Materials (AMAT 49.075, -4.885, -9.05%), the semiconductor equipment giant, is trading lower after
reporting Q2 (Apr) earnings/guidance last night. In terms of quick background,
AMAT is a supplier of manufacturing equipment, services, and software to the
semiconductor, display, and related industries. Its products improve device
performance, yield, and cost. AMAT's customers include manufacturers of
semiconductors, liquid crystal and OLED displays, and other electronic devices.
AMAT operates in three reportable segments: Semiconductor Systems (65% of FY17
revenue), Applied Global Services (21%), and Display and Adjacent Markets
Its Semiconductor Systems segment sells a wide range of manufacturing equipment used to fabricate semiconductor chips. This includes semiconductor capital equipment used for many steps of the chip making process including the transfer of patterns into device structures, transistor and interconnect fabrication, metrology, inspection and review, and packaging. Its AGS segment provides services to optimize equipment and fab productivity, including spares, upgrades, services, remanufactured earlier generation equipment, and factory automation software. Finally, its Display and Adjacent Markets segment sells products for manufacturing LCDs, OLEDs, and other display technologies for TVs, PCs, tablets, smart phones etc.
Turning to the Q2 (Apr) results, non-GAAP EPS jumped 54% year/year to $1.22, which was above prior guidance of $1.10-1.18. Revenue rose 28.8% year/year to $4.57 bln, which also was above prior guidance of $4.35-4.55 bln. In terms of guidance for Q3 (Jul), AMAT expects non-GAAP EPS of $1.13-1.21 and revenue of $4.33-4.53 bln. The EPS guidance was in-line, but the revenue guidance is a bit below market expectations.
On the call, AMAT said there have been some puts and takes in its customers' near-term investment plans. Smartphone sales have been below expectations, particularly for high-end models. In response, both semiconductor and display suppliers have made adjustments to their capacity planning. AMAT views the current investment levels as rational and disciplined, particularly in the memory market. AMAT, therefore, believes a healthy balance of supply and demand will be maintained.
In contrast to the weakness in smartphone unit sales, there is evidence that emerging drivers of industry growth are picking up pace. The Internet of Things (IoT), Big Data, and Artificial Intelligence (AI) will disrupt and transform virtually every industry. While only at the very beginning of the buildof the AI big data era, AMAT is already starting to see the positive impact on its markets. In just the past six months, cloud service providers have increased their capital investments significantly.
In Display, investments in large substrate Gen 10.5 TV capacity remain strong. Adoption of OLED screens in mobile and the ramp of manufacturing capacity are slower than previously expected, primarily due to weakness in high-end smartphone sales. AMAT views OLED as a compelling technology, and the leading handset makers are committed to making the transition over time. Compared to LCD, OLED offers significant performance in power advantages, as well as lower cost and high-volume production. In addition, next-generation flexible OLED will enable new form factors such as curved and ultimately, foldable screens.
In sum, the stock is trading lower as investors are a bit concerned about the downside JulQ revenue guidance. Smartphone sales have been disappointing, which has caused some OEMs to pull back on purchasing equipment from AMAT. The stock has been mostly trading sideways since late September. It seems investors were looking for a more upbeat outlook from AMAT.
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