) fourth quarter pro forma earnings of 6 cents beat the Zacks
Consensus Estimate by 3 cents. Revenues were partly responsible,
beating consensus expectations by 4.2%.
Applied reported revenue of $1.65 billion, which was down
29.7% sequentially and 24.6% year over year, at the low end of
the 25-40% decline. The outperformance versus expectations was on
account of better-than-expected results in the SSG segment, which
offset the worse-than-expected results in the other segments.
Revenue by Segment
segment revenue slid 43.7% sequentially and 18.5% year over year
to 53% of total revenue. The decline was broad-based across
foundry, memory and logic customers. Logic appears to be the most
steady at the moment, though foundry is also expected to be up in
the next quarter.
) Ultrabook partners and
) Windows 8 adopters may be expected to help demand. The
transition to smaller geometries will continue to drive demand in
fiscal 2013. Applied generally sees seasonal strength in the
second and fourth quarters of its fiscal year, with weakness in
the fourth and first.
The second largest segment was
with a 38% revenue share. Segment revenue was up 7.3%
sequentially and down 1.3% year over year, missing the mid-point
of Applied's expectations of a 5-15% sequential increase, despite
a $10 million outperformance in the thin film line. Segment
weakness was related to lower wafer starts and lower utilization
rates at semiconductor fabs.
The 34.5% sequential and 45.6% year-over-year declines in the
segment was within management's very broad guidance range of a
sequential decline of 25-40%. Segment contribution remained at
6%. Demand for mobile devices (high-resolution mobile displays
for tablets and touch panels for ultrabooks) were again the
driver for the segment in the last quarter, which was however
offset by weakness on the TV side.
However, management appeared optimistic about resurgent TV
demand in the next quarter. 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 4% of total quarterly revenue, down 19.5%
sequentially, 80.3% from last year and more or less in line with
management's guidance of a 10-30% sequential decline. The
weakness in the last quarter was because of protracted weakness
in solar (due to overcapacity and weaker-than-expected demand),
which had management write down EES goodwill by $425 million.
Revenue by Geography
Around 73% of Applied's quarterly revenue came from the
Asia/Pacific region, with the largest contribution from Taiwan,
which generated 28% and followed by China, which generated 12%.
Applied saw double-digit sequential declines across all regions
in Asia. North America also declined 15.4%. Europe was the bright
spot, growing 47.3%.
Total orders were down 18.6% sequentially and 8.2% year over
year. Orders grew across all except the SSG segment (in line with
normal seasonality). SSG was down 36.4% sequentially and 19.9%
year over year.
The AGS, Display and EES segments increased 8.5%, 23.9% and
85.7%, respectively on a sequential basis, while growing 2.1%,
315.0% and -24.4%, respectively from last year. The net result
was a negative BTB across all except the EES segment, with SSG
coming in weakest, followed by Display and then AGS.
Orders declined across all geographies except Japan and North
America, which were up sequentially by 43.8% and 3.6%,
Applied generated a gross margin of 38.4%, down 317 basis
points (bps) from the previous quarter's 41.6%, hurt by weaker
volumes. The gross margin was down 125 bps from the year-ago
Applied's operating expenses of $518 million were down 4.6%
from the June 2012 quarter, but not enough to prevent the
operating margin sliding 1,147 bps sequentially (1,067 bps year
over year) to 6.9%. 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
$70 million, or a 4.3% net income margin compared to $300
million, or 12.8% in the previous quarter and $271 million, or
12.4% in the fourth quarter of fiscal 2011.
The fully diluted pro forma earnings were 6 cents a share
compared to earnings of 24 cents in the previous quarter and 20
cents in the comparable prior-year quarter. Our pro forma
estimate excludes restructuring, acquisition-related, goodwill
impairment and other charges and 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 management.
On a fully diluted GAAP basis, the company recorded a net loss
of $515 million (-$0.42 per share) compared to income of $218
million ($0.17 per share) in the previous quarter and $466
million ($0.35 per share) in the year-ago quarter.
Despite the 7.8% decline in inventories, inventory turns
dropped from 4.0X to 3.2X. Days sales outstanding (DSOs) went
from 60 to 67. The cash and short term investments balance was
$1.94 billion at quarter-end, having dropped $227 million during
the quarter. Goodwill was 29.1% of total assets in the last
The company generated $411 million of cash from operations,
spent $41 million on capex, $516 million on share repurchases and
$111 million on dividends. At quarter-end, Applied had $1.95
billion of debt on its balance sheet, with a net debt position of
$9 million. The debt cap ratio including long term liabilities
and short term debt was just 26.5%.
Applied expects revenues and orders to bottom in the fiscal
fourth quarter unless there is further weakening of the global
economy. It currently expects SSG to be up 0-10% sequentially,
AGS to be down 15-25% (as the $85 million contribution from the
thin film solar line will be absent in the next quarter), Display
to be down 0-30% (due to the TV capacity ramp being pushed out
another quarter) and EES to be down more than 30%. The net effect
will be a 0-15% sequential decline in revenue.
The non-GAAP EPS (excluding 5 cents of acquisition-related
charges) is expected to come in at 0-6 cents a share. The Zacks
Consensus Estimate for the October quarter was 10 cents when the
company provided guidance, much above the high end of the guided
Applied's results in the last quarter were better than
expected, although both revenue and earnings projections for the
next quarter were well below expectations. While management did
show optimism about a turnaround and order rates do look positive
(especially in Display), growth is likely to remain muted for
The last two years have seen revenue decline across all
segments, as the company continues to battle with the cyclical
industry, as well as caution and increased efficiency at
customers. Since Applied is a company with significant fixed
costs, the bottom line has also taken a beating.
Additionally, the solar business has shrunk 90.3% from over
22% of its revenue in the January quarter of 2011 to a little
over 4% in the last quarter. If the solar business had taken off,
it would have been a competitive edge for Applied, but in the
current environment, it is actually turning into a negative for
In contrast, companies like
) are not weighed down by solar exposure. KLA in particular has
gained from the demand for increased efficiency in the soft
demand environment. These Zacks #3 Rank stocks are therefore
better plays on the equipment sector.
The fact that guided numbers were below expectations will tell
on Applied's earnings estimate revisions, which will therefore
keep the Zacks Rank under pressure Applied shares currently have
a Zacks Rank of #4 (Sell rating in the next 1-3 months).
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