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Applied Materials (AMAT) Beats on Q2 Earnings, Revenues

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Applied Materials Inc. (AMAT - Free Report) reported strong second-quarter fiscal 2017 results, with both the top and the bottom line surpassing our estimates.

The company’s pro-forma earnings per share (EPS) of 79 cents beat the Zacks Consensus Estimate by almost 4% and came in toward the higher end of the guided range.

This quarter Applied Materials’ revenues and earnings were at an all-time high. In fact, the company delivered record earnings for four quarters in a row. Inflection-focused innovation strategy was the main growth driver.

Applied Materials continues to see technological advancements in semiconductor and display areas. The ramp up of 3D NAND has led to significant market share gains.

The company has well-differentiated products and high market share and is efficiently delivering key enabling technology to logic and foundry customers.  The company continues to expect strong products and services demand in the near future driven by continuous adoption of new technologies by semiconductor and display customers. It also sees significant opportunities in the patterning market.

Applied Materials remains strongly positioned in China, where it continues to see strong growth in semiconductor and display. Growing investments from Chinese domestic manufacturers have been the main catalysts.

Applied Materials, Inc. Price, Consensus and EPS Surprise

Notably, the company has gained considerable success in expanding beyond semiconductors, particularly in display.  New displays technologies like OLED are opening up new market opportunities for Applied Materials. Rapid growth in large-format TVs has opened up opportunities to invest in new Gen 10.5 capacity and Applied Materials is currently tracking seven Gen 10.5 projects.

Applied Materials sees significant opportunities from emerging trends on the semiconductor and display fronts such as artificial intelligence, big data, cloud infrastructure, Internet of Things (IoT), virtual reality and smart vehicles.

We believe 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.

Shares of Applied Materials have outperformed the Zacks Semiconductor Equipment - Wafer Fabrication industry on a year-to-date basis. While the stock returned 37.5%, the industry gained 29.6%.

Let’s delve deeper into the numbers.

Revenues

Applied Materials reported revenues of $3.5 billion, up 8.2% sequentially and a massive 44.7% year over year. Revenues beat the Zacks Consensus Estimate by a slight margin and were within the guided range of $3.45 to $3.60. The year-over-year revenue growth was backed by higher demand in the U.S., Europe, Taiwan, Korea and Japan, partially offset by lower demand in Southeast Asia and China.

Revenues by Segment

The Silicon Systems Group (SSG) contributed 68% of revenues, up 11.8% sequentially and 51.5% year over year.

The second-largest contributor was Applied Global Services (AGS) with 20% revenue share. Segment revenues were up 7.1% sequentially and 11.7% year over year.

The Display segment was down 7.3% from the last quarter but up a massive 134.1% from the year-ago level, contributing 11% to revenues.

The corporate segment contributes just 1% to revenues and was up 11.1% sequentially.

Revenues by Geography

Korea contributed 27% to revenues, Taiwan 24%, China 21%, U.S. 11% and Japan 9%. Europe contributed 5%, while Southeast Asia contributed 3%.

Southeast Asia and Europe were the weakest, declining 39.8% and 18.4%, respectively, on a sequential basis. China, the U.S. and Korea were up 46.7%, 9.7% and 6%, respectively. All the other regions decreased from the previous quarter.

Margins

Applied Materials generated pro-forma gross margin of 46.3%, up 91 basis points (bps) sequentially and 362 bps from the year-ago quarter.

Applied Materials’ adjusted operating expenses of $654 million increased 3% from the last quarter and 13.7% from the year-ago quarter. Operating margin of 27.8% increased 184 bps sequentially and 865 bps year over year.

Net Profit

On a pro-forma basis, Applied Materials reported net income of $861 million, or 79 cents per share compared with $732 million or 67 cents in the prior quarter. In the year-ago quarter, Applied Materials had reported net income of $376 million or 34 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 $824 million (76 cents per share) compared with $703 million (65 cents per share) in the previous quarter and $320 million (29 cents per share) a year ago.

Balance Sheet

At the end of fiscal second quarter, inventories increased to $2.61 billion from $2.28 billion in the previous quarter. Accounts receivables increased to $2.38 billion from $2.37 billion in the prior quarter.

Cash and short-term investments balance was $4.94 billion compared with $3.49 billion in the prior quarter. Goodwill was 18.3% of the total assets.

The company generated $898 million in cash from operations. The company spent $77 million on capex and returned $390 million through stock repurchases and cash dividends to shareholders.

Guidance

Applied Materials also provided guidance for the third quarter of fiscal 2017. Revenues are expected between $3.60 and $3.75 billion, better than the Zacks Consensus Estimate of $3.32 billion. Non-GAAP EPS is expected to come in the range of 79 to 87 cents, much higher than the consensus mark of 68 cents.

Zacks Rank & Other Stocks to Consider

Currently, Applied Materials has a Zacks Rank #2 (Buy). Other stocks in the broader technology sector worth considering include Monolithic Power Systems, Inc. (MPWR - Free Report) , Maxim Integrated Products, Inc. and ON Semiconductor Corp. (ON - Free Report) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term expected earnings per share growth rates for Monolithic Power, Maxim Integrated Products, and ON Semiconductor are 17%, 10.3% and 16.7%, respectively.

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