Applied Beats on Revs and Margins - Analyst Blog

Applied Materials’ (AMAT) fourth quarter earnings beat the Zacks Consensus Estimate by 12 cents. Revenue beat the consensus by 15.6%. All the peer companies -- ASML Holdings (ASML), KLA Tencor (KLAC) and Lam Research (LRCX) -- reported results that also beat the consensus. The general improvement in results is proof of the growing momentum in the semiconductor capital equipment market.

Revenue

Revenue of $1.53 billion was up 34.6% sequentially and down 25.3% year over year. The year-over-year decline in revenue moderated with respect to the three preceding quarters.

Revenue by Segment

All segments contributed to the sequential increase, as well as the year over year decline in revenue.

Silicon Systems (SSG) remains the largest segment, with a 43% revenue revenue share. Segment revenue increased 31.7% sequentially and declined 11.8% year over year. Capacity expansion and technology transitions at foundry customers were the drivers behind the revenue increase in the last quarter. Management stated that utilization rates were also on the rise, which along with stronger DRAM and NAND prices were driving demand at memory and logic manufacturers.

The second largest segment was Applied Global Services (AGS), which generated 26% of total revenue. Segment revenue increased 13.7% sequentially and declined 26.1% year over year. The company saw strength in spares sales, which have been rising steadily over the last two quarters.

Energy and Environmental Systems (EES) was third, with an 18% revenue share, increasing 25.0% sequentially and declining 36.1% year over year. The solar photovoltaic market started looking up in the last quarter, with the pressure on module prices letting up a bit and the broader availability of financing.

The smallest segment, Display, witnessed the strongest sequential growth and year-over-year decline. The segment generated around 13% of revenue, up 189.9% sequentially and down 40.1% year over year. Management stated that demand for TVs and LCD monitors were very strong, especially in China. With utilization rates remaining high and its largest customers returning to profitability, strength in this market should be sustained.

Orders

All segments witnessed sequential increases in orders, although the strongest growth was in EES. Display also increased strong double-digits, followed by SSG and then AGS. However, book-to-bill (BTB) was well below unity in display, indicating that there was not much addition to backlog. AGS and SSG also had BTB below unity. The sharp increase in EES orders resulted in a BTB of 1.28, indicating continued strength in the next quarter.

The sequntial increase in orders came from Korea, South East Asia & China and North America, in that order. Other regions declined, with particular weakness in Europe.

Operating Margin

Gross margin for the quarter was 38.1%, up 745 basis points (bps) from the previous quarter’s 30.6%. The gross margin improvement was due to a better mix of business, as the higher-margin businesses performed relatively better. The gross margin was down 273 bps from the year-ago quarter, mainly due to lower volumes.

The operating expenses of $358.5 million were flattish in comparison to the previous quarter’s $358.7 million. However, the operating margin expanded 1,560 bps sequentially and declined 322 bps year over year. The sequential improvement was primarily attributable to the higher gross margin, although lower R&D also declined significantly as a pecentage of sales. Lower G&A and S&M ( as a percentage of sales) also contributed.

SSG operating margin improved 1,284 bps, AGS improved 941 bps, Display 2,875 bps and EES 1,295 bps.

Net Margin

On a pro forma basis, AMAT had a net income of $207.5 million, or a 13.6% net income margin, compared to a loss of $1.6 million, or 0.1% in the previous quarter and profit of $293.4 million, or 14.4%, in the fourth quarter of last year.

Fully diluted pro forma earnings per share (EPS) were $0.15 compared to $0.00 in the Jul 2009 quarter and $0.22 in the comparable prior-year quarter. Our pro forma estimate excludes restructuring charges, acquisition-related charges, stock-based compensation expenses and impairment of investments on a tax-adjusted basis 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 $137.9 million ($0.10 per share) compared to a loss of $54.9 million (-$0.04 per share) in the previous quarter and a net profit of $231.1 million ($0.17 per share) in the prior-year quarter.

Balance Sheet

Inventories were down 6.9% sequentially, with inventory turns increasing from 1.8x to 2.3x. Days sales outstanding (DSOs) were around 62 days, down from 67 days at the end of the Jul quarter. The cash and short-term investments balance was $2.21 billion at quarter-end, up $76.1 million during the quarter. The company generated $240.6 million of cash from operations and spent $80.5 million on dividends. At quarter-end, Applied Materials had $200.6 million of debt on its balance sheet, or a net cash position of $2.01 billion.

Guidance

Management provided guidance for the first quarter. Accordingly, revenue is expected to increase 10-25%, with SSG growing 20%, AGS growing modestly, display down and EES up more than 20%. The tax rate is expected to be around 29%. Including restructuring charges of 6-7 cents a share, the GAAP EPS is expected to be 4-8 cents a share.
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