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Applied Materials’ (AMAT - Analyst Report) fiscal first quarter pro forma earnings of 6 cents beat the Zacks Consensus Estimate by 3 cents. Revenues were also slightly ahead, beating by 1.5%.

Revenue

Applied reported revenue of $1.57 billion, which was down 4.4% sequentially and 28.1% year over year, at the high end of the guided range of flat to down 15%. The outperformance versus expectations was on account of better-than-expected results in the SSG segment.

Revenue by Segment

SSG segment revenue grew 11.4% sequentially, which was however down 27.9% from the year-ago quarter. Strength at foundries drove the outperformance in the last quarter that was partially offset by softness in the NAND segment. Management stated that there was great revenue concentration in the last quarter with most of the revenue coming from the top three customers.

Intel’s (INTC - Analyst Report) Ultrabook partners and Microsoft’s (MSFT - Analyst Report) Windows 8 adopters may be expected to help demand through 2013. Applied generally sees seasonal strength in the second and third quarters of its fiscal year, with weakness in the fourth and first.

The second largest segment was AGS with a 30% revenue share. Segment revenue was down 24.2% sequentially and 11.8% year over year, at the low end of Applied’s expectations of a 15-25% sequential decline.

The sequential comparison was more difficult because of the $10 million contribution from the thin film line in the preceding quarter. Segment weakness was related to lower wafer starts and lower utilization rates at semiconductor fabs for the second straight quarter, as customer spending patterns remained cautious.

The 6.5% sequential and 16.3% year-over-year declines in the Display segment was within management’s very broad guidance range of a sequential decline of 0-30%. Segment contribution remained at 6%. Demand for mobile devices (high-resolution mobile displays for tablets and touch panels for ultrabooks) continues to increase, which is the main reason that the rate of revenue decline is going down.

Management also stated that there was evidence of TV demand coming back. Applied’s expanding product line is partly responsible for the increased total available market (TAM), which will spur growth in following quarters.

The EES segment accounted for 3% of total quarterly revenue, down 25.8% sequentially, 77.8% from last year and better than management’s guidance of at least a 30% sequential decline. The weakness in solar (due to overcapacity and weaker-than-expected demand) continued in the last quarter, while other parts of the business did better.

Revenue by Geography

Around 67% of Applied’s quarterly revenue came from the Asia/Pacific region, with the largest contribution from Taiwan, which generated 36% and followed by China, which generated 11%. Applied saw double-digit sequential declines in South East Asia, China and Japan. Taiwan and Korea were up strong double-digits due to the strength at foundries. The U.S. also grew though not as strongly. Europe disappointed.

Orders

Total orders were up 44.2% sequentially and 5.2% year over year. Orders grew across all except the AGS segment (in line with normal seasonality). SSG and Display were up 83.9% and 66.3%, respectively on a sequential basis with EES growing 4.6% and AGS declining 5.6%. Display and EES jumped 245.0% and 106.1%, respectively from last year, with AGS growing 5.2% and SSG down 3.9%.

The net result was a positive BTB across all segments, with Display coming in strongest, followed EES, SSG and then AGS.

Orders grew very strongly across all Asian countries except Japan. They were down, however, in Japan, the U.S. and Europe.

Margins

Applied generated a gross margin of 39.8%, up 140 basis points (bps) from the previous quarter’s 38.4%, as a higher mix of SSG revenue offset the impact of weaker volumes. The gross margin was down 86 bps from the year-ago quarter.

Applied’s operating expenses of $514 million were flattish with the Sep 2012 quarter, which helped the 19 bp sequential expansion in the operating margin. The operating margin was still well below the 15.7% level posted in the year-ago quarter. Lower volumes impacted results, with all expenses increasing as a percentage of sales.

Net Profit

On a pro forma basis, Applied Materials had a net income of $69 million, or a 4.4% net income margin compared to $70 million, or 4.3% in the previous quarter and $240 million, or 11.0% in the first quarter of fiscal 2012.

The fully diluted pro forma earnings were 6 cents a share compared to earnings of 6 cents in the previous quarter and 18 cents in the comparable prior-year quarter. Our pro forma estimate excludes restructuring and acquisition-related, as well as tax adjustments in the last quarter. Our pro forma estimate may not match management’s presentation due to the addition/exclusion of some items not considered by management.

On a fully diluted GAAP basis, the company recorded a net income of $34 million ($0.03 per share) compared to loss of $525 million ($0.43 per share) in the previous quarter and income of $117 million ($0.09 per share) in the year-ago quarter.

Balance Sheet

Inventories increased just 0.5% during the quarter, with inventory turns dropping from 3.2X to 3.0X. Days sales outstanding (DSOs) went from 67 to 64. The cash and short term investments balance was $1.75 billion at quarter-end, having dropped $184 million during the quarter. Goodwill was 30.0% of total assets in the last quarter.

The company generated $16 million of cash from operations, spent $49 million on capex, $48 million on share repurchases and $108 million on dividends. At quarter-end, Applied had $1.95 billion of debt on its balance sheet, with a net debt position of $193 million. The debt cap ratio including long term liabilities and short term debt was just 26.8%.

Guidance

Applied expects a stronger second quarter. It currently expects SSG revenue to be up 20-25% sequentially, AGS to be up 0-10%, Display to be up 0-25% (due to strength in mobile platforms and TV capacity additions) and EES to be relatively flat. The net effect will be a 15-25% sequential increase in revenue.

The non-GAAP EPS (excluding 4 cents of acquisition-related charges) is expected to come in at 9-15 cents a share. The Zacks Consensus Estimate for the Apr 2013 quarter was 11 cents when the company provided guidance, within the guided range.

Conclusion

Applied’s results in the last quarter were better than expected, with both revenue and earnings projections for the next quarter more or less in line with expectations. Order growth was also encouraging and it appears that the company is past the bottom.

However, Applied’s results have been impacted by caution at customers stemming from a weak demand environment. Since Applied is a company with significant fixed costs, the bottom line has also taken a beating. Therefore, the strength in mobility platforms and increased TV capacity will have a positive impact on its profitability going forward.

Applied shares currently have a Zacks Rank #3 (Hold), similar to other equipment suppliers, such as KLA Tencor (KLAC - Analyst Report) and Lam Research.

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