Earnings Preview: Applied Materials

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Applied Materials, Inc. (AMAT) is scheduled to announce its fiscal second-quarter 2012 results on May 17, 2012. We witness only one downward movement in analyst estimates in the build-up to the release.

Prior-Quarter Synopsis

Applied’sfirst quarter 2012 pro forma earnings were above the Zacks Consensus Estimate due to higher revenue and lower-than-expected opex.

Revenue growth was weak in the Applied Global Services (AGS) segment, while all other business segments did better than expected. The softening at 200mm was the main reason for the decline in the AGS segment, and Applied expects this to continue through the first half of 2012.

Orders in the quarter were up 25.9% sequentially due to order improvement in the SSG and Display segments. The higher demand for TVs and mobile devices in SSG and Display were the main reasons for the increase. Gross margins also improved sequentially to 40.7% mainly on account of the richer mix of SSG.

Second Quarter Guidance

Applied now projects second quarter revenue to be up 5-15% sequentially, with SSG (including Varian) increasing 15-25% sequentially, AGS to be up 5-10%, Display being flat to down 25% and EES to be down more than 40%. The non-GAAP EPS is expected to come in at 20–28 cents a share. For the second quarter, the Zacks Consensus Estimate is pegged at 24 cents, below the guided range.

(Detailed earnings results can be viewed in this blog: Applied Guides Above Expectations

Agreement of Analysts

Out of the 17 analysts providing estimates for the second quarter, none made any revisions in the last 30 days. For fiscal 2012, only 1 analyst made a downward revision over the same 30-day time period.

A few analysts expect a decent second quarter with revenue and earnings in line with guidance of $2.4 billion and $0.24, respectively. They believe that pressure in both Display and Solar will be partially offset by growth in Silicon and a modest improvement in Service, helping results to match the guidance.

Also, a few analysts expect revenue to come in modestly above the mid-point of guidance, consistent with its peers including Lam Rearch (LRCX), Novellus Systems, Inc. (NVLS) and KLA-Tencor Corporation (KLAC). 

Additionally, the analysts believe Applied is benefiting from continued strength in the foundry market, as many of the key players have maintained or increased their levels of spending. In particular, Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) has increased its capex guidance by more than 30% for 2012 at its 1Q12 earnings call.

With TSMC likely employing multiple patterning at its 28nm ramp, the analysts believe Applied’s CMP tools will be in high demand, given the additional steps and layers required in the chip manufacturing process. According to Gartner, Applied is the market leader in CMP equipment, with approximately 67% of the total market in 2011.

Magnitude of Estimate Revisions

In the past 30 days, there was no change to the Zacks Consensus Estimate for the second quarter and fiscal 2012.

Over the 90-day period, the Zacks Consensus Estimate increased 7 cents to 24 cents for the second quarter and 13 cents to 94 cents for fiscal 2012.

The recent strength in semi-cap orders and shipments could be the reason for the increase in estimates.

Our Recommendation

We expect a decent second quarter due to higher overall semiconductor equipment spending levels. Though we believe there is potential in the solar energy market over the long term, we remain cautious about the company's efforts since management has already missed several targets to bring its solar division to profitability.

Nevertheless, we remain positive on Applied’s strong position in the semiconductor market, the solar business in China, a vast portfolio and strategic relationships. The semiconductor business appears to be improving, both on account of strengthening end markets and the Varian acquisition.

Applied, which competes with other large equipment makers, such as KLA-Tencor, Lam Research and Novellus Systems, holds a Zacks #3 Rank that translates into a short-term Hold rating.

Read the Full Research Report on AMAT

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Read the Full Research Report on LRCX

Read the Full Research Report on TSM

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