) third quarter pro forma earnings beat the Zacks Consensus
Estimate by 2 cents or 9.0%. Revenues were partly responsible,
beating consensus expectations by 1.0%.
Applied reported revenue of $2.34 billion, which was down 7.8%
sequentially and 15.9% year over year, better than management's
revised guidance of at least a 10% sequential decline. The
outperformance versus expectations was on account of improvement in
the Display business and in-line performance of the AGS
As indicated at Semicon West, the SSG segment suffered due to
weakness at foundries and NAND memory manufacturers. EES was also
weak, although within management's very broad guidance range.
Revenue by Segment
Despite the weak demand that brought
revenue down 13.1% sequentially, revenue remained 10.5% higher than
in the year-ago quarter. Of course, the contribution slipped from
70% to 66% of total revenue.
In line with our expectations, foundry investment is turning out
to be front-end loaded, with equipment demand dropping off in the
second half of the calendar year. Demand from NAND manufacturers
are following along the same lines, with SSD adoption also falling
well below expectations (not surprising given the extra cost).
Management stated that NAND was likely to remain weak until the
end of the calendar year (Applied's fiscal first quarter), but
expects foundries to pick up strongly. The DRAM side of the
business was always expected to be weak this year and unless there
is a resurgence of demand related to
) Ultrabook partners and
) Windows 8 adopters, the market will remain very weak.
On the positive side, there still appears to be room for much
more growth related to the transition to smaller geometries. While
the timing of this investment remains uncertain as of now, we think
this is likely to be a 2013 phenomenon.
The second largest segment was
with a 25% revenue share. Segment revenue was up 5.1% sequentially
and down 4.0% year over year, exactly in line with Applied's
expectations of a 0-10% sequential increase. Segment performance
was the result of strength in spares and services as offset by
weakness in 200mm tools.
Despite the current weakness across the industry and Applied's
weak expectations for its fiscal fourth quarter, the company's
expectations for wafer fab equipment ("WFE") spending remains more
positive than Gartner's expectations of a 22.9% decline. The
weakness this year is not surprising, given that 2011 was a very
big year for WFE.
segment did moderately well, with the sequential growth of 6.0%
better than management's very broad guidance range of flat to +/-
20%. While the 36.3% decline from the year-ago quarter indicates
continued weakness in the television manufacturing segment, the
sequential growth is reflective of growing demand for
high-resolution mobile displays for tablets and touch panels for
Customer transition to new technologies, such as metal oxide
transistors and low-temperature polysilicon for OLED and
high-resolution LCDs is expected to expand the SAM by 30%, which is
segment accounted for 3% of total quarterly revenue, down 2.5%
sequentially, 86.3% from last year and just slightly weaker than
management's guidance of flat revenues (at the mid-point). The
weakness in the last quarter was expected, since there is
significant excess capacity.
However, Applied's market position remains strong due to
customers picked up earlier in the year. Some positive trends
include the improving module efficiencies and lower manufacturing
costs, which would make solar offerings more affordable.
Applied did not update its expectations with respect to the
market, so we assume that they remain the same. Accordingly, panel
demand is expected to increase 4-30% in 2012 and installations to
touch 28-35 gigawatts.
Increasing competition is driving down module prices and
government subsidies are becoming more uncertain, which is pushing
manufacturers to cost-efficient technologies. These are the secular
forces driving demand in all the big solar markets, such as the
U.S., Germany, Italy, China and Japan.
Revenue by Geography
Around 73% of Applied's quarterly revenue came from the
Asia/Pacific region, with the largest contribution from Taiwan,
which generated 35% and followed by Korea and China, which
generated 17% and 11%, respectively. China saw the strongest growth
in the last quarter (up 61.8% sequentially), followed by Taiwan,
which was up 24.0%.
Taiwan has shown the most consistent growth this fiscal year,
increasing at a strong double-digit rate in each of the last three
quarters. However, the situation will change going forward given
the weakening at foundries that pushed orders down 27.4% in the
last quarter. North America and Europe were down 14.9% and 19.7%,
respectively to 19% and 8% of revenue, respectively.
Total orders were down 34.9% sequentially and 24.7% year over
year. Orders were down across all segments, although SSG and EES
declined the most. Specifically, SSG was down 40.8% sequentially
and 5.9% year over year. AGS declined 18.3% sequentially and 13.4%
from last year.
Display was down 20.2% and 69.5% from the previous and year-ago
quarters, respectively, while EES declined 43.5% and 89.0% from the
two periods. As a result, the BTB was negative across all segments,
with EES being the weakest, followed by Display, SSG and then
Orders declined across all geographies except Japan and South
East Asia, which were up sequentially by 5.8% and 33.8%,
respectively. Korea declined 57.5% while both North America and
Europe saw orders declining in the mid-30% range.
Applied generated a gross margin of 41.6%, down 54 basis points
(bps) from the previous quarter's 42.1%, hurt by the weaker
volumes. The gross margin was down 91 bps from the year-ago
Applied's operating expenses of $543 million were down 6.5% from
the March 2012 quarter, but not enough to prevent the operating
margin sliding 85 bps sequentially (611 bps year over year) to
18.4%. All expenses increased from the year-ago quarter, with only
G&A declining on a sequential basis. Specifically, R&D
increased 56 bps sequentially and increased 307 bps year over year,
while G&A declined 24 bps sequentially while increasing 213 bps
year over year.
On a pro forma basis, Applied Materials had a net income of $300
million, or a 12.8% net income margin compared to $348 million, or
13.7% in the previous quarter and $467 million, or 16.8% in the
third quarter of fiscal 2011.
The fully diluted pro forma earnings were 24 cents a share
compared to earnings of 27 cents in the previous quarter and 35
cents in the comparable prior-year quarter. Our pro forma estimate
excludes restructuring, acquisition-related 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 net income
of $218 million ($0.17 per share) compared to $289 million ($0.22
per share) in the previous quarter and $476 million ($0.36 per
share) in the prior-year quarter.
Inventories were down 13.4% sequentially, with inventory turns
increasing from 3.7X to 4.0X. Days sales outstanding (DSOs) went
from 64 to 60. The cash and short-term investments balance was
$2.18 billion at quarter-end, having dropped $6 million during the
quarter. Goodwill was 29.6% of total assets in the last
The company generated $656 million of cash from operations,
spent $45 million on capex, $500 million on share repurchases and
$115 million on dividends. At quarter-end, Applied had $1.95
billion of debt on its balance sheet, with a net cash position
(excluding short and long-term debt) of $218 million. The debt cap
ratio, including long-term liabilities and short-term debt, was
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 down 45-55% sequentially,
AGS to be up 5-15% (including more than $75 million from a thin
film solar line), Display to be down 25-40% (due to the TV capacity
ramp being pushed out another quarter) and EES to be down 10-30%.
The net effect will be a 25-40% 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 12 cents when the
company provided guidance, much above the high end of the guided
The SSG and AGS segments are expected to benefit from the Varian
acquisition in fiscal 2012, partially offsetting the uncertainties
in the core business. The LCD and touch panel equipment market is
expected to remain extremely weak.
Given that the last quarter's results and forward guidance were
much weaker than expected, we think that the positive impact of
acquisitions and restructuring activity will be offset. We
therefore expect further downward revision to estimates, keeping
the Zacks Rank at #5 (Strong Sell in the next 1-3 months).
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