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Applied Materials (AMAT) Q2 Earnings & Revenues Beat - Analyst Blog

Applied Materials Inc .'s AMAT fiscal second-quarter 2015 pro forma earnings per share of 29 cents marginally beat the Zacks Consensus Estimate of 28 cents and were at the higher end of the guidance range provided by the company.

Revenues

Applied Materials reported revenues of $2.44 billion, up 3.5% sequentially and 3.8% year over year, and slightly above the guidance range provided by the company. Revenues beat the Zacks Consensus Estimate of $2.39 billion. This was also the highest quarterly revenues recorded in a span of three years.

Revenues by Segment

The Silicon Systems Group (SSG) contributed 64% of revenues, up 7.9% sequentially but down 1.5% from the year-ago quarter. The sequential increase was attributed to higher volume and a favorable product mix. Foundry demand was strong because of the drive toward new-age mobile devices that are also more power efficient. Technology transitions facilitating this change are a big positive for a leading equipment manufacturer like Applied Materials. Technology transitions are also driving equipment purchases at memory makers. Moreover, management is positive about its leading-edge products (particularly deposition and etch) that will continue to help the company gain market share. In the past two quarters, the installed base for the latest generation etch system has grown 1500% to more than 160 chambers. This represents the fastest adoption rates for any new Applied Materials product. The company believes that as its technical position gets stronger, it sets a foundation for future share gains.

The second-largest contributor was Applied Global Services (AGS) with a 26% revenue share. Segment revenues were up 10.8% sequentially and 21% year over year. AGS revenues are correlated to the SSG segment. Therefore increased wafer starts and higher utilization rates across the industry were positives for the segment. The sequential increase was also driven by growth in spares and services along with 200mm equipment.

The Display segment was down 40.7% sequentially but up 10.9% from the year-ago level with segment contribution declining from 12% to 7%. The sequential decline was a combination of softer seasonality and currency.

Applied Materials is reaping the benefits of its growth initiatives within FSG, Display and AGS that will allow it to grow revenues and profitability as customers ramp up new nodes into higher volumes.

The Energy and Environmental Solutions (EES) segment accounted for 3% of total quarterly revenues, increasing 32.7% sequentially but decreasing 17% from the year-ago quarter.

Revenues by Geography

Around 69% of Applied's quarterly revenues came from the Asia/Pacific region. Taiwan contributed 19% of revenues, followed by Korea with 18% share, China with 17%, Japan with 11% share and Southeast Asia with 4% share. While the U.S contributed 26% of revenues, Europe contributed 6%. Taiwan was the weakest link in the last quarter, declining 12.3% on a sequential basis. All the other regions increased sequentially. Southeast Asian countries grew 2.4% sequentially, followed by Europe (up 4.9%). Japan grew 11.3% sequentially. The U.S saw a sequential increase of 19.5%.

Orders

Total orders were up 10.6% sequentially but down 4.3% year over year. On a sequential basis, AGS orders were down 7.1% while SSG and Display orders improved 19.5% and 12.1% respectively. EES orders were flat sequentially. However, all segments except Display and EES increased on a year-over-year basis.

Backlog for the quarter remained flat sequentially, nearly half of which was attributable to SSG, followed by AGS, Display and EES.

Margins

Applied Materials generated gross margin of 43.2%, up 85 basis points (bps) from the previous quarter's 42.3%.The increase was attributed to favorable customer mix. Gross margin however shrank 104 bps from the year-ago quarter.

Applied's operating expenses of $579 million increased 4.9% from the last quarter. The increase in general and administrative expense was the most significant. Operating margin of 19.5% increased 54 bps sequentially but was down 99 bps from the year-ago quarter.

Net Profit

On a pro-forma basis, Applied Materials reported net income of $362 million, or 29 cents which was up 7.10% sequentially. In the year-ago quarter, Applied Materials had reported a net income of $348 million, or 28 cents.

Our pro-forma calculation excludes restructuring, acquisition-related, impairment and other charges as well as tax adjustments in the reported quarter.

On a fully diluted GAAP basis, the company recorded a net profit of $364 million (29 cents per share) compared with $348 million (28 cents per share) in the previous quarter and $262 million (21 cents per share) in the year-ago quarter.

Balance Sheet

Inventories increased 4.4% during the quarter while accounts receivables increased 13.8% sequentially to $1.8 billion. Cash and short-term investments balance was $3.23 billion at quarter end, compared with $3.09 billion in the prior quarter. Goodwill was 24.3% of total assets.

Applied Materials generated $298 million of cash from operations. The company spent $64 million on capex and $123 million on dividends. At quarter end, the company had $1.95 billion of debt on its balance sheet.

Guidance

Applied also provided guidance for the third quarter of fiscal 2015. Revenues are expected to be up 2%-6% percentage points sequentially. Non-GAAP EPS is expected to come in a range of 31 cents to 35 cents.

Conclusion

The second quarter was a good one for Applied Materials, with both the top and bottom lines beating the Zacks Consensus Estimate.

Applied Materials has a solid product line and management has stepped up investments to prepare for the ongoing transitions to larger wafer sizes and smaller process nodes. The ramp up in FinFET, 3D NAND and new display technology will likely be catalysts going forward.

There is also scope for share gains on the Display side of the business backed by PVD tools. The drivers of this business are larger TV screens and better mobile displays that involve more complicated production processes and new tools. Also, management expects demand for DRAM chips to improve in the upcoming quarter.

Developing trends in mobility, connectivity, video and wearable devices are fueling the growth of the industry. This in turn is increasing advancement in mobile processors, solid-state storage and interactive displays. Customers are focused on increasing shares in these inflections and this in turn is resulting in a period of continued investment by semiconductor customers.

Applied has strengthened its R&D and at the same time increased investment in product development.

Also, investments by its customers provide a solid foundation for the upcoming year. Though there are challenges inherent in its spending mix and issues about timings, the company remains well poised to tap the opportunity.

To fully capitalize on these transitions, Applied has focused its structure and talent around key areas of value creation. It plans to align its product portfolio in a way that it generates the best returns for its clients.

Applied Materials has a Zacks Rank #3 (Hold).

Better-ranked stocks in the technology sector include Orbitz Worldwide, Inc. OWW , PetMed Express, Inc. PETS and Ellie Mae, Inc. ELLI . All these stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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