In the previous part of the series, we saw that Applied Materials (AMAT) had received new orders from flash memory makers and foundries in fiscal 2Q16. A significant portion of these orders will likely be reflected in the company’s fiscal 3Q16 earnings.
One major twist witnessed in fiscal 2Q16 was a fivefold increase in new orders for Applied Materials’ display products. The company is the largest manufacturer of equipment that produces flat-panel displays used in electronics products such as televisions, cameras, laptops, and mobile phones.
Electronics industry transitions to OLED
More and more electronic devices, especially smartphones, are transitioning away from liquid-crystal displays to OLED (organic light-emitting diode) displays. There are rumors that Apple (AAPL) will use OLED displays in its iPhone 8. Samsung (SSNLF) and some Chinese (FXI) handset makers are already using OLED in their high-end smartphones.
At a time when the smartphone market is slowing, handset makers are looking for new technology that could encourage consumers to upgrade their phones. OLED provides that technological upgrade. Even if smartphone sales slow or fall, handset makers will need AMAT’s equipment and services to add features.
Display products financial performance
In fiscal 2Q16, AMAT’s Display segment’s revenue rose by 2.5% YoY (year-over-year) to $167 million, accounting for 6.8% of the company’s revenue. The company expects the segment’s revenue to almost double to about $300 million in fiscal 3Q16.
However, profits could shrink, as this is a new technology, and the company will have to spend a large amount of money on product development. The Display segment’s non-GAAP (generally accepted accounting principle) operating margin fell from 24.5% in fiscal 2Q15 to 17.4% in fiscal 2Q16, and it may fall further in fiscal 3Q16.
Energy and Environmental Solutions
Applied Materials also manufactures equipment that produces wafer-based crystalline silicon cells and modules. However, things have been slow in this area, and the company doesn’t expect growth to come anytime soon.
In fiscal 2Q16, the segment’s revenue fell by 34.2% YoY to $48 million. The company expects its revenue to remain flat in fiscal 3Q16.
Applied Global Services
Other than equipment, AMAT provides services to optimize the performance of its equipment and maximize productivity. This is the company’s most profitable segment and the only one reporting growth in its operating margin.
In fiscal 2Q16, the segment’s revenue rose by 0.3% YoY to $648 million. Its revenue is expected to rise by 5%–8% to above $705 million in fiscal 3Q16. The segment’s operating margin rose slightly, from 26.3% in fiscal 2Q15 to 26.4% in fiscal 2Q16, and it’s likely to rise further in fiscal 3Q16.