For the third straight quarter, AMAT issued a beat-and-raise report with revenue accelerating into the 30-45% range. This is a vast improvement from late 2015 and early 2016 when revenue growth was virtually flat. As we discuss in more detail below, the broad, primary catalyst has been strong growth in the WFE (wafer fab equipment) market as semiconductor producers seek enhanced efficiency and applications in chips -- but with a smaller form factor. This tailwind has been a major catalyst for the semicap space over the past year, benefiting companies like Lam Research (LRCX), Ichor (ICHR), KLA Tencor (KLAC), and MKS Instruments (MKSI).
Taking a closer look at AMAT's Q2 report, it generated EPS of $0.86, beating the Capital IQ Consensus by $0.03. Revenue jumped by 33% year/year to $3.74 billion, also ahead of the $3.69 billion expectation. Not only were the headline numbers strong, but, so too were some other key metrics. For instance, gross margin expanded by 310 basis points to 54.4% and operating margin improved by an impressive 590 basis points to 28.7%. As a result of the healthier margins, AMAT delivered its first quarter of $1 billion in operating profit. Furthermore, the company generated record cash flow from operations of $1.37 billion.
There are a number of growth drivers behind AMAT's emergence. First, as noted above, the overall WFE market has been very strong. During its conference call last night, management stated that it expects wafer fab equipment spending to grow 20% year/year. It also expects that 2018 will be higher than its current 2017 estimate, and this is including a conservative estimate for spending in China.
What's facilitating this growth is the ever-increasing demand for consumer electronics, and the increasing applications for these electronics, which is growing AMAT's markets -- while also making them less cyclical. Additionally, newer technologies in big data, the Internet of Things, and artificial intelligence are already becoming a factor and will only become a more prominent force in the years to come.
From a more company-specific standpoint, AMAT believes that its product portfolio is the strongest and most diverse it has ever been, with exposure to the highest growth areas. The combination of exposure to deposition, removal, materials modification, and inspection are providing it with key competitive advantages.
So, to wrap up, while its Q2 headline looks a bit "promotional" at first, there is certainly a lot of truth to it. AMAT really did deliver an outstanding quarter with a bullish outlook into Q3 and beyond.