Applied Materials’ Profit Surges on Reduced Cyclicality in Displays

Revenue jumped 39.2% Y-o-Y to $3.30 billion on higher demand in Taiwan, Korea, and Japan

a1Applied Materials Inc. (NASDAQ: AMAT), the world’s largest semiconductor fabrication and display equipment supplier, announced its Q4 FY16 and full year FY16 financial results on November 17th, 2016.

The Santa Clara, California-based company provides manufacturing equipment, services, and software to the semiconductor, display, solar photovoltaic (PV), and related industries. It operates through three segments: Semiconductor Systems, Applied Global Services, Display and Adjacent Markets. Its manufacturing activities consist of assembly, test and integration of various commercial parts, components and subassemblies that are used to manufacture systems. It has implemented a distributed manufacturing model under which manufacturing and supply chain activities are conducted in various countries, including Germany, Israel, Italy, Singapore, Taiwan, the U.S. and Asia. Read more about Applied Materials’ financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Applied Materials reported revenues of $3.30 billion, up 39.2% Y-o-Y, versus $2.36 billion in the year-ago period. Revenue growth was driven by higher demand in Taiwan, Korea and Japan, partially offset by lower demand in Southeast Asia, China, and the U.S.

Taiwan was the major contributor to revenues at 35%, followed by Korea with 19%, China 13%, Japan 11%, U.S. 9%, Europe 8%, and Southeast Asia with 5% during Q4 FY16. The contribution of Southeast Asia and China fell 46.9% and 22.8%, respectively, on a sequential basis.a2

During Q4 FY16, new orders jumped 25% Y-o-Y to $3.03 billion, driven by a higher capital expenditure for leading-edge wafer fabrication equipment by its customers. Applied Materials has been benefiting from rising demand for 3D NAND memory chips from smartphone makers and the shift to organic light-emitting diode (OLED) technology for displays.

The company’s major customers are increasingly adopting 14 nm, 10 nm, and 7 nm process technologies, which is providing a key source of equipment demand for the company. Further, capacity additions on core geometries (22 nm and 28 nm) remain strong. In addition, the company is witnessing strong demand from key customers that are upgrading their manufacturing capacity to satisfy an anticipated strong of 3D NAND Flash memory products and FinFET-based logic products. Taiwan Semiconductor, a leading foundry, recently ordered semiconductor equipment worth $18 million from Applied Materials. In fact, in FY15, Taiwan Semiconductor contributed 15% (or $1.4 billion) of the company’s net sales.a3

The company’s backlog soared 46% Y-o-Y to $4.58 billion during the reporting quarter. In Q4 FY16, gross margin was at 42.4% and operating margin at 23.6%. In all, on a GAAP basis, the company recorded net profit of $610 million, or $0.56 per share, compared to $336 million, or $0.28 per share, in the year-ago period. On a non-GAAP adjusted basis, Q4 FY16 gross margin rose to 43.7%, operating margin to 25.2%, and diluted EPS jumped 128% Y-o-Y to $0.66.

FY16 financial highlights

During FY16, new orders grew 23% to $12.42 billion and net sales increased 12% to $10.83 billion. The company recorded gross margin of 41.7%, operating income of $2.15 billion, or 19.9% of net sales, and diluted EPS of $1.54. On a non-GAAP adjusted basis, gross margin increased 300 basis points to 43.2%, operating income increased 24% to $2.35 billion, or 21.7% of net sales, and diluted EPS jumped 47% to $1.75.

Segmental highlights

Semiconductor Systems: This segment’s Q4 FY16 net sales jumped to $2.12 billion from $1.49 billion in the year-ago period. Operating income increased to $667 million from $318 million, while operating margin jumped from 21.3% to 31.4% during the reporting quarter. New orders surged to $1.83 billion from $1.44 billion during Q4 FY16.

Applied Global Services: This segment’s Q4 FY16 net sales jumped to $693 million from $611 million in the year-ago period. Operating income increased to $193 million from $160 million, while operating margin jumped from 26.2% to 27.8% during the reporting quarter. New orders surged to $794 million from $743 million during Q4 FY16.

Display and Adjacent Markets: This segment’s Q4 FY16 net sales jumped to $452 million from $235 million in the year-ago period. Operating income soared to $103 million from $28 million, while operating margin jumped from 11.9% to 22.8% during the reporting quarter. New orders surged to $387 million from $219 million during Q4 FY16.

Other highlights

Cash generation: Applied Materials generated $797 million in cash from operations in Q4 FY16 and $2.47 billion in FY16.

a4Share buyback and dividends: In Q4 FY16, Applied Materials returned $279 million to shareholders through stock repurchases and cash dividends. It paid dividends of $444 million and spent $1.89 billion to repurchase 96 million shares at an average price of $19.82 during FY16.

Backlog information: Applied Materials’ backlog fell 7% from Q3 FY16 to $4.58 billion and included negative adjustments of $106 million, primarily due to changes in expected timing of shipments and other adjustments, partially offset by favorable foreign currency impacts. Backlog composition by reportable segment was as follows:a5

Guidance for Q1 FY17

In Q1 FY17, Applied Material expects net sales to be in the range of $3.20 billion to $3.34 billion; the midpoint of the range would be an increase of approximately 45% Y-o-Y. Non-GAAP adjusted diluted EPS is expected to be in the range of $0.62 to $0.70; the midpoint of the range would be an increase of approximately 154% Y-o-Y. The outlook for non-GAAP adjusted diluted EPS excludes known charges related to completed acquisitions of $0.04 per share.

Source: WSJ, Company's Data
Source: WSJ, Company’s Data

Stock Performance

a7Applied Materials’ stock ended the day at $31.67, climbing 1.02%, at the close on Tuesday, November 22nd, 2016, having vacillated between an intraday high of $31.80 and a low of $31.35 during the session. The stock’s trading volume was at 8,892,726 for the day. The Company’s market cap was at $34.22 billion as of Tuesday’s close.

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KEY TRENDS IN SEMICONDUCTOR EQUIPMENT MARKET

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The semiconductor equipment market, which is dominated by Applied Materials Inc. (NASDAQ: AMAT), KLA-Tencor Corporation (NASDAQ: KLAC), ASML Holding N.V. (NASDAQ: ASML), Tokyo Electron Ltd., and Hitachi Ltd., are witnessing a slowdown in wafer fab equipment (WFE) spending in 2016. The downturn in spending is mainly on account of lower foundry spending, as customers are managing excess inventory, improving their yields, and reusing equipment in light of the weak macroeconomic situation. Despite the short-term pause in capacity additions, leading foundries are aggressively pursuing 10 nm technology; the build-out of pilot production in 10 nm nodes is expected to benefit Applied Materials and KLA-Tencor.

While foundry spending remains weak in the short-term, many companies are making major investments in building memory capacity, which is expected to make up for nearly 50% of WFE in the next two years, compared to less than 25% in 2012. Over the same timeframe, Applied Materials’ memory revenue is on track to grow by more than 150%. The company claims that it is significantly outpacing the memory market and has gained market share in both Dynamic random access memory (DRAM) and NAND. The semiconductor equipment market expects DRAM spending to be driven by 20 nm upgrades and some capacity additions.

Pending technology transitions (22nm and 16 nm, FinFET, and 3D NAND) will drive higher levels of investment in the future. The semiconductor industry growth is fuelled by evolving trends in mobility, connectivity, video, and smart wearable devices. This is accelerating innovations in mobile processors, solid-state storage and interactive displays, which would result in a period of sustained investment by semiconductor customers. Emerging trends on the semiconductor and display fronts such as artificial intelligence, big data, cloud infrastructure, Internet of Things (IoT), virtual reality and self-driving cars, are also expected to boost upgrades and spending by customers in the near future, propelling industry growth.

Semiconductor industry customers are also ramping up their manufacturing capabilities in different technology nodes; foundry is ramping up 20 nm accelerating pilot lines for 16 nanometer and 14 nanometer FinFET technology; NAND flash is ramping up the 3X node; and DRAM will be ramping up 4X and 3X. This is expected to benefit companies such as Applied Materials, KLA-Tencor, and ASML, which are major suppliers of equipment for these technology nodes. Moreover, the demand for bigger, higher resolution, low-power screens for mobile applications is also a key factor driving display growth over the next few years.

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