) fiscal first-quarter pro forma earnings of 23 cents beat the
Zacks Consensus Estimate by a penny, or 4.5%. Revenues were more
or less in line, beating by 1.4%.
Applied reported revenue of $2.19 billion, up 10.2% sequentially
and 39.2% year over year, at the high end of the guidance range.
Revenue by Segment
segment contributed 68% of revenue, up 19.4% sequentially and up
53.1% from the year-ago quarter. NAND and foundry sales helped
segment sales in the last quarter, with logic and DRAM remaining
The second largest segment was
with a 23% revenue share. Segment revenue was down 5.8%
sequentially and up 7.6% year over year. AGS revenues are
correlated to system sales and benefited from stronger equipment
sales in the last quarter.
segment saw a 2.5% sequential decline although sales were still
82.8% above year-ago levels. Segment contribution dropped from 8%
to 7%. Management stated that the segment performed better than
expected due to share gains. Higher demand for bigger TV screens
remains a driver of segment revenues.
Demand for mobile devices (high-resolution mobile displays for
tablets and touch panels for ultrabooks) also 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).
segment accounted for 2% of total quarterly revenue, declining
9.1% sequentially and 13.0% 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 80% of Applied's quarterly revenue came from the
Asia/Pacific region, with the largest contribution from Taiwan,
which generated 32% and followed by China with 27%, Korea with 9%
and Japan with 7%. Japan and Europe were the weakest in the last
quarter, declining 40.6% and 32.2%, respectively on a sequential
basis. China was the strongest region (up 188.7% sequentially),
which along with Taiwan (up 19.7%) were the only regions to have
seen positive growth.
Total orders were up 9.2% sequentially and up 8.1% year over
year. SSG and AGS orders were up 12.9%, and 8.9%, respectively.
Display orders declined 30.7%, with EES coming in flat. SSG and
AGS also increased on a sequential basis although the other two
Backlog for the quarter increased 16.7%, with SSG building the
most, followed by AGS, Display and then EES. The BTB was 1.04.
Applied generated a gross margin of 42.5%, up 248 basis points
(bps) from the previous quarter's 40.0%. A lower mix of EES sales
were beneficial for the gross margin in the last quarter and will
likely remain so through 2014. Applied's gross margin
improvements may be traced to its improving mix of higher-value
products in semiconductor and display, as well as material cost
efficiencies. The gross margin was up 267 bps from the year-ago
Applied's operating expenses of $512 million were down 4.9% from
the Oct 2013 quarter. All expenses declined as a percentage of
sales from both the previous and year-ago quarters. As a result,
the operating margin of 17.9% expanded 371 bps sequentially and
1,083 bps from last year.
On a pro forma basis, Applied Materials had a net income of $276
million, or a 12.6% net income margin compared to $228 million,
or 11.5% in the previous quarter and $69 million, or 4.4% in the
first quarter of fiscal 2013.
The fully diluted pro forma earnings were 23 cents a share
compared to earnings of 19 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 quarter.
On a fully diluted GAAP basis, the company recorded a net profit
of $253 million ($0.21 per share) compared to income of $183
million ($0.15 per share) in the previous quarter and profit of
$34 million ($0.03 per share) in the year-ago quarter.
Inventories increased 8.5% during the quarter, with inventory
turns down slightly from 3.4X to 3.3X. Days sales outstanding
(DSOs) went from 75 to 63. The cash and short-term investments
balance was $2.29 billion at quarter-end, having increased $398
million during the quarter. Goodwill was 27.0% of total assets in
the last quarter.
The company generated $372 million of cash from operations, spent
$48 million on capex and $120 million on dividends. At
quarter-end, Applied had $1.95 billion of debt on its balance
sheet, with a net cash position of $343 million. However, the
debt cap ratio including long term liabilities and short term
debt was just 25.5%.
Applied provided guidance for the fiscal second quarter. Revenue
for the quarter is expected to be up 3-10%, with the non GAAP EPS
coming in at 25-29 cents a share. The Zacks Consensus Estimate
for the Apr 2014 quarter was 27 cents when the company provided
guidance, within the guided range.
Applied beat estimates in the last quarter entirely on account of
the strength in semiconductor-related sales. This strength may be
expected to continue through the year, spurred by the increasing
demand for mobile devices. The proliferation of mobile devices is
leading foundries to expand capacity with the transition to 20nm
further boosting sales.
Spending on NAND and 3D NAND is also expected to increase this
year although logic sales will not be that exciting. The overall
market should be highly positive for a broad-based supplier such
as Applied Materials.
The traditional computing market is also looking up, which is a
positive for all major players from
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.
The merger with Tokyo Electron will further improve innovation on
the materials side, thereby helping sales and providing the
company a competitive advantage.
There is also scope for share gains on the Display side of the
business on the back of the company's PVD tools. The drivers of
this business are larger TV screens and better mobile displays
that involve more complicated production processes and new
Applied shares currently have a Zacks Rank #2 (Buy), similar
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