Applied Materials Inc.’s (AMAT) fiscal first-quarter 2015 pro forma earnings per share of 27 cents were in line with the Zacks Consensus Estimate.
Revenues
Applied Materials reported revenues of $2.36 billion, up 4.2% sequentially and 7.7% year over year, and within the guidance range provided by the company. Revenues beat the Zacks Consensus Estimate of 2.33 billion.
Revenues by Segment
The Silicon Systems Group (SSG) contributed 61% of revenues, up 0.8% sequentially but down 2.6% from the year-ago quarter. 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 optimistic that Applied’s leading-edge products (particularly deposition and etch) will continue to help the company gain market share.
The second-largest contributor was Applied Global Services (AGS) with a 25% revenue share. Segment revenues were down 1.5% sequentially but up 15% 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 Display segment was up 44.7% sequentially and 73.0% from the year-ago level with segment contribution jumping from 8% to 12%. Display had a good drive, with new Gen 6 PVD products for advanced mobile displays and new CVD encapsulation systems for OLEDs.
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 new nodes into higher volumes.
The Energy and Environmental Solutions (EES) segment accounted for 2% of total quarterly revenues, increasing 14.6% sequentially and 37.5% from the year-ago quarter.
Revenues by Geography
Around 72% of Applied Materials’ quarterly revenues came from the Asia/Pacific region. Taiwan contributed 22% of revenues, followed by Korea with 20% share, China with 16% and Japan with 10% share. While Taiwan was the weakest link in the last quarter, declining 16% on a sequential basis, Korea was the strongest, growing 148.1% sequentially. All other regions declined. Southeast Asian countries performed dismally (down 37.5% sequentially), followed by Europe (down 19.7%). The U.S saw a sequential decline of 16.4%.
Orders
Total orders were up 0.8% sequentially but down 0.5% year over year. On a sequential basis, Display and AGS orders were down 17.7% and 7.63% respectively. EES and SSG orders improved 13.6% and 6.9% respectively. However, all segments except SSG increased on a year over year basis.
Backlog for the quarter declined 5% sequentially, nearly half of which was attributable to SSG, followed by AGS, Display and EES.
Margins
Applied Materials generated gross margin of 42.3%, down 187 basis points (bps) from the previous quarter’s 44.2%. Gross margin also shrank 12 bps from the year-ago quarter.
Applied’s operating expenses of $552 million declined 1.3% from the last quarter. The decline in general and administrative expense was the most significant, but was offset by an increase in selling and marketing expense. As a result, operating margin of 18.9% shrank 57 bps sequentially but was up 210 bps from the year-ago quarter.
Net Profit
On a pro-forma basis, Applied Materials reported net income of $338 million, or 27 cents which was flat sequentially. In the year-ago quarter, Applied reported a net income of $268 million, or 22 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 $348 million (28 cents per share) compared with $290 million (23 cents per share) in the previous quarter and $253 million (21 cents per share) in the year-ago quarter.
Balance Sheet
Inventories increased 4.8% during the quarter while Accounts receivables declined 5.4% sequentially to $1.5 billion. Cash and short-term investments balance was $3.09 billion at quarter end, compared with $3.16 billion in the prior quarter. Goodwill was 25.3% of total assets in this quarter.
Applied Materials generated $60 million of cash from operations, which reflects higher revenue from Display tools that were previously secured with cash in advance. The company spent $49 million on capex and $122 million on dividends. At quarter end, the company had $1.95 billion of debt on its balance sheet.
Guidance
Applied Materials also provided guidance for the second quarter of fiscal 2015. Revenues are expected to be flat to up a couple of percentage points sequentially. Non-GAAP EPS is expected to come in a range of 26 cents to 30 cents.
Conclusion
The first quarter was a moderately good one for Applied Materials.
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 the 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 is in turn is resulting in a period of continued investment by semiconductor customers.
Due to major transitions in semiconductor and Display technology, big opportunities lie ahead of Applied. Its upcoming merger with Tokyo Electron will further take it toward its long-term strategic goals.
Applied has strengthened its R&D and at the same time increased investment in product development.
Also, the investment by its customers provides 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). Investors interested in the technology sector can also consider stocks like consider PetMed Express, Inc. (PETS), EVINE Live Inc. (EVLV) and Autobytel Inc. (ABTL). While PetMed sports a Zacks Rank #1 (Strong Buy), EVINE Live and Autobytel carry a Zacks Rank #2 (Buy).
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