Applied Materials (AMAT) Stock Rises on Q2 Earnings Beat

Shares of Applied Materials Inc. AMAT gained nearly 14% last Friday in response to better–than-expected fiscal second quarter 2016 results.

The company’s pro-forma earnings per share (EPS) of 34 cents in the second quarter beat the Zacks Consensus Estimate of 32 cents and came in at the higher end of the guided range.

Revenues

Applied Materials reported revenues of $2.45 billion, up 8.6% sequentially and 0.3% year over year. Revenues beat the Zacks Consensus Estimate of $2.41 billion, backed by higher demand in Southeast Asia, Korea and China and partially offset by lower demand in Taiwan, Europe, Japan and the U.S.

Revenues by Segment

The Silicon Systems Group (SSG) contributed 65% of revenues, up 15.6% sequentially and 1.7% year over year.

The second-largest contributor was Applied Global Services (AGS) with 26% revenue share. Segment revenues were up 3.5% sequentially and 0.3% year over year.

The Display segment was down 21.6% from the last quarter but up 2.5% from the year-ago level, contributing 7% to revenues.

The Energy and Environmental Solutions (EES) segment accounted for 2% of total quarterly revenue, up 6.7% sequentially but down 34.2% year over year.

Revenues by Geography

China contributed 31% to revenues, Korea 21%, Taiwan 13%, Japan and U.S 11% each. While Southeast Asia contributed 10% of revenues, Europe contributed 4%.

The U.S., Southeast Asia, Taiwan and Europe were the weakest, declining 44.1%, 31.3%, 2.2% and 1.4%, respectively, on a sequential basis. All the other regions increased from the previous quarter. Southeast Asia, Korea and China increased a respective 180%, 88.8% and 51.3%.

Orders

Total orders of $3.45 billion were down 6% sequentially but remained flat year over year.

Backlog for the quarter decreased 34% to $4.17 billion, nearly half of which was attributable to SSG, followed by Display, AGS and EES.

Margins

Applied Materials generated gross margin of 42.7%, up 25 basis points (bps) from the previous quarter’s margin of 42.4% but down 55 bps from 43.2% reported in the year-ago quarter.

Applied Materials’ adjusted operating expenses of $575 million increased 4.0% from the last quarter but decreased 0.7% from the year-ago quarter. Operating margin of 19.2% increased 128 bps sequentially but decreased 31 bps year over year.

Net Profit

On a pro-forma basis, Applied Materials reported net income of $376 million, or 34 cents per share compared with $302 million or 26 cents in the prior quarter. In the year-ago quarter, Applied Materials had reported a net income of $362 million or 29 cents per share.

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 $320 million (29 cents per share) compared with $286 million (25 cents per share) in the previous quarter and $364 million (29 cents per share) a year ago.

Balance Sheet

Inventories increased to $1.92 billion from $1.84 billion in the first quarter. Accounts receivables increased to $1.91 billion from $1.63 billion in the prior quarter.

Cash and short-term investments balance was $2.64 billion at the end of fiscal second quarter compared with $3.12 billion in the prior quarter. Goodwill was 25.3% of total assets.

The company generated $481 million in cash from operations. The company spent $47 million on capex and paid dividends worth $113 million. It used $900 million to repurchase 45 million shares.

Guidance

Applied Materials also provided guidance for the third quarter of fiscal 2016. Revenues are expected to increase 14–18 percentage points sequentially. Non-GAAP EPS is expected to come in a range of 46 cents to 50 cents.

Our Take

The second quarter was a decent one for Applied Materials, with both the top and bottom line surpassing the respective Zacks Consensus Estimates.

In the second quarter, the ramp up of 3D NAND has led to significant market share gains. Combined CVD and etch revenues were at a nine-year high.  

Applied Materials has well-differentiated products and high market share and is efficiently delivering key enabling technology to logic and foundry customers.

The company is doing very well on the service front and has witnessed 10 consecutive quarters of year-on-year growth.

Applied is strongly positioned in China. In this quarter, Applied received a record number of semiconductor orders from China. Growing investments from Chinese domestic manufacturers have been the main catalyst.

Notably, the company is getting considerable success in expanding beyond semiconductor, particularly in display.  New display technologies like OLED are opening up new market opportunities for Applied.

Applied continues to expect strong products and services demand in the near future driven by continuous adoption of new technologies by semiconductor and display customers.

Management believes that Applied Materials is in a great position to grow sustainably and profitably based on its strong pipeline of enabling technologies, supported by expanding opportunities on the semiconductor, service and display fronts.

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

Better-ranked stocks include TiVo Inc. TIVO, Netgear Inc. NTGR and Radcom Ltd. RDCM, each sporting a Zacks Rank #1 (Strong Buy).

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