) fiscal second quarter pro forma earnings of 17 cents beat the
Zacks Consensus Estimate by 4 cents, or 30.8%. Revenues were also
ahead, beating by 3.5%. Increased demand in the SSG and Display
segments and effective cost control helped results.
Applied reported revenue of $1.97 billion, which was up 25.4%
sequentially and down 22.4% year over year, better than the
guided range of a 15-25% increase. The outperformance versus
expectations was on account of better-than-expected results in
the SSG and Display segments, as offset by the
worse-than-expected results in the EES segment.
Revenue by Segment
segment contributed 65% of revenue, growing 33.2% sequentially
and declining 27.3% from the year-ago quarter. Foundry and DRAM
spending helped the revenue increase in the last quarter, with
NAND orders finally picking up. Considering order trends, the
revenue concentration at a few large foundry customers should
) 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 26% revenue share. Segment revenue was up 9.8%
sequentially and down 6.2% year over year, at the high end of
Applied's expectations of 0-10% sequential increase. While
revenues came in at the high end of guidance, lower-than-expected
wafer starts and utilization rates impacted orders.
The 46.0% sequential increase and 5.2% year-over-year decline
segment was much better than the broad guidance range of a
sequential increase of 0-25%. 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 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 following quarters. Order growth was attributed to share
gains and TV capacity adds in China.
segment accounted for 2% of total quarterly revenue, down 17.4%
sequentially, 51.9% from last year and significantly lower than
management's expectations of sequentially consistent revenues.
The weakness in solar (due to overcapacity and
weaker-than-expected demand) continued in the last quarter, while
other parts of the business did better.
Revenue by Geography
Around 74% of Applied's quarterly revenue came from the
Asia/Pacific region, with the largest contribution from Taiwan,
which generated 42% and followed by China, which generated 9%.
The only softness in the last quarter was in the U.S., which
declined 9.7% sequentially. Applied saw double-digit sequential
increases across all other geographies, with Japan, Taiwan and
China growing the strongest. The revenue distribution by
geography was as follows: the U.S. 18%, Europe 7%, Taiwan 42%,
Korea 11%, China 9%, Japan 8% and South East Asia 4%.
Total orders were up 7.2% sequentially and down 18.0% year
over year. AGS and EES orders were down 11.6% and 42.6%,
respectively. However, SSG and Display more than made up, growing
13.8% and 41.3%, respectively from the Jan 2013 quarter. Display
was the only segment that grew from last year (up 132.1%), with
all other segments declining double-digits.
The net result was a positive BTB across all except the AGS
segment, with Display coming in strongest, followed by SSG and
Orders were up sequentially across all Asian countries except
Taiwan, which was down slightly. The U.S. was also sluggish,
growing a mere 1.8%, but Europe was strong, jumping 29.1%.
Applied generated a gross margin of 43.2%, up 339 basis points
(bps) from the previous quarter's 39.8%, helped by higher volumes
and lower inventory charges. The gross margin was up 107 bps from
the year-ago quarter.
Applied's operating expenses of $567 million were up 10.3%
from the Dec 2012 quarter. However, all expenses declined as a
percentage of sales, which resulted in the 732 bp sequential
expansion in the operating margin. The operating margin was still
well below the 19.2% posted in the year-ago quarter, with higher
R&D being the most significant driver and SG&A also
increasing substantially as a percentage of sales.
On a pro forma basis, Applied Materials had a net income of
$199 million, or a 10.1% net income margin compared to $69
million, or 4.4% in the previous quarter and $348 million, or
13.7% in the second quarter of fiscal 2012.
The fully diluted pro forma earnings were 17 cents a share
compared to earnings of 6 cents in the previous quarter and 27
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 loss
of $129 million ($0.11 per share) compared to income of $34
million ($0.03 per share) in the previous quarter and income of
$289 million ($0.22 per share) in the year-ago quarter.
Inventories increased 3.1% during the quarter, with inventory
turns increasing from 3.0X to 3.4X. Days sales outstanding (DSOs)
went from 64 to 59. The cash and short term investments balance
was $1.77 billion at quarter-end, having increased $17 million
during the quarter. Goodwill was 28.2% of total assets in the
The company generated $224 million of cash from operations,
spent $51 million on capex, $100 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
$176 million. The debt cap ratio including long term liabilities
and short term debt was just 27.3%.
Applied did not provide expectations for each individual
segment as it usually does and instead said that there would be a
slight sequential increase in revenue.
The non-GAAP EPS (excluding 4 cents of acquisition-related
charges) is expected to come in at 16-20 cents a share. The Zacks
Consensus Estimate for the Jul 2013 quarter was 20 cents when the
company provided guidance, at the high end of the guided
Applied's results in the last quarter reflect improvements in
its core semiconductor and display markets. However, AGS orders
indicate that customers remain cautious and management also
stated that the strength at foundries (the biggest driver of SSG
revenues) remains concentrated in a few hands. Therefore, any
recovery is likely to be slow. The EES business is a drag due to
multiple issues and over capacity in that market. While
management initiatives to cut segment costs are encouraging, the
segment will continue to pull down overall results at
Additionally, since Applied is a company with significant
fixed costs, the bottom line has also taken a beating. Therefore,
the strength in mobility platforms, increased TV capacity and
cost diversion from EES to more profitable areas will have a
positive impact on its growth and profitability going
Applied shares currently have a Zacks Rank #3 (Hold), similar
to other equipment suppliers, such as
) and Lam Research.
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