Applied Materials (AMAT 44.46, -2.97, -6.26%), the semiconductor equipment giant,
is trading lower after reporting Q3 (Jul) earnings/guidance last night. AMAT is
a supplier of manufacturing equipment, services, and software to the
semiconductor and display industries and related fields. 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 for equipment optimization 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, and more.
When you look at the company as a whole, about 40% of revenue now comes from sources other than new semiconductor equipment sales. AMAT's services, spares, upgrades, consulting, software, display, and flexible technology businesses will generate more than $7 bln of revenue this year. In Display, AMAT has scaled its business from about $600 mln in 2012 to $2.5 bln in 2018. In Service, it has grown at a 15% CAGR since 2014, and it expects to sustain at least that pace of growth. So as you can see, AMAT is about more than just new equipment sales.
Also, AMAT sees its most exciting days ahead. Over the next decade, AI and Big Data are expected to transform almost every sector of the economy and be a major growth driver for electronics and semiconductors because it requires new types of computing at the edge and in the cloud, lower cost, lower power chips, and abundant storage.
Turning to the Q3 (Jul) results, non-GAAP EPS jumped 40% year/year to $1.20, which was on the higher end of prior guidance of $1.13-1.21. Revenue rose 19.3% year/year to $4.47 bln, which also was on the higher end of prior guidance of $4.33-4.53 bln. In terms of guidance for Q4 (Oct), AMAT expects non-GAAP EPS of $0.92-1.00 and revenue of $3.85-4.15 bln. The OctQ revenue and EPS guidance were well below market expectations.
On the call, AMAT said that, in aggregate, it sees ongoing strength in its markets. Customers are making rational investments in new capacity, resulting in well-balanced supply and demand dynamics. At the same time, they are spending at healthy levels for next-generation technologies. Demand for wafer fab equipment is on track to be at an all-time record in 2018, and AMAT's view of 2019 remains positive. Its thesis that spending in 2018 plus 2019 combined will exceed $100 bln remains firmly intact.
However, foundry customers have trimmed their capital spending plans for the year. They are still pushing forward with prioritizing investments towards long lead-time equipment, which is a positive leading indicator for 2019. NAND bit demand is expected to grow at about 40% this year, with bit supply growing slightly faster. As a result, AMAT sees spending levels flat to modestly down from last year's record levels. DRAM investments are strong, up approximately 50% year/year. Capital investments by cloud service providers continues to strengthen, up about 85% YTD.
Looking at the broader context, 2018 shows how the industry has fundamentally changed over the past five years. More diverse demand drivers spanning consumer and enterprise markets, combined with very disciplined investment, has reduced cyclicality. AMAT says it's not seeing the large fluctuations in wafer fab equipment spending that it did in the past.
In sum, the JulQ results were good, but the guidance is causing weakness in the stock today. The main reason seems to be foundries cutting back on capital spending in 2018 although AMAT sounds a bit more optimistic about 2019. On the positive side, the stock is not down that much despite what was a fairly large downside guidance outlook for OctQ. Part of that is because some pessimism was probably already built into the stock price heading into this JulQ report. The stock has been trending lower since its March 2018 high of $62.40 and it traded lower on AprQ results in May. That tells us investors had been bracing for weak guidance for OctQ, so it's not a huge surprise.
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