG remained sluggish, it was not worse than expected.
The display side was impacted by slowdown in China, but strength
in other areas compensated. Also, diversion of funds locked in
The PC market remains a dampener, which has impacted all major
). However, longer-term drivers for the foundry business remain
very strong since mobile devices are dependent on them. Applied
has a very strong product line and management has stepped up
investments here in preparation for the on-going transitions to
larger wafer sizes and smaller process nodes. Management expects
significant share gains through 2014, which should generate
There is also scope for share gains on the Display side of the
business, as the company's PVD tools are doing extremely well.
The drivers of this business are larger TV screens and better
mobile displays that involve more complicated production
processes and new tools.
Applied shares currently have a Zacks Rank #3 (Hold), similar
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