component supplier Applied Materials (AMAT 35.145, +0.125, +0.36%) pares
opening losses, now down about 4.8% vs 8.4% at today’s lows, after the
company’s in-line results and tepid guidance signaled several negative factors
impacting industry spending.
There wasn’t much surprise in the company’s fourth quarter where earnings per share (EPS) of $0.97 while lower demand compared to the first half of 2018 left revenue growth at 1.0% to $4.01 bln, in-line with market expectations.
The Global Services business saw revenue growth of 18% to $977 mln and non-GAAP operating margins increased to 29.7%. Applied’s Display group delivered $702 mln in revenue on non-GAAP operating margins of 29.3%.
Despite challenging market conditions in the second half of the year, each of Applied Materials’ major businesses delivered double-digit growth in fiscal 2018. While the company expects market headwinds to continue in the near term, it does not see the large fluctuations that characterized the semiconductor and display equipment industries in the past.
In recent months, Applied has seen several factors negatively impacting industry spending. These include elevated macroeconomic risks, global trade tensions and specific to Applied’s industry, and a pullback in memory investments. Overall demand in the server, PC, and mobile markets is weaker than it was earlier in the year and memory prices are softening in the near term. Applied’s customers feel demand may pick up and pricing may stabilize in the second half of 2019. Additionally, after a long time in development, the first EUV tools are expected to enter volume production in 2019. To support the initial adoption of EUV, Applied is seeing additional investments in these long lead-time systems in 2018 and 2019, creating share headwinds for Applied during this period.
As to the guidance, Applied’s outlook includes the impact of a recent export restriction – specifically, in late October the U.S. announced it had added Chinese-based Fujian Jinhua Integrated Circuit to its list of banned exporters. In short, U.S.-based companies are barred from selling products to Fujian without a special license. Without this, Applied noted it would have guided its semiconductor revenue to be higher sequentially. The company’s semi equipment guidance for Q1 implies annualized WFE in the mid-$40 bln range. It's important to note that this is about $10 bln higher than in all of the years prior to the current cycle.
Specifically, the company expects revenue to be between $3.56-3.86 bln in the first quarter. Within the outlook, Applied expects silicon systems revenue to be down by about 21% yr/yr, Services revenue to be up by about 7% yr/yr, and Display revenue to be up by about 10% yr/yr. Gross margins are expected around 44.6% and the EPS outlook stands at $0.75-0.83.
With the overall semiconductor market reeling these past few weeks in light of some underwhelming outlooks for the next quarter from some pretty influential names in the space, it’s no surprise that Applied traded lower initially today. Shares were up about 4.3% into the print yesterday, so a bit of a retreat could have been in the cards. At one point this morning AMAT trimmed its losses to 0.3%, though the stock has resumed its lower trajectory in recent action.
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