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What to Expect from Applied Materials’ Fiscal 3Q17 Earnings

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Part 4
What to Expect from Applied Materials’ Fiscal 3Q17 Earnings PART 4 OF 11

Could AMAT’s Profit Margin Reach New Highs in Fiscal 2017?

AMAT’s profitability

In the previous part of this series, we saw that Applied Materials’ (AMAT) revenues are growing faster than KLA-Tencor’s (KLAC) revenues but slower than Lam Research’s (LRCX) revenues. However, the scenario is different on the profitability front. AMAT’s and LRCX’s profit margins are narrower than KLA-Tencor’s margins.

Leaving aside the comparison, Applied Materials’ record-high revenue growth is driving its profits to new peaks.

Could AMAT’s Profit Margin Reach New Highs in Fiscal 2017?

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Gross margin

Applied Materials’ non-GAAP1 gross margin expanded from 42.7% in 1Q16 to 46.3% in 1Q17, driven by high volumes and a rich product mix.

Lam Research increased its gross margin from 46.1% in 1Q17 to 46.5% in 2Q17, and KLA-Tencor increased its margin from 62.4% to 62.9% during the same period. This indicates that Applied Materials’ gross margin could improve to around 46.8% in 2Q17.

Operating margin

AMAT’s non-GAAP operating margin improved from 19.2% in 1Q16 to 27.8% in 1Q17—the widest margin reported by the company in at least seven years. The margin improved as it focused its R&D (research and development) efforts on differentiated products and services in fast-growing markets.

Lam Research increased its operating margin from 26.9% in 1Q17 to 27.7% in 2Q17. However, KLA-Tencor’s operating margin decreased from 37.7% to 37.2% during the same period as its operating expenses increased faster than its revenues. As Applied Materials’ earnings are closer to Lam Research’s earnings, AMAT is likely to report a sequential improvement in its operating margin in 2Q17.

Earnings milestones

On the EPS (earnings per share) front, Applied Materials achieved a few milestones. Its non-GAAP EPS rose 132% YoY (year-over-year) to $0.79 in 1Q17. This was the third consecutive quarter of triple-digit YoY EPS growth and the fourth consecutive quarter of record-high EPS.

For 2Q17, Applied Materials expects to report EPS of $0.83 at the midpoint, equal to the consensus estimate of $0.83. AMAT has beaten analysts’ EPS estimates in five out of the past six quarters by an average of 3.0%. If the company maintains this momentum, it could report EPS of $0.85.

Morgan Stanley analyst Joseph Moore has raised the firm’s EPS estimates for AMAT and LRCX as continuous increases in memory sales drive equipment demand longer than expected. Meanwhile, demand remains robust in the display market. Moore raised his fiscal 2018 EPS estimate for AMAT from $2.87 to $3.31 compared to its actual EPS of $1.75 in fiscal 2016. He also raised his fiscal 2018 EPS estimate for Lam Research from $10.63 to $12.65 compared to its actual EPS of $9.98 in fiscal 2017.

Next, we’ll look at the performance of AMAT’s business segments.

  1. generally accepted accounting principles
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