Leading semiconductor equipment supplier Applied Materials ( AMAT ) reported its Q4'16 earnings on November 17th. (Fiscal years end with October.) The company saw an uptick in its display and silicon system sales in the quarter, which grew at 42% and 92%, respectively, year on year. Applied's silicon system sales growth was driven by incremental foundry spending and an additional investment by its customers in upgrading to 3D NAND technology. The company now expects the wafer equipment spending to be up by 5% in 2016 over 2015. In this analysis, we discuss in detail key factors that drove the current quarter growth for Applied. We will also discuss factors that are likely to drive future growth for the company.
In the table below we list down the key metrics as reported by the company in Q4'16:
Source: Sec filings
Changing Trend In Semiconductor Spending
It is quite remarkable that, despite a decline in the PC market, a key source governing the semiconductor equipment demand, Applied's revenues have strongly surged in 2016. We can attribute the company's strong growth to two factors: 1) The company's leading customers are aggressively pursuing 7nm and 10 nm process technologies; and, 2) strong demand from key customers that are upgrading their manufacturing capacity to satisfy an anticipated strong demand for advanced logic and 3D NAND Flash memory products.
However, there is more that needs to be noted. The current year witnessed significant developments in emerging technologies such as Internet of Things (IoT), virtual reality, augmented reality, big data, artificial intelligence and self-driving cars. These new technologies will be key sources driving the growth for Applied going ahead. In the Q4'16 earnings call, Applied acknowledged that these areas have the potential to significantly increase semiconductor spending and drive the advances in silicon technology in future. Furthermore, the company also believes that capital equipment spending has become less cyclical and more normalized over time, because of an increasing demand in these areas.
Strong Surge In Display Revenues
Applied stated that the surge in display revenues is being driven by large format TVs and an increasing investment in OLED displays by its customers. According to the company, large format TVs are expected to grow at a rate of 50%, compared to the single-digit growth of TV's overall. Furthermore, the company is seeing a significant market opportunity in OLED display equipment, as its key customers are ramping up their investment in this technology to gain a leadership position in the market. Applied said that it is building a strong product portfolio to support its customers to support their transition to OLED displays over the next few years. The uptick in display orders for Applied suggests that this segment can be a major revenue growth driver for the company in future.
We are in the process of updating our model of Applied Materials
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